Stocks that will take off after a vaccine

If a vaccine for COVID-19 is discovered, developed and distributed there are several companies whose share prices currently reflect a continuation of lockdown conditions, that will re-rate very quickly.  Several leading fund managers nominate the stocks that are likely to do well should a vaccine become a reality.

Nathan Bell (Head of Research, InvestSMART) nominates Sydney Airport as a vaccine trade contender as “the share price is currently one third below its high of $9 late last year as Sydney’s major airport will remain a ghost town until our local borders, and later on, international borders reopen.  But we expect leisure travel will recover over the next few years and eventually the airport will greet more passengers than ever.  An increase in online business meetings will reduce business travel, but it will also recover strongly even if it remains below previous levels indefinitely.”

Matt Williams (Portfolio Manager, Airlie Funds Management) suggests that Qantas has good leverage to a vaccine rollout.  He says “International travel would re-commence.  However, Qantas is also a good bet even in case of vaccine delays.  This is because Australian domestic borders will progressively open up regardless of vaccine arrival.”  Williams points to the Tourism Research Australia Report (March 2020) which showed that Australia’s standing is in the global top 10 for outbound international travel and in 2019 Australians spent $64.2bn on international trips.  With international borders closed, Williams argues that consumers will be keen to spend at least a portion of their former international spend in Australia.

Hugh Dive (CIO, Atlas Funds Management) approached the vaccine trade by looking at poor performers since February and screening out companies that are likely to face a tougher road back to pre COVID profits.  He cites Flight Centre as an example that may jump initially on news of a vaccine, but is likely to disappoint with the trajectory of their earnings.  “A vaccine may not see corporate travel (around 60% of Flight Centre revenue) bounce back”.

Instead Dive prefers Webjet, as their domestic and leisure focus should see this business bounce back quickly in the event of a vaccine.   “Webjet is well placed to capture pent-up demand for leisure travel.  Following the capital raising in April, Webjet has a strong capital position”.

Gary Rollo (Portfolio Manager, Montgomery Small Companies Fund) also likes Webjet and noted “its cash burn in the first quarter of financial year 2021 is $10.5 million per month and this is helped by $3m of revenue and $700,000 of government subsidies.  The company reported liquidity of $420m which suggests that cash burn is currently not an issue.”

Dive and Bell suggest Crown would be a beneficiary from a vaccine not withstanding the AUSTRAC probe.  Bell says most of their profits come from locals and Dive adds “currently the only property open is Crown Perth, but a vaccine would see the reopening of Crown Melbourne, with Crown Sydney slated to open shortly and begin contributing to profits”.

Rollo also flags Tyro payments as a beneficiary of a vaccine.  “Tyro provides small businesses with merchant credit, debit and EFTPOS services.  This of the machine you use to ‘tap and go’ at the café when buying a coffee.  If it’s a machine not owned by the big four banks it is likely to be a machine owned by Tyro.  That’s because Tyro is Australia’s fifth largest merchant acquiring bank by terminal count.  As at 30th June 2020, the company had 62,722 of those tap and go point of sale terminals in circulation with just over 32,000 merchants.

Most of those merchants however are in the retail and hospitality sector (Victoria represents 23% of transaction value) which of course have been hit hard by lockdowns and border closures.  Prior to COVID the company was on track to hit its growth forecasts, where hospitality transaction values were growing at 47% annually.  A vaccine could mean the company’s growth targets and prior growth rates aren’t dead, merely deferred.”

Finally, for those looking for a bit more excitement, Bell suggests investors look at Frontier Digital Ventures (Emerging markets online classified business).  He says “the CEO believes COVID-19 has brought forward the growth in online property transactions, in the frontier markets where Frontier Digital operates, by two years.  The company has reached breakeven along with many of its underlying portfolio companies, which means profits should explode in the years ahead.”

The World Health Organisation lists 10 vaccines in phase 3 trials, investors would be wise to think about how to tilt part of their portfolio should some of these succeed.

 

This article appeared in the Australian Financial Review on Wednesday 28th October 2020