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Value still seen in some ‘re-opening’ trades

Nicki Bourlioufas  |  11 Oct 2021Text size  Decrease  Increase  |  
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Australian investors are positioning themselves for so-called “re-opening trades” as the vaccine rollout proceeds across Australia towards 80 per cent of the eligible population, led by New South Wales. However, care is needed with re-opening stock plays, with some stocks having already priced in expected gains, according to the experts.

The reopening of Sydney and the NSW economy, and soon Victoria, has already benefited the travel and entertainment sector, including Webjet, Flight Centre and the Star Entertainment Group, as well as retail listed property trusts. Over the month to 8 October, Flight Centre, for example, was up 26 per cent, Webjet and Scentre Group were both up 6 per cent while Star Entertainment had edged forward 1 per cent compared to a fall of around 1 per cent for the S&P/ASX 200.

According to Morningstar analyst Brian Han, the foundation remains in place for Flight Centre “to benefit from the release of pent-up demand, a term becoming a catchphrase for the travel industry.” Flight Centre is now trading at around $22 a share compared to Morningstar’s fair value of $18.

Forager Funds Management senior analyst Gaston Amoros says many retail and travel shares have already priced in opening benefits, but they think there is still value in Unibail-Rodamco-Westfield. The opening of other countries in the Northern Hemisphere has improved the performance of ASX-listed Unibail-Rodamco-Westfield, which owns Westfield shopping malls in the US and UK and shopping malls in Europe.

“Sales in the US are back to pre-covid levels in the last few months and in Europe, sales are back to 80% to 90% of pre-Covid levels which is a nice trajectory considering where they are coming from,” says Forager Funds’ senior analyst Gaston Amoros.

“So, the business itself is performing well but the stock isn't,” he said, adding that Unibail-Rodamco-Westfield securities have dropped 10 per cent on the ASX in the last month alone.

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“The business is also disposing assets and the more assets that they sell that will leverage will come down, which contribute to a rerating of the shares. We think it's quite an interesting investment opportunity.”

Morningstar Analyst Alexander Prineas agrees, seeing favourable omens for URW’s planned asset sales and upside for Unibail-Rodamco-Westfield, with its current share price of $4.94 well below his fair value of $7.15.

“URW’s exposure to the reopening trade is higher than many other mall operators because its exposure in the U.S. is in areas where restrictions were tighter. Its portfolio is 84 per cent in California, New York, and New Jersey, and by contrast only 2 per cent in Florida and zero in Texas, where restrictions were fewer,” says Prineas.

For local Australian REITs, the reopening trade is largely priced in, Prineas says, but Vicinity Centres “has some upside to the reopening theme.” He points out that it has substantial exposure to CBD sites such as The Strand and QVB in Sydney, and Melbourne’s Emporium, as well as luxury and tourist spending through its malls such Chadstone in Melbourne.

Andrew Chambers, portfolio manager with Martin Currie, says transport infrastructure such as toll roads, rail and ports (which Currie calls ‘real assets’) will also benefit as the NSW and Victorian economies open.

“Despite the dislocation in markets over the last quarter, we are seeing real signs of this ‘re-opening’ trade getting closer and gathering pace through the stronger earnings and dividends reported in August.  

“This re-opening theme has significant upside in Australia, as many real assets are still trading well below their pre-COVID-19 levels. This is particularly apparent in real asset sub-sectors such as transport infrastructure, that is, toll roads, rail, ports and retail REITs, sectors that were hurt by lockdowns originally.

“As the vaccine rollout progresses, and social restrictions and travel restrictions are eased, we believe that now is truly the time to capitalise on these themes, before the reopening is complete, as it will not be long until the share prices of these higher-quality real-asset stocks begin to reflect this opportunity and narrow the valuation gap,” says Chambers.

Transurban

Stock examples in this space include Transurban. Toll road volumes dropped during lockdowns. “However, once restrictions are eased, volumes are expected to recover rapidly … With vaccination rates rising rapidly in Melbourne during the September quarter and into October, the Government has already begun gradually loosening social restrictions. We believe this will lead to much better Melbourne data ahead, similar to the growth already being see in Brisbane,” says Chambers.

Separately, pent-up holiday demand will also benefit Ingenia Communities Group via the regional holiday parks that make up half its asset base, he says.

Globally, re-opening trades, or buying up cyclical stocks, still offer opportunities for investors. UBS Group AG’s global wealth management team led by Mark Haefele recently said in a research report:

“We continue to recommend investors position for winners from global growth. While policy will tighten at a different pace around the world, we expect top central banks to remain broadly accommodative, and only tighten as output gaps narrow and employment conditions improve. Against this backdrop, we expect cyclical parts of the market to outperform, including energy, financials,” Haefele said, preferring those over sectors such as technology.

Energy and financials have been strong performers on the ASX in recent weeks. In the last month alone Woodside Petroleum has jumped 32 per cent, and Santos has gained 22 per cent. The big banks are also stronger, with the Commonwealth Bank up around 3 per cent, and Westpac and ANZ up around 1 per cent as at 8 October, compared to the slight drop in the overall share market.

Morningstar analyst Mark Taylor still sees upside for Woodside, which will benefit from renewed economic activity after lockdowns lift globally and energy use rises along with oil prices. He has a fair value on the stock of $40, compared to its market price of around $25, with the merger with BHP petroleum unit also bringing value to the company. 

is a Morningstar contributor.

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