The restrictions imposed on people movement and business activity during the pandemic have certainly led to a significant reduction in COVID-19 cases. Despite Australia’s success in containing the virus and a remarkable health response, these restrictions weighed heavily on household spending and consumption and revenues across all business sectors. Recently, the Government came up with a ‘3-Step Framework for a COVID-Safe Australia’ to reopen the country by December 2020 to a state of ‘COVID Normal’.
Prerequisites for National Reopening: The framework states some prerequisites for managing the outbreak, which includes physical distancing at 1.5 metres, stay at home if unwell, frequent cleaning and disinfection, COVID-Safe Plan in place for all businesses, and effective testing and contact tracing
3-Step Plan to Sustain a COVID Normal Australia
Step 1: During this phase, businesses will operate according to the principle of limiting group interactions and movement. Childcare centres, primary and secondary schools will be allowed to re-open and retail stores will operate with COVID-Safe plans. Cafes and restaurants will also be allowed to operate with up to 10 customers at one time, however, food courts will remain closed. All accommodation venues will be allowed to open with limited gatherings and will be required to record contact details of all customers for tracing purposes. Under domestic travel, free movement will be allowed between areas with no community transmission. However, international borders will remain closed with Entry by exception.
Step 2: Under Step 2, the country will operate on the principle of ‘Larger gatherings, more movement’. Restrictions will be eased for all cafes and restaurants, which will be allowed to open for dining adhering to the 2 or 4 square metre rule. All entertainment and amusement venues, except the ones listed as high risk by the AHPPC, all sports and recreation events and venues, accommodation venues, weddings, funerals and religious services, hair and beauty services, etc., will be carried out with proper social distancing measures (2 or 4 square metre rule) and will be required to record contact details of customers. This is phase will also see the removal of all domestic border restrictions, in addition to free movement in areas with no community transmission.
Step 3: This step involves attaining a COVID Normal state by Christmas 2020, with no restrictions on gatherings. All cafes and restaurants will be allowed to operate with 1.5 metres of social distancing between groups. Entertainment and Amusement venues will require approvals for events over 500 people while events under 500 people will operate with a COVID-Safe plan. Sports and recreation, accommodation, weddings, funerals, hair and beauty services, etc., will continue with the social distancing of 1.5 metres. In addition to restriction-free domestic movement, quarantine free international travel with New Zealand and other low-risk cohorts will be allowed.
Source: Framework for National Reopening, Australia.gov.au; Chart Created by Kalkine Group
Improved Health Practices: Along with the framework to reopen the economy, the government also highlights the importance of health measures and aims to adopt the best practices by the end of November 2020. The key components of this plan include:
- Surveillance – A streamlines system of daily reporting of cases and clusters, routine wastewater testing, Australian Health Protection Principal Committee’s (AHPPC) monthly review of innovative and novel testing platforms, etc.
- Quarantine and Isolation – Up to the mark quarantine and isolation practices and data about individuals in quarantine.
- Testing and Contract Tracing – Setting up laboratory capacity of 3 tests per 1000 population per day and detecting all chains of transmission by contact tracing downstream and upstream contacts.
- Outbreak Responsiveness – Setting up skilled outbreak management teams, support detection of disease outside immediate response zone, and ensure an embedded Aged Care Response Centre in each jurisdiction.
Key Risks: Some sections of the society may continue to witness the ill effects of the pandemic despite the reopening of the economy. Significant reduction in activity levels and COVID-19 containment measures pose of risk of job losses in the arts, sports, entertainment services and tourism sector. Fall in international student tuition fees will impact Australia’s universities. Demand for housing and hospitality will get impacted due to lesser disposable incomes. Moreover, retail sales, despite being the most resilient of all, may also witness reduced service levels in the non-food segment.
With the aforesaid framework, the Government is following a disciplined approach to supporting economic activity through community and consumer confidence. Businesses are expected to maintain health and safety measures while conducting operations. Removal of border restrictions will be accompanied by a COVID-19 suppression strategy, towards the goal of no community transmission. Despite the sector-specific risk factors, Australian businesses are expected to witness a better future as the framework is implemented and reduced restrictions positively impact demand across all sectors. Considering the Government’s target of a COVID Normal state by Christmas 2020, let us discuss four stocks listed on ASX which are offering decent growth prospects.
1. Qantas Airways Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 8.58 Billion, Annual Dividend Yield: 5.82%)
Qantas Domestic Remains Profitable: Qantas Airways Limited (ASX: QAN) is Australia’s leading domestic and international airline with interests in associated businesses, including holiday and travel operations. In addition to the core business of transporting passengers and air freight, the company also operates a number of subsidiaries, including QantasLink and Jetstar. For the year ended 30 June 2020, QAN reported total group revenue of $14.25 billion, down by 21% on the previous year, impacted by the government-imposed travel restrictions and border closures due to the COVID-19 pandemic. Further, the company reported an underlying profit before tax of $124 million and statutory loss before tax of $2.7 billion. Despite the impact of government-imposed travel restrictions, Qantas Domestic remained profitable during the year and reported an EBIT of $173 million. Further, Jetstar’s domestic flying achieved an EBIT of $112 million in FY20. Over the year, the company enhanced its liquidity through cutting capital expenditure, cancelling shareholder distributions and sourcing additional funding. As at 30 June 2020, the company’s cash and cash equivalents stood $3.5 billion with total liquidity at $4.5 billion.
Outlook: Looking ahead, the company expects the domestic demand for freight business to remain strong due to growth in e-commerce. Qantas Loyalty is expected to deliver a strong cash flow contribution in FY21. The company expects the impacts from COVID-19 pandemic to continue this year as well and expects a significant underlying loss in FY21. To rightsize the business, restructure its cost base and recapitalise its balance sheet, the company has introduced a Three-Year Recovery Plan which targets a total of $15 billion in savings over the three years to FY22-23.
Easing of Travel Restrictions: In Step 3 of the Framework for National Reopening, the government talks about arriving at a COVID Normal state across the nation. At this stage, the domestic border restrictions will be removed and free movement between areas will be permitted. Further, the government will allow quarantine free international travel with New Zealand and other low-risk areas. The government intends to achieve COVID Normal state by Christmas 2020. The easing of restrictions will improve the overall business conditions for QAN and it will position it better for future opportunities and recovery.
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 QAN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of QAN has provided a return of 26.23% in the past three months and 16.62% in the last one month. With a significant base of unencumbered assets and a decent liquidity position, the company seems to be well placed to navigate through COVID-19 pandemic and make a recovery. 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 “Buy” recommendation on the stock at the current market price of $4.58, up 0.66% on 26th October 2020.
2. Star Entertainment Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.43 Billion, Annual Dividend Yield: 5.67%)
FY20 Pre-COVID Revenue Up by 7.5%: The Star Entertainment Group Limited (ASX: SGR) is mainly involved in the management of integrated resorts with gaming, entertainment and hospitality services. The company owns and operates several businesses, including The Star Sydney, The Star Gold Coast and Treasury Brisbane. During the pre-COVID-19 period (Jul 2019 to Feb 2020), the company saw decent performance across its business and reported a 7.5% YoY growth in normalised gross revenue and 15.6% YoY growth in normalised NPAT. However, due to the impact of COVID-19 pandemic and associated restrictions, the company’s full-year results were materially impacted. For the full year ended 30 June 2020, the company reported normalised gross revenue of $1,972.9 million, down by 21.1% on pcp. Further, the company reported a 46% decline in normalised NPAT which stood at $120.8 million. During the year, the company refinanced its bank facilities and secured a further $200.0 million short term facility, providing additional liquidity through the COVID-19 pandemic. As at 30 June 2020, the company had a total net debt of $1,382.7 million.
Outlook: For FY21, the company is focused on driving a COVID-19 earnings recovery. It intends to de-gear its balance sheet through cash preservation and capital recycling. The company intends to execute the Capital Light Model via further delivery on a centralised operating model, completing investment projects on time and on budget, and executing in a capital-efficient way. In the long run, the company expects the investments in its network of integrated resorts and continuous operational improvements to drive visitation and earnings.
Easing of Restrictions at Accommodations and Entertainment Venues: If Australia reaches COVID Normal stage, the government will ease several restrictions related to entrainment and accommodation places. At COVID Normal stage, any event with under 500 people will be allowed to proceed with a COVIDSafe plan. For events over 500 people, approval from relevant authority will be required. Further, gatherings at venues will also be allowed but social distancing of 1.5 metres will have to be maintained. The easing of accommodation and entertainment venue restrictions will lessen the overall impact of COVID-19 on the company’s results.
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 SGR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: Over the last three and six months period, the stock has provided a return of 28.52% and 48.95%, respectively. SGR is committed to maintaining a balance sheet that positions it well for the post COVID-19 recovery. In FY21, SGR is going to have a rapid re-focus on local markets and domestic tourism, operating expenses, and liquidity. 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 $3.56, down 1.39% on 26th October 2020.
3. Coles Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 22.93 Billion, Annual Dividend Yield: 3.34%)
Online Sales Up by 18.1%: Coles Group Limited (ASX: COL) is a leading retailer in Australia with over 2,500 retail outlets nationally. The company owns and operates several businesses, including Coles Supermarkets, Coles Online, Coles Liquor, Coles Express. For the year ended 29 June 2020, the company reported total sales revenue of $37.4 billion, up 6.9% on the previous year, driven by decent growth across all business segments. Notably, Coles online sales grew by 18.1% over the year. For the full year, the company reported a retail NPAT of $931 million, up 7.1% on pcp. The company has declared a fully franked final dividend of 27.5 cents per share, taking the total full-year dividend to 57.5 cents per share. Through its ‘Smart Selling’ strategy, the company achieved cost savings in excess of $250 million in FY20.
Outlook: Looking ahead, the company is focused on realising cost-out opportunities and intends to retain its $1 billion cost-out target to be achieved between FY20 and FY23. The company’s gross operating capital expenditure is expected to be approximately $1 billion in FY21. Further, the company’s net earnings from property operations are expected to be more modest than FY20. In FY21, the company intends to step up its investment in customer service of Liquor segment.
Retail Stores Continue to Remain Open: In Australia, the retail stores have continued to remain open during the COVID-19 pandemic. The government has advised stores and shopping centre managers to have COVIDSafe plans. Coles has been closely working with government experts and the Supermarkets Taskforce to formulate industry-wide hygiene and distancing protocols to keep its customers and team members safe and improve product supply.
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
P/CF 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 COL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: Over the last six months period, the stock has provided a return of 6%, but a negative return of 3.76% in the last three months. The stock is currently inclined towards its 52-weeks high price. With optimised store network, online sales growth, ongoing cost saving initiatives, COL seems to be well placed for long term growth. 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 “Hold” recommendation on the stock at the current market price of $17.110, down 0.47% on 26th October 2020.
4. Ramsay Health Care Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 14.80 Billion, Annual Dividend Yield: 2.38%)
Decent Balance Sheet Position: Ramsay Health Care Limited (ASX: RHC) is a global healthcare operator focused on providing high-quality services and delivering excellent patient care. For the year ended 30 June 2020, the company reported statutory net profit after tax of $284.0 million, down by 47.9% on pcp. The company’s revenue from Australian operations decreased by 2.2% in FY20, due to elective surgery restrictions imposed during the last quarter. To strengthen its balance sheet and enhance its financial flexibility, the company undertook an equity raising of $1.5 billion during H2FY20. As at 30 June 2020, the company had an available undrawn debt capacity and cash headroom of around $3 billion.
Outlook: Looking ahead, the company is focused on expanding its business both in Australia and overseas, in and out of the hospital where there is a strategic fit and it meets its strict investment criteria. Due to the uncertainty surrounding the ongoing impact of the pandemic, the company has not provided a guidance for FY21. Over the long-term, the company expects to benefit from strong industry fundamentals. Following the recent $1.5 billion equity raising, the company seems to be well-capitalised to implement its strategic objectives, including continuing its brownfield developments and providing the ability to take advantage of other opportunities that may arise in the future.
One of the Key Players in the COVID-19 Battle - During FY20, the company entered into partnership agreements with governments in New South Wales, Queensland, Victoria and Western Australia to maintain full capacity and make its facilities available to assist with the national COVID-19 response. With the new framework for reopening and greater need for healthcare services amid COVID-19, the company will continue to be at the forefront of battling the pandemic.
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
P/CF 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 RHC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: Over the last six months period, the stock has provided a return of 4.02%, but a negative return of 7.15% in the last one month. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the company’s robust balance sheet, decent long-term fundamentals, future focus areas, we give a 'Hold' recommendation on the stock at the current market price of $64.220, down 0.70% on 26th October 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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