The 2022 Federal Budget was announced on Tuesday evening, the focus was on helping the economy battle the rising costs of living characterised by rising petrol prices and an elevation in the price of general expenses.
The proposals within the budget have a broad range of implications for not only individuals, but businesses and subsequently the stocks of companies held within Oracle’s portfolios.
The primary highlights within Tuesday’s budget are outlined below:
Temporary Fuel Excise Halving
Halving the fuel excise over the next six months will deliver a $3bn net benefit over the period.
For a family with two cars who fill up once-a-week, they will save $30/week, or $700 over the next six months. This has come into effect immediately, however, might take up to two weeks for individual petrol stations as they exhaust existing fuel stocks.
Extension & Increase of Low- and Middle-Income Tax Offset (LMITO)
The $1,080 low-and middle-income tax offset (LMITO) will be extended into Fiscal Year 2023, and in addition will be increased by up to an additional $420 per eligible person.
The maximum benefit is received by those with taxable income between $48,000 and $90,000. Individuals will receive the benefit when they lodge their tax returns sometime after 1 July 2022.
There will be a $250 one-off payment for pensioners, veterans, and concession card holders. This will be paid in April.
Home Guarantee Scheme Expansion
The scheme that allows first home buyers to enter the market with only a 5% deposit without having to pay Lenders Mortgage Insurance (LMI) has been expanded from 20,000 home buyers per annum to 50,000.
Small Business Deductions
Small businesses with an annual turnover of less than $50m, will be able to deduct an additional 20% of the cost of expenses and depreciating assets for digital adoption (e.g., subscriptions to cloud-based services, cybersecurity systems, etc).
There will be an annual cap so that only expenditure up to $100,000 per annum will be eligible for the boost.
Instant Asset Write-Off Extension
The instant asset write off will be extended by one year to the end of Fiscal Year 2023.
Not only can the full cost of eligible capital assets be deducted now (in 2019 the asset limit was $30k), but businesses with an annual turnover of less than $5bn can now access the write off (was less than $50m in 2019).
Budget Implications to the Australian Equities Portfolio
The total net benefit from the first three proposed noted above actions is $8.6bn. Including 35% of this aiming to partially offset the rising cost of fuel. It’s clear that the near-term benefits tilt towards the low-income earners whose expenditure on items such as fuel comprise a larger portion of their income as opposed to higher income earners.
In respect to how these salient proposals within the budget will likely impact the stocks with the Australian Equities Portfolio, given the skew to low-income earners, it’s expected that in the short-term there will be modest benefits for discount department stores like Wesfarmers and Woolworths. Those involved in retail and gaming such as Endeavour Group, as well as those with a broad consumer base such as JB Hi-Fi and Harvey Normal. However, its likely these benefits won’t be material, since, although $8.6bn is no small sum, it equates to just 0.6% of 2021’s annual household disposable income. It’s likely the impact would be minimal and wouldn’t warrant any immediate changes to our asset allocation and security allocation.
From a macroeconomic point of view, the budget does not seem financially wise given the economic backdrop characterised by very low unemployment rates, increasing inflation, and a huge government deficit. To use borrowed funds to inject billions more into the pockets of consumers seems like a pure vote-buying play at the expense of economic discipline. Given that there is no attempt on either side of Australian politics to reduce the deficit quickly via severity, it seems increasingly plausible that there is a rising likelihood that the Reserve Bank of Australia raises interest rates quicker and more meaningfully in order to combat inflation pressures. This would put more downward pressure on the share prices of the higher growth stocks within the portfolio due to valuation implications. For example, the unprofitable first-class SME accounting software provider Xero and Australia’s leading data centre provider NEXTDC. Although, arguably rising rates have already been largely priced into stock valuations.
The budget outlined some proposals with specific implications for Sonic Healthcare, one of the healthcare stocks within the portfolio, which focuses on medical diagnostics. These proposals and their relevance to Sonic are outlined below.
In Fiscal Year 2023, there will be a $546m temporary extension to Medicare Benefits Schedule (MBS) pathology items, particularly those for Covid PCR testing – no changes to the benefit, just an extension. Likely to be extended to end of Calendar Year 2022.
$22.1m in Fiscal Year 2023 to extend PCR testing in residential aged care facilities to 30 Sep 22. SHL conducts all PCR testing in residential aged care facilities.
$66m over four years will be deployed to remove the restriction on the number of MRI machines eligible for Medicare in regional, rural, and remote Australia. This is essentially the abolition of the MRI licensing system, but only outside of major cities. In regions where there is an incumbent provider with a license, the incumbent will be worse off. However, practices with an unlicensed MRI will benefit.
Sonic’s current valuation already largely prices in an extension of Covid PCR MBS items, so this development does not represent an upside catalyst for Sonic’s valuation, however, still supports the current valuation. However, there is a notion that RAT tests will replace PCR testing, which would adversely impact Sonic’s testing revenues. Perhaps the fact that no further government funding is allocated to RAT will put these concerns to rest. Although, the Labor party were previously proponents for funding on RAT via Medicare.
Budget Implications to the Oracle Emerging Companies Portfolio
Two of our core holdings in the Emerging Companies Portfolio have been discussed below, as they will directly benefit from new initiatives announced in technology and cybersecurity. There may also be benefits for retail and consumer discretionary companies given the one-off handouts and tax offsets aimed at low to medium income earners.
Technology & Cybersecurity
The Federal Government announced tax offsets for investments in training and new technology for small to medium businesses (SMB’s). The key points from this announcement were SMB’s under $50m being eligible to claim 20% of the costs as deductions, capped at a $100,000 investment. An estimated 3.6m businesses eligible for the Technology Investment Boost.
One of our core holdings Dicker Data will be a clear beneficiary from this announcement as they are the leading SMB technology distributor for Australia.
An announcement of a $10bn cybersecurity and intelligence package over 10 years for the Australian Signals Directorate (ASD). The ASD is responsible for the Australian Cyber Security Centre. This package is expected to stimulate additional jobs in the private cyber security sector.
We expect Data3 to be a beneficiary of this announcement, given they have a focus on growth in the cyber security sector. We recently added to our position in Data3 given the strong tailwinds in cyber security.
Retail & Consumer Discretionary
Some of our holdings in retail and the consumer discretionary categories may benefit from the short-term benefits to low- and middle-income earners. Premier Investments and Baby Bunting are two retail companies we own which may see a short-term uplift in revenue from these initiatives. Although, we don’t see this as being significant given the rising cost of living will offset the benefits of the budget for the consumer. Another company we own, Jumbo Interactive, which is an online lottery reseller, may also see a short-term bump in revenue. However, again we believe this will be minimal due to the reasons outlined above.
As we have a long-term investment outlook, the budget won’t change the way we invest in the Emerging Companies Portfolio. It’s good to see two of our core holdings in technology and cyber security will benefit from this budget. This confirms our thesis that there are strong tailwinds in these sectors, and we are confident that Data3 and Dicker Data, two of our larger holdings, will continue to ride this momentum over the long-term.
Overall, the Australian government proposals outlined within the budget are likely to have no material impact on our stocks specifically. However, it is likely that the proposals will have a stimulatory effect on the domestic economy, during a time of rising prices throughout the economy.
On one hand, this could spur demand, increase consumption to a healthy level, and increase revenue for businesses. On the other hand, this could help contribute to unsustainable inflation and lead to a faster than expected tightening of monetary conditions by the Reserve Bank of Australia, leading to broad-based headwinds for the economy. As far as short-term implications in regard portfolio management at Oracle, nothing within the budget prompts an immediate shift in asset and security allocation, however we will keep a close eye on the macroeconomic conditions.
Written by Lachlan Hyde & Jack Magann
Oracle Investment Management
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