As I write this column, NSW has had record Covid cases. Victoria has introduced another curfew, the ACT is in lockdown, and the Northern Territory has announced a snap lockdown for Greater Darwin and Katherine.
In that context, identifying “reopening” trades for investors feels redundant. Parts of the East Coast could be in lockdown for months and a full resumption of international travel seems years away. It’s hard to get excited about “reopeners” when there is no clear timeframe for opening.
But successful investors always look ahead. They buy when news is bad and fear is high. They know it is too late to buy when conditions stabilise and uncertainty recedes.
That could be true of some reopening trades now. As hard as it is today for those Covid-affected States and Territories, consider what life will be like in the New Year when the vaccination rate is 70-80%. The offshore experience suggests rampant pent-up demand in industries most affected by Covid.
I’ve suggested several reopening ideas for this Report in the past few months. They’ve ranged from the obvious: casinos, airlines and travel agents. To the less obvious: funeral operators, in vitro fertilization providers and Queensland-based banks and insurers.
This column digs even further into the reopening theme, identifying another three companies that will benefit when restriction conditions ease. Each is what I call a “deep reopener”; that is, further down the queue in how the market rates re-opening ideas.
The first two stocks – Kathmandu Holdings (KMD) and oOh Media (OML)– have solid underlying tailwinds that will re-emerge when Covid restrictions ease. The third idea, MACA (MLD), is more a cyclical idea as demand for mining services improves later in FY22.
Here is a snapshot of each idea:
1. Kathmandu Holdings (KMD)
I have written favourably about Kathmandu previously for this Report. The stock has disappointed: the five-year average total annual return (including dividends) is about 3%, Morningstar data shows.
Kathmandu has suffered more than most retailers from Covid-related lockdowns. Its puffer jackets and hiking shoes are popular with Australians who travel overseas. With international borders shut, Kathmandu has watched a big part of its sales vanish.
In its June 29 trading update, Kathmandu downgraded earnings guidance. It said the NSW and Victorian lockdowns would take an expected $13 million off its underlying earnings (EBITDA). Forty of its NSW stores were closed for at least two weeks; 62 Victorian stores were affected.
Market conditions have deteriorated since June. Sadly, NSW’s lockdown looks like it will last much longer than first expected. So, too, does Victoria’s. If sales were struggling in late June, Kathmandu might have to downgrade again, given the severity of lockdowns.
It wasn’t all bad news in the trading update. Kathmandu’s Rip Curl business is trading strongly in North America and Europe despite Covid restrictions. And its Oboz shoe business had record sales in the second half of FY21, in part because of strong wholesale orders.
For all the short-term challenges, Kathmandu has a great brand and product – and significant latent value in its Summit customer database for e-marketing. I expect its sales to rebound strongly when Covid restrictions finally ease, as more people buy travel gear.
Investors will need patience and have high tolerance to volatility. But the Kathmandu share price at $1.22 is factoring in much bad news.
Chart 1: Kathmandu Holdings (KMD)
Source: ASX
2. Ooh Media (OML)
Once a market darling, OML has had a tough time. From $4.30 in mid-2018, OML hit a 52-week low of 80 cents. The stock last traded at $1.41.
OML’s problems emerged well before Covid. At its peak, OML had run too far, too fast. Upon releasing a disappointing full-year 2018 result in February 2019, OML was crunched. Costs were higher than expected and the market’s interest in the company waned.
Falling advertising volumes during Covid have been a problem for all media companies. OML has been particularly hard hit because it relies on the out-of-home advertising market. Fewer cars on the road during Covid hurt demand for billboard advertising and street furniture like bus shelters.
OML’s FY20 revenue fell 34% to $426.5 million. Underlying earnings (EBITDA) tumbled 55% to $63.2 million on the previous year. An equity capital raising of $167 million was needed and the dividend was suspended. Management and board changes added to the uncertainty.
Amid the gloom, bright spots emerged. In its latest trading update, OML said its key formats of Road, Retail, Street Furniture and New Zealand advertising continued to recover from the Covid’s effects on advertising demand. It’s still bad, but ad revenue is building momentum.
Longer term, OML will benefit from structural growth in out-of-home advertising, particularly digital billboards. The market loved this story before Covid, given the potential for this form of advertising to take share from traditional ads. Nothing has changed with that trend.
It could get worse before it gets better for OML, given the latest lockdowns. Expect more news about challenging conditions when the company reports its half-year result on August 23.
However, any price weakness after the result could provide a better entry point into a small-cap media company badly affected by Covid.
Chart 2: Ooh Media (OML)
Source: ASX
3. Maca (MLD)
I’ve nominated Maca as the mining-services stock for this week’s column. I’d be just as happy including mining-software stock Imdex (IMD), which had an excellent profit result this week; NRW Holdings (NWH); or coal-services microcap Mastermyne Group (MYE), which is up since I wrote about it last month.
Chart 3: Mastermyne (MYE)
Source: ASX
Mining services are an interesting recovery play on Covid restrictions easing. The pandemic sparked shutdowns at some mines, particularly those overseas. Some miners have also faced labour shortages, wage-inflation pressures, and other supply-chain complications.
A few small-cap fund managers I know are worried about the earnings viability of mining-services contracts, believing mining-services providers have little bargaining power with resource giants. These thoughts on industry conditions are reflected in falling share prices for mining-services stocks.
The question is whether this is as bad as it gets in the sector. The market is factoring in extended NSW and Victorian lockdowns, and continued Covid uncertainty in the mining states of Queensland and, to a lesser extent, Western Australia.
For all the gloom, mining-services companies are clear “second-derivative” beneficiaries of high commodity prices. Elevated mineral prices encourage more investment in mining production and exploration, and projects to be restarted. That should be good for mining-services stocks in the next few years.
Maca has had a tough five years: the average annualised total return is minus 8.3%. From above $1.40 in January, Maca hit a 52-week low of 71 cents and now trades at 83 cents. A Covid-related slowdown and a key contract not being extended were partly behind the losses.
I like Maca’s acquisition of the fleet of Downer’s Mining West business, which gives Maca more than 500 pieces of major equipment, mostly in WA. It looked like a smart acquisition at the bottom of the mining-services cycle.
For all the challenges, Maca is still the largest contract miner in WA and had $3.4 billion in work-in-hand at February 2021.
Earlier this year, Maca said “several material opportunities are anticipated to commence in FY22 for existing clients”. That matches what I’m hearing elsewhere in the resource sector, as more mining projects restart next year when Covid restrictions finally ease.
Chart 4: Maca (MLD)
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 18 August 2021.