Australia has built resilience against the pandemic with the right strategy for recovery. The Government, the RBA, banks, and regulators have worked in collaboration to fight the battle against coronavirus. Progress on the health front has boosted confidence among citizens and further increased activity levels. Recovery, however, has been an uneven affair for different sections of the economy.
Looking at Employment Data: Since the outbreak, there have been massive job losses across various industries. This trend continued until May and began to improve post that. According to the latest speech by Philip Lowe, RBA Governor, employment in the mining, finance, and public sector has been less affected. Notably, people working in the lowest-paid occupations have been severely affected while employment increased for occupations with the highest hourly earnings.
Employment by Industry (Source: ABS, RBA)
Impact on Businesses: The impact of uneven recovery led to small businesses being impacted more than large businesses. In October 2020, firms with at least 200 employees reported a decline of only 1% in the number of people on payroll since mid-March. However, firms with 20-200 employees or less than 20 witnessed an average decline of 7%. On the retail front, large retailers continue to remain resilient with increased sales due to their diverse offerings, low cost due to economies of scale and strong online presence. Retailers selling groceries, home office equipment, electronics, etc., have performed better than cinemas and restaurants.
Retail Sales (Source: ABS, RBA)
Household Spending: After the outbreak of COVID-19, Australians increased spending on day-to-day requirements with an inclination towards online purchasing. Household consumption witnessed a large decline in the June 2020 quarter. Besides, household saving rate increased to 20%, the highest since the past 50 years, due to surge in fear about the pandemic. Reduced spending impacted the banking sector as interest-bearing credit card balances fell by 22% since March 2020 to their lowest level in 15 years. Various government support programs like the JobSeeker and JobKeeper payments boosted the household income.
A successful upcoming 2020 holiday and the festive season will be essential for retailers to survive and recoup the lost revenue in the last 6-8 months. With online shopping spree picking up, large retailers are set to benefit from a surge in sales across digital retail channels due to their diversified offerings and well-established online platform.
Unconventional monetary and fiscal policies and lowering of interest rates through changes in cash rates may stimulate economic activity in the near term. Increased savings and superannuation withdrawals have led to an increase in all forms of mortgage payments including additional balances in offset accounts. Improved debt situation and extra savings may have a positive spiral effect on the economy.
According to Philip Lowe’s speech, household income may decline in the December 2020 quarter due to an increase in unemployment rate and redirection of government support. A decline in income may reduce consumption in the times ahead. However, there remains a possibility of increased spending as restrictions ease further. Similarly, businesses have also accumulated cash reserves and may look for ways to spend that money. Overall, increased spending and investment by households and businesses will lead to better outcomes for the economy.
Key Risks: With this uneven recovery, the way of doing business has changed significantly. Firms and individuals have become more risk averse, which is affecting their appetite to spend and invest. Such a scenario may lead to increased business failures and further financial distress among households. Households and businesses are currently counting on the government’s support programs, which, when withdrawn will paint a better picture of recovery. Apart from the above risks, further outbreaks in the future are a major potential threat to the economy.
Outlook: According to the recent Budget, the government has extended its support to the economy in the form of increased employment opportunities, expansion to the digital world, health initiatives, and a boost to income and demand. The RBA has offered plentiful support to the Australian financial system, which has enabled a continued supply of credit to households and businesses. The Reserve Bank of Australia Board has decided not to increase the cash rate until actual inflation is sustainably within the target range of 2-3%. Moreover, to support jobs, incomes and businesses, the Reserve Bank is considering further monetary easing and its impact on the overall economy.
Amid the current scenario where large businesses are moving in line with the recovery process and banks remain at the forefront of delivering essential financial support to businesses and individuals, let us have a look at two major banks and two large retailers which seem well-positioned for the post-COVID world.
1. National Australia Bank Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 63.23 Billion, Annual Dividend Yield: 5.87%)
Increase in Revenue by 10%: National Australia Bank Limited (ASX: NAB) provides banking, financial and related services. The bank reported an unaudited statutory net profit of $1.50 billion and cash earnings of $1.55 billion in the third quarter of FY20. Group Common Equity Tier 1 Ratio for the quarter stood at 11.6%. Revenue for the period increased by 10%, reflecting higher Markets & Treasury income. Net interest margin remained stable, except the decline in Markets & Treasury margin due to low interest rate environment and competitive pressures.
Outlook: COVID-19 has continued to impact the bank’s customers, with varied impacts across industries. The bank strengthened its balance sheet in April 2020 to continue to support its customers. It has offered repayment deferrals to customers as they continue to face an uncertain future due to COVID-19. Notably, around 16% of the bank’s home loan deferral customers have recommenced repayments, which is a positive sign.
The bank offered deferred repayment arrangements on 86,000 home loans and 38,000 business loans amounting to $55 billion. In addition, the bank also provided 6000 business support loans under the Government’s SME Loan Guarantee scheme.
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 NAB (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has given positive returns of 12.20% on ASX. Despite the uncertainty in relation to the pandemic, the bank is continuously engaging in investment for its long-term future and is quickly embedding its new operating model to better serve its customers. 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, we give a “Buy” recommendation on the stock at the current market price of $19.40, up 0.936% on 19th October 2020.
2. Australia and New Zealand Banking Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 54.84 Billion, Annual Dividend Yield: 5.43%)
Solid Capital Position: Australia And New Zealand Banking Group Limited (ASX: ANZ) is one of the leading banks in Australia. The bank reported unaudited statutory profit of $1,327 million and cash profit from continuing operations of $1,498 million, in the June 2020 quarter, representing an increase on the 1H20 quarterly average. As on 30th June 2020, the bank had a Level 2 Common Equity Tier 1 capital (CET1) ratio of 11.1%, representing a strong capital position. The Board also declared a fully franked interim dividend of 25 cents per share.
Outlook: The bank witnessed increased deposit balances upto 3QFY20 in Retail, Commercial and Institutional segments. As on 31 July 2020, financial support has been provided to ~39,000 personal, home and business loan customers through repayment deferrals. Overall, strong deposit inflows will continue to support the bank’s liquidity metrics.
During 3Q20, the bank grew home loans in Australia well above the rest of the market and reported a strong deposit growth. In response to COVID-19, the bank launched support packages for retail and commercial customers and restructured loans or provided loan repayment deferrals for ease of customers. Notably, there were around 84,000 deferrals for home loan accounts and around 22,000 deferred business loans as on 31 July 2020.
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 ANZ (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has given positive returns of 14.29% on ASX. The bank has demonstrated the strength of its portfolio with its performance in 3Q and is well-placed to offer continuous support to customers during these challenging times. 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, we give a “Buy” recommendation on the stock at the current market price of $19.510, up 1.035% on 19th October 2020.
3. Wesfarmers Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 54.65 Billion, Annual Dividend Yield: 3.52%)
Strong Sales Growth: Wesfarmers Limited (ASX: WES) is one of Australia’s leading retail groups. During FY20, the company reported total revenue amounting to $30.8 billion, up 10.5% on the previous year. Net profit after tax from continuing operations stood at $1.6 billion, down 16.4% on pcp. Operating cash flows for the year stood at $3.597 billion, up from $2.718 billion in FY19. Net debt reduced substantially from $2.5 billion in FY19 to a net cash of $85 million in FY20. Total dividend for the year amounted to 170 cents per share. On a segmental basis, Bunnings reported the highest revenue at $14.999 billion, up on FY19 revenue of $13.166 billion. Kmart Group reported a revenue of $9.217 billion, up on FY19 revenue of $8.713 billion.
Outlook: During FY20, WES delivered a decent trading performance, with all its businesses remaining focused on long-term value creation. The company’s diverse portfolio of cash-generative businesses, leading market position, and a strong balance sheet make it well-positioned to deal with the current economic conditions.
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 WES (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has given positive returns of 9.37% on ASX. As on 30th June 2020, the company had a cash balance of $2,913 million. 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 strengthened balance sheet position, growth in sales revenue, strong customer relationships, diversified portfolio, current trading levels, and valuation upside, we give a “Hold” recommendation on the stock at the current market price of $48.210, up 0.020% on 19th October 2020.
4. Woolworths Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 49.60 Billion, Annual Dividend Yield: 2.39%)
Decent Performance in First 8 Weeks of FY21: Woolworths Group Limited (ASX: WOW) is involved in food, general merchandise, and specialty retailing via chain store operations. During FY20, group sales amounted to $63,675 million, up 8.1% on the previous year. Online sales increased by 41.8% to $3,523 million. Group EBIT and NPAT for the year stood at $3,219 million and $1,602 million, respectively. During the year, the company managed to deliver a dividend of 94 cents per share. Woolworths Supermarkets sales increased substantially in the second half, owing to more demand from customers staying at home. BIG W demonstrated strong sales momentum, with all major categories delivering growth in Q4. For the first 8 weeks of FY21, the company delivered 12.4% growth in group sales and 84.6% growth in online sales.
Outlook: Despite the above performance, the company will continue to be impacted by any potential adverse impact or challenges posed by COVID-19. Henceforth, the company is carefully setting material productivity targets and undertaking strong cost management for FY21. The company is eyeing the separation of Endeavour Group in calendar year 2021.
In the recently held Annual Australia and New Zealand Investment Conference, Philip Lowe stated that spending at large retail firms has been increasing and is moving towards pre-COVID levels. The demand for essential items like home office equipment, electronics, groceries, etc., has risen in the wake of more people staying at home during 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 WOW (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has given positive returns of 9.29% on ASX. As on 30th June 2020, the company had a cash balance of $2,068 million. 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 online sales performance in FY20 and first 8 weeks of FY21, recovery in sales across all categories for BIG W, current trading levels, and valuation upside, we give a “Hold” recommendation on the stock at the current market price of $39.40, up 0.510% on 19th October 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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