The Australian Government’s response to COVID-19 marks a remarkable journey from a massive fallout in March to the implementation of a well-devised plan for economic recovery. After imposing strict restrictions across the country to combat the outbreak of the virus, the Government laid down a well-contemplated three phased plan of reopening the economy. Alongside the above initiative to boost activity and enable business recovery, the government released several support packages to prevent the economy from collapsing. The Government’s JobKeeper program, for instance, has been successful in restoring employment and operations in businesses across a variety of sectors.
Among the most recent steps taken by the Government to safeguard the economy from COVID-19, the support packages for the defence industry and the aged-care sector are worth noting. While the revival of the defence sector is expected to play a crucial role in economic recovery, protecting the aged-care sector represents one of the key priorities for the government amid the COVID-19 outbreak.
$1 Billion Support to the Defence Industry: The Federal Government recently announced a support package worth $1 billion to boost the defence industry and accelerate the process of COVID-19 recovery. Some of the components of the newly planned investment include a $300 million national estate works program focused on regional areas including bushfire affected regions and an investment of around $190 million in approved infrastructure projects in the Northern Territory. Other objectives under the proposed package are aimed at increasing the employment of Australian Defence Force (ADF) Reservists who have lost their civilian income and the recruitment of additional 500 Australian Defence Force (ADF) Reservists; boosting the employment opportunities for the current and previous ADF personnel and their families; and increasing funding for innovation, skilling and micro credentialing, and cyber training for defence. The Government considers its support to the defence industry to be a crucial aspect in the process of combating the economic impacts of the pandemic.
To boost the skills of the defence industry, the Government significantly increased its funding under the Skilling Australia’s Defence Industry (SADI) grants program from $4 million per year to $17 million per year till the end of 2021-22. The added investment will support the expansion of relevant workforce skills to develop critical capabilities. In addition, the Government awarded a $20 million contract to DATAPOD, a canberra-based company, to provide portable, containerised data systems for boosting defence capabilities against cyber-attacks. Below is a snapshot of the Government’s 202 Defence Strategic Update, released in July 2020.
Defence Strategic Update (Source: Company Reports)
Aged Care Emergency Response Plan: Considering the current conditions in Victoria after the second outbreak of COVID-19, the Government recently announced additional support of $171 million for the Aged Care Sector to boost national immunity. The new financial package includes a funding of $9.1 million to fight COVID-19 in Residential Aged Care and additional funding of $103.4 million to increase nation-wide workforce of aged care providers, activation of national emergency call centre surge capability, funding training, and covering quarantine costs for staff. In addition, the package also includes an investment of $9 million to ensure quality care by the Aged Care Quality and Safety Commission and additional funding of $50.6 million for the aged care workforce retention payment, due in September 2020. The above package brings the Government’s total Aged Care COVID-19 support to over $1 billion.
Key Risks: Until now, the Australian Government has taken some significant initiatives to progress the economic recovery, while maintaining the best possible health and safety standards. The Government’s efforts and economic revival are, however, subject to some factors which remain out of control. A second wave of coronavirus in Victoria compelled the Government to take strict measures and announce another shutdown to prevent the outbreak. In the event of similar adversities in other states may lead to reinstatement of restrictions which can delay the process of recovery. The relief packages announced by the government are deemed to be fit in the current economic environment, where all states except Victoria, are witnessing increased activity and may not be effective if another outbreak calls for a complete shutdown. Disruptions in operations due to COVID-19 and delay in delivery of contracts in the defence sector, and a high-risk of transmission due to boost in activity across Aged Care, remain few potential headwinds.
Notwithstanding the above risk factors, the Government’s support packages have provided relief to many businesses in the form of financial assistance for conducting operations. Let us have a look at few stocks on ASX, which have secured benefits under these government schemes and are demonstrating a decent potential for growth.
1. Austal Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.25 Billion, Annual Dividend Yield: 2.29%)
Record Revenue and Decent Increase in NPAT: Austal Limited (ASX: ASB) is engaged in the designing, manufacturing, and support of high-performance vessels for commercial and defence customers worldwide. Despite the significant global disruption and economic uncertainty due to the COVID-19 pandemic, the company surpassed its record earnings of FY19 and reported record revenue of $2,086 million. This was mainly due to the expansion of commercial shipbuilding, support revenue growth in the USA and favourable FX translation. During FY20, ASB reported an increase of 30.5% in EBITDA to $176.13 million and an increase of 45% in NPAT to $88.97 million. The company has entered FY2021 with an order book of $4.3 billion. The decent financial and operational performance enabled the Board to pay a dividend of 8 cents per share, reflecting an increase of 33% on the pcp.
Outlook: The company is prioritizing to implement an upgrade of US$100 million to US shipyard to meet new steel naval vessel program demands. It is also prioritising the use of strategic Asian positioning to pursue Defence and Commercial programs and exploit technology leadership positions. The company will continue to drive group-wide competitiveness through automation, ERP systems, and a growing international footprint.
Orders from the Government: Australian Government has committed to a major increase in defence expenditure to counter the increasing threats in the Australasia region. ASB’s 21-vessel Guardian Class Patrol Boat is a product of Australia’s increased commitment to the South Pacific islands. The Australian Department of defense has ordered six 58 metre Cape Class Patrol Boats for the Royal Australian Navy.
Key Risks: The company’s operations are exposed to market risk, which arises from the change in interest rates and foreign exchange rates. Moreover, failure to meet contractual requirements by customers, additional costs, or modifications to contract schedule represent other risk factors for the business.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs ASB (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company seems to be well-positioned with the skills and expertise, the drive and the vision, infrastructure, and technology, to continue to take up future growth opportunities. In the last three months, the stock gave positive returns of 20.96% on ASX. Movements in the stock have been driven by an increase in earnings and NPAT despite the COVID-19 challenges. Going forward, the company’s strong customer base and major contracts secured during FY20, are expected to be the key growth catalysts. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $3.54, up by 1.433% on 31st August 2020.
2. Quickstep Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 61.36 Million, Annual Dividend Yield: NA)
Incremental Revenue Opportunities: Quickstep Holdings Limited (ASX: QHL) is engaged in the production, engineering, manufacturing, and testing of advanced composite components to aerospace and defence-quality standards, and development of related manufacturing processes. During FY20, the company reported an increase of 12% in sales revenue to $82.3 million and an improvement in EBITDA margin to 10.1%. In the same time span, the company reported a NPAT of $3.9 million, reflecting an increase of 44% on the prior year. During FY20, the company reported an increase in its net debt by $6.1 million over the year to fund its capital spend. The company is likely to witness a growth in the existing order book and product development, demonstrating the incremental revenue opportunities within its core customer group.
Outlook: QHL demonstrated resilience in a COVID challenged industry and retains a positive long-term outlook. It has provided guidance for FY21 and expects an increase of 5% to 10% in customer revenues and improvement in EBITDA. The company also expects improvements in the operating cash flow because of improved profitability and an increase in cash receipts from the C-130 contract.
Support from Government: The US Department of Defence and the Australian government partly funded the company’s innovative flare housing production cell to establish a reliable second source for the long-term countermeasure program. The Federal is continuously working to expand the capabilities across the defence sector, which is expected to provide further growth opportunities to the company.
Key Risks: The company is susceptible to a variety of risks including the risks related to the changes in general economic and business conditions, regulatory environment, results of advertising and sales activities, competition, and the availability of resources. Further, the company’s financial instruments expose it to the several risks, including fair value interest rate risk, currency risk, credit risk, liquidity risk and cash flow interest rate risk.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs QHL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company may witness continued uncertainty and an increasingly competitive aerospace market. However, it remains highly resilient to enhance competitiveness through further process improvements, technology deployment and several key efficiency initiatives. The stock of QHL is currently trading below the average of its 52-week trading range of $0.055 - $0.165. The stock of the company has witnessed favourable movements in the past few months as QHL’s customers continued to operate without any disruptions. Going forward, a strong order book and product development will drive further growth in the business. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.085, down by 1.163% on 31st August 2020.
3. Regis Healthcare Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 374.43 Million, Annual Dividend Yield: 8.94%)
Resilient Financial Performance and Stable Balance Sheet: Regis Healthcare Limited (ASX: REG) provides residential aged care services. It aims to provide quality care to meet the growing needs of elderly population by focusing on care delivery, well-resourced risk management, risk integration, etc. Despite the difficult macroeconomic environment due to the impact of COVID-19, the company reported an increase of 4.8% in revenue to $677.87 million. In the same time span, the company reported a slight decline in average occupancy to 90.3% and reported an underlying EBITDA of $85.1 million. During FY20, the company received $69.8 million from RAD receipts and reported a net operating cash flow of $127.2 million. The company also reported a stable balance sheet with a decline of $66.5 million in net debt to $69.8 million.
Outlook: The company is focused on strengthening its key business drivers including occupancy, income generation and cost discipline. It is optimising the business portfolio mix and is working on the identification of growth areas. REG is planning to sell its non-core assets to strengthen its balance sheet. The company will provide a business update at its Annual General Meeting, which is to be held on 27 October 2020.
Government Funding: The company has received $6.4 million of additional Government funding and $1.8 million of temporary uplift in the Aged Care Funding Instrument in FY20. As a part of $662 million additional funding boost to support older Australians, $320 million was allocated to residential aged care by the Government. As a relief for COVID-19 retention bonus, the Aged Care Industry received a $235 million package for COVID-19 retention bonus to ensure the continuity of workforce for aged care workers and REG have provided $3.2 million in retention bonuses for staff so far.
Key Risks: The business operations are exposed to the risk of changes in the regulatory framework, reduction in occupancy levels, loss of approvals or accreditation, increased competition, loss of skilled staff or key personnel, etc.
Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs REG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: REG will continue to review its portfolio mix, acquisition, and development opportunities, while conservatively managing its balance sheet and debt position. It is focussed on occupancy and earnings uplift strategies while maintaining disciplined cost management. In the last three months, the stock has corrected by 18.36% on ASX. While the stock suffered setbacks due to COVID-19, the decent fundamentals along with Government support depict an optimistic picture for the future. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.210, down 2.811% on 31st August 2020.
4. Japara Healthcare Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 122.93 Million, Annual Dividend Yield: 11.63%)
Decent Increase in Revenue and Long-Term Growth of Shareholders: Japara Healthcare Limited (ASX: JHC) is the owner, operator, and developer of residential aged care homes. During FY20, the company reported solid cash flows with earnings reflecting ongoing industry pressures. It also reported an increase of 6.9% in statutory revenue to $427.5 million but a decline of 24.1% in recurring EBITDA to $36.9 million. During the year, the company reported a moderate increase in net debt to $190.7 million. This was mainly due to ongoing development expenditure with NPAT impacted by impairment and lower operational earnings. Despite the immense challenges from the outbreak of COVID-19, the focus of the company has remained on the wellbeing of residents and staff and long-term growth for its shareholders.
Outlook: The company is focused on the management of COVID-19 to ensure resident and staff wellbeing. JHC has recently completed developments that are likely to contribute to EBITDA. The company is also anticipating strong RAD inflows from ramping up of new homes. The company may complete developments that are currently under construction and add ~250 new places.
Support Packages from Government: As an approved provider of residential aged care services, each of the Group’s homes is eligible to receive funding contributions from the Federal Government. The company received a funding of $5.5 million from the 1.23% temporary Aged Care Funding Instrument boost and the COVID-19 specific support package in FY20.
Key Risks: The residential aged care industry in Australia is highly regulated and received a significant amount of funding from the Federal Government. Any changes in regulations or government funding will have a direct impact on the company’s operations. Other potential risks for the business, include staff cost increases, reduction in occupancy levels, compliance health and safety standards, loss of key personnel, etc.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs JHC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: JHC is focused on managing the current COVID-19 crisis whilst trying to build a path to sustainable growth. Despite the uncertain short-term outlook, the company retains modest longer-term fundamentals including an aging population. In the last three months, the stock has corrected by 20% on ASX. The stock has depicted stable movements in the past few months and will be driven by ongoing business developments and government support. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.455, down by 1.087% on 31st August 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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