The lessons investors have learnt from Australia’s lockdowns

November 1 marks yet another milestone in the return to normality for many Australians. Regional businesses will be brimming with hope that regional tourism exuberance will once again return. As will the nation’s airlines and tourist operators with the resumption of international travel.

Despite a milder recession in 2020 vs many other OECD countries, 2021 has had its challenges. Significant lockdowns of varying duration and severity at different times across the country are expected to weigh on Australia’s 3Q GDP print due at the beginning of next month.

For dividend investors, it’s been a rough ride.Credit:Louie Douvis

Despite the disruption and significant toll on business, the consensus amongst economists is for Australia’s economy to grow by 3.8 per cent in 2021. There have been COVID winners and losers, businesses that have boomed during re-opening and many that have struggled with the inconsistency of policy.

Australian businesses on the whole are a resilient bunch, and many have “not wasted a good crisis”. It’s an incredibly appropriate characterisation of corporate Australia’s efforts during the past 20 months.

There have been so many challenges and triumphs, and it’s a difficult task to put all our learnings into one article, but for now we have settled upon eight.

Retailers have reset margins higher

Larger retailers have used the pandemic to accelerate store consolidation and regain the upper hand with landlords. Premier Retail which owns brands Peter Alexander and Smiggle have successfully reset rents by 2.5 per cent. As a result, margins have reset higher, and profitability has improved.

Significant increase in near-term investment, to de-risk growth in outer years

As bricks and mortar retailers closed their doors in March, e-commerce players boomed. Whether it was masks and mugs from Redbubble or a new desk and chair from Temple & Webster, comparable sales spiked as consumers spent online. Equity valuations have swollen, as revenue bases are multiple times the base pre-pandemic.

The question now turns to the sustainability of the boost. In recent months Redbubble, Adore Beauty and Breville are just some who have signalled a significant increase in near-term investment, to de-risk the growth in the outer years.

Diversification of supply chains

By the middle of May in 2020, much of retail had reopened and a counter meal was back on offer albeit with limited capacity. With a new appreciation for work from home, supply shortages began to emerge, as global supply chains had been disrupted or shut since early January with the onset of the pandemic. Bikes, manchester, gym gear and furniture were amongst some of the goods in short supply as demand spiked, and inventories were not rebuilt quick enough.

The trade wars of 2018 and 2019 were a warning shot for many Australian corporates, as to the need to have more diverse supply chains. The pandemic has forced diversification out of necessity, with delays still prevalent some 20 months on from the initial shutdown.

Opportunistic acquisitions at or near the lows, have been rewarded handsomely

As last year’s AGM season rolled around, the deals began. Corporate Travel MD Jamie Pherous flew to the US and endured 2 weeks quarantine to secure the acquisition of Travel & Transport for $US204 million ($271 million), significantly less than the vendors would have considered previously. Consolidating an industry, with limited visibility on the corporate travel recovery, takes courage. But firing a bullet at or near the lows has been rewarded handsomely by the market.

The Australian economy is recovering, with the consensus amongst economists is for it to grow by 3.8 per cent in 2021.Credit:Bloomberg

Pherous was not alone, with Shane Fallscheer embarking on a similar deal in November of that year, buying 80 Lovisa fashion jewellery stores in Europe. At the time of the announcement Lovisa noted all their existing stores across France & the UK were temporarily closed.

As India was trying to cope with a significant and tragic COVID spike on the back of the Delta variant in May 2021, IDP Education’s India business was significantly impacted. Thinking beyond the next quarter, Andrew Barkla and his team at IDP Partners embarked on a deal to acquire 100 per cent of British Council’s IELTS operations in India on July 1.

One of the key takeaways has been the propensity of the boards of Corporate Australia to make changes to dividend policy and at relatively short notice.

Acceleration of long-term megatrends

While some long-term megatrends such as international education has been disrupted, others have thrived. The car industry has used the pandemic to accelerate their shift to electric vehicles, and consumers have embraced the trend in their droves. The Tesla model 3 has just been crowned Europe’s best-selling car. ESG has also become front and centre for both investors and policy makers, while online consumption has had the revolution required to get the regular mall dwellers buying fashion online.

Aviation industry has relied on fleet flexibility

As the aviation industry breathes a sigh of relief today, with the resumption of international travel, capacity will be in focus, as airlines attempt to match aircraft with demand from travellers. The challenging aviation environment in the past few years has called for fleet flexibility, with Alliance Aviation able to expand its fleet with cost-effective purchases, and meet the capacity needs of Qantas and Virgin.

The travel industry has been one of the hardest hit during the pandemic. Credit:Louise Kennerley

At the same time charter activity increased appreciably during COVID and Alliance’s enlarged fleet meant they were able to play here whilst competitors could not supply capacity to the market. Amid the chaos of lockdowns and aircraft groundings a new Australian airline was born, Bonza Airlines, which will chance its hand in a rapidly changing environment.

Cost bases have been structurally reset

The tourism and travel industry has arguably suffered the most of any industry in Australia. With revenue down to a trickle, they have had to attack their cost bases with rigour, mostly out of necessity. As such when we see a full recovery in travel volumes, we should see structurally lower cost bases.

Other industries have found ways to operate more efficiently. The auto dealers have seen demand soar for new and used cars. At the same time, AP Eagers has reduced its head count by 1200 people. Despite supply disruptions, Australian new car volumes are on track for over one million vehicles.

Dividend policy changes a dime a dozen

Finally for those dividend investors, it’s been a rough ride. One of the key takeaways has been the propensity of the boards of Corporate Australia to make changes to dividend policy and at relatively short notice. Usually, payouts are very sticky because of the signalling that goes along with changing them, however uncertainty was often the reason cited for the change. Many retailers cancelled the dividend, while several industrials deferred the dividend payment. The REITS chose to remove distribution guidance all together.

Every crisis is different, every government response is different, but the resilience of corporate Australia was again on display, over a decade on from the tumult that the global financial crisis wrought on the local economy.

Nick Guidera is a Portfolio Manager at Eley Griffiths Group

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