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, Industrials & Developers

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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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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