4 stocks to benefit from a Shorten government

Financial journalist and commentator on 3AW and Sky Business
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With the polls shifting further in favour of the Australian Labor Party in the wake of August’s defenestration of Prime Minister Turnbull, attention is starting to focus on the prospect of Prime Minister Bill Shorten. Paul outlined what we can expect from a Shorten government last week, but to recap, Labor has said it will alter the dividend imputation rules to stop investors from claiming a cash refund on franking credits that exceed their tax obligations. Labor also proposes to halve the capital gains tax (CGT) discount for all assets purchased after a yet-to-be-determined date after the next election, and ban negative gearing on property investments unless it is a new building. We also know that Labor will commit to a 50% renewable energy target for Australian electricity, and much higher carbon dioxide emissions reductions targets for Australia.

The ALP is also likely to commit to a massive (but not yet quantified) infrastructure spending target; curtail the current government’s proposed tax cuts for business; and further crack down on financial services in the wake of this year’s Royal Commission.

Here’s a look at 4 stocks that could benefit from Labor’s policy program.

1) Infigen Energy (IFN)

Market capitalisation: $598 million
FY19 forecast yield: no dividend expected
Analysts’ consensus target price: 78 cents (Thomson Reuters), 64 cents (FN Arena)

Australia’s largest listed owner of wind power generators, Infigen Energy, is poised to benefit from Shorten Labor’s commitment to a 50% renewable energy target, by which half of Australia’s electricity is to be sourced from renewable energy by 2030, compared to about 19% at present.

Infigen has installed capacity of 557 megawatts (MW) of wind-powered electricity, with a further 113 MW under construction. In the financial year ended 30 June 2018, Infigen generated 1,549 gigawatt hours (GWh) of electricity and sold 1,480 GWh of it, helping it to a 7% increase in revenue, to $210.1 million, and a 41% rise in net profit to $45.7 million.

Where it gets interesting for Infigen is that it is supported by Australia’s energy settings under the Renewable Energy Target (RET), in that it is paid for generating power whether that power is sold or not. The RET requires electricity retailers to buy a set percentage of their electricity they sell from renewable sources. Because Infigen generates non-fossil-fuel power, it is eligible to receive large-scale generation certificates (LGCs), each of which represents 1MWh of ‘approved’ renewable electricity. LGCs can only be ‘created’ by accredited wind, solar, hydro or biomass generators of more than 100kW in size. Energy retailers need to buy LGCs to represent the amount of ‘non-approved’ electricity – that is, ‘non-renewable,’ meaning fossil fuels – that they provide. The renewables providers have these LGCs to sell, and that is from where the energy retailers obtain the LGCs they need to reflect their production.

This means that a renewable electricity provider like Infigen has a revenue figure made up of sales of electricity, plus sales of LGCs. At the moment, selling an LGC will bring about $70 a megawatt. Infigen does not provide a breakdown of the proportion of its revenue that comes from selling LGCs versus actual power, but it would be quite a substantial proportion.

Ironically, with the RET scheme getting closer to being filled, the value of the LGCs that underpin the RET is considered likely to begin to fall in the early 2020s. That is bad for Infigen – and is largely behind a fall in its share price from $1.16 two years ago to 62.5 cents – but the 50% renewable energy target of Shorten Labor, plus Labor’s pledge to reduce Australia’s carbon dioxide emissions, by 2030, by 45% from 2005 levels (versus the Coalition’s reduction target of 26%) indicates a major re-set of Australian energy policy, including a price on carbon. As a major renewables generator, Infigen would be in the box seat to benefit, although it may not be in the form of LGCs. Infigen trades at a discount to international peers, but the market would expect that discount to disappear under a Shorten government.

2) Boral (BLD)

Market capitalisation: $8.2 billion
FY19 forecast yield: 4%, 50% franked
Analysts’ consensus target price: $7.90 (Thomson Reuters), $7.55 (FN Arena)

While it would no doubt gall the unions which back Labor, that their nemesis Mike Kane could benefit from a Shorten government, the reality is that the Boral chief is justifiably salivating at the infrastructure pipeline that Australia is looking at over the coming years – a pipeline to which Labor’s infrastructure policies will only add. Victoria’s $50 billion underground suburban rail plan, announced last month by Labor’s state stablemate Daniel Andrews, is just an example of what Boral sees as an “extraordinary next decade,” with what Kane calls an “amazing” amount of work on roads, highways, bridges, tunnels and airports. The work in commercial, infrastructure and major projects activity should well and truly offset any impact from the residential property slowdown. Peers like CIMIC Group (the former Leightons), Downer EDI and Adelaide Brighton should also benefit from increased infrastructure spending under a Shorten government.

3) Challenger (CGF)

Market capitalisation: $6.5 billion
FY19 forecast yield: 3.3%, fully franked
Analysts’ consensus target price: $12.00 (Thomson Reuters), $11.64 (FN Arena)

Labor’s policy to remove the cash rebates on franked dividends has been well-canvassed for its harmful impact on some retirees and self-managed superannuation funds (SMSFs). Annuities specialist Challenger (CGF) could potentially benefit from the proposed crackdown on cash refunds for excess dividend imputation credits, because it could make – for self-managed super fund (SMSF) trustees in particular – an annuity a more attractive prospect than holding direct shares for the franking credit rebates. Challenger is also free of Royal Commission baggage, and has a strong demographic tailwind behind it – as Australia’s leading provider of annuities. Challenger is benefiting from demand coming from the rising number of retirees: the number of Australians older than 65 is expected to swell by 75% over the next 20 years.

4) BHP (BHP, $33.22)

Market capitalisation: $176.8 billion
FY19 forecast yield: 5.8%, fully franked
Analysts’ consensus target price: $35.90 (Thomson Reuters), $35.54 (FN Arena)

BHP has what it considers its ideal portfolio these days – built around iron ore, petroleum, copper, thermal coal and steelmaking coal – but that is not what brings it into this article. It’s not so much even that it would benefit under a Shorten Labor government, as BHP will flourish no matter who is in the hot seat in Canberra. BHP in fact benefits because of its war-chest of stored franking credits, and the cash to be attached to them.

At the completion of FY18, BHP had $US11.7 billion ($16.3 billion) worth of stored franking credits waiting to be distributed to Australian shareholders. As well, given that BHP will receive $US11 billion ($15.3 billion) from the sale of its US shale oil and gas assets, that brings to about $US20 billion ($27.8 billion) the amount it has available to be distributed to shareholders – well and truly enough to absorb the franking credits stash.

An ALP government is likely to backdate its franking credits policy to dividends paid after 1 July 2019, so to help its Australian shareholders, BHP should release its franking credits pile before 30 June next year, through some combination of ordinary dividends, special dividends or share buybacks.

For the year just gone, BHP declared a record final dividend of 63 US cents compared to 43 US cents last year, taking its fully franked total dividend to US$1.18 for FY18, a 35-cent (42%) lift. According to FN Arena, analysts expect a dividend of 140.6 US cents this financial year: with the need to get the franking credits out to eligible shareholders, more largesse is likely from BHP.

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.

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