Although economic activity contracted heavily in the early months of the pandemic, significant support from both fiscal and monetary policy has been effective at preserving many jobs and businesses through the period of restrictions. The Federal Budget 2021 has announced significant stimulus for all sections of the economy in the form of the JobKeeper program, health initiatives, investment in infrastructure, etc. As per the latest Statement of Monetary Policy for November 2020, the RBA has announced a reduction in the cash rate target to 0.1%. The bank has also announced a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%. The Board believes that interest rates have been lowered to the farthest extent possible and has committed not to increase the cash rate target until actual inflation is sustainably within the target range of 2-3%.
Household Consumption to Increase in 2H2020: Following the release of the budget, measures of consumer sentiment increased sharply. Individuals have voluntarily adjusted their behaviour in response to concerns about the spread of the virus. In the June quarter, household disposable income increased despite the challenges in place, mostly on the back of the JobKeeper program, which increased unincorporated business income and supported labour income. Due to improved household cash flow, household consumption is forecasted to increase by close to 10 per cent over the second half, compared to a 13% decline over the first half of 2020.
Trend in Household Disposable Income (Source: ABS, RBA)
Housing Market Conditions and Business Investment: Australia has reported an increase in new listings in most cities since August, except Melbourne, where new residential property listings fell sharply because of the restrictions. The rental vacancy rate has increased in Sydney. Fiscal and monetary policy measures are supporting detached residential construction in the near term, with a strong increase in building approvals over the September quarter. In the June quarter, mining sector investment increased by 1%, while non-mining investment, including non-residential construction, fell by 5%. Mining investment is expected to be a little higher in the near term, led by work on iron ore and coal projects. Investment in iron ore projects has been made more attractive by ongoing high prices, supported by Chinese steel production and restricted supply from Brazil.
Housing prices Trend (Source: RBA)
Bulk Commodity Prices (Source: RBA)
Improved Liquidity in Banking System: The Reserve Bank’s exchange settlement (ES) balances indicate high liquidity in the banking system due to the Reserve Bank’s package of policy measures. Purchases of government bonds by the Reserve Bank and increased use of the Term Funding Facility (TFF) have added liquidity in the system. The measures announced have also led to a large increase in RBA’s balance sheet to $110 billion, higher than pre-COVID levels. Cash rate reductions and other policy measures have enabled a reduction in interest rates on outstanding business loans, providing support during the crisis. The demand for housing loans has also picked up recently, with commitments for new housing loans over the September quarter above the levels seen in March 2020.
Housing Loan Commitments – Seasonally Adjusted and Break-Adjusted (Source: RBA)
Key Risks: Despite the removal of restrictions and developments in the economy, the medium-term outlook is exposed to some risks and challenges. Expiry of temporary cash flow support measures such as tax cuts may lead to a decline in consumer spending. Households may choose to save more in the future due to high levels of uncertainty. Moreover, the inability to meet mortgage obligations may weigh heavily on housing prices and a slowdown in population growth can adversely impact housing demand. As government support is reduced or withdrawn, businesses may become insolvent and reduce investment, which will put further pressure on the unemployment rate.
Notwithstanding the above risks, improved health outcomes and policy stimulus have enabled an upgrade in the economic outlook due to stronger-than-expected household consumption and additional policy support mentioned in the Federal Budget 2021. Notably, easing of restrictions on consumption of some services and the previously accumulated savings will support household consumption through the period of lower income. Contribution of business investment to growth is also expected to increase and exports are also set to improve over the coming years. Considering the improvement in housing market conditions, favourable scenario in the mining sector, especially iron ore, and developments in the banking systems, we have figured out 4 stocks on ASX that stand to benefit from the recent monetary and fiscal policy measures.
(1) Lendlease Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 8.96 Billion, Annual Dividend Yield: 2.55%)
Improvement in Development Pipeline of Core Business: Lendlease Group (ASX: LLC) is an international property and investments group having core expertise in shaping cities and creating strong and connected communities. The company recently completed the sale of its Engineering business to Acciona Infrastructure Asia Pacific. In FY20, the company reported a profit after tax of $96 million from its core business. Development pipeline for the core business came in at $113 billion, up 48% on pcp. Overall statutory loss after tax came in at $310 million. During the year, the company secured two major urbanisation projects, with an estimated end development value of $37 billion.
Outlook: Going forward, the company expects to accelerate development and reach $8+ billion of production p.a. Planning for around 90% of production for the next 5 years has been approved. The company possesses a $50+ billion FUM opportunity from a secured development pipeline. In the residential segment, the company expects strong growth in build to rent sector.
The recently announced fiscal and monetary policy measures will offer continued support to businesses in the form of lending support during the COVID-19 crisis. Therefore, these measures will help the company in executing its strategy and conduct the business as per plans. Notably, building approvals for detached dwellings rose strongly over the September quarter. The demand increased on the back of Australian Government’s HomeBuilder scheme.
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 LLC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company entered FY21 in a strong position, with an outstanding pipeline of projects expected to drive high-quality earnings growth. The stock of the company gave positive returns of 18.55% in the last three months. 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 valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $13.00, down 0.231% on 9th November 2020.
(2) Bendigo and Adelaide Bank Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 3.66 Billion, Annual Dividend Yield: 9.55%)
Rise in Total Lending: Bendigo and Adelaide Bank Limited (ASX: BEN) is engaged in the provisioning of a range of banking and other financial services. During Q1 FY21, the bank experienced a rise in total lending with YTD (27th October 2020) growth of 11%. Net interest margin for the quarter increased by 1 bps to 2.30% as compared to 2H FY20. During FY20, BEN recorded a statutory net profit of $192.8 million as compared to $376.8 million in FY19. In addition, CET1 ratio for FY20 stood at 9.25%, which is higher than 8.92% of FY19.
Outlook: Going forward, the bank is focused on generating sustainable growth with the help of active cost management. The strategy revolves around investing in capacity for growth in existing and new markets and decreasing operational complexity and moving on productivity opportunities. For FY21, the bank is planning to leverage its partners capability in order to ramp up the build-out of its key digital channels and offers.
Increased fiscal and monetary support in the form of a reduction in cash rate target, loan guarantee programs and funding for lending schemes are encouraging banks to provide credits to households and businesses. Moreover, the Reserve Bank’s package of policy measures has enabled a high liquidity position in the banking system.
Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)
P/BV 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 BEN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In order to simplify its business, the bank is working continuously to reduce the number of products and technology applications. In the past three and six months, the stock of BEN has provided positive returns of 3.67% and 17.40%, respectively. We have valued the stock using the P/BV multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of $6.920, up 0.144% on 9th November 2020.
(3) Bank of Queensland Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 2.90 Billion, Annual Dividend Yield: 1.87%)
Rise in Total Income Supported by Lending Growth: Bank of Queensland Limited (ASX: BOQ) provides banking, financial and related services. For the year ended 31st August 2020, the bank recorded cash earnings after tax of $225 million, reflecting a fall of 30% as compared to FY19. This was mainly due to COVID-19 collective provision of $133 million. As a result of the previously guided restructuring charges and intangible asset review, BOQ recorded a fall of 61% in statutory NPAT to $115 million. Lending growth of $827 million and a focus on margin management assisted the bank in achieving growth of 1% in total income to $1,096 million. Out of 21,000 customers who availed banking relief, 25% continued to make full or partial repayments, thus reducing total loan balances on deferral.
Outlook: The bank is focused on implementing its strategy and maintaining momentum in its business. BOQ is also committed to deliver long-term value to shareholders via sustainable, profitable growth and attractive returns. The bank has made good progress on digital transformation with 6 core projects completed, including moving the data centres to a cloud environment.
The RBA has announced several policy measures to support the economy. In November, the bank reduced the cash rate target to 0.1% and does not intend to increase the cash rate target until actual inflation is sustainably within the target range of 2–3%. Loan guarantee programs and funding for lending schemes have been introduced, which will enable banks to draw on their capital buffers to provide credit to households and businesses.
Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)
P/BV 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 BOQ (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: During FY20, the bank was focused on strategy execution and transformation in spite of the challenging environment created by COVID-19. The bank has a strong capital position and is expected to grow its business through organic capital generation. The stock of BOQ has provided a return of 33.12% in the past six months. We have valued the stock using the P/BV multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, considering the valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $6.400 on 9th November 2020.
(4)Fortescue Metals Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 50.95 Billion, Annual Dividend Yield: 10.63%)
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Record Iron Ore Shipments in Q1FY21: Fortescue Metals Group Ltd (ASX: FMG) is a metal and mining company, mainly involved in the mining, processing, and transporting of iron ore. In Q1FY21, the company reported record first quarter iron ore shipments of 44.3 million tonnes (mt), up 5% on Q1FY20. C1 costs for the quarter stood at US$12.74/wet metric tonne (wmt), down 2% on pcp. The company witnessed a strong free cashflow generation in the quarter. Revenue realisation increased on the back of robust demand from customers, 31% up on the June quarter.
Outlook: In FY21, the company expects iron ore shipments between 175 - 180mt. C1 costs are expected in the range of US$13.00 - US$13.50/wmt and capital expenditure is expected in the range of US$3.0 - US$3.4 billion.
Australia’s iron ore demand has remained resilient due to the demand from China and restricted supply from other countries due to COVID-19 restrictions. Iron ore prices increased significantly and mining investment across the country has increased due to continued demand for commodities. Going forward, the strength of FMG’s business coupled with improved macroeconomic conditions will drive growth in the 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 FMG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of FMG has provided a return of 45.18% in the past six months. 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). Considering the record iron ore production in Q1FY21, strong free cash flow generation, and resilient iron ore markets, we give a “Hold” recommendation on the stock at the current market price of $17.610, up 6.404% on 9th November 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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