Last Thursday, the Federal Government announced a $17.6bn stimulus package to support the Australian economy. Estimated to be worth around 0.9% of annual GDP (gross domestic product), the package is front-loaded in order to help instil confidence in businesses and households, and keep people employed.
The most important part of the package is a one-off payment of $750 to pensioners, social security, veteran and other income support recipients, and eligible concession card holders. This will go to about 6.5 million lower income Australians, will be tax free, and not count as income in the social security tests. It will be paid starting 31 March, with over 90% of payments made by mid-April. The cost is $4.8bn.
Aged pensioners receiving a part pension will also see a boost to their pension, with the deeming rate used to assess investment income being cut by 0.5%. From 1 May, the lower rate will reduce to 0.5% and the upper rate to 2.5%. About 900,000 Australians will see a pension rise, with the average affected age pensioner getting an increase of $219 a year.
For businesses, there are 4 stimulus measures:
- A $6.7bn boost to cash flow for small and medium sized businesses. Businesses that employ staff with a turnover of less than $50m will be eligible for a cash payment of between $2,000 and $25,000. This will be refunded automatically by the ATO upon lodgement of their BAS or IAS statement. Over a four month period, they will effectively get 50% of the PAYG tax they withhold, up to a maximum of $25,000. The first payments will be made from 28 April;
- The instant asset write-off limit is being increased from $30,000 to $150,000, effective 12 March. This allows businesses to immediately write-off the cost of any equipment purchased for less than $150,000 against their taxable income. They can do this multiple times. The threshold for eligible businesses is also being increased, from a turnover of under $50m to an annual turnover of $500m. The initiative goes to 30 June;
- Depreciation incentives to support business investment are also being increased. For the next 15 months until 30 June 2021, businesses with a turnover of less than $500m will be able to deduct 50% of the cost of an eligible asset (plant and equipment) upon installation, with existing depreciation rules applying to the balance; and
- An incentive to support businesses retaining apprentices and trainees, with a wage subsidy of 50% of the apprentice’s wage for 9 months from 1 January 2020 to 30 September 2020.
There is also $1bn to support severely affected regions, including those heavily reliant on industries such as tourism, agriculture and education. A separate $2.4bn has been provided for the health system.
Which stocks will benefit?
Broadly, the stocks fall into three categories: discretionary retailers, gaming and medical:
1. JB Hi-Fi (JBH) and Harvey Norman (HVN)
The most obvious beneficiary is Australia’s best retailer, JB Hi-Fi. (JBH). When mass payments were made following the GFC, technology and home entertainment items were in hot demand. This behaviour is likely to be repeated. Further, the extension of the instant asset threshold to businesses with turnover of $50m to a turnover of $500m will provide support.
Harvey Norman (HVN) is another possible winner, but because its business is more in white goods and home furnishings, it may not have the same impact.
In the current market, broker valuations and earnings estimates are almost academic, but for the record, JB Hi-Fi has a target price of $38.70 (16.4% above Friday’s close), while HVN’s target is $3.96 (25.8% higher than Friday’s close).
JB Hi-Fi (JBH) – Mar 15 to Mar 20
The big challenge for both JB Hi-Fi and Harvey Norman is whether, in the short term, the Coronavirus may discourage store visits and online channels may struggle to meet delivery schedules. Consumer confidence will also take a hit. According to FN Arena, Macquarie cut its target on Friday for JB Hi-Fi in the face of lower consumer discretionary spending. It cut its target from $51.10 to $38.80, but retained its “outperform” call.
One early winner from the Coronavirus and potentially a beneficiary from the stimulus spending is The Reject Shop (TRS). It reported today that sales for the three-week period between 24 February to 15 March were up 15.1% compared to the same period in 2019. Growth was driven by strong category performances in cleaning, groceries, toiletries and pet care. The stimulus spending may not have the same impact, but it won’t do any harm.
This leads to the question of whether the supermarket chains, Woolworths (WOW) and Coles (COL) will benefit. It can’t do any harm, and you would expect some flow through to discount department store Big W. It should also be good for their liquor businesses – Endeavour Drinks (Dan Murphys/BWS) for Woolworths, and Liquorland/Vintage Cellars/FirstChoice for Coles.
Wesfarmers (WES), through the Kmart Group (Kmart/Target) and Officeworks, may also be a winner. Officeworks did well out of the previous extension of the instant office write-off (it sells computers and other electronic goods), but if a large number of employees switch to working from home, it could be impacted by a fall in the demand for stationery and general office goods.
2. Tabcorp (TAH)
Nominating chronic underperformer, Tabcorp (TAH), to any list like this is a high risk strategy. The graph below tells the story:
Tabcorp (TAH) – March 15 to March 20
But Tabcorp did purchase the high performing Tats business, and although it is struggling with parts of the integration, the gaming business is doing well. This includes brands such as TattsLotto, OzLotto, Powerball and Keno. Some recipients of the $750 handout will spend monies on these products.
A downside for Tabcorp is that if the Coronavirus forces the cancellation of sporting and racing events, the wagering business through TAB in all states and territories (except WA) may suffer.
According to the analysts, TAH closed on Friday at $3.22, some 43.1% below its current target price of $4.61. It is yielding a forecast 6.3%, fully franked.
Unloved online gambling retailer, Jumbo Interactive (JIN), may also be a winner. It distributes lotteries and other gaming products under the Oz Lotteries brand.
3. Sonic Healthcare (SHL)
Pathology and diagnostic businesses, while not direct beneficiaries of the stimulus package, will benefit from the Government’s separate $2.4bn package to support the health system and manage any Coronavirus outbreak in Australia.
The leading pathology and diagnostic business is Sonic Healthcare (SHL). About 80% of its revenue is from pathology, with imaging and other services making up the balance. It is a global business, with the USA and Australia each accounting for about a quarter, and significant contributions from Germany and the UK. The Australian business (through Douglass Hanly Moir) is an accredited COVID-19 tester.
According to FN Arena, Sonic’s target price is $32.52, about 15.4% higher than Friday’s close of $28.17. There were 5 buy recommendations, 1 neutral recommendation and 1 sell recommendation.
Sonic Healthcare (SHL) – March 15 to March 20
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.