I. Sector Landscape and Outlook

Australia’s consumer discretionary sector broadly encompasses cyclical industries that cater to the end consumers, for instance, automotive, household durables, retail, and tourism. Household spending and disposable income are typical economic drivers of this sector. Australia has a sizable consumer market and is positioned as the ninth largest high-income consumer market with an annual growth potential of 3%. Subsequently, Australia also facilitates its principal export partners in Northeast and Southeast Asia with a grid of 15 free trade agreements to facilitate the emergence of 2.4 billion Asian middle-class consumers by 2020. According to the IMF, Australia is on track to generate US$1.5 trillion, accounting for 1.6% of the global economy. Australia has a highly diversified and competitive industry mix where the services and goods industry constitutes 81% and 19% of Gross Value Added (GVA), respectively, according to The Australian Trade and Investment Commission.

The sector's key growth drivers revolve around Australia’s economic indicators to provide a macroeconomic view of the current financial framework, as suggested by household spending, disposable income, and business sentiments. They are accompanied by developments in industries that carry major contributing factors of growth in the discretionary consumer sector, specifically retail, automotive, hospitality, & tourism.

Figure 1. Growth Leavers Driving Discretionary Sector:

Source: Analysis by Kalkine Group

Household consumption for the December quarter 2020 increased by 4.3%, following the record growth of 7.9% in September quarter 2020. According to a survey conducted by the Australia Bureau of Statistics, around 29% of Australians expect their household spending to increase, 63% expects it to remain constant, and 8% expects a decline. In the same survey, 38% of the Australians with weekly earnings of $3,000 or more expected an increase in income. 

In December 2020, Victoria phased out from stage 4 restrictions that materialized in 10.4% growth in household consumption. Moreover, prompt recoveries in consumer spending in the December 2020 quarter was apparent across both goods and services, which surged by 5.2% and 2.8%, respectively.

Figure 2. Witnessing Significant Recovery in Consumer Spending from COVID-19 Aftermath:

Data Source: The Australian Bureau of Statistics (ABS), Chart Created by Kalkine Group

The extension of JobKeeper and boosting cash flows for employer’s schemes lead to the most significant recorded subsidy in national accounts. Observing recoveries, the government reduced JobKeeper payments from ~$35.8 billion in September 2020 quarter to ~$11.9 billion in December 2020 quarter. Similarly, boosting cash flow for employers spent was ~$6.7 billion in December 2020 quarter, down from $13.5 billion in the September 2020 quarter. Subsequently, real disposable income dropped from ~$343.0 billion in September 2020 to ~$331.8 billion in December quarter 2020. Consumer panic and reduced discretionary spending led to an increase in propensity to save, as illustrated by the surge in real household savings rate from 7.9% in March to 22.0% in June 2020.

Figure 3. Disposable Income Took a Recent Hit:

Data Source: The Reserve Bank of Australia (RBA), Chart Created by Kalkine Group

Spend on capital expenditure by corporate houses have shown a sharp rebound in March 2021 quarter, reaching ~$31.5 billion, with an increase of 6.3% (QoQ basis). As per the latest survey conducted by the Australian Bureau of Statistics, 22% of the businesses are experiencing supply chain disruption. About 60% of Wholesale Trade businesses have adequate cash on hand to cover less than three months of operations. As business conditions showing rebound, about 20% of businesses were stopped accessing support government support programs. A large proportion of companies expressed COVID-19 uncertainties, and future economic uncertainties are the factors influencing future capital expenditure plans. 

During the COVID-19 turmoil, businesses and consumers were bailed out via online market space through a swift move by retailers from brick-and-mortar to online platforms. During the pandemic, online sales witnessed exponential growth from ~$1.86 billion in January 2020 to ~$2.80 billion in April 2020, up by 50.6%. With the onset of COVID-19 related restrictions, total retail sales declined radically from $30,033 million to $24,817 million, a monthly decline of 17.4%. However, post-restrictions, total retail and online sales have manifested an upward trend. Total retail turnover grew by 1.1% in April 2021, followed by 1.3% in March 2021, in turn, directed by improved food retail sales, up 1.5% in April 2021 month on month.

Figure 4. Online Sales Cushioning Turbulence in Retail Marketplace:

Data Source: Australian Bureau of Statistics (ABS), Chart created by Kalkine Group

Although Ford, Holden and Toyota have ceased manufacturing in Australia, the growth prospects for the automotive industry appear constructive. New vehicles demand recovers sharply, underpinned by the highest-selling April with 92,347 vehicles, up by a whopping 137.2% over the previous year. YTD sales reached 355,995 units, up by 30.7% (YoY basis). Through Automotive Transformation Scheme (ATS), government support targets to stimulate competitive investment, economic sustainability, and innovation in the automotive industry by receiving cash payments for production-related activities.

Figure 5.: Historic Record of New Vehicle Sales in April 2021:

Data Source: Federal Chamber of Automotive Industries, Chart created by Kalkine Group 

With the reopening of borders, April 2021 witnessed a 66.6% increase in overseas trips relative to March 2021. The latest data extrapolates that the hospitality industry continues to be the most affected by payroll job losses. Payroll jobs were 0.2% below mid-March across the economy, while payroll jobs in hospitality were 11.6% below. Morrison government has extended support to Australia’s tourism and hospitality industry. The government is expected to remove work hour caps for student visa holders operating in the industry. The government has also authorized temporary visa holders to access the 408 COVID-19 Pandemic Event Visa, particularly for the tourism sector, for a twelve-month period.

Index Performance:

The ASX 200 Consumer Discretionary (GIC) Index has generated a 1-year return of ~41.26% as compared to ~23.06% by the ASX 200 Index. Government support programs, surge in household consumption, stable unemployment levels, and proliferation of online sales drove the sector performance.

Figure 6: The ASX 200 Consumer Discretionary (GIC) Index outperformed ASX 200 Index in the past one year by whooping ~18.20%:

Source: REFINITIV as on the close of 27 May 2021

Key Risks and Challenges

Whilst labour costs have showcased consistent growth since June 2020 quarter, and they remain down by 4.5% relative to pre-COVID levels. This may directly impact household spending. As a proportion of GDP, net public sector debt levels have skyrocketed to 32.1% in the 2020 financial year, close to a low of -6.4% during the 2008 financial year. Support from the government is gradually fading away with stumbling JobKeeper policy support, undermining business sentiments. Though the real household savings rate declined sharply from 22% in June to 12% in December 2020, it remains high compared to pre-COVID levels. Moreover, new COVID-19 cases were identified, predominately from overseas, from 16 April 2021 to 25 April 2021, unveiling COVID-19 uncertainties.

Figure 7. Key Risks in The Consumer Discretionary Sector:

Source: Analysis by Kalkine Group

Outlook

The government has proposed $7.8 billion in personal income tax cuts to brace low and middle-income individuals with higher disposable income. With the extension of Low and Middle-Income Tax Offset (LMITO), the government expects to amplify GDP by $4.5 billion and create 20,000 jobs by the end of the 2023 fiscal year. As illustrated by upward trending retail trade and vehicle sales, the industry standpoint has been relatively positive, partially offset by the dramatic impact on the hospitality/travel industry. Although disposable income declined in December 2020 quarter to ~$331.8 billion, it stays well ahead of March 2020. With $291 billion direct government support, Australia remains ahead in employment from other developed economies such as the US, UK, Canada, and Germany.

II. Investment theme and stocks under discussion (IEL, TWP, LOV, CCX)

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’ method.  

1. ASX: IEL (IDP Education Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$6.05 Billion)

IEL is involved in international education business with major operations in Australia and Asia.

Source: Analysis by Kalkine Group

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 15.15% on 27 May 2021. We believe that the stock might trade at a premium as compared to its peer average EV/Sales (NTM Trading multiple) given better liquidity position, geographically diversified operations, sustained margins, and gradual reopening of international borders. For the said purposes, we have taken peers such as Elanor Investors Group (ASX: ENN), Betmakers Technology Group Ltd. (ASX: BET), InvoCare Ltd. (ASX: IVC). Considering the cost cutting strategy, diversified segments, cash balance, valuation, and trading levels, we give a “Buy” recommendation on the stock at the current market price of $22.110, up by 1.608% on 27 May 2021. The stock has delivered an annualized dividend yield of 1.10%.

2. ASX: TPW (Temple & Webster Group Ltd)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.12 Billion)

TPW is a pure-play online retailer involved in furniture and homewares market.

Source: Analysis by Kalkine Group

Valuation

3. ASX: LOV (Lovisa Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.50 Billion)

LOV is involved in retail sales of fashion jewellery and accessories. The company operates in Australia, New Zealand, Asia, Africa, Europe and Americas.

Source: Analysis by Kalkine Group

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 21.14% on 27 May 2021. We believe that the stock might trade at a discount as compared to its peer median EV/Sales (NTM Trading multiple) considering recent currency volatilities, drastic shift in consumer behaviours to online retail and COVID-19 uncertainties. For the said purposes, we have taken peers such as Nick Scali Ltd (ASX: NCK), Universal Store Holdings Ltd. (ASX: UNI), Accent Group Ltd. (ASX: AX1). Considering the store rollouts, acquisitions, robust sales from online channel, we give a “Hold” recommendation on the stock at the current market price of $14.150, up by 0.927% on 27 May 2021. The stock has delivered an annualized dividend yield of 2.47%.

4. ASX: CCX (City Chic Collective Limited)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$1.05 Billion)

CCX is an international omni-channel retailer operating in fashion retail and specialize in plus-size women’s apparel, footwear, and accessories.

Source: Analysis by Kalkine Group

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 8.11% on 27 May 2021. We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) given a differentiated product mix, dominant online presence, growth strategies to inter EU market and operational advancements. For the said purposes, we have taken peers such as Nick Scali Ltd (ASX: NCK), Universal Store Holdings Ltd (ASX: UNI), Harvey Norman Holdings Ltd. (ASX: HVN). Considering the US segment growth, international store expansion, increasing online channel, we give a “Hold” recommendation on the stock at the current market price of $4.560, up by 2.471% on 27 May 2021.

Note: All the recommendations and the calculations are based on the closing price of 27 May 2021. The reference data has been retrieved from the respective company’s website and REFINITIV. 

Investment decision 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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