A corporate Australia balance sheet stress test
The COVID-19 shock is driving a sharp fall in economic activity. In our view, at a macro-level Australia is making solid progress toward an effective response, given: i) containment measures slowing the growth in cases below 5% per day; ii) monetary stimulus, with rates at effective zero and RBA asset purchases of A$36 billion in twelve days; iii) unprecedented fiscal support measures of ~10% of GDP; iv) fiscal stimulus measures of ~1.5% of GDP; and v) the oil price windfall of ~1% of GDP.
At a company level, a resilient business model and robust balance sheet are keys to sustaining a business and helping it emerge from this downturn in strong shape. Corporate Australia entered this downturn with debt of 72.8% of GDP, 7.4ppts below the pre-GFC level and below other Advanced economies.
For the ASX 100, the median Net Debt to EBITDA is a moderate 1.5x, interest cover a strong 8.2x and the quick ratio 1.0x. Utilities, REITs and infrastructure have higher levels of debt, reflecting their long-term, regulated or contractually-fixed income. COVID-19 is a particular negative for retail malls, airports, tourism-related and consumer discretionary businesses.
Of the ASX 100 stocks, the vast majority have solid-to-strong balance sheets. At the weaker end we would include Boral (BLD), Incitec Pivot (IPL) and Oil Search (OSH), with OSH launching a capital raising. An extended COVID-19 shutdown would pressure Sydney Airport (SYD), Star Entertainment (SGR), Tabcorp (TAH) and Scentre Group (SCG).
Investment implications: Large-cap Australian corporate balance sheets are generally relatively strong. Defensive utilities, REITs and infrastructure have the highest leverage, as should be expected. COVID-19 is a particular challenge for retail, travel and tourism-related businesses. Elsewhere, BLD, IPL and TAH are less well positioned than peers.