The full effects of the Federal Government’s latest financial rescue initiatives will take time to flow through to the broader economy. But if the estimated $1.7 billion boost to December consumer spending (courtesy of the government’s pre-Christmas $10.4 billion cash-splash) is any indication, retail will immediately benefit from this year’s $42 billion fiscal stimulus package.
Given that the $900 cash bonuses, which are effective early April, are of a similar amount to those handed out last December, Michael Heffernan, senior client adviser with Austock says retailers are primed for another surge from April. This should help alleviate the deterioration in retail spending due to rising unemployment.
Assuming that around 20 percent of the $12.7 billion in payments will be spent at retail, he expects retail sales to experience a similar kicker in the June quarter to the 3.8 percent uplift witnessed last December. It was household goods that recorded the biggest rise, of 9.9 percent, while department stores and soft retailing sales rose 8.3 per cent and 5.8 percent respectively.
So while a shake-out among smaller retailers is on the cards, which retail stocks stand to benefit the most? Having posted a 9.8 percent jump in sales last December, Heffernan expects Woolworths (WOW) to remain the standout recipient from an expectant increase in consumer spending.
Other stocks, he expects to benefit most from the handouts include, consumer staples like Metcash (MTS), Wesfarmers (WES); and consumer discretionaries, including: The Reject Shop (TRS), JB Hi-Fi (JBH), David Jones (DJS), Lion Nathan (LNN), Foster’s Group Ltd (FGL), and Coca Cola Amatil (CCL).
Given the demographic impacts, broker Citi Smith Barney expects the retail categories to benefit the most from the 2009 fiscal stimulus to be discount department stores, clothing and appliance sectors. And in addition to its three most favoured stocks – Woolworths, Wesfarmers and JB Hi-Fi – the broker Citi also believes Solomon Lew’s Premier Investments (PMV) warrants inclusion in any list of ‘best-positioned’ retailers. PMV owns a portfolio of fashion retailers within the Just Group stable.
Trading well under Citi’s target price of $5.20, Premier Investments is expected to benefit from more broadly administered cash handouts this April.
But despite being more targeted at pensioners, pre-Christmas cash bonuses still managed to reverse November’s 2.4 percent fall in clothing sales with a 4.7 percent growth in December. And given that two-thirds of April’s cash handouts will reach 25-54 year olds, Just Group’s clothing retail chains, including: Jay Jays, Dotti, Just Jeans and Portman’s are all expected to benefit.
Also at a store level, the three non-clothing retailers Citi expects to benefit the most from cash handouts include Wesfarmers-owned Target & Big W, plus Woolworths’ Consumer Electronics division. Within the appliance category the broker expects cash handouts to mostly benefit the small electronics categories, notably notebook computers and gaming as opposed to big-ticket items like white-goods and furniture.
While this bodes well for Harvey Norman (HVN) and JB Hi-Fi, the former is trading at a more attractive entry point given Citi’s valuations on both stocks. While JB Hi-Fi is trading at a premium to Citi’s target price of $8.30, Harvey Norman has significantly greater valuation upside at current levels.
Meantime, Wesfarmers, which has the largest retail business footprint in Australia, is currently trading at the largest discount (15.26) of any preferred retailer to Citi’s target price of $24.80 (PE at 9.9x). And despite Wesfarmer’s balance-sheet issues, Citi sees accelerating comparable store sales growth in food & liquor as a primary catalyst for the conglomerate’s upside on 2009.
So beyond retail, what other sectors can expect to benefit from the Federal Government’s fiscal stimulus package? Numerous industrials like Boral (BLD), Reece Australia Ltd (REH), Hills Industries Ltd (HIL), GWA International Ltd (GWT), and Brickworks Ltd (BKW) may experience minor uplift from the Government’s $1.2 billion education building programme. Insulation manufacturer CSR (CSR), together with Fletcher Building also expect to benefit from initiatives to install insulation batts within homes across Australia.
But the greater relief for these stocks is currently coming via falling interest rates which saw loans for new dwellings jump 15.2 percent in the December alone. Yet Boral expects neither lower interest rates nor government spending to help its housing business until at least mid-2009.
Meantime, JP Morgan says infrastructure stocks like Leighton Holdings Ltd (LEI), Transfield Services Ltd (TSE), United Group Ltd (UGL), Lend Lease (LLC), and Downer EDI Ltd (DOW) can expect the most upside from the government’s remaining $27 billion spend on construction related activities. But despite the Federal Government’s efforts to fast-track stgelopments, tardiness by state governments to move quickly enough means the full effects of this upside may take two years to kick-in. Nevertheless, Leighton’s long-term outlook remains solid due to a $37.5 billion pipeline of global contracts within the engineering and mining contractor’s core markets.
Given that the government’s first cash-splash saw gaming expenditure in Victoria jump 13.4 percent in December, JP Morgan expects gaming companies including, Tatts Group (TTS), Tabcorp Holdings (TAH) and Crown Limited (CWN) to benefit from the next wave of cash bonuses. But while Crown has suffered setbacks with its US casino expansion, the duopoly currently enjoyed between Tabcorp and Tatts for the ownership of Victoria’s 27,000-plus poker machines is about to end.