The Australian Government has been very responsive to the impacts of COVID-19 and has achieved remarkable health and economic outcomes in the world. With the uncertainty regarding the timing and duration of the pandemic, it is imperative to extend an unprecedented level of support across the country. The Government recently announced the Budget for 2020-21 and laid out some key initiatives to accelerate the process of economic recovery. In the new budget, the government has laid further commitments to support the recovery process, with the total financial support standing at $507 billion. Below are some excerpts from the newly announced budget along with a snapshot of the major payment initiatives.

Major Payment Initiatives (Source: Budget.gov.au)

Infrastructure Investment: The Government has planned to invest $14 billion in new and accelerated infrastructure projects over the next four year, that will support job creation. Besides, the government has extended a support of $3 billion to shovel-ready projects, $2 billion to deliver small scale road safety projects, and $1 billion of funding for the Local Roads and Community Infrastructure Program. These investments form part of Government’s 10-year infrastructure investment pipeline worth $110 billion.

Digital Business Plan: To support adoption of new technologies by businesses and consumers, the government announced its Digital Business Plan, wherein, it will provide $24.7 million to small business operators to use technology, which will assist growth in the technology sector. Notably, the government expects Australia to become a leading digital economy by 2030.

JobMaker Hiring Credit: Unemployment has been at its peak since the COVID-19 outbreak. Therefore, to accelerate growth in employment the government introduced its JobMaker Hiring Credit as a part of its JobMaker Plan. Under the scheme, the government will spend $4 billion from 2020-21 to 2022-23 to support around 450,000 positions for young people.

Education, Training and Employment: The government is investing $296 million to deliver a new Digital Employment Services platform, $183 million to support online job seekers, and $21.9 million to enable easy access to specialised support for young people. A funding of $1 billion has been set aside to support 340,700 additional free or low-fee training places. 

Health Measures in Response to COVID-19: The government announced an investment worth $4.9 billion to introduce health measures in response to the pandemic. $3.2 billion has been invested in personal protective equipment to protect healthcare and other frontline workers from COVID-19. Besides, $1.7 billion has been provided for securing doses of potential vaccines developed by the University of Oxford and the University of Queensland. 

Key Risks: The economic and health outcomes of the pandemic have weighed heavily on consumer and business confidence. Containment restrictions may further impact economic activity for some time. Moreover, subsequent outbreaks remain a significant risk to the economy. Continued trade and travel restrictions may limit the positive impacts from Government’s financial initiatives. Therefore, the pandemic remains a substantial risk to national recovery until a vaccine is developed and becomes widely available. 

Strict containment measures have brought Australia’s situation under control and led to the easing of restrictions across several states. Consequently, the job market began to recover, and economic activity is picking pace. If the current momentum continues, the government expects economic activity of recover from late 2020 and into early 2021, on the back of improving business and consumer confidence, and unprecedented government support. Considering the initiatives undertaken in 2020-21 budget, let us now have a look at four stocks on ASX (DOW, GEM, SEK, ANN) that are expected to grow in the process.

1. Downer EDI Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 3.46 Billion, Annual Dividend Yield: 5.7%)

Decent Performance by the Core Business: Downer EDI Limited (ASX: DOW) is a leading provider of integrated services in Australia and New Zealand. The company was recently awarded a contract worth $320 million by NBN Co Limited for a maximum term of 8 years. Services under the contract will include network restoration, network performance and capacity enhancement, site maintenance, etc., across Western Australia, South Australia and the Northern Territory. During FY20, the company witnessed a decent performance in its Urban Services businesses, with total revenue of $13.4 billion, in line with FY19. Group Underlying EBIT came in at $344.7 million, down 29.7% on pcp. During the year, the company renegotiated on some debts and reported an operating cash flow before interest and tax of $340.4 million.

Outlook: The company refused to provide earnings guidance for FY21 due to COVID-19. The company is counting on its acquisition of Spotless for driving earnings and generating cash flow from long term customers. The company enjoys resilience on the back of a diversified business across road, rail, gas, water, defence, health, education, 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 DOW (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The company is expected to remain resilient in the current challenging times driven by its well-diversified portfolio and a solid foundation in the market. 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 $4.920, down -0.405% on 12^th October 2020. 

2. G8 Education Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 874.34 Million, Annual Dividend Yield: 10.28%)

Strengthened Balance Sheet: G8 Education Limited (ASX: GEM) is one of Australia’s largest quality early childhood education and care providers. The company reported a strong start to 2020 but was significantly impacted by COVID-19. Revenue in the first half ended 30^th June 2020 stood at $308 million, down 28% on pcp and underlying EBIT went down by 44% to $29 million. During the half, the company reported a strong cash conversion of 98%, due to the benefits from cost control measures and disciplined cash management. The company deferred the FY19 final dividend and expects to pay a dividend in CY21, subject to financial performance.

Outlook: The company expects to continue executing its cost control and cash management measures and is set to benefit from a national footprint and a diversified portfolio, which will guard it against the pandemic. Due to the uncertainty pertaining to COVID-19, the company has not provided any guidance for the upcoming reporting period. However, GEM’s current occupancy levels remain decent at 69%. 

The Federal Government is investing $146 million in several programs to provide education access to disadvantaged students and school leavers. In addition, spending on school funding has increased from $13.8 billion in 2014 to $21.8 billion in 2020. Therefore, despite the short-term impacts of child-care subsidy on the financials, the company seems to be a potential beneficiary of such initiatives as Australia returns to a more normal scenario.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales 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 GEM (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: During the first half, the company raised $301 million in equity and reduced its net debt to strengthen the balance sheet position. We have valued the stock using the EV/Sales 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 $1.095, up 4.784% on 12^th October 2020.  

3. Seek Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 8.25 Billion, Annual Dividend Yield: 1.49%)

Increase in Reported Sales: Seek Limited (ASX: SEK) is a provider of online employment marketplace to recruiters and candidates, and education services to students/ adults, and invests in early stage businesses engaged in human capital management. It has 2 divisions - Asia Pacific & Americas (AP&A) & Early Stage Ventures (EVSs) and SEEK Investments comprising of Zhaopin, Online Education Services (OES) and other ESVs. As on 12^th October 2020, the market capitalization stands at $8.25 billion. The company reported 3% increase in sales to $1577.4 million due to uncertain macro-economic conditions. Its AP&A business fell by 11% due to weakening of AUD$, HK$ and Malaysian Ringgit. However, SEEK Investments division is up by 15% reflecting growth of Zhaopin (16%), OES (7%) and SEEK ESVs (18%). SEEK Investments’ reported strong results driven by the weakening of AUD$ against Chinese RMB. Both OES and ESVs (JobAdder and Sidekicker) posted strong performance as they continue to scale up and expand offerings. The company has reported an interim dividend of 13 cents per share to the shareholders for FY20.

Outlook: On the back of continuous investments across its portfolio, good returns witnessed in ESVs, increased demand in OES, HR Software (SaaS), contingent labour, shift in online learning and platforms, coupled with rising international partnerships (M&As), the firm is poised for times ahead.

The government’s JobMaker plan will help accelerate growth in employment, hence, boosting Australia’s economic recovery. The JobMaker Hiring Credit is expected to support around 450,000 positions. Henceforth, the boost in the job market may positively impact Seek’s business.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales 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 SEK (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The company has reported a sound cash and cash equivalents at hand ($604.8 million for FY20) and an interim dividend of 13 cents per share. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $23.440, up 0.213% on 12^th October 2020. 

4. Ansell Limited (Recommendation: Hold, Potential Upside: High Single-Digit)

(M-cap: A$4.98 Billion, Annual Dividend Yield: 1.83%)

Record Growth in HGBU: Ansell Limited (ASX: ANN) is engaged in manufacturing protective industrial and medical gloves. As on 12^th October 2020, the company reported a market capitalization of $4.98 billion. The company reported 7.7% increase in revenue from US$1499 million in FY19 to US$1613.7 million in FY20 and 42.1% increase in PAT from US$111.7 million in FY19 to US$158.7 million in FY20. This was due to outstanding organic growth of Healthcare GBU (13.4%) across all its products. 18.2% from industrial and medical applications, 4.1% from surgical and safety solutions, and 16.3% from Life sciences products. Due to COVID, the demand for gloves, protection suits, masks, gloves surged. In FY20, the company has also undertaken expansion in manufacturing and distribution facilities. Industrial GBU contributed 4.2% sales growth. The company has reported a dividend of 50 cents per share in FY20 as compared to 46.75 cents per share in FY19.

Exceeded expectations: The company reported 14% ROCE, and strong cash flow generation (cash conversion %: 117.7%). For FY20, the company has surpassed target growth (price & volume), and received net gains from raw materials, transformation measures and acquisitions. For FY21, the company anticipates growth in volume, similar SG&A cost levels and organic growth to continue at higher levels than projected.

To support through the pandemic times, the Australian government has invested $3.2 billion in personal protective equipment, which may help ANN’s business to grow. Over 76 million masks have been distributed from the National Medical Stockpile to the healthcare and frontline workers and Ansell Limited stands to benefit through these measures.

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 ANN (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The firm paid higher dividends of 50 US cents per share in FY20 as compared to 46.75 US cents per share in FY19, a 23.6% rise in EPS in FY20 and posted a strong cash position. 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 “Hold” recommendation on the stock at the current market price of $38.920, up 0.335% on 12^th October 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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