Examining the Australian Equity Recovery Trade

Our weekly view on Australian equities.

10 September 2020

Issued by Wilsons Advisory and Stockbroking Limited (Wilsons) ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. What if the World Got Better: Our COVID-19 Recovery Basket

The Australian stock market has Exhibit 1: Australian recovery stocks versus the rest of the market risen considerably from its March 120 lows but has been marking time 110 for 3 months now. 100 90 80 has a large proportion of 70 the market index (by both number of 60 stocks and market cap) that have been 50 negatively impacted by the COVID-19 40 induced recession. 30 20 To assess the market’s attitude to 10 0 recovery prospects we have constructed Jan 2020Feb 2020Mar 2020Apr 2020May 2020Jun 2020 Jul 2020Aug 2020 Sep 2020 a COVID-19 casualties–or more optimistically–a COVID-19 recovery ASX 100 ex Recovery Recovery Basket Source: Refinitiv, Wilsons basket that includes 24 impacted stocks across 7 sectors. Exhibit 2: Australian recovery stock performance YTD versus the rest of Constructing a the market ASX 200 Recovery Basket Travel Group Ltd Ltd Confining our universe to large caps Challenger Ltd Airways Ltd (ASX100), we have screened on Ltd year-to-date performance as well as consensus earnings revisions to isolate the stocks the market perceives to Ltd be most impacted. We have made Ltd additional adjustments for stocks that Group Ltd have had stock-specific issues largely Bendigo and Adelaide Bank Ltd unrelated to COVID-19, to come up with GPT Group a 24 stock COVID-19 recovery basket. Alumina Ltd Our basket contains stocks exposed to Santos Ltd international travel, inbound tourism, Airport Holdings Pty Ltd banking, selected resources (mostly Group Banking Corp energy), real estate and transport Ltd infrastructure. ANZ Banking Group Ltd As highlighted in exhibit 1, the Ltd performance of this segment of the Ltd market is decidedly worse than the Group broader index performance. The -80% -70% -60% -50% -40% -30% -20% -10% 0% renewed rise in uncertainty around the Source: Refinitiv, Wilsons domestic economy, triggered by the Victorian lockdowns, has weighed on With the performance of our recovery have been stocks perceived to be many of these exposed stocks in recent index clearly lagging the ASX200, it is immune from the COVID-19 economic months while investors have preferenced evident the market is not pricing in a and earnings downdraft. In contrast, the COVID-19 winners’ trade (most V-shaped recovery and is in a holding recovery plays, while well off their lows, obviously the tech sector). pattern, much like the economy. have been bouncing around in a range Market outperformers in recent months in recent months.

2 What Could Spark While a desire to be overweight quality The consensus has revised down is an important hallmark of our stock the earnings of COVID-19 casualties Renewed Interest in the selection, there are a number of across FY20, FY21, and FY22. Despite Recovery Trade? above-average quality businesses hit forecasting some recovery through the hard by COVID-19, and a number of next 2 years, FY22 estimates generally The announcement of an effective lower but still decent quality businesses look modest compared to pre-COVID-19 vaccine is the most obvious catalyst for offering significant valuation upside on a earnings levels. Multiples also generally renewed optimism around COVID-19 recovery scenario. Generally, those with look undemanding based on these impacted stocks. stressed balance sheets have been able FY22 estimates. to raise equity to bolster their position. While this is by no means a certainty, particularly on a short-term (3-6 month) Read more on Assessing our timeframe, with 7 vaccines in phase Exposure to a Cyclical Recovery. 3 trials we think the likelihood of positive news is reasonably good. The manufacturing and logistical roll-out Exhibit 3: Australian recovery stocks earnings revisions year-to-date of the vaccine, both domestically and  globally, is a daunting prospect. As seen 105 in recent months, if we do receive good  news on the effectiveness of one or more  vaccines, the share market would almost 85 certainly be prepared to look forward  12-18 months to factor in improved 75  economic conditions. 65  While this is likely to be the biggest 55 potential swing factor in sentiment  towards the recovery stocks, the easing 45 of restrictions in Victoria would be  another positive catalyst. Victoria’s Feb 2020Apr 2020Jun 2020   roadmap for re-opening has been widely ASX 100 ex Recovery Recovery Basket Source: Refinitiv, Wilsons criticised by businesses and medical groups as being overly conservative in its assumptions, thresholds and timelines; Exhibit 4: Australian recovery stocks - FY22 EPS estimate versus FY19 however, the Victorian government has at least flagged an intention to respond to Flight Centre Travel Group Qantas Airways the data. If infection rates decline faster Oil Search than is currently modelled there is a Origin Energy chance re-opening will happen sooner. Stapled Units Vicinity Centres The combination of a successful vaccine Woodside Petroleum and a re-opening scenario for Victoria Alumina before year-end would focus the market Star Entertainment Group back on recovery trades in our view. Challenger Bendigo and Adelaide Bank Scentre Group Unit What’s Supporting the ANZ Banking Group Ltd Valuation Appeal in Westpac Banking Corp Crown Resorts Recovery Trades? Santos Mirvac Group Stapled Units While we are dealing with a range of National Australia Bank uncertainties in relation to the path of Dexus Stapled Units the virus, its treatment and the impact GPT Group Stapled Units Aristocrat Leisure on the economy, we believe there is LendLease Group Stapled Units significant potential valuation appeal Worley in recovery trades. Atlas Arteria Stapled Units -100% -80% -60% -40% -20% 0% 20% 40% 60%

Source: Refinitiv, Wilsons

3 What the New Normal While the recovery is unlikely to be holding both global and domestically perfectly even, conditions are likely to exposed plays across the range of Will Look Like? improve substantially from where we are impacted sectors (we have identified today. Earnings recovery profiles look 7 recovery sectors as highlighted in Aside from debates around the conservative on average and valuations exhibit 1). With valuations stretched in re-opening of the economy and the likely generally look undemanding. “safe” areas of the market, we believe a success of vaccine candidates, there are spread of recovery trades is a worthwhile still substantial questions around what We think a diversified approach to the consideration to supplement already the “new normal” will look like. recovery trade is wise. This would suggest well-diversified portfolios.

Exhibit 5: Australian recovery stocks summary statistics

Net Debt to 6 mth. EPS YTD Price Equity Raise EPS growth Company Name EBITDA revision (Average PE (FY21) PE (FY22) Change in CY2020 FY20-22 CAGR* (12 Mth FWD) FY20 and FY21)

Energy

Oil Search Ltd -54% Yes 2.90 -77% 26.7 20.2 124%

Origin Energy Ltd -36% No 2.12 -28% 20.8 15.0 -23%

Santos Ltd -33% No 1.38 -54% 15.9 12.4 35%

Woodside Petroleum Ltd -45% No 1.01 -54% 19.8 16.8 28%

Financials Australia and New Zealand -28% No N/A -32% 12.0 10.0 16% Banking Group Ltd

Bendigo and Adelaide Bank Ltd -35% Yes N/A -25% 12.6 11.0 0%

Challenger Ltd -50% Yes N/A -24% 10.2 8.9 -6%

National Australia Bank Ltd -29% Yes N/A -34% 12.1 10.4 16%

Westpac Banking Corp -30% No N/A -33% 11.7 10.1 31%

Metals and Mining

Alumina Ltd -33% No -5.41 -29% 17.9 13.0 25%

Real Estate

Dexus -27% No 5.42 -5% 14.5 13.9 2%

GPT Group -34% No 6.30 -17% 12.5 11.9 11%

LendLease Group -33% Yes 1.98 -71% 18.9 12.5 164%

Mirvac Group -36% No 5.57 -13% 14.8 13.3 0%

Scentre Group -42% No 8.65 -29% 10.9 10.5 15%

Vicinity Centres -43% Yes 5.61 -32% 16.0 11.4 -9%

Resource Services

Worley Ltd -39% No 1.55 -23% 14.3 12.6 1%

Tourism and Entertainment

Aristocrat Leisure Ltd -18% No 0.90 -43% 24.2 18.0 47%

Crown Resorts Ltd -25% No 1.42 -68% 126.5 19.8 43%

Flight Centre Travel Group Ltd -69% Yes -13.75 -165% N/A 29.5 N/A

Qantas Airways Ltd -45% Yes 3.11 -136% N/A 14.3 N/A

Star Entertainment Group Ltd -37% No 3.24 -61% 31.5 17.0 32%

Transport Infrastructure

Atlas Arteria Group -17% Yes 13.16 -44% 17.5 15.6 67%

Sydney Airport Holdings Pty Ltd -33% Yes 12.08 -124% 586.9 47.3 220%

*DPS used for ALX and SYD Source: Refinitiv, Wilsons

4 Disclaimer and disclosures

Recommendation structure and other definitions

Definitions at www.wilsonsadvisory.com.au/disclosures.

Disclaimer This document has been prepared by Wilsons Advisory and Stockbroking Limited (AFSL 238375, ABN 68 010 529 665) (“Wilsons”) and its authors without consultation with any third parties, nor is Wilsons authorised to provide any information or make any representation or warranty on behalf of such parties. Any opinions contained in this document are subject to change and do not necessarily reflect the views of Wilsons. This document has not been prepared or reviewed by Wilsons' Research Department and does not constitute investment research. Wilsons makes no representation or warranty, express or implied, as to the accuracy or completeness of the information and opinions contained therein, and no reliance should be placed on this document in making any investment decision Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Wilsons and therefore may not be realised in the future. Past performance is not an indication of future performance.

In preparing the information in this document Wilsons did not take into consideration the investment objectives, financial situation or particular needs of any particular investor. Any advice contained in this document is general advice only. Before making any investment decision, you should consider your own investment needs and objectives and should seek financial advice. You should consider the Product Disclosure Statement or prospectus in deciding whether to acquire a product. The Product Disclosure Statement or Prospectus is available through your financial adviser.

Wilsons Corporate Finance Limited ACN 057 547 323, AFSL 238 383 acted as Joint Lead Manager and Underwriter in the July 2017 Accelerated Non-Renounceable Entitlement Offer of Limited securities for which it received fees or will receive fees for acting in this capacity. Wilsons Advisory and Stockbroking Limited may have a conflict of interest which investors should consider before making an investment decision. Wilsons Advisory and Stockbroking Limited, Wilsons Corporate Finance Limited and its related bodies corporate trades or may trade as principal in the securities that are subject of the research report.

Wilsons Corporate Finance Limited ACN 057 547 323, AFSL 238 383 acted as Joint Lead Manager and Joint Underwriter to the Telix Pharmaceuticals Limited November 2017 IPO for which it received fees or will receive fees for acting in this capacity. Wilsons Advisory and Stockbroking Limited may have a conflict of interest which investors should consider before making an investment decision. Wilsons Advisory and Stockbroking Limited, Wilsons Corporate Finance Limited and its related bodies corporate trades or may trade as principal in the securities that are subject of the research report.

Wilsons contact [email protected] | +61 2 8247 3149 [email protected] | +61 2 8247 3118 www.wilsonsadvisory.com.au

Source: Refinitiv, Wilsons

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