How long before things might return to normal? “It is a bit hard to say”.
Australia’s summer of bushfires has been unprecedented. Getty Images
That echoes the sentiment of many experts trying to work out the impact of the bushfire crisis which has burned more than 11 million hectares on the eastern coast of Australia, with 2,800 houses destroyed.
New South Wales and Victoria have borne the brunt and investors face a real conundrum as the impact drags on the economy. Canberra Airport was shut for much of the day on January 23 as a bushfire burnt on the outskirts of the national capital. The sheer size of the bushfires and the unpredictability of fresh outbreaks has rattled the nation. Regular smoke haze drifting across Sydney and Melbourne is a constant reminder of what is occurring in the bushfire-ravaged parts of rural areas.
Goldman Sachs has estimated the bushfire fallout could strip 0.4 per cent off Australia’s GDP, with the international dimension a potentially long-term drag.
“The smoke haze and the international media attention are unprecedented,” the stockbroking house said on January 23 in a note. There were ”significant tail-risks” over the longer term.
A raft of profit downgrades from ASX-listed companies in the retail and tourism sectors in January were the first wave of the real-world impact through the broader economy. UBS estimates could strip 0.25 per cent off GDP in both the December quarter of 2019 and the March quarter of 2020.
But there’s also niggling uncertainty about whether there has been a structural shift in the climate, and a fear that this outbreak of serious bushfires might not be a one-off.
Morgan Stanley equity strategist Chris Nicol said over the next few weeks as companies report their first-half profit results to the market there is likely to be a pervading air of subdued outlooks.
“The combination of a long-lasting drought and recent extreme bushfire catastrophe has placed the policy reaction footing in crisis response mode,” Mr Nicol said.
“Given the breadth of impact and also potential for longer lasting compression of confidence and sentiment we would expect company outlooks to be subdued by recent events,” he said.
UBS analyst Pieter Stoltz says ASX-listed stocks with exposure to the retail sector, insurance, tourism and transport, and food and beverage are likely to feel the biggest negative effects.
He says whenever there is negative news for stocks with bushfire exposure there will likely be sell-offs, but the ”financial impact will be non-recurring”.
“Therefore, any share price over-reactions could present a buying opportunity,” he says.
The Kangaroo Island fires have been contained, but in NSW there are still 84 fires burning, with a renewed heatwave and temperatures above 40 degrees Celsius adding to the problems on January 23.
The tragic deaths of three American firefighters aboard a C-130 Hercules water bomber aircraft which crashed in the Snowy Mountains will put the Australian crisis further into the international spotlight just as Tourism Australia ramps up attempts to stem an expected slump in international visitors.
The companies behind camping and outdoor chain BCF and outdoor clothing brand Macpac, and clothing brands Noni B and Rivers were the first retailers to downgrade profits because of the bushfires. But they won’t be the last.
Analysts believe the unprecedented bushfires, which forced millions of consumers to cancel their holidays or seek shelter indoors to avoid the haze, will crimp sales and margins at many more listed retailers.
Those most at risk are retailers with stores in areas directly hit by the fires and those with a focus on outdoor activities such as camping, fishing and DIY.
These include Wesfarmers’ Bunnings, Solomon Lew’s Premier Investments which owns Dotti, Portmans, Just Jeans, Jay Jays and Peter Alexander, Super Retail Group rival Bapcor, which owns Autobarn and Autopro, outdoor retailer Kathmandu, The Reject Shop and wholesaler Metcash, which supplies dozens of IGA and Mitre 10 stores in fire-affected areas such as Mallacoota, Eden and Malua Bay.
Like for like sales at Super Retail Group’s BCF and Macpac stores fell more than 10 per cent in the December quarter, with 50 stores directly affected, closing their doors temporarily due to evacuations and road closures.
“Australia effectively didn’t go camping or hiking,” Super Retail Group chief executive officer Anthony Heraghty says.
As a result, Super Retail Group expects earnings for the December-half to fall about 9 per cent and says June-half sales and profits are also likely to be affected by the bushfires, but to a lesser extent.
Earnings forecasts for Noni B owner Mosaic Brands have also been scaled back after same-store sales fell 8 per cent in the December-half and by a whopping 16 per cent in November and December.
Even food and grocery retailers such as Coles and Woolworths and those with stores far from the fire grounds are likely to have suffered side effects as consumers diverted spending to donations or felt so miserable about the fires they eschewed the shops.
Consumer confidence took a beating in January, particularly among younger people, with the Westpac-Melbourne Institute Index of Consumer Sentiment falling 1.8 per cent to 93.4, continuing the downtrend seen over 2019.
JP Morgan analyst Shaun Cousins said consumers are unwilling to spend on discretionary products when others are struggling and are reallocating spending towards donations or deferring outlays altogether.
Pressure is likely to continue in the June half if retailers have to discount heavily to clear excess stock at the expense of margins, says Citigroup analyst Bryan Raymond.
The one upside for retailers from the bushfires is that food and grocery prices are likely to rise due to shortages of supply, helping Coles, Woolworths and Metcash recoup rising labour costs. This is one of the reasons why Woolworths shares have risen 10 per cent this month.
SeaLink Travel Group, which runs Captain Cook Cruises on Sydney Harbour and ferry services in Queensland and Western Australia along with its Kangaroo Island operations, diversified into commuter bus services with the $635 million acquisition of Transit Systems late last year.
Mr Feuerherdt, who had been running Transit Systems, took over as chief executive of SeaLink on January 16. The usual playbook for a new CEO was tossed out the window as he dealt with the bushfire crisis. SeaLink has 250 staff living on Kangaroo Island.
SeaLink shares were at $4.94 on December 30 but have slipped 12 per cent to $4.35.
There are already some more positive signs after a new South Australian government campaign under the #BookThemOut banner designed to re-invigorate tourism to Kangaroo Island and fire-affected parts of the Adelaide Hills.
The spotlight on Kangaroo Island was enormous during the fires.
“KI naturally got a huge level of focus,” he said, because of its much-loved status as a magnet for lovers of nature.
Most of the western end of Kangaroo Island was burnt. Tourism infrastructure, such as the visitor centre at the popular Flinders Chase National Park, was destroyed.
The Vivonne Bay Lodge accommodation, which SeaLink also uses as a lunch stop for its tour groups, was destroyed on the southern coast. Mr Feuerherdt said it is realistically a 12 to 18 month rebuild.
The highest profile loss was the luxury Southern Ocean Lodge owned by James and Hayley Baillie. In the aftermath, graphic photographs showed a burnt large industrial sculpture of a kangaroo in the charred interior of the lodge.
Southern Ocean Lodge on Kangaroo Island was gutted by fires. Supplied
Apollo Tourism and Leisure, which rents out campervans to tourists in Australia, the United States, Europe and New Zealand, has also taken a hit.
Chief executive Luke Trouchet warned on January 13 that domestic last-minute bookings for the peak summer holiday season had been affected by the fires. He also warned that global media coverage of the fires would dent long-term bookings from international tourists, who may now re-think their plans. The Apollo share price has sunk to 40¢ from $1.18 a year ago.
The international tourist impact is a big swing factor. UBS says overseas tourists account for about 20 per cent of passenger volumes and if there is an extended downturn this could be a negative for Sydney Airport. Sydney Airport said on January 20 trading conditions had been at their toughest in more than a decade.
All eyes on insurers
Australia’s two major ASX-listed home and car insurers, IAG and Suncorp, have both been hit hard by the bushfires. IAG estimates the claims cost will be $160 million, while Suncorp has said the cost of bushfires is $315 million to $345 million.
The disastrous fires meant that both firms exceed their six-month natural perils allowance – that is, the amount of money they put in reserve to fund insurance claims from extreme weather events and other natural disasters such as earthquakes.
IAG blew its allowance by $80 million, meaning it now has $220 million to play with for the rest of the financial year. Suncorp blew its allowance by $100 million, meaning it has just $300 million left for the six months to June.
Both companies initially downplayed any potential hit to earnings, saying they were well covered by reinsurance contracts – most importantly, stop loss insurance, which kicks in when claims hit a certain point.
Analysts have not, by and large, sounded any major warning notes. In a recent note, Citi’s Nigel Pittaway said there was a “strong possibility” IAG would exceed its allowance.
“However, including the stop loss, second-half 2020 hazard losses will have to exceed $376m for it to be more than $34m above its full year allowance. This is possible though would still require a relatively eventful second half,” he wrote.
But that was before this week’s extreme hailstorms, which hit Melbourne, Canberra and Sydney. Canberra was particularly hard hit, with golf ball sized hailstones damaging houses and cars.
IAG issued an earnings downgrade on Friday, saying the hailstorms would cost it a massive $169 million – $9 million more than the bushfires. It knocked 150 basis points off its expected full-year insurance margin, which will now be between 14 and 16.5 per cent. IAG’s share price plummeted more than 6 per cent in early trading on Friday.
Suncorp as yet has not issued any guidance on the cost of the hailstorms.
Golf ball-sized hail blankets the lawn in front of Parliament House, Canberra. AAP
The catastrophic bushfires have become a global story about climate change and in the industry are viewed as a taste of things to come. The human cost of hailstorms is negligible next to the horrors of the bushfires, but for insurers they are actually much costlier events because of their wider reach in urban areas. IAG said in a major report late last year that hailstorms, like bushfires, would become more frequent in the south-eastern states and territories as a result of global warming.
The wine sector has been hit hard in some areas, with the Hunter Valley in NSW suffering from smoke taint and parts of the Adelaide Hills suffering direct damage as 650 hectares of vineyards burnt.
One of the Hunter’s most famous producers, Tyrrell’s Wines, warned this week that it would only produce 20 per cent of its usual crop, because smoke taint has ruined much of its grape harvest. Managing director Bruce Tyrrell said he wasn’t prepared to risk the high-quality reputation of a firm which started in 1858. Another Hunter Valley producer, Mount Pleasant, has also declared that its grape crop had been severely affected.
Investors are sweating on something more concrete from Penfolds and Wolf Blass owner Treasury Wine Estates, as to whether there’s been any impact on its grape intake. A Treasury Wine spokeswoman says there has been no direct property damage to vineyards and testing is underway to assess any potential impacts from smoke taint in some areas.
The vast damage to countryside across NSW, Victoria and South Australia has also caused problems for energy infrastructure, with power lines and supporting infrastructure suffering damage.
The Australian Energy Market Operator pushed large industrial businesses in NSW to reduce their power consumption on January 23 in a “lack of reserve 2” notice for the period from 2.30pm until 6pm, with households also asked to shoulder the load by cutting their energy usage by temporarily switching off pool pumps and not running multiple appliances at once.
Bushfire damage to transmission lines and infrastructure in NSW was part of the reason for the shortfall, along with problems at AGL Energy’s Bayswater coal plant in the Hunter Valley.
NSW Energy Minister Matt Kean said bushfire impacts had played a part along with mechanical problems at power stations.
Longer-term rebuild upside
Construction companies are expected to benefit from government contracts to repair roads and rail links damaged in the fires, but some contractors also suffered from the fires’ destruction.
Downer EDI, which issued a profit warning this week due to cost blowouts on two projects, has lost its Mogo asphalt and road services plant in NSW’s Batemans Bay after it burned down.
The plant, which employed about 25 people and will cost $10 million to rebuild, produced asphalt to surface roads and means Downer will have to use mobile asphalt plants to repair roads along the state’s South Coast. Warm asphalt cannot be transported for long distances because it cools and becomes difficult to lay.
Contractors have already been helping in reconstruction work, including emergency traffic control and removing trees and other hazards in NSW and Victoria, and clearing debris from regional power generators.
Some 25 kilometres of NSW rail lines were damaged by the fires in early January, including signalling infrastructure, road signs, power lines and bridges.
Bede Noonan, managing director of Acciona Geotech, which acquired Lendlease’s engineering business in late 2019, said buildings and infrastructure will need to be built to higher standards to withstand future fires, which is likely to increase costs.