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Stock Insights

Election results: winners, losers and three small caps to benefit.

29/5/2019

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This week we analyse the aftermath of what some would consider the most surprising election result in Australia’s history. And by “surprising”, for us at least, we mean a welcome relief.
For anyone that woke up on Sunday morning following Saturday’s elections and did not watch the news, they would have woken up assuming Labor had won as expected. Election news polls widely predicted a Labor victory and even the bookies proclaimed it a done deal with Libs paying $7 to win (extremely unlikely) and in some cases, deciding to pay out all bets on Labor, prior to the day! (Sportsbet – ouch!)
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The good news for us investors is that unlike the notion portrayed by the polls and the bookies, there is a large chunk of Australians that, amongst other things, are not fond of paying higher taxes, losing out on franking refunds and seeing their houses or investment properties continue to decline in value. The people have spoken.

So, what are the implications for us investors and who are the biggest beneficiaries from the Coalition retaining power with what is believed to be a more stable government.

It was no secret that bank shares had been sold off in the weeks and months heading into the election as investors feared the loss of the franking cash refunds. In the week following the election results bank shares rallied 10-15%. Coincidence? I think not. Other beneficiaries also include retail stocks as they avoid stronger unions and higher staff expenses, Labour hire firms, and mortgage brokers who will have a more favourable commission structure under the Coalition. Finally, an improved property market will benefit most housing exposed stocks such as mortgage lenders, real estate agents and building material stocks.

We have already seen profound enthusiasm return to the property market with last weekends auction results already at the high for the year, with 60-70% clearance rates in Sydney and Melbourne. CBA was reporting home loan applications jumping to a ten month high and AFG’s broker networks reported increased levels of activity since the election. We attribute this resurgence to the continuity of negative gearing and capital gains tax concessions for investors, the proposed change to the APRA serviceability buffer and the likelihood of interest rates cuts as soon as next week.

With an improved outlook for the housing market and lower interest rates, consumer confidence should improve from the positive wealth effect of rising home equity and stock markets. This should lead to improved retail sales in the second half of the year, and we expect this renewed confidence in the property market will soon spill over into new vehicle sales, which have been through a severe year long downturn.

In terms of election losers, there are no net losers in our view (maybe the Australian Tax Office?).  There are although, certain sectors that would have benefited under a Labor government and these include childcare operators and healthcare providers like radiology, pathology and GP operators. 

So this week we discuss three small caps in the TAMIM All Cap portfolios we see as direct beneficiaries from some of the factors we discussed above:

Resimac (RMC.ASX) - is one of the largest non-bank mortgage lenders in the country. We see RMC benefiting from both an improved housing market and the consumer appetite for credit. In addition, with the big four banks tightening lending conditions in the wake of the Royal Commission, RMC should see more business come their way. As of 1H19 RMC had a $9.4B mortgage loan book, generated $55M of interest income (up 8%) and reported a normalised net profit of $14.5M (up 15%).

More importantly, the market is currently overlooking the positive impact of lower interest rates on RMC's funding costs. RMC’s funding structure is a margin over the BBSW rate which has averaged 1.80% and 1.89% over 2H18 and 1H19 (chart below).

RMC Performance Highlights
Source: Company filings
For every 0.01% drop in this rate, RMC earns an incremental $1M PBT on an annualised basis. The current BBSW rate is sub 1.50% and so far is tracking much lower than pcp in 2H19. If this rate were to remain for another twelve months, we think RMC could increase profit by over 30% in FY20. To put this in perspective, we are forecasting EPS of 7.5 cents this year growing close to 10 cents next year compared to the current share price of 60 cents. We value RMC at over $1.00.

Noni B (NBL.ASX) - is a leading women fashion retailer with brands such as Noni B, Katie’s, Miller’s, Rockmans to name a few. The company has an impressive track record of acquiring poorly managed retail brands and putting in place strict cost controls and improving margins through better procurement. These measures have led to significant profit improvement over the years. We see NBL benefiting from improved consumer confidence and the avoidance of higher staff expenses that a Labor government would have brought about.

We believe the company is underplaying the quantum of cost savings from its recently acquired Specialty Fashion brands, and we expect an earnings upgrade for next year based on our analysis. Current consensus is $75m EBITDA for next year compared to our own forecast closer to $100m (we have identified up to $20m of additional cost savings). We expect the stock to re-rate once the company updates the market on this year’s sales and provides some guidance for next year. We value NBL in excess of $5.00.

National Tyre & Wheel (NTD.ASX)
- is a leading distributor of 4WD and SUV tyres and wheels for many exclusive global brands such as Cooper, Dynamics and Mickey Thompson to name a few. The company listed a couple of years ago to consolidate the industry and drive efficiencies through scale. Unfortunately the business is highly cyclical and has recently been impacted by a fall in car sales and consumer spending. We see a possible turnaround in trading conditions as we indicated above.

Even through a tough trading period, NTD is still on track to deliver on this year’s revenue of $165m and EBITDA of $12m. This equates to cash EPS of circa 7.5 cents and a forecast final dividend of 2 cents fully franked. Additionally the company has negligible debt and a NTA of 40 cents compared to current price of 38 cents. Trading below liquidation value and on a PE of 5x with a solid balance sheet, gives us comfort the business can withstand the cycle or even become a takeover target. We value NTD at 65 cents.

NTD - A diversified tyre and wheel wholesaler
Source: Company filings
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