Retail Sector: Covid-19 vaccine changes the sentiment game and accelerates the reopening trade

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
11 November 2020, 11:50 AM
Sectors Covered:
Consumer Discretionary (Retail)

In our last sector report we noted that the development of a vaccine poses the largest threat to the consumer discretionary sector – both from a valuation/sentiment perspective initially and an earnings impact down the track from redirection of spend.

There are many unknowns around timing/scalability/adoption of the vaccine, but whichever way you look at it, most retailers have been a major beneficiary of the redirection of spending during COVID and could now become a funding source.

We continue to think Christmas will be a boomer this year and 1H results will show extraordinary growth with strong opex leverage on buoyant top-line trading. However, as we saw with AGM update reactions, the market will likely look through this strength (one step closer to the peak; risk to FY22 earnings) – a potential vaccine makes this reaction even more likely in our view.

The key enduring benefit of COVID can be seen in materially repaired balance sheets across the sector, providing a better protection backdrop than previously.

Looking at our FY21 EBITDA forecasts in February (pre COVID) compared to today, the largest upgrades have been in: MotorCycle Holdings Limited (ASX:MTO), Beacon Lighting Group Ltd (ASX:BLX), Adairs Limited (ASX:ADH), Super Retain Group Limited (ASX:SUL), JB Hi-Fi Limited (ASX:JBH), Eagers Automotive (ASX:APE) and Domino's Pizza Enterprises Limited (ASX:DMP). Conversely, the largest downgrades have been in: Apollo Tourism & Leisure (ASX:ATL), Mosaic Brands Ltd (ASX:MOZ), Lovisa Holdings Ltd (ASX:LOV) and Idp Education (ASX:IEL).

While our earnings are largely unchanged at this stage, we have lowered multiples/valuations for those likely to suffer from a return to some sense of normality (redirection of spend); and vice versa for those who have been negatively impacted by COVID (see table overleaf). This is a call on a material shift in sentiment towards COVID winners.

Ratings changes

We lower ratings from Add to Hold on: Accent Group Ltd (ASX:AX1), Baby Bunting Group Ltd (ASX:BBN), BLX, MTO and SUL.

While 1H21 earnings for these companies are likely to show very strong growth/outperform expectations, we think the market’s willingness to capitalise these earnings has diminished.

We struggled the most with our approach to ADH which, as a homewares retailer, has certainly benefited from COVID like most others. However, at no stage did ADH attract the premium valuation of peers and following today’s sell-off, is trading on sub 10x (admittedly FY22 earnings risk has increased). We keep an Add rating here, but caution that this is a long-term call and outperformance is unlikely while vaccine noise is loud and as strong comps are cycled from 4Q21.

The obvious stocks in our coverage with most leverage to a return to some form of normality include: LOV, ATL and IEL. We are less concerned about the exit trade impact on APE given the material cost-out strategy which has lessened the group’s vulnerability to macro factors – weakness provides a good opportunity in this stock.

Our re-set key picks include: AP Eagers (ASX:APE), Breville Group Ltd (ASX:BRG), Collins Foods Ltd (ASX:CKF) and Lovisa (ASX:LOV).

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