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The Australian Government announced an extension to the JobKeeper Program on 21st July 2020. As per the revisions introduced by the Government, JobKeeper Payments have now been extended by further six months until 28th March 2021 and will be assisting the businesses which continue to be impacted by COVID-19. The program was originally due to be off the table on 27th September 2020. Moreover, from 3rd August 2020, the Government also introduced an extension to the relevant date of employment to 1st July 2020, as compared to 1st March 2020 earlier, increasing employee eligibility for the existing scheme and the extension.
Payment Rate: As per the updated JobKeeper Program factsheet released by the Australian Government on 10th August 2020, the payment rate for eligible employees and business participants will come down to $1,200 per fortnight for the period between 28th September 2020 and 3 January 2021. The original program guaranteed a payment rate of $1,500 per fortnight before these revisions were announced by the Government. The revised rate will be applicable for the employees who will have fewer than 20 working hours per week. For other eligible employees and business participants, the payment rate would be $750 per fortnight from 28 September 2020 to 3 January 2021. For the remaining program duration, i.e., 4 January 2021 to 28 March 2021, the payment rate will be $1,000 per fortnight for the employees who worked for less than 20 hours per week in the relevant reference period and $650 per fortnight for other eligible participants.
Turnover Tests: The Government also laid down new conditions for businesses and not-for-profits for an extended period. For each of the two periods of extension (28th September 2020 to 3 January 2021 & 4th January 2021 to 28th March 2021), the participants will have to meet a further decline in turnover to obtain relief under the program.
Eligibility for the First Extension Period (28th September 2020 to 3rd January 2021): In order to avail the benefits of the JobKeeper Program for this period, business and not-for-profits have to demonstrate a decline in their actual GST turnover during the September 2020 quarter in comparison to the prior corresponding period.
Eligibility for the Second Extension Period (4th January 2021 to 28th March 2021): Eligibility conditions under the second extension period require the candidates to demonstrate a decline in actual GST turnover in the December 2020 quarter as compared to the prior corresponding quarter.
Turnover Decline Rates: Under the eligibility conditions, the Government requires the businesses and not-for-profits to report a 50% decline in turnover if their aggregated turnover is more than $1 billion and a decline of 30% if the aggregated turnover is $1 billion or less. For Australian Charities and Not-for-profits Commission-registered charities (excluding schools and universities), the required decline rate would be 15%.
Employment and Hours Worked (July 2020): The Australian Bureau of Statistics notified that the seasonally adjusted employment increased by 114,700 people between June and July. The number of hours worked witnessed an increase of 1.3%. The recovery was backed by a larger increase in part-time employment than full-time employment. Overall, Australia reported a rise in the percentage of people employed to 59.8% in July, as compared to 58.2% in May.
Changes in Labour Force Populations (Source: ABS)
The JobKeeper Program has provided immense support to businesses and employees amid the current economic conditions. Some of the businesses which received benefits under the original program have been able to provide relief to employees who were stood down during the pandemic. Payments under the JobKeeper Program have led to the rehiring of employees and the conduct of business in a more efficient manner. Human capital plays a significant role in shaping up the day-to-day operations and the Government’s JobKeeper Program has eased the process of recovery for its participants. Moreover, an extension to the program reinstates the confidence in the reliability of the JobKeeper Program, which is expected to positively impact overall economic conditions over the extended tenure. In light of the above factors, let us have a look at few companies which have been beneficiaries under the program and have been able to stay afloat despite the market uncertainties.
1. Qantas Airways Limited (Recommendation: Buy, Potential Upside: Low Double Digit)
(M-cap: A$ 6.94 Billion, Annual Dividend Yield: 7.2%)
Decent Platform for Future Profitability, Growth and Long-Term Shareholder Value: Qantas Airways Limited (ASX: QAN) provides international and domestic air transportation services, the sale of worldwide and domestic holiday tours and associated support activities. The company has launched an exclusive partnership allowing its frequent flyers to earn Qantas Points with the Buy Now Pay Later platform of Afterpay Limited. During 1H20, the company retained its sustainable competitive advantage and home-based strength with a decent underlying group domestic EBIT of $645 million and an operating margin of 14.4%. In the same time span, statutory PBT of the company stood at $648 million and statutory EPS was 28.8 cents. As at 31 May 2020, the company reported a stable balance sheet with pro-forma net debt of $4.7 billion and liquidity of $4.6 billion.
Outlook and Guidance: The company is taking proactive measures to accelerate recovery from the COVID-19 crisis and to create a stronger platform for future profitability, growth, and shareholder value. It expects to report a breakeven to FY20 Underlying PBT and cash flow from operations and solid recovery for domestic flights. It is also anticipating its earnings to recover at a faster pace than global peers.
The company has availed benefits under the JobKeeper program and is under discussions with the Government for a possible extension of support for those in the aviation industry who will be stood down for an extended period. Therefore, the recently announced extension to the program is expected to be in favour of QAN’s employees and business.
Key Risks: The company is susceptible to a variety of risks including the risk from travel industry disruptions and the impact of COVID-19, general economic conditions, inadequate capital and liquidity risks, reliance on key suppliers and service providers, risks from key business partners, fuel and foreign exchange volatility, etc.
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 the company has witnessed stable movements over the past few months, despite the hard-hit travel industry. In the last three months, the stock gave positive returns of 10.51% on ASX and is inclined towards its 52-weeks’ low level of $2.03. The company is strengthening its balance sheet and is improving its financial flexibility. The company retains a sustainable competitive advantage and its portfolio will continue to drive strategic priorities. 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 $3.710, up 0.815% on 17 August 2020.
2. Eagers Automotive Limited (Recommendation: Buy, Potential Upside: Low Double Digit)
(M-cap: A$ 2.2 Billion, Annual Dividend Yield: 2.95%)
Healthy Balance Sheet and Record Operating Profit: Eagers Automotive Limited (ASX: APE), formerly known as AP Eagers Limited, is engaged in the sale of motor vehicles, the distribution of parts, and the repair and servicing of motor vehicles. The Company marked upon its major strategic initiatives and completed its merger with AHG to create a leading, national automotive group, with a foothold in New Zealand. During FY19, the company reported a consolidated revenue $9.2 billion demonstrating its enhanced scale post acquisition. Despite challenging market conditions, the Group delivered a resilient performance to record Underlying Operating Profit Before Tax of $100.4 million. As at 30 June 2020, the company decreased its corporate debt net of cash to $7.6 million.
Outlook and Guidance: The company remains focused on its Next100 Strategy, which is aimed at delivering a superior customer experience with sustainable and productive cost base. It has provided guidance for FY20 and expects underlying operating profit from continuing operations of $40.3 million. The company retains a healthy financial position with liquidity of around $633.9 million, which will help it withstand any long-term impacts of COVID-19 and also provides flexibility to pursue new opportunities.
Rehired 165 Employees: In response to the global pandemic and escalated Government restrictions, the company reduced its headcount to reduce its costs base. With the access to the Federal Government’s JobKeeper program and a temporary rostering arrangement, the company was able to save many jobs and retained its workforce. Additionally, through the JobKeeper program, the company has been able to rehire 165 employees. The revised JobKeeper Program will provide a further shield to the business if it remains applicable under the conditions for the extended period.
Key Risks: The company has exposure to the risks from its use of financial instruments including Credit risk, Liquidity risk, Market risk. The second outbreak of COVID-19 and potential restrictions with respect to social distancing and lockdown may have a material impact on its financial performance.
Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
Price to Cash Flow 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 APE (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company retains a healthy financial position with a substantial property portfolio and asset base. It remains focused on leveraging the current market conditions to navigate these uncertain times. Over the past few months, the stock has depicted an upward trend on the back of decent performance and resilient financial position. In the last one month, the stock gave positive returns of 41.02% on ASX and is currently close to the average of its 52-week trading range of $2.50 - $14.490. 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 “Buy” recommendation on the stock at the current market price of $8.430, down 1.519% on 17 August 2020.
3. Accent Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 837.18 Million, Annual Dividend Yield: 5.83%)
Record Daily Digital Sales: Accent Group Limited (ASX: AX1) owns and operates a number of footwear and apparel businesses in the performance and active lifestyle sectors. For the last 2 weeks of April 2020, the company saw a surge in its digital sales from an average of ~$250,000 per day to between $800,000 and $1.1 million per day. During May 2020, it made a new daily record of over $2 million. The company has also seen an increased demand for footwear for essential workers. As at week ending 21 June 2020, the company reported year to date sales of $923 million. During 1H20, EBITDA of the company witnessed an increase of 10.5% to $67.70 million and a growth of 9.7% in NPAT to $35.28 million.
FY2020 Results Outlook: The company has provided guidance for FY20 and expects EBITDA to be around 10% above the $108.8 million achieved in FY2019. The company is committed to maintaining its position as the largest multi-channel footwear retailer. The customer trend to activewear and performance running continues to remain very strong which is likely to benefit the operational performance of the company.
The company opened its stores in Australia and New Zealand with the help of JobKeeper program wage subsidy scheme. This has allowed the company to bring back stores team to work and trade in all stores despite the lower centre traffic and store originated sales.
Key Risks: The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The company is also susceptible to risks from general and economic conditions, reduced tourism, increased levels of unemployment and related economic impacts.
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 AX1 (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The digital infrastructure of Accent Group Limited has ensured the management of customer numbers and deliveries. The company is capitalizing on the digital trend and remains focused on leveraging the current market conditions to navigate these uncertain times. The stock of the company has been on stable grounds in the current economic environment. Going forward, increased demand along with decent digital capabilities is expected to drive the performance. In the last three months, the stock gave positive returns of 40.45% on ASX and is currently trading above the average of its 52-week trading range of $0.555 - $2.20. 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). Hence, we give a “Hold” recommendation on the stock at the current market price of $1.555, up 0.647% on 17 August 2020.
4. Nick Scali Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 714.42 Million, Annual Dividend Yield: 5.39%)
Stable Balance Sheet and Strong Working Capital Position: Nick Scali Limited (ASX: NCK) is engaged in the sourcing and retailing of household furniture and related accessories. During the year ended 30 June 2020, sales revenue of the company decreased by 2.0% to $262.5 million with negative same store sales of 6.7%. In the same time span, gross profit margins of the company were 62.7% and NPAT stood at $42.1 million. During FY20, net cash inflows were $26.75 million, reflecting an increase of $27.05 million on the pcp, driven by strong trading in May and June, and the impact of one-off property sales. The Group continues to have low debt and a decent working capital position. For FY20, the company paid a final dividend of 22.5 cents per share, as compared to 20 cents per share in FY19.
Outlook: The company experienced a rebound in customer activity with sales orders of over 65% as consumers continue to reallocate discretionary spending toward furnishings and homewares. The recent strong order intake performance means that the Company’s opening order book for FY21 is significantly higher than the previous years. As a result of strong sales revenue growth, the company expects first half profit to be up by at least 50 -60% when compared to 1H FY20.
With the onset of COVID-19, the Company experienced delays in its supply chain from Asia and a sharp decline in store traffic. The company was eligible for the Australian Government’s JobKeeper wage subsidy scheme and the New Zealand Government’s equivalent scheme and received $3.91 million in wage subsidies. It also received recessions on rent for over 85% of its landlords.
Key Risks: The company is exposed to a variety of risks including foreign currency risks, interest rate risks and commodity price risks. Furthermore, the company operates in a competitive retail market which is subject to moderate barriers to entry and changing consumer preferences.
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 NCK (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company has launched one new store and has successfully introduced its online sales channel. The company is capitalizing on the digital trend and remains focused on leveraging the current market conditions to navigate these uncertain times. In the last three months, the stock gave positive returns of 68.64% on ASX and is currently trading very close to its 52-weeks’ high level of $9.41. Favourable movements in the stock price are supported by the rising demand for household goods and NCK’s strong order book. 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 “Hold” recommendation on the stock at the current market price of $8.800, down 0.227% on 17 August 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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