Three winners for this year’s budget

Predicting winners and losers from the Federal Budget is always tricky. The market factors in the Budget well before its release because so much of it leaks to the media.

COVID-19 adds other complications. Budget 2020 assumes a vaccine is discovered and that Australians can access it by the end of next year – a reasonable call, although far from certain.

The timing of State border re-openings further clouds forecasts. The national economy is relying on recalcitrant State Premiers to put principles before politics with border re-openings.

Caveats aside, the scale of this year’s Budget means it will have more market impact than any I can recall. Monday’s share market rally came after reports of tax cuts being brought forward.

I see three potential winners from this year’s Budget: discretionary retail, home-renovation stocks and gambling.

Bears will argue the gains in these sectors are already “priced in”. Several retail and home-furnishing stocks have been a tear this year as consumers spent money earmarked for travel and other services, or ploughed their superannuation withdrawals into discretionary goods.

Pessimists also point to the looming “economic cliff” as JobKeeper and JobSeeker programs end, home-loan repayment deferrals are wound back and unemployment spikes.

That is a recipe for economic catastrophe. However, view is the economic recovery will be stronger and faster than the market expects because of all the stimulus in the pipeline.

This view, of course, depends on COVID-19 containment in Australia and a vaccine. All bets are off if a third wave emerges in Victoria or a second wave in New South Wales. Or if news of vaccine development and distribution disappoints over the next six months.

A Joe Biden victory in the November US Presidential election would be another market headwind, but it’s foolish to write Trump off, given the unreliability of opinion polls. His rapid discharge from hospital after contracting COVID-19 will boost his campaign.

Back home, Australians who still have jobs are itching to spend when COVID-19 restrictions are further relaxed. The country’s rising savings ratio will tumble as consumers nationwide are free to visit supermarkets, dine out, go to pubs and attend events.

Those with jobs will have more in their pocket. Someone earning $100,000 will save $1,530 in income tax in FY21 – and have another $30 to spend each week.

Some of that tax gain will find its way into retail, home furnishings and poker machines. Here are three stocks that will benefit:

1. JB Hi-Fi (JBH)

The electronics retailer was among the first stocks I wrote about at the depth of the share market sell-off in March. JB Hi-Fi has soared from $31 to $47.40 since that column.

I was bullish on tech as a recovery play from COVID-19, and JB Hi-Fi (essentially a retail technology distributor) is an outstanding company.

The move to home-based work boosted JB Hi-Fi and Harvey Norman Holdings as consumers stocked up on home-office equipment and technology.

Federal and State government support for small business is another tailwind for JB Hi-Fi. The Commonwealth’s Boosting Cashflow Program for small business provided $20,000 to $100,000 of tax credits and any excess was returned to companies to help them survive.

The Victorian Government is now up to its third round of business support ($10,000) and will probably need at least another round, depending on the easing of COVID-19 restrictions.

The Federal Budget’s instant tax asset write-offs should boost JB Hi-Fi and other retailers, as small business owners have more financial incentive to upgrade their technology.

Add to that new technology releases, such as the latest Apple Watch and Fitbit Sense, and there should be enough for JB Hi-Fi to justify its recent gains and head higher in FY21

Share-price gains will be slower from here, but there’s a lot to like about JB Hi-Fi’s prospects in FY21 as consumers spend some of their tax cut on technology upgrades.

Chart 1: JBH

Source: ASX

2. Reece (REH)

I wrote favourably on the plumbing-products group for this report in May in a story on equity capital raisings. Reece has rallied from $8.19 to $13.75 since that column.

Expect further, albeit smaller, gains for Reece in the next 12 months as the market factors in an increase in home-renovation spending and better-than-expected growth for plumbing suppliers.

I’m seeing rising interest in renovations first-hand: a friend recently decided to renovate a bathroom and another is upgrading her kitchen. Money set aside for an overseas holiday (redundant with international borders shut) is being ploughed back into the family home.

A similar trend is at play in furniture and other home furnishings, judging by high-frequency sales data that is publicly released. That’s why I continue to favour furniture retailer Nick Scali (NCK), a long-time column favourite. Breville Group (BRG) is another of my preferred mid-caps.

Moreover, the Federal Government is hell-bent on stimulating the construction sector, which it should, given the jobs at stake. The Budget includes an additional 10,000 places for the First Home Loan Deposit Scheme to help first-home buyers purchase a house with a small deposit.

That follows the $25,000 grant announced earlier this year for eligible owner-occupiers to substantially renovate an existing house (poor policy, in my view).

Another interest-rate cut from the Reserve Bank, likely in November after this week’s RBA meeting, will further support the home-renovation market and building-products suppliers.

There are, of course, many risks. Job losses and economic recession are an awful backdrop for housing construction. But residential property has been more resilient than expected and the renovation market is less cyclical because homeowners are likelier to have a job.

Either way, Reece is a well-run and well-capitalised company with strong international growth prospects. Also, plumbing is an essential service and Reece has shown it can grow in good and bad markets. If any business can ride out a downturn and emerge stronger, it’s Reece.

Chart 2: Reece

Source: ASX

3. The Star Entertainment Group (SGR)

I featured the casino and integrated resort operator in this Report in early June. The Star was $3.17 at the time and has mostly traded sideways since that report.

I argued that Electronic Gaming Machines (EGM) would be an early beneficiary of COVID-19 restriction easings – a clear trend in New Zealand casinos after that country emerged from its pandemic restrictions.

There was also evidence overseas that casinos have had more of a V-shaped recovery than other sectors after COVID-19 restrictions were eased.

In its latest earnings results, The Star noted improving EGM volumes. Whether one likes or loathes poker machines (I’m in the latter camp), there are plenty of habitual gamblers who are itching to play the pokies at The Star’s Sydney and Queensland casinos.

Sadly, some of the Budget tax cuts will find their way into poker machines. An extra $20-30 a will encourage more people to have a flutter. Or put more money into pokies each week.

My hunch is that many consumers, having endured COVID-19 restrictions for months, will be eager for extra leisure. Tax cuts will help fund a small part of entertainment at casinos.

The Star has done a good job during the pandemic by cutting costs and reducing debt. Longer term, the company has the eye-catching Queen’s Wharf development in Brisbane underway (50% SGR) and more growth ahead from its Gold Coast casino upgrade.

I also argued that investors “need patience with The Star”. Border closures mean fewer international and domestic visitors at casinos. The Star also has competition risk from the new Crown Sydney next year – a threat already priced into its valuation.

The Star this week said it is eligible for Phase 2 of the JobKeeper program at its Sydney casino, meaning revenue there in the September quarter is at least 50% down on the same period a year earlier. Its Queensland operations are not eligible, so at least part of The Star is well on the road to recovery.

The Star has plenty of near-term challenges, but should be firing on all cylinders in a year or two when Queen’s Wharf opens and the company’s revamped Gold Coast and Sydney offerings hit their stride. The company’s valuation is undemanding at the current share price.

Chart 3: The Star Entertainment Group

Source: ASX