Equity Strategy: Federal Government Stimulus

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
12 March 2020, 12:10 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

The Federal Government has today announced $17bn in fiscal stimulus targeted primarily at businesses and households. This is in addition to $2.4bn of emergency Healthcare funding announced earlier in the week. 

Below are the first impressions from Analysts across relevant sectors:

The Economy (Michael Knox)

Our estimate of COVID-19’s impact on the Australian economy is 0.75% of GDP in the first quarter or $15bn. Therefore this stimulus announced looks like more than enough to fill that void. The duration of the impact is still uncertain but we're comfortable that the Government has capacity to continue to act in response if required.

Banks (Azib Khan, Steve Sassine)

The stimulus targeted at SMEs will be supportive of asset quality, which will be particularly important for NAB which is the major bank most exposed to SME banking. The government is trying to incentivise businesses to retain employees, and if the government is successful in achieving this then a potential increase in the unemployment rate may be less pronounced; this would be broadly positive for asset quality.

Targeted cash payments to certain households may be temporarily supportive of personal lending credit quality to a mild extent.

The Consumer / Retailers (Jo Little)

The material increase in the small business instant asset write-off is clearly a positive for some retailers (JBH, HVN, WES, APE). However, we question whether this will be enough to offset the underlying decline in foot traffic/spending/general activity.

The A$750 cash hand-out for pensioners and low-income earners is also a potential positive for retailers/consumer spending. But again, it is may not be enough to offset the underlying decline in foot traffic/spending/general activity.

Travel / Tourism (Belinda Moore)

The Government has allocated A$1bn in support of regions/communities that have disproportionately been affected by COVID-19, including those dependent on tourism, agriculture and education.

Measures include waiving fees and charges for tourism business operating in the Great Barrier Reef Marine Park and Commonwealth National Parks, as well implementing targeted measures to further promote domestic tourism.

We struggle to see a material benefit for the ASX listed travel stocks (CTD, FLT, WEB & HLO) in today’s economic response and expect reduced travel demand will continue to impact the travel sector to at least the 1H21 and currently see FY22 as the next full financial year where these companies will benefit from normalised trading conditions.

ATL may benefit from an uptick in local travel/domestic tourism, however this will not be able to offset the material impact from declines in international travel (c75% of its customer base).

Healthcare (Derek Jellinek, Scott Power, Iain Wilkie)

The sharp focus on the health-related COVID-19 crisis is likely to provide strong tailwinds for the diagnostic/pathology players such as Sonic Healthcare (SHL) and Healius (HLS), but also downstream into the medical suppliers such as FPH (respirators) and ANN (examination gloves).

Given COVID-19 often results in pneumonia – we see potential for an increase in radiological lung imaging demand with Capitol Health (CAJ) and Integral Diagnostics (IDX) placed well for growth in imaging demand across the Australian market, while Promedicus (PME) and Mach 7 Technologies (M7T) is likely to benefit from heightened demand across the US and Asia. X-ray equipment manufacturer Micro-X (MX1) has already seen a significant uptick in demand for its mobile units

General Industrials (Alex Lu)

The package aims to build confidence in broad based economic activity, but is targeted at those segments affected the most (small business, households). Aside from the benefit to confidence in broad activity/consumption, there is arguably a limited direct impact to many listed pure "Industrials" companies. Officeworks (WES) stands to benefit given its exposure to small to medium size businesses, but only represents ~6% of group EBIT for WES.

Large Financials (Richard Coles, Scott Murdoch)

We don’t think there is a meaningful direct impact on the large cap financials as a whole from the stimulus package (Insurers, Fund managers/Registries). Macquarie’s equipment finance business should be a direct beneficiary, although this is a relatively small area of business relative to the whole group.

Small Financials / SME & Consumer lenders (Richard Coles, Scott Murdoch) 

The 'instant asset write off' is positive for demand for equipment finance; and potentially the cash handout is positive for consumer finance providers. However, overriding this, for smaller companies in this space (e.g., ZIP, APT, FXL), we think the market will be focused on their ability to access capital (reliance on wholesale debt markets) and the bad debt environment. Too early to buy this sector solely based on stimulus.

Electricity utilities (Max Vickerson) 

This package is unlikely to have a significant impact on the integrated electricity generator/retailers except to limit extended drops in electricity demand by encouraging economic activity. Electricity companies risk facing a drop in demand from a broad shutdown of industry, businesses, schools etc.

By looking at the historical drop in demand during public holidays in April, we estimate that if there is a broad shutdown that electricity demand could drop by ~10% during that period.

It’s hard to predict how long a broad closure of schools and businesses would be in place, if it happens, however if any potential shutdown doesn’t extend longer than four weeks the average impact to demand in 2H could be as low 2%.

Spot prices are also likely to be lower in the period which will impact IFN more than AGL and ORG. AGL is the most vertically integrated and therefore most strongly hedged against falls in the spot price over the short term.

More analysis on the effects of COVID-19

More information

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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