While Treasurer Scott Morrison’s second budget inflicted a controversial levy on the nation’s five biggest banks, it delivered welcome news for various listed companies, particularly those in the media, healthcare, housing and infrastructure sectors. With the obvious exception of banking stocks, which tumbled on news of the tax, the market’s reaction to the 2017 budget was broadly neutral.
Although many details of the budget were foreshadowed in the weeks prior, there were still some surprises, including an increase to the Medicare levy and the six-basis-point big bank levy. A key revenue measure aimed at budget repair, the tax is predicted to cut bank profits by around 5 per cent. The consensus view appears to be that the banks will pass on the cost of the levy to customers, for example through term deposits or mortgage products. However, if the banks cannot, or will not pass the cost on to consumers, investors are likely to bear the brunt. In theory, any fall in profit could see dividends cut in line with earnings.
In our view, coupled with a softer-than-expected earnings season, banking stocks are now a less attractive investment proposition. For offshore investors in particular, the new bank impost also raises the risk that other profitable companies and/or sectors could also be targeted by the government as it seeks to raise revenue. With the broad support of the community and the opposition, the introduction of the levy from July 1 this year appears all but guaranteed. If the experience of banks in Britain, where a similar levy was adopted, is anything to go by, the tax may increase over time.
Boon for healthcare
The budget represents a boon for many companies in the healthcare sector. The government will retain the bulk-billing incentive for diagnostic imaging and pathology services and introduce indexation for some medical imaging, such as mammography and CT scans. Radiology providers such as Capitol Health are set to be significant beneficiaries when the current cap on indexation is lifted in 2020. Similarly, the repeal of the freeze on the indexation of the Medicare Benefits Schedule (including GP payments) is positive for healthcare providers such as Primary Health Care, which has a large medical centre business.
Media sector ripe for consolidation
The budget incorporated measures forming part of the government’s recently announced media reform package, including the abolition of broadcast licence and datacasting fees. Aimed at levelling the playing field with new media players such as Facebook and Google, free-to-air broadcasters will be charged a significantly lower ‘spectrum fee’, saving them around $90 million a year.
The Coalition’s media reform package, which is yet to be implemented, includes significant changes to cross-media ownership laws, which would abolish the current “two out of three” and 75 per cent audience reach rules. The mooted changes are broad-reaching with various companies across the sector potentially affected including Here, There & Everywhere, Fairfax Media, Nine Entertainment, Ten Network Holdings, Seven West Media and Southern Cross Media Group. If enacted, the new media ownership laws would likely trigger a surge in merger and acquisition activity resulting in a rapid consolidation of the industry.
The major reform package also incorporated tighter restrictions on gambling advertising during live sports broadcasts. Senator Nick Xenophon is a key proponent of the proposed new gambling rules that could mean the key crossbencher also supports the government’s other media reforms, including changes to cross-media ownership laws.
Housing affordability initiatives
The government proposed a range of initiatives to tackle housing affordability, including increasing housing supply and support for first home buyers, which will create tailwinds for residential developers. The federal Treasurer predicts the First Home Super Savers Scheme will “accelerate [first home buyer] savings by at least 30 per cent”. Obvious winners from the scheme include Stockland Group and Mirvac Group with sales to first home buyers accounting for 50 per cent and 25 per cent respectively of all residential sales, according to Credit Suisse.
The budget brought clear funding commitments for various infrastructure plans. The budget outlined $75 billion in infrastructure funding and financing over the next 10 years, which is a positive for companies with exposure to increased infrastructure spending, such as Downer EDI and CIMIC (formerly Leighton Holdings). Funding was announced for key infrastructure projects including the western Sydney airport and the Melbourne to Brisbane Inland Rail project.
The outlook for the economy in the near-to-mid-term remains generally positive, albeit growth has stalled in recent months as consumers have absorbed out-of-cycle interest rate rises. Similarly, our outlook for the Australian sharemarket is largely unchanged following the budget, although there are various companies and sectors positioned to be winners or losers from the revenue and expenditure measures. With the narrowest of majorities in the House of Representatives and no control of the Senate, the government is not assured all its budget measures will be passed. Investors should therefore monitor progress of the budget supply bill through the Parliament with various policies, if enacted, representing positive catalysts to invest in a number of listed companies.