The re-rating of the ASX consumer discretionary sector is under threat from a new risk that could punch a big hole in their bottom line.

Retail stocks have been stealing the limelight as Australia emerges from the lockdown to contain the COVID-19 pandemic.

But yesterday’s Federal Court ruling on casual leave entitlements could cost employers billions of dollars if applied across the economy.

ASX stocks in the firing line

This risk is yet to be reflected in the share prices of leading ASX retailers with the sector being a big employer of causal staff.

The Premier Investments Limited (ASX: PMV) share price surged 18% over the past month, while the Breville Group Ltd (ASX: BRG) share price and JB Hi-Fi Limited (ASX: JBH) share price rallied 16% and 12%, respectively.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) is trailing behind with a modest 4% gain over the same period.

Bankruptcy warning

The Federal Court decision, which upheld an earlier lower court ruling, was alarming enough for the National Retail Association (NRA) to issue a blunt warning to the Morrison government.

“Retail has one of the highest proportion of casual workers of any sector,” said NRA chief executive Dominique Lamb.

“If businesses are forced to back-pay leave entitlements to casuals who have worked regular shifts it could spell doom for many businesses and the workers they employ.”

Details of the court case

The court case relates to a casual employee hired by labour hire firm WorkPac to work at two Queensland mines owned by Glencore.

The casual staff, which isn’t entitled to paid leave and other entitlements reserved for permanent employees, was paid a 25% loading in addition to his wage.

But the courts found that the casual should be entitled to all benefits despite being paid a loading because he had “regular, certain, continuing, constant and predictable” work, reported the Australian Broadcasting Corporation.

The NRA is worried that the ruling will force all businesses who employ causal staff to be back-paid billions in entitlements.

Other ASX stocks that could be impacted

It isn’t only retailers that could suffer. There could be ramifications for fast food businesses like Domino’s Pizza Enterprises Ltd. (ASX: DMP) and Collins Foods Ltd (ASX: CKF) too.

Our supermarket giants Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) will be nervously watching this issue also.

Is it time to panic?

But it’s too early to sound the death knell for consumer-facing stocks. Not all casuals will qualify even if the decision is upheld as their work schedules and obligations have to be similar to permanent staff.

Further, there is growing pressure on Industrial Relations Minister Christian Porter to enact a new legislation solution to protect businesses.

There is also talk of another appeal from Workpac, which could set aside the Federal Court’s finding. At the very least, that could delay back payments to casuals for a few more years.

What this means is that it’s too early to price in this risks into ASX share prices, although investors better stay on their toes given what’s at stake.

Watch this space fellow Fools!

More reading

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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Collins Foods Limited and Domino’s Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It is looking as though 2020 will be a difficult year for income investors.

While this is understandably very disappointing, I’m confident that 2021 will be very different.

This could make it worth looking beyond this year and buying the dividend shares that could provide generous yields in 2021.

Two to consider are listed below:

Commonwealth Bank of Australia (ASX: CBA)

Commonwealth Bank looks to be the best placed bank to pay another dividend in FY 2020. However, given the current trading conditions, it wouldn’t be overly surprising if the bank chose not to pay one. But I wouldn’t let that put you off investing. I expect trading conditions to start to improve once the crisis passes. And although it may be a couple of years until the bank is back to its best, I believe it will still be able to pay shareholders attractive dividends before then. In FY 2021 I estimate that Commonwealth Bank will pay a dividend in the region of ~$3.70 per share. This represents a fully franked 6.25% dividend yield.

Sydney Airport Holdings Pty Ltd (ASX: SYD)

With its passenger traffic currently down ~98% because of the pandemic, I think Sydney Airport shareholders will be lucky if they get any dividends this year. However, travel markets will rebound and traffic will start to flow through its airports again in the not so distant future. I believe this leaves the airport operator well-placed to pay a decent dividend in FY 2021. At present I estimate that it will pay ~27 cents per share to shareholders. This equates to a generous forward 4.8% yield. After which, in FY 2022 I expect a recovery in international tourism to allow Sydney Airport to lift its dividend to around ~37 cents per share. This will be a very attractive yield of 6.6% if it proves accurate.

More reading

• ASX retail stocks facing new billion-dollar earnings scare during COVID-19 recovery
• This ASX 200 stock has rocketed 63% in 2 months. Is the Ansell share price still a buy?
• 5 dark horse ASX shares that have tripled in the last 2 months
• The latest ASX stocks hit by broker downgrades today
• Top brokers name 3 ASX 200 shares to sell today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It will hardly come as a surprise to many that shares in Ansell Limited (ASX: ANN) have surged 63% since they bottomed out at $21.43 in March. The manufacturer of personal protective equipment (PPE) and healthcare products is one of only a handful of S&P/ASX200 Index (ASX:XJO) companies that have benefited from the challenging COVID-19 environment.

Having seen Ansell’s share price reach an all-time high of $35.07 earlier today, many prospective investors may be wondering if they’ve missed this buying opportunity.

Here are a few reasons I believe the Ansell share price may have its best days ahead yet. 

Unprecedented demand for healthcare products

The operations of manufacturing companies are currently being strained to meet unprecedented global demand for healthcare safety products. Reflecting this trend, on 3 March the World Health Organization (WHO) called on governments and industry to increase manufacturing by 40% to adequately meet demand for medical equipment. Based on WHO modelling, it is estimated that a mammoth 76 million disposable gloves will be required each month for the foreseeable future as an essential part of the global COVID-19 response.

In its business update to the market on 30 March, Ansell confirmed it had upscaled its production of hand and body protection products, including single and multi-use surgical gloves. Healthcare production normally accounts for 52% of total company revenue. However, this figure is set to increase as demand for industrial products (48% of total revenue) weakens due to coronavirus factory closures. The company commented:

The Ansell teams are working tirelessly to maximize output including making selective investments in new capacity and by leveraging manufacturing locations that are not affected and we expect to be able to continue to ship large quantities of product to key markets.

The market has undoubtedly priced the current demand for PPE into the Ansell share price. Despite this, I believe the sheer volume of demand for its healthcare products will allow the company to outperform market expectations when it reports its full year FY20 results in August this year.

Robust working capital

A key metric of a company’s short-term liquidity, defined as the ability for a business to meet its day-to-day financial obligations, is working capital. Many investors commonly use the current ratio (current assets divided by current liabilities) to calculate working capital.

As seen from Ansell’s balance sheet as of 18 February, the company has a current ratio of 2.91. This means that Ansell has the necessary funds to meet all of its short-term payments almost 3 times over. It also highlights the strength of Ansell to withstand the challenging current economic environment.

Furthermore, in its COVID-19 business update, Ansell re-affirmed its FY20 earnings guidance of US$112c to 122c earnings per share. It also confirmed it had $500 million in cash reserves with no significant debt obligations for the next 12 months. This robust financial position may also afford the company some flexibility to boost its inventory, sales or staff volumes to reflect the upsurge in demand for its healthcare products.

Notably, Ansell’s high working capital suggests the company is efficiency managed and well-positioned for increased growth for the remainder of FY20 and beyond. This is a positive sign for prospective investors that the company share price may not have yet peaked.

Social implications of COVID-19

Many believe the current relentless demand for PPE and health products will persist beyond a widely available COVID-19 vaccine. It is hypothesised that industries will be forced to implement rigorous new OH&S standards, the use of gloves and masks will become commonplace for consumer-facing businesses. More broadly, caution toward superior hygiene will be embedded in societies.

Even if there is only a fraction of truth to this outlook, the increased daily demand for Ansell’s healthcare products creates a significant opportunity for prospective investors. As a manufacturer, Ansell relies on economies of scale to increase its profits. With the enlarged volumes of gloves and other PPE expected to be produced and distributed over the next 3–5 years, Ansell shareholders are likely to primarily benefit from wider profit margins and improved earnings growth.

Foolish takeaway  

Having risen steeply in the past month, the Ansell share price appears likely to remain near the $35.00 mark for the foreseeable future. Yet, due to Ansell’s strong financial position and the continuing demand for its niche range of health and PPE products, I believe there remains significant upside for investors still looking to add this company to their portfolio.

More reading

• ASX retail stocks facing new billion-dollar earnings scare during COVID-19 recovery
• 2 ASX 200 dividend shares to buy for income in 2021
• 5 dark horse ASX shares that have tripled in the last 2 months
• The latest ASX stocks hit by broker downgrades today
• Top brokers name 3 ASX 200 shares to sell today

Motley Fool contributor Toby Thomas has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post This ASX 200 stock has rocketed 63% in 2 months. Is the Ansell share price still a buy? appeared first on Motley Fool Australia.

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