Stocks Hit Hard in Pandemic Might Be Australian Earnings Winners

(Bloomberg) -- Some of Australia’s most beleaguered stocks amid the coronavirus pandemic could emerge from the crisis as earnings winners, according to analysts.

Citigroup Inc. and Morgan Stanley both see that theme in the reporting season that kicks off this week. Unloved sectors like transportation, construction and industrials may show promising profit outlooks even amid Covid-19 lockdowns and gloomy economic forecasts.

Aviation, among the most affected by shutdowns and travel restrictions, offers “intrinsic value and leverage to Covid-19 vaccine scenarios,” Morgan Stanley analysts led by Rob Koh wrote. Sydney Airport’s strategy and liquidity are seen remaining stable even if the outlook deteriorates further.

While the economic fallout from coronavirus has negative implications for global housing markets, “there are already diverging trends emerging presenting some buy ideas” in the Australian construction sector, Citi analysts led by Lisa Huynh wrote.

Citi prefers shares with U.S. housing exposure or a more variable cost base. James Hardie Industries Plc is best leveraged to a swift rebound in America’s property market, while Brickworks Ltd. “has a property portfolio that we believe is undervalued in the share price.”

A steep decline in engineering and contracting shares reflects the challenging sector outlook, according to Morgan Stanley analysts led by Adam Martin. Industrials are among Australia’s worst-performing stocks, plunging about 20% in 2020, compared with the S&P/ASX 200’s 10% drop.

Earnings volatility could be “high” for Downer EDI Ltd. as it focuses on its core business, although its capital raising and restructuring plans lower the risk, the analysts said. Morgan Stanley is overweight ALS Ltd. given life science expansion opportunities and a valuation discount to global peers.

Still, the food and beverage sector outlook may not be as bright, with the reporting season likely to highlight companies expanding margins during the lockdown and those that face weaker demand within more profitable channels, Citi analysts led by Craig Woolford wrote.

Costa Group Holdings Ltd. and a2 Milk Co. Ltd. are expected to benefit from their skew toward supermarket and daigou sales. Coca-Cola Amatil Ltd., Domino’s Pizza Enterprises Ltd., Inghams Group Ltd. and Treasury Wine Estates Ltd. may have seen margins shrink amid Covid-19 measures.

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