Australia’s consumer discretionary sector broadly encompass household products, footwear & accessories, clothing, and online retailing. Amidst soaring disposable income and resilient consumer spending, Australian retail activities generated 4.5% of the nation’s total gross value added (GVA) in 2020, amounting to ~$81.36 billion. In addition, the wholesale and retail trade industry secured $61.5 billion, 6.0% of foreign direct investment stock in Australia in 2020.
Economic Overview
The overall economic scenario remains favourable for the sector, broadly attributed to an incline in household spending, disposable income, and consumption. On the other hand, restructuring the domestic supply chain via a supply chain resilience initiative poised a considerable impact on consumption expenditure and terms of trade.
Figure 1: Economic Indicators Snapshot of March 2021 Quarter
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Sector’s Key Driving Factors
Household Spending: For the March 2021 quarter, total final consumption expenditure (FCE) inclined by 0.5% QoQ and 1.3% PcP due to a 1.2% incline in household FCE, primarily lead by service-oriented consumption. The decline in food & beverages and electricity, gas & other fuels remained the critical restraining factors.
Online Retail Platforms: Online platforms gained significant popularity during the government’s containment measures and poised considerable support to the sector. Total online sales peaked at $3,632.1 million in November 2020, relative to $1,712.5 million in January 2020 (pre-COVID period) and fell by 3.2% MoM in April 2021 amidst the resurgence of traditional retail activities. However, changed consumer behaviour amidst pandemic scenarios drove an upward shift of online sales trend-line.
Peformance of Retail Industry: Retail trade EBITDA surged by 27.4% in FY20, primarily driven by a 3.1% uptick in sales and service income and $3.7 billion funding support from the government amidst COVID-19 turmoil. Retail trade’s industry value added (IVA) inclined by 1.0%, following surged EBITDA and sales income.
Wholesale and Retail Trade
Aggregate Retail Statistics: For June 2021, total retail turnover clocked $30,590.5 million relative to $29,724.9 million in June 2020, up by 2.9% PcP. The MoM decline emerged as a consequence of containment measures for multiple territories and states. As a result, for June 2021 quarter, retail turnover inclined by an astonishing 9.2% PcP and 0.8% QoQ.
Figure 2: Monthly Retail Turnover – Aggregate and Industry Specific
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Statistics of Major Contributing Industries
Food Products: Food retailing surged by 1.5% in June 2021, critically attributed to a 1.5% increase in supermarket and grocery stores, 2.7% increase in other specialized food retailing and 1.3% increase in liquor retailing.
Household Goods: Household goods retailing declined by 1.3% in June 2021, critically attributed to a 3.1% decline for floor covering houseware, furniture & textile goods, 2.0% decline in electronic and electrical goods retailing, partly offset by a 0.7% surge for building, hardware and garden supplies.
Clothing, Footwear and Personal Accessory: Clothing retail declined by 11.1% and footwear and other personal accessory retailing declined by 6.1%.
Cafes, Restaurants, and Take Away Food Services: Café, restaurants and takeaway services declined by 6.0% for June 2021 due to the resurgence of containment measures in most states and territories.
Index Performance
The ASX 200 Consumer Discretionary (GIC) Index posted 5-year returns of ~+62.11%, as compared to ~+35.82% by the ASX 200 Index. Increasing disposable income and wealth of Australians, and favorable government policies supporting household spending and job creation are some of the supporting factors driving sector gains.
Figure 3: The ASX 200 Consimer Discretionery (GIC) Index outperformend the ASX 200 Index in the past five years by whopping ~26.29%:
Source: REFINITIV as on 26 August 2021
Key Risks and Challenges:
A potential decline in household spending looms on the risk of high inflation, as CPI rose by 3.8% PcP in June 2021 quarter. For instance, the retrenchment of government support, JobKeeper scheme and business investment aid may sweep away disposable income. Nations’ high household debt-to-income ratio, which stood at 180.4% in the December 2020 quarter, may potentially impact consumer spending. The delta-variant may call for a nationwide lockdown scenario which may, in turn, curtail consumer spending activities. The decline in public compensation of employees may translate to low-income levels.
Figure 4: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook
Figure 5: Key Drivers for Consumer Discretionary Sector:
Source: Analysis by Kalkine Group
Tax-Relief for Households: The Australian government announced $7.8 billion tax cuts for middle- and low-income earners, amounting to $2,160 for dual-income couples and $1,080 for individuals. The benefit may add to the household’s disposable income.
Temporary Loss Carry-back Facility: The government has extended the temporary loss-carry back facility and temporary full expensing to support business investments and job creation. These extensions are expected to deliver $20.7 billion in additional tax relief.
Favourable Aftermath of JobKeeper Initiative: The successful implementation of the jobkeeper initiative has embarked upon a record high employment rate with almost 1 million job creations. Subsequently, disposable income and household expenditure took off despite pandemic turmoil.
The decline in Savings Indicate Rising Confidence: The household saving ratio declined to 11.6% in March 2021 relative to 12.2% in the previous quarter. The declined in the savings ratio and advancing public health facilities has proliferated consumer confidence.
Established Online Platform to Maintain Sector Resilience: Most traditional retailers have promptly established their marketplace on online platforms; hence, the potential resurgence of COVID-19 may pose a minimal impact on the sector.
II. Investment theme and stocks under discussion (CWN, GUD, HVN, PTL)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple methods.
1. ASX: CWN (Crown Resorts Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$6.36 billion)
CWN is an entertainment company based in Australia with its operations in various integrated resorts.
Valuation
The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a potential upside of 18.54% on 26 August 2021. The company might trade at some premium compared to its peers' average EV/Sales (NTM trading multiple), given a diversified revenue stream via gaming operations. For the purpose of valuation, few peers such as Aristocrat Leisure Ltd (ASX: ALL), Flight Centre Travel Group Ltd (ASX: FLT), Tabcorp Holdings Ltd (ASX: TAH) have been considered. Considering potential retrenchment of containment measures, government aid, and valuation, we give a “Buy” recommendation on the stock at the market price of $9.260, as of 26 August 2021, 04:02 PM (GMT+10), Sydney, Eastern Australia.
2. ASX: GUD (GUD Holdings Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.01 billion)
GUD is engaged in the distribution and sale of automotive products, pumps, pool and spa systems, and water pressure systems.
Valuation
The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a potential upside of 18.46% on 26 August 2021. The company might trade at a slight premium compared to its peers' average EV/Sales (NTM trading multiple) given an optimised combination of organic & inorganic growth. For the purpose of valuation, few peers such as ARB Corp Ltd (ASX: ABR), Carbon Revolution Ltd (ASX: CBR), Apollo Tourism & Leisure Ltd (ASX: ATL) have been considered. Considering resilient top-line growth, operational efficiency initiatives, a strong market standing, and valuation, we give a “Buy” recommendation on the stock at the market price of $10.410, as of 26 August 2021, 03:09 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 5.46%.
3. ASX: HVN (Harvey Norman Holdings Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$7.03 billion)
HVN operates integrated retail, franchise, property and digital enterprise.
Valuation
The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a potential upside of 10.05% on 26 August 2021. The company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple) given highly resilient and diversified operations. For the purpose of valuation, few peers such as Wesfarmers Ltd (ASX: WES), Premier Investments Ltd (ASX: PMV), Reject Shop Ltd (ASX: TRS) have been considered. Considering the significant uptick in franchising revenue, low debt levels, favourable bottom-line, and valuation, we give a “Hold” recommendation on the stock at the current market price of $5.580, down by ~1.239%, as of 26 August 2021. In addition, the stock has delivered an annualised dividend yield of 6.81%.
4. ASX: PTL (Pental Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$61.31 million)
PTL is engaged in the manufacturing and distribution of personal care and home products.
Valuation
The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a potential upside of 8.94% on 26 August 2021. The company might trade at a slight premium compared to its peers' median EV/Sales (NTM trading multiple), given high demand-driven product customisation. For the purpose of valuation, few peers such as McPherson's Ltd (ASX: MCP), Ridley Corporation Ltd (ASX: RIC), Metcash Ltd (ASX: MTS) have been considered. Considering high sales expectations, Duracell distribution agreement, low debt levels, and valuation, we give a “Hold” recommendation on the stock at the current market price of $0.425, down by ~5.556%, as of 26 August 2021. In addition, the stock has delivered an annualised dividend yield of 6.11%.
Note: All the recommendations and the calculations are based on the closing price of 26 August 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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