Australia / Coronavirus Insights
ASX 200 Changes Reflect COVID-19 Economy

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by IBISWorld
Jun 17 2020

The S&P/ASX 200 index is designed to measure the performance of the 200 largest stocks listed on the Australian Securities Exchange (ASX) by market capitalisation. This index is adjusted quarterly, to reflect the surging performance of new entrants, and the declining prospects of other companies. In the June 2020 index adjustment, several companies have been added and removed in a reflection of the performance of the economy following the outbreak of COVID-19.

Additions

Centuria Industrial REIT – CIP

Centuria Industrial REIT (CIP) is a real-estate investment trust, which owns and operates a portfolio of industrial real estate assets delivering rental income from 49 properties across metropolitan Australia.

Australia's property management subdivision has been heavily impacted by the outbreak of COVID-19. Social distancing measures and the general slowdown in economic activity have reduced revenue for many retail and commercial businesses, making it difficult for some firms to meet their rental obligations. The Retail Property Operators industry has been severely disrupted by social distancing regulations, with foot traffic in major retail areas down by over 50.0%. The Office Property Operators industry has also been impacted by the recent shift to working from home.

Conversely, the Industrial and Other Property Operators industry is anticipated to be less severely affected by the outbreak of COVID-19. The mix of tenants in industrial properties typically includes larger firms with a higher proportion of non-discretionary businesses, which are more insulated from economic downturns. Therefore, industrial property operators with a diverse mix of high-quality tenants are well placed to endure poor economic conditions. However, slowing economic and international trade activity may create issues for some tenants. As a result, industrial property operators are likely to face lower rental yields in 2020-21, before a recovery in 2021-22.

Megaport Limited – MP1

Megaport Limited (MP1) is a telecommunications infrastructure business that provides Network-as-a-Service (NaaS) to enterprise clients. The company provides elastic connectivity between businesses and cloud service providers. This enables businesses to vary how much bandwidth is required to use their data storage without installing fixed physical infrastructure.

The operations of Megaport Limited are included in the Data Processing and Web Hosting Services industry, which is expected to grow by 5.4% in 2019-20. The industry has surged over the past five years, due to rising domestic internet traffic and the expanding volume and availability of digital data. The industry is expected to continue to grow over the next five years, as corporate and government entities continue to outsource their data processing and web hosting requirements. However, increasing cybersecurity concerns could limit the rate that corporations move their operations to cloud servers, restricting domestic revenue growth.

In contrast to the rest of the economy, COVID-19 may be a benefit for cloud infrastructure providers, such as those in the Data Storage Services industry. The rapid shift to working from home and online retail has accelerated the move towards online infrastructure. As social distancing restrictions are eased, many businesses are expected to continue to operate on a partial work-from-home basis, providing a long-term opportunity for internet infrastructure providers.

Perseus Mining Limited – PRU

Perseus Mining Limited (PRU) is an operator and developer of gold mines in Ghana and Côte d’Ivoire. PRU has been a major beneficiary of a surge in the price of gold, reaching over $1,700 USD per ounce in recent months. This represents the highest price of gold since November 2012 in USD terms. A sharp decline in the value of the Australian dollar in March also contributed to gold prices achieving an all-time high in terms of the Australian dollar, reaching over $2,700 AUD per ounce in April 2020.

Historically low interest rates and rising uncertainty have driven global investors to increase holdings of gold, which is regarded as a safe-haven asset. Record buying of gold by the central banks of Russia, China, Turkey, Hungary and Kazakhstan have contributed to prolonged growth in the price of gold.

The surging price of gold has assisted miners operating within Australia, such as Newmont Australia, Newcrest Mining, and Gold Fields. Revenue growth for the Gold Ore Mining industry is expected to increase by 4.7% in 2019-20, following higher gold prices due to local and global economic uncertainty over COVID-19. The degree to which gold miners benefit from a higher gold price is mixed, as most major miners have pre-existing hedging instruments that have locked-in gold prices from prior years. While hedging may offset the benefits of higher prices, it also insulates mining firms from a future fall in the gold price, such as that which occurred in 2012-13.

Removals

Estia Health Limited – EHE

Estia Health Limited (EHE) is an operator in the Aged Care Residential Services industry. In 2018-19, the company derived 74.4% of its revenue from government subsidies and income, with resident contributions accounting for the balance. The Company has had three confirmed cases of COVID-19 within its workforce of approximately 7,500 staff, which occurred in March and April.

The Aged Care Residential Services industry has been supported by the government throughout the COVID-19 pandemic. In March 2020, the Federal Government announced $101.2 million in funding to educate and train aged care workers in infection control, and to enable aged care operators to hire additional nurses and workers. This was followed in May by an additional subsidy of $900 per resident in major metropolitan areas and approximately $1,350 per resident in all other areas, at a total cost of $205 million.

The industry is expected to grow at an annualised 2.8% over the five years through 2019-20, to $22.6 billion. Operators have contended with tightening regulatory controls and rising compliance costs over the past five years. In 2018-19 there were 55 sanctions imposed on 36 providers across the industry for failure to meet quality standards and 267 notices of non-compliance.

Regulatory conditions have tightened due to the Royal Commission into Aged Care Quality and Safety, which was established in October 2018. A damning interim Royal Commission report was released in October 2019, with the final report due by November 2020. New national quality standards, which came into effect on 1 July 2019, have influenced the industry’s operating environment.

Jumbo Interactive Limited – JIN

Jumbo Interactive Limited (JIN) is an online reseller of lottery games in Australia and abroad. JIN uses a Software-as-a-Service (SaaS) model to attract customers to lottery games via digital marketing campaigns and digital platforms. JIN partners with major players in the Lotteries industry, such as Tabcorp Holdings Limited. JIN also distributes lotteries on behalf of Australian charities, including Surf Lifesaving and the RSPCA.

Unlike other forms of gambling, such as within the Casinos industry and the Horse and Sports Betting industry, lottery ticket sales are not expected to be significantly disrupted by COVID-19. The closure of alternative gambling channels is expected to drive some consumers to purchase lottery games as a substitute product, leading to expected revenue growth of 1.4% in the Lotteries industry in 2019-20. In addition, social distancing requirements are likely to encourage consumers to purchase lottery games through online channels, rather than through traditional outlets such as the Newsagents and Book Retailers industry.

The Lotteries industry is expected to grow at an annualised 0.4% over the five years through 2019-20, to total $6.9 billion.  Growth in the industry has been primarily supported by a change in the Powerball lottery game offered by Tabcorp, which has facilitated larger jackpots since 2018. However, industry growth has been constrained by declines in real household discretionary income and per capita gambling expenditure.

Pilbara Minerals Limited – PLS

Pilbara Minerals Limited (PLS) is a lithium-tantalum mining company operating in Western Australia. Lithium is a critical input used in the production of batteries. Demand for lithium has increased over the past five years, following a global shift towards electric vehicle manufacturing. However, demand for lithium and other battery inputs has since subsided, with prices falling significantly due to the outbreak of COVID-19 and its impact on the global economy.

The Salt, Lithium and Other Mineral Mining industry’s performance has been constrained by weaker than expected growth in electric vehicle sales in 2019-20. The outbreak of COVID-19 has disrupted global supply chains, and is likely to lower lithium demand until 2022-23, as global demand for new electric vehicles is subdued by weak economic growth.

COVID-19 is expected to lead to a drop in annual electric vehicle sales in 2019-20. However, this decline is likely to be reversed in 2020-21 as battery prices fall, electric vehicle technology improves, and more charging infrastructure is built. Investment in electric vehicle manufacturing is expected to continue to rise, in anticipation of future growth. Furthermore, the number of electric vehicle models on the market is expected to increase to over 500 by 2021-22.

Demand for electric vehicles is expected to grow in coming decades. Global investment in new battery manufacturing capacity, such as Tesla’s Gigafactories in the United States and China, is expected to support demand for lithium, cobalt, and other production inputs. As a result, uptake of electric vehicles is expected to accelerate, with the volume of sales forecast to surpass sales of internal combustion engine vehicles by 2050. Advancements in battery manufacturing technology are also anticipated to support demand for lithium.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647
Email: mediarelations@ibisworld.com