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Some commentators claim COVID-19 will change Australian industry as we know it. Others even suggest the virus will permanently reshape society, government and economies worldwide.
Forecasters making breathless, headline-grabbing predictions should know better. Much has changed and will change this year because of the virus. But most change will be temporary.
Granted, some changes will last longer than others. COVID-19 will provide a strong tailwind for supermarkets well into 2021 as consumers eat more at home and hold a little extra stock in their pantry and fridge, mindful of the food-buying panic the virus created.
That’s good for Woolworths (WOW) and a reason why I nominated it two weeks ago in this Report as one of five defensive industrial stocks for long-term investors to consider.
Chart 1: Woolworths
COVID-19 will also boost companies exposed to remote-working trends over the next 18 months. The pandemic left too many companies scrambling to organise home-based workforces. Employees having a functional home office as a back-up will be vital.
That’s good for JB Hi-Fi (I nominated it JBH this Report last month) and Wesfarmers-owned Officeworks (part of that conglomerate). As more people hunker down for home-based work or e-learning, a modest upgrade of office equipment, stationery and gadgets is likely.
Interest in remote-based working arrangements should also boost co-working space providers in the medium term. Co-working spaces are bleeding now, but the case to have cheap co-working space available at short notice in coming years has strengthened.
My preferred long-term local play on this trend is Servcorp (SRV), down 35% to $2.50 since early March. By this time next year, I suspect more corporates will be looking at decentralising their workforce a little and having access to co-working or service offices for parts of their workforce, if needed.
E-commerce tailwinds from COVID-19 could be larger and last longer than widely realised. Some older people I know have bought groceries, clothes and other items online for the first time – and claim they will buy more goods online in the future. COVID-19 has changed their purchasing habits.
Migration from bricks-and-mortar retailing to digital channels was well entrenched, but COVID-19 will surely speed up that trend. Just as it could hasten the demise of printed newspapers and magazines as more people consume COVID-19 news via mobile devices.
Kogan.com (KGN) looks like a stock for the times. The e-retailer has fallen from a 52-week high of $7.94 to $5.82, having sunk to almost $4 in early March. Kogan.com shares can be volatile and the stock suits experienced investors comfortable with small-cap companies.
Chart 2: Kogan.com
Travel is a different story. I fear the effect of COVID-19 on international-travel providers could be larger and last longer than the market expects. It could take years before some travellers, feel safe to holiday in developing nations.
Domestic travel could benefit when the crisis eventually subsides. There will be much pent-up travel demand and cheaper, safer domestic holidays will appeal. The trouble is, so many of Australia’s best tourism assets are foreign owned.
Sydney Airport (SYD) and Auckland International Airport (AIA) look interesting at current prices and I have been a long-time supporter of both stocks. I went cold on Sydney Airport for valuation reasons when it traded well above $7 and it is back at $5.23.
However, I cannot see any rush to buy Sydney Airport and or Auckland International Airport given airports are the epicentre of the economic fallout from the crisis. Also, I’d prefer to see if Sydney Airport will need to raise equity capital.
Still, the airports are starting to looking interesting for long-term value investors.
Readers will recall my strategy since this crisis began has been to average cautiously into the market by putting some available cash to work in equities. The goal should be to buy on big down days in the market – plenty such falls are still ahead – rather than chase the market higher on strong days.
My early preference was to buy high-quality Australian and international technology companies that were pummelled in the initial sell off. Technology was the best-performing sector a year after the 2003 SARS crisis and I believe that will be the case again with COVID-19.
Next, five defensive industrial stocks were added to the ideas list: Woolworths (WOW), Telstra Corporation (TLS), Australian Securities Exchange (ASX), APA Group (APA) and ANZ Banking Group (ANZ).
Last week, I added three large mining and energy stocks: BHP Group (BHP), Fortescue Metals Group (FMG) and Woodside Petroleum (WPL). Each came into the crisis with strong balance sheets and in the case of BHP and Fortescue, excellent cash flow, thanks to rising commodity prices in the past few years.
I suggested last week that investors should have by now used at least half of their available investment cash to increase equities exposure. That view still holds. I’m still not convinced it’s time to go “all in” or that the market has bottomed.
Again, keep some cash on the sidelines to buy on big down days or into higher-quality companies that have to raise emergency capital at deeply discounted prices.
Conservative investors should stick to defensive blue chips, given the potential of ongoing high market volatility. Those who can take more risk might consider mid-cap Domino’s Pizza Enterprises (DMP) and small-cap Collins Food (CKF), owner of KFC and Taco Bell stores.
I have written favourably about Collins Food several times in this Report over the past five years and became more positive on Domino’s, on valuation grounds, last year.
Domino’s has fallen from a 52-week high of $66 to $49 and Collins Food has plunged from a high of $10.80 to $5.57 during the COVID-19 crisis. Both stocks look oversold.
Chart 3: Domino’s Pizza Enterprises
Collins Food closed its in-store dining facilities in Australia and The Netherlands and wound back opening hours at its German operations. The focus shifted entirely to takeaway, drive-through and delivery options – channels worth at least 80% of its sales.
Chart 4: Collins Food
Sales were down about 8% on the same time last year, Collins announced this month, due to closure of instore dining and reduced shopping-mall traffic. Sales were sharply lower in Europe because drive-through facilities are not as prominent in KFC stores there.
Domino’s closed its New Zealand stores for four weeks in line with government directions and voluntarily closed its French stores. Like Collins Food, Domino’s has predominantly a takeaway and home-delivery model rather than dine-in business.
Like all fast-food companies, Domino’s and Collins will be affected by COVID-19 over the next 12 months as consumers cut spending and cook more at home.
Evans & Partners this week estimated $8.8 billion in sales from Australia’s $47 billion café, restaurant and takeaway sector will shift to supermarkets and that the pandemic will have a longer-lasting effect on consumption patterns.
I feel for owners of high-end restaurants and those relying heavily on in-store dining. Domino’s and Collins Food are exceptions: their business models are heavily geared towards takeaways and their low price points and well-known food brands suit cash-conscious consumers.
A $5 value pizza at Domino’s or cheap box of KFC, while not to everyone’s taste, appeals to those seeking cheaper food offerings or who want to downsize from more expensive takeaways bought via Uber Eats. Or to people who have been eating much more at home during the crisis, are tiring of their own cooking and yearn for cheap takeaway, home-delivered meals.
Longer term, Domino’s and Collins Food could benefit as COVID-19, sadly, forces many small takeaway operators to shut. Many small operators were barely profitably before the crisis and rationalisation of small food providers is long overdue. Watch Domino’s and Collins increase their share of a contracting takeaway market.