Newspapers this week have been full of Federal budget “winners and losers” stories and, predictably, some reports have linked the changes to the sharemarket. It’s all good stuff, but most changes were flagged well in advance – and priced into the sharemarket accordingly.
On balance, the sharemarket is a mild loser from the budget. Treasury projections for gross domestic product of 2.5 per cent, unemployment at 6.25 per cent, and a lower average iron ore price in FY2015 are a touch more bearish than the consensus and slightly negative for growth assets.
Of course, that’s assuming Treasury is correct – a big call, given its recent patchy forecasting record. Either way, consumer sentiment will weaken in the next few months as higher taxes, levies and tighter welfare entitlement rules dent confidence.
I see only two stock winners from the budget. The first is obvious: road builders. An extra $11.6 billion in an infrastructure growth package is good for the likes of Lend Lease, Downer EDI, Boral, Adelaide Brighton and Seven West Group Holdings. Lend Lease looks the pick of those.
Another group of winners – a handful of companies I call the “hardship stocks” – is less obvious. They provide debt advice, debt recovery, pawnbroking and equipment rental services, mostly to low-income earners. Key stocks are Credit Corp Group, Collection House, Cash Converters International, Thorn Group and FSA Group.
I analysed these stocks for The Bull in January, and wrote: “More families will sadly be in financial distress in 2014 as unemployment rises. And many with low-paid jobs, limited income growth and high debt will struggle with rising living costs. The result: more unpaid bills and bad debts – and opportunities for companies that specialise in this area.”
I also wrote that hardship stocks, such as FSA, were due for a share-price pullback after stellar gains. Since late January, FSA has slumped from $1.50 to $1.10, Credit Corp has eased from around $9.60 to $9.18, Collection House has moved from $1.80 to $1.90, and Thorn Group is slightly higher at $2.18. Cash Converters has bucked the trend, rallying from 96 cents to $1.10.
Some of these stocks appeal at current prices, with qualifications. I do not think for a minute that the Federal budget will send lots of people to the wall, or lead to a sharp increase in unpaid debts. If anything, the Government’s bigger austerity changes kick in later than expected. But the budget, at the margin, will add further pressure to an already weak household sector.
It is always dangerous to extrapolate budget news directly to stocks. Apart from the news already being priced in, myriad other factors affect stock valuations and budget changes may not translate to higher corporate earnings for some time.
Also, buying stocks that offer pawnbroking services, high-interest finance, and collection of unpaid debts is not to everyone’s liking – although others could argue these are mostly good-quality companies that help struggling people, and clean up the mess of bad debts.
That said, pain from the Federal budget, in my view, is slanted towards low-income earners, the unemployed, students, and other welfare recipients. Yes, a 2 per cent deficit levy higher income earners will hurt, but not as much as for someone under 30 being denied the dole for six months, or a single-income family with children that can no longer access the Part B Family Tax Benefit.
These budget changes could lead to a small increase in those who need to rent rather than buy equipment, need short-term finance to cover unexpected bills, cannot pay this month’s utility bill, or need help to restructure their debts and get back on track financially.
As I said, not a sharp increase, but enough to benefit the hardship stocks, at current valuations, in this new era of fiscal austerity.
FSA is the pick of these stocks at current valuations. It is Australia’s largest provider of consumer-debt solutions and is a small lender to individuals and small businesses. Its Fox Symes Debt Solutions business offers debt solutions such as budgeting advice, informal creditor arrangements, personal insolvency agreements and bankruptcy advice. Its target market is consumers drowning in debt and urgently needing help.
I wrote in January for The Bull: “FSA can continue to rise in 2014, but I would wait for a pullback in its share price before buying. It is due for a pause after almost tripling from the 52-week low of 48 cents, and would be a lot more interesting if its share price retreated towards $1. There’s a lot to like about FSA – at the right price.”
FSA is approaching value and further price weakness to below $1 would put it on the radar of value investors. It has a good business model, with a high proportion of recurring annuity-like income from its debt business, and thus higher earnings visibility.
As a small-cap stock, FSA suits investors comfortable with higher risk.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at May 14, 2014.
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