Australian Government delivers very few surprises in Federal Budget
During the week, U.S Donald Trump withdraws on Iran nuclear deal and the Australian Federal Government delivered its 2018/19 Federal Budget plans. The release of the 2018/19 Federal Budget plans saw very few surprises given that major initiatives within the budget were mostly pre-flagged. The Budget deficit is forecasted to drop to $14.5bn in 2018/19, as the Government forecasted stronger economic fundamentals in the Australian economy, with unemployment falling to 5.25%, GDP expected to grow to 3% by 2019/20 and inflation expected to rise to 2.25%.
U.S President Donald Trump withdraws on Iran nuclear deal and reinstates sanctions on Iran.
The decision was well flagged and has disappointed key allies, with French President Emmanuel Macron (who lobbied Trump to remain the deal) noting on Twitter “France, Germany, and the UK regret the U.S. decision to leave the JCPOA” (the acronym for the agreement). It is worth noting here that European Union has economic growth at stake here given EU’s trade relationship with Iran – EU trade with Iran has nearly tripled since 2015. Geopolitical tensions in the middle east, no doubt adds to volatility in equity markets.
Personal income tax relief could potentially be supportive of retail sales
The Federal Government announced a 7-year income tax relief program. From 1 July 2018, Australians earning up to $90,000 will receive a tax cut worth up to $530, and the income tax threshold paying 37c on the dollar will rise from $87,000 to $90,000. By 2022, this threshold will be increased again to $120,000, until 2024-25, when the 37% tax rate will be abolished entirely. In our view, low to middle income earners are more likely to spend the extra cash windfall and therefore, in general terms, this should be supportive of retail sales.
However, we note the potential uplift from this for broader retail sales (as measured by Australian Bureau of Statistics) is likely to be less than 1% and will be more meaningful for retailers operating the discount department store (DDS) format. Wesfarmers (WES) via Kmart and Target, Woolworths (WOW) via Big W, the Reject Shop (TRS), JB Hi Fi (JBH), especially via the Good Guys.
Injection into in-home care may reduce demand for aged care providers.
Long awaited funding for aged care was provided in the budget (as anticipated in accordance with long term demand from Australia’s ageing population). However, such programs have been targeted to support people to stay at home longer, with an additional 14,000 of home care packages to be delivered over four years.
In our view, this does put pressure on listed aged care providers such as Regis (REG), Estia (EHE) and Japara (JHC), with people delaying moving into aged care facilities. At this stage, given the size of the waiting list, we do not expect material earnings impact however remain weary on potential impacts to the pipeline of developments and demand for services Overall, the long-term demand for the sector remains healthy, with the increased supply of residential aged care places through ACAR highlighting that there continues to be significant demand for aged care which should continue to support earnings growth for aged care providers and underpin rationale for continued growth of development pipelines.
Public health-care spending may drive demand away from private health care.
The Federal Government announced a public hospital agreement that will deliver more than $30bn in extra funding from 2020 to 2025, a 30% increase over the last five years, to tackle increased waiting times and lists in the public sector. In our view, this policy has the propensity to have some impact on private health care providers such as Ramsay Health Care (RHC) and Healthscope (HSO) that cater to provide for overspill in public hospitals, especially given that there has been no update on private health insurance affordability schemes that were announced in October 2017 which aim to support the ongoing decreased demand in the private health sector.
New and amended listings to the Pharmaceutical Benefits Scheme.
The Government will provide $1.4bn across five years to new and amended listings on the PBS, including specific drugs to prevent myeloma, multiple sclerosis, HIV and Hodgkin lymphoma. Further, the Budget proposed greater use of generics which should improve pharmacy cash flow issues. Net additions to the PBS potentially benefits distributors such as Sigma (SIG) and Australian Pharmaceutical Industries (API). Increase funding of ~$43m over 5 years for the vaccines program is a positive for CSL Ltd (CSL) but on a total earnings basis, immaterial for the Company.
The Budget has proposed $5bn for a Melbourne airport train line, the largest federal infrastructure spending boost to alleviate traffic in Victoria. Whilst the proposed spending on the Melbourne Airport Link may cause concern over Transurban’s Citylink asset, we believe there is no significant impact given that it is unlikely that such a substantial proportion of traffic would be redirected to use the train, noting that the construction of the Sydney Airport rail link has not affected the value of the Eastern Distributor.
Further, the Government announced spending of up to $5.3bn for a Western Sydney Airport, which may impact the value of Sydney Airport (SYD) in the longer term.
The Federal Budget focused largely on boosting retirement income, through the Pension Loans Scheme and the Pension Work Bonus, without affecting pension payments. The Budget may also spur the development of a range of retirement income products by requiring superannuation fund trustees to develop a retirement strategy for members and offer a wider variety of products, which should provide financial institutions such as Challenger (CGF), a long-term advantage in a new market for such products, despite limited detail regarding such policies.
The Australian government has also aimed to provide a safeguard for under 25’s superannuation balances by posing an annual cap on super accounts with balances below $6,000 and a ban on all exit fees on super accounts. Further, insurance linked to superannuation will move from an opt out model to an opt in model for a range of customers, which may decrease revenue streams for life insurance companies such as AMP Ltd (AMP), and Insurance Australia Group (IAG).
The Australian government is set to crack down on those that look to profit from land speculation by stopping property owners to claim expenses such as council rates and maintenance costs for vacant land in their tax returns. In our view, this is not expected to have an impact on property developers such as Stockland (SGP) and Mirvac (MGR), given that deductions will still be able to be claimed once a property is constructed on the land.
The Government announced a $28m plan to collect energy data from companies to help customer choice of service providers, which is predicted to increase competition amongst the bigger players and reduce retail costs.
In our view, this does not have any material impact currently, given that the larger power companies AGL Energy (AGL) and Origin Energy (ORG) already release detailed energy use data, however we are weary of any major policy changes that seek to reduce prices in the industry and may impact earnings in the future.
Subscribe below to receive access to the Australian Equity Strategy Reports
Our Australian Equity Report includes investing and trading ideas as well as tips and strategies for trading the Australian stock market.
Here you’ll find just some of our past ideas and upcoming IPO’s.
For full access register below.
1414 Degrees are looking to raise up to $50,000,000 at 35 cents per share. Their technology is clean, sustainable, scalable, low cost and has a 20 to 30-year life. For more information on the 1414 Degrees IPO or to receive a copy of the prospectus please register your...
Macquarie Group (MQG) has announced the IPO of a new Additional Tier 1 (AT1) capital hybrid (under Basel III) Macquarie Capital Notes 3 (MCN3). Further, the holders of existing Macquarie Capital Notes (MQGPA) will have the opportunity to rollover into the new...
The WAM Global IPO lead by Catriona Burns aims to provide capital growth over the medium to long term and deliver a stream of fully franked dividends whilst still preserving capital by investing in a diversified portfolio of undervalued growth companies. The Fund aims...
Here’s what you
will get if you subscribe
to our three month trial
Small, Mid and Large Cap Trading Ideas
Options Trading Ideas
Warrant Trading Ideas
Access to IPO’s
Access to 708 Deals
Phone calls with ideas (only if you want them)
Access to Research
Global Thematic Reports
Weekly Credit Reports
Trading Strategies and Education
Trading Equities Pty Ltd is an Authorised Representative of Vested Equities Pty Ltd ABN 54 601 621 390 AFSL 478987. All advice (if any) is general advice only. Your personal circumstances and financial objectives have not been taken into consideration. Accordingly you should consider if the advice is right for you. Past performance is not a reliable indicator of future performance. Please be aware that all investment and trading activity is subject to both profit & loss and may not be suitable for you. All advice and education content is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or personal advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. Investing and Trading involves an inherent level of risk. The decision to trade or invest and execution methods employed are a personal decision. You must obtain your own advise and undertake your own research when making investment decisions regarding the suitability of a product for your circumstances.
© Copyright 2017 Trading Equities Pty Ltd ABN 55 605 460 811