Apart from Government support and an increase in business activity, consumer behaviour is another key factor shaping up the recent economic trends. Goes without saying, that any increase on the supply side of the business, should match well with the demand side to reap benefits. Over the last few months, there have been unprecedented changes in consumer buying patterns, influenced by various factors, including fear of shortage of essential products, reduced travel, remote working and reduced physical purchasing.

Increase in Online Purchases: A large set of businesses in Australia has reported a significant increase in online spending during the COVID-19 crisis, which indicates that the threat of physical purchasing is one major factor impacting consumer buying patterns. At the same time, the gradual reopening of the economy and the need for an antidote for the psychological impact of the shutdown, have possibly persuaded Australians to resort to a safer channel for shopping. As per the information published on the media platform, online spending for the week ended 3^rd July 2020, increased by 16.7% on a year-on-year basis. Moreover, an increase of 9.9% in-store spending was also cited, which directly relates to an increase in people movement and reopening of physical stores across businesses, post the easing of containment restrictions. During the last couple of months, consumer spending was mostly inclined towards personal care products, clothing, footwear and household furnishings and equipment, which drove a 16.9% increase in retail turnover in May 2020, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

Increased in Loan Refinancing and Fixed Term Personal Finance: As per another recent release on ABS, the value of new loan commitments for housing fell by 11.6% in May on the previous month, driven by strong falls in the value of loan commitments for housing in New South Wales and Victoria. However, reduced interest rates coupled with refinancing offers drove a record increase in the value of existing owner-occupier loans refinanced with a different bank, in May 2020. During the same period, the value of new loan commitments for fixed-term personal finance increased by 14.5% in May, following a decline of 24.8% in April. This increase, according to ABS Chief Economist, Bruce Hockman, was driven by a partial rebound in the value of new loan commitments for road vehicles. As per the information published on other media platforms, personal lending from revolving sources (including credit cards) increased by 11.5% in May, after a decline of 5.1% in April. The increase in refinancing of loans and a boost in fixed-term personal finance & credit card loans raises optimism around healthier consumer spending patterns in the near terms. 

Excerpts from Minutes of Monetary Policy Meeting of the Reserve Bank Board: While the country has been hit by a second wave of virus infections, the RBA, in its latest Board meeting, cited the beginning of recovery over the course of May. While March and April saw a significant drop in spending along with massive job losses, the pace of job losses slowed down towards the end of April. During these tough times, household income was supported by government support in the form of the JobKeeper program and increased JobSeeker payments, lower fuel prices, free childcare and other initiatives, implying increased household savings.

Overall, an increase in online retail spending, rebound in in-store sales, increased business activity compared to the initial days of COVID-19 spread and rising demand for personal finance, are some of the positive factors driving the economy. Lately, consumer sentiments seem to have improved significantly in comparison to March, due to the efforts of the Government in containing the virus and simultaneously mitigating the economic impacts of the same. Relief to businesses in the form of stimulus packages and permission to resume operations has boosted the economic activity and has worked well on driving consumer spending as well.

Risks that Cannot be Ruled Out: Continuity of the above events and developments, however, remains subject to certain risks that are to be looked upon. The country has been hit by a second wave of COVID-19 infections, which makes it crucial for the Government and citizens to act in accordance with the highest standards of safety. In the absence of the required preventive measures, the positive trends witnessed in recent months may not last for a long period of time. Moreover, deferment of capital expenditure, lack of future projects and reduced demand in some sectors, may continue to pressurise the economy.

Considering the recent events and associated risks, we expect a few businesses to reap the benefits of positive trends. With a resilient business model, decent financial position and a firm foundation in key markets, these businesses seem to be at the frontline of deriving benefits out of overall economic improvements. Let us have a look at these stocks in detail:

1. Nick Scali Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 526.5 Million, Annual Dividend Yield: 6.92%)

Resilient Performance in H1FY20: Nick Scali Limited (ASX: NCK) is mainly involved in the sourcing and retailing of furniture and related accessories. For H1FY20, the company reported sales revenue of $137.5 million, down by 2.5% on the previous corresponding period. Further, the company reported Underlying NPAT of $20.1 million, higher than the guidance of $17-$19 million. For H1FY20, the company declared a dividend of 25 cents per share. In the first quarter, the company experienced difficult trading conditions with a significant drop in store traffic and negative comparable store sales growth of 8.3%. However, later in the second quarter, the company saw improvement in sales and store traffic and achieved 3.5% like-for-like written orders growth in Q2FY20. For the fourth quarter to date, i.e., the period from 1 April 2020 – 14 June 2020, written sales orders witnessed growth of 20.4%. 

Outlook: Due to the outbreak of COVID-19 and the temporary closure of showrooms and stores, the company witnessed a significant decline in sales orders during the second half of March and the first half of April. However, the company witnessed a significant rebound in customer activity during May and the first half of June due to easing of government restrictions and a reallocation of discretionary consumer spending toward furnishings and homewares. The company expects sales orders for the months of May and June to be around 54% higher than prior corresponding period. Further, the company expects sales revenue for Q1 FY21 to be approximately 30% higher than pcp. FY20 revenue is estimated between $260 million - $263 million. Underlying NPAT for the year is expected in the range of $39 million - $40 million.

The significant rebound in customer activity during May and June demonstrates that the spending on household furnishings and equipment has improved following the ease in activity restrictions. Over the recent months, the company has also launched its digital offering, which aligns with the increased online spending by customers and will help drive sales, going forward.

Key Risks: The company operates in a competitive retail market which is subject to only moderate barriers to entry and changing consumer preferences. Further, the company has exposure to foreign exchange risk, interest rate risk, credit risk and liquidity risk.

Bankruptcy and DuPont Analysis:

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 NCK (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last six months, the stock has corrected by 7.28% on ASX. Given the nature of Nick Scali’s business model and the significant increase in sales orders during May and June, the company is expecting an improvement in the sales numbers of the coming quarters. As depicted in the chart above, the stock reacted positively to the boost in sales orders and has witnessed a remarkable trajectory after the impact of COVID-19 market fallout. 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). Considering the above factors, we see further potential in the stock and give a “Speculative Buy” recommendation at the current market price of $6.51, up 0.154% on 13^th July 2020.

2. Money3 Corporation Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 309.43 Million, Annual Dividend Yield: 5.99%)

Decent YTD March 2020 Results:  Money3 Corporation Limited (ASX: MNY) is a specialist non-bank finance provider that provides automotive finance for the purchase and maintenance of vehicles. The company operates in Australia and trades as Go Car Finance Ltd in New Zealand. For the 9 months ended 31 March 2020, the company reported revenue of $93.3 million, up 44.4% on the previous corresponding period. For the same period, the company reported normalised NPAT of $22.9 million, up 49.2% on pcp. The company recently paid an interim dividend of 5 cents to shareholders. The company is predominantly equity funded and has low leverage. The company is well funded with a strong cash balance of $43 million as at 27^th April 2020, continuing to grow with prudent loan originations.

Outlook: Before the outbreak of COVID-19, the company was expecting its FY20 NPAT (continuing operations) to be around $30 million and statutory NPAT to be around $32 million. However, due to the uncertainty surrounding the impact of COVID-19, the company withdrew its guidance. In response to COVID-19, the company has implemented robust business continuity measures to maintain the resilience of its business operations and protect the health and well-being of its staff. Currently, the company seems well placed to deal with any disruptions that are likely to be caused by the pandemic.

Although the Stage 3 restrictions in Australia caused reduced demand for automotive finance, the Government stimulus is expected to have a positive impact on customers’ ability to continue to make payments toward their loans. New loans originations are continuing albeit with prudence to unaffected industries. In New Zealand, during the lockdown period, the customers continued to seek loan pre-approval. With the gradual lifting of restrictions, the demand for automotive finance is expected to return. Recently, the company has also updated regarding the extension of the debt facility with FCCD (Australia) Pty Ltd by one year. The facility of $150 million was acquired to fund the growth of the automotive loans business.

Key Risks: The fact that the company has withdrawn its FY20 guidance, demonstrates that its operations are exposed to the risks and uncertainties of COVID-19. Further, the company is exposed to a variety of financial risks through its use of financial instruments. The company’s exposure to market interest rates relates primarily to its short-term deposits, deposits at call and borrowings.

Bankruptcy and DuPont Analysis:

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 MNY (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last six months, the stock has corrected by 30.42% on ASX and is currently trading close to the average of its 52-week trading range of $0.67 - $3.04. After the market fallout, the stock began the journey of recovery and has performed decently in the last couple of months. The rise in consumer spending and increased demand for personal loans is expected to support the business in the near term. Moreover, with a decent cash balance, the company seems well funded to deal with any disruptions that are likely to be caused by the COVID-19 pandemic. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with a low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.76, up 5.389% on 13^th July 2020.

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

(M-cap: A$ 1.21 Billion, Annual Dividend Yield: NA)

Decent YTD March 2020 Results:  EML Payments Limited (ASX: EML) is a prepaid service provider which offers secure payment solutions to its customers. For the nine months ended 31 March 2020, the company reported Gross Debit Volume (GDV) of $9.83 billion, up 55% on the previous corresponding period (pcp). For the same period, the company reported revenue of $87.1 million, up 20% on pcp. Further, the company reported EBITDA of $27 million, up 24% on pcp and operating cash flows of $27.3 million, an increase of $18.2 million over the first half result. The Gross Profit margin stood at 75.9%. At the end of April 2020, the company had over $125 million in cash. 

Outlook: In April 2020, the company completed the acquisition of Prepaid Financial Services (Ireland) Limited. This acquisition will help the company in deriving revenues and earnings from general-purpose reloadable programs. From this acquisition, the company expects net run rate synergies of $6 million to commence in FY22. Due to mall closures, social mobility and social distancing restrictions associated with COVID-19, mall gift card sales are expected to get significantly impacted in the remainder of FY20. However, the sales volumes are expected to recover with the easing of lockdown and reopening of economy. Due to uncertainty surrounding the COVID-19 pandemic, the company has suspended its earnings guidance. 

There is a possibility that recessionary forces may impact consumer discretionary spending and GDV levels. However, with increased digital activity in the last few months, positive trends in credit card payments, and increased activity across businesses, may positively impact the business. Amid the pandemic, the company has managed to continue to support its customers, launched new programs and signed new contracts, which depicts the resiliency and adaptability of the business.

Key Risks: Mall closures, social mobility and social distancing restrictions associated with COVID-19, pose a significant challenge to the company. Further, the company is also exposed to interest rate risk, liquidity risk, and currency risk.

Bankruptcy and DuPont Analysis:

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 EML (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last six months, the stock has corrected by 30.64% on ASX and is currently trading close to the average of its 52-week trading range of $1.2 - $5.7. The company is currently in an enviable position of having a balance sheet to weather any downturn in business and the financial strength to continue to invest in growth and take advantage of opportunities. The resilience of the business is depicted in the performance of the stock amid these challenging times. The upward trajectory is attributable to the company’s firm foundation in its markets and strong immunity built upon a healthy balance sheet. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $3.25, down 2.985% on 13^th July 2020.

4. Harvey Norman Holdings Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 4.39 Billion, Annual Dividend Yield: 9.38%)

Decent H1FY20 Results: Harvey Norman Holdings Limited (ASX: HVN) is primarily involved in the operations of integrated retail, franchise, property and digital enterprise business. For H1FY20, the company reported profit before tax of $301.15 million, down by 4.6% on pcp and net profit after tax of $213.59 million, down by 4.1% on pcp, impacted by a decrease in the net property revaluation increment, mainly attributable to a net decrement for a residential zoned property in NSW, as well as the first-time application of AASB 16 Leases. For H1FY20, the company reported EBITDA of $443.43 million, up 15.7% on pcp.  The value of net assets stood at $3.28 billion as at 31 December 2019, up 4.2% on pcp.

Outlook: For H1FY20, the company had declared a fully-franked interim dividend of 12.0 cents per share. However, due to the uncertainty regarding the duration of the COVID-19 pandemic, the company cancelled the FY20 interim dividend, resulting in $149.5 million of cash being retained in the business. Instead, the company has paid a fully franked special dividend of 6.0 cents per share to its shareholders. Due to COVID-19 pandemic, two franchised complexes in Tasmania were closed for two weeks due to a mandated closure of the region by the Tasmanian State Government. All other Australian franchised complexes have remained open throughout the COVID-19 pandemic.

With the recovery of Australian economy, consumer spending on household items has seen an increase. The increase in retail sales during the month of May’20 was contributed by increased sales of personal care products, clothing, footwear and household furnishings and equipments. Continuation of the above trend in retail sales is expected to benefit the business, going forward.

Key Risks: The company is exposed to the risk of increased competition which could result in a decline of retail margin or a loss of market share for franchisees in Australia and company-operated stores in overseas markets. The company is also exposed to the risk of decline in the commercial property sector which could lead to softening in property asset values, falling rental returns and a reduction of future capital returns on property assets.

Bankruptcy and DuPont Analysis:

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 HVN (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last six months, the stock has corrected by 18.98% on ASX and is currently trading close to the average of its 52-week trading range of $2.285 - $4.787. After witnessing a sharp fall led by COVID-19, the stock has performance decently since the markets began to stabilise. While the company cancelled its interim dividend due to COVID-19 impact, it has paid special dividend to its shareholders, depicting its ability to manage the crisis. The strength of the business and positive retain trends will be the key catalysts driving the stock, going forward. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with a low double-digit upside (in percentage terms). Considering the decent H1FY20 results, resilient retail performance amid Covid-19 pandemic, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $3.56, up 1.136% on 13^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters) 

Note: 

Altman’s Z-Score Model:

(1) When Z-Score <1.81, then it is in Distress Zone

(2) When Z-Score is between 1.81 and 2.99, then it is in Grey Zone

(3) When Z-Score > 2.99, then it is in Safe Zone

The above relative valuation implies a target price incorporating the key positive factors driving the business and indicate long term potential of the stock. Prices, however, remain subject to any short-term movements due to the impact of coronavirus on the business fundamentals. 

All the recommendations and the calculations are based on the closing price of 13 July 2020. The financial information has been retrieved from the respective company’s website and Thomson Reuters.

Disclaimer

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