Can these companies profit from the coming budget?

Soon after the Abbott government came to power, it commissioned a so-called commission of audit (COA), charged with identifying wasteful practices and potential savings, the COA gives an indication of some of the measures that are likely in the forthcoming budget (and, more generally, in the current term of the government.) So what are the main findings of the COA, and what are the likely impacts on our portfolios?

Theme 1: “A reduction of around 5 per cent of total Commonwealth General Government Sector employment” and “a whole of government user-charging framework,” for example, “expand road user charging.”

These kinds of measures are fairly classic 1980’s neo-liberalism, and tend to hit people in the hip pocket. Paying more for government services, infrastructure use and even services such as seeing the doctor hits consumers in the hip pocket. The reaction is two-fold. First, consumers have less money, and second, they feel like they have less money. This hit to confidence impacts low and average income earners more severely, so retailers that sell mostly to the masses are more likely to feel the pain. In my opinion most people will underestimate the expense of user pays, because as government departments offer voluntary redundancies, the best and most efficient employees (who can get a job elsewhere) will take the money, buy their holiday house and move on. In my opinion on average government will become smaller and even less efficient – are we really supposed to believe that virtually never is a public servant incompetent? Well, that’s how often they get sacked.

To my mind, that means discretionary retailers such as Premier Investments Limited (AS: PMV) and Super Retail Group (ASX: SUL) are most likely to notice an impact. For example, Super Retail Group sells an awful lot of leisure-related products and services: bikes, sports gear, camping and fishing gear, gym equipment and specialty auto. If you ask me, these are the first things people avoid replacing or buying when they are feeling cash-strapped. On the other hand, prestige retailers like OrotonGroup Limited (ASX:ORL) should escape any impact, and retailers like Pacific Brands Limited (ASX: PBG) should escape major impacts, because they sell essential items (think sheets and underwear) under no-nonsense affordable labels, though I would expect some impact on Pacific Brands.

Measures to “contain growth in the minimum wage” and “requiring young single people aged 22 to 30 without dependents or special exemptions to relocate,” if enacted, would be quite likely to impact retailers such as Thorn Group Limited (ASX: TGA) which rents and sells an awful lot of products to people who are receiving government support or, at the very least, are sufficiently cash-strapped to need consumer credit. In fact Thorn’s “fair go” advertising directly appeals to the fact that they give credit to those with a bad credit history.

Theme 2: “The Commission has identified several areas where the Government could better harness technology to improve services and inform policy, including through greater use of data analytics and more assertive requirements to use cloud computing for non-core IT services.”

This implies that the government may end up spending more on IT services, particularly in moving to the cloud. Potential beneficiaries include, Vocus Communications Limited (ASX: VOC)Amcom Telecommunications Limited (ASX: AMM), and particularly Macquarie Telecom Group Ltd.  (ASX: MAQ), which has been targeting governments as clients for a few years already, offering them super-secure and efficient managed data centres (a.k.a. the cloud).

The fact that the COA sees a need for the greater use of IT also bodes well for IT consulting companies such as SMS Management & Technology Limited (ASX: SMX) and DWS Ltd (ASX: DWS). These companies have been suffering from reduced government IT spend, so a rebound in government revenues would be most welcome. It also has to be said that My Net Fone Limited (ASX: MNF) has been working hard to set governments up with money-saving VOIP networks, so they might see a bit of extra work come their way. All in all, the telcos should escape the COA largely unscathed.

Indeed, it appears the NBN farce is set to continue, with the COA more focussed on selling it than fixing it. “It is likely,” says the report, “that the long-term future of NBN Co will include an eventual privatisation.” The lack of a large government-owned competitor over the long term is likely to be good news for Telstra Corporation Ltd  (ASX: TLS) and TPG Telecom Ltd  (ASX: TPM), although who knows what will happen in that regard.

Foolish takeaway

This article touches on how this government’s policies (and upcoming budget) are likely to impact retailers, telecommunications companies and IT companies. It would appear that consumers might have less discretionary spending money after this budget – in the words of one analyst I admire – “this might be tougher love than the country needs right now.” Please keep in mind that although the COA gives an indication of the government’s intentions, it is not an accurate guide to what will actually happen. It doesn’t hurt to be ready, but don’t overreact.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Vocus Communications and My Net Fone, and has indirect interests in Amcom Telecommunications, SMS Management, Macquarie Telecom and TPG Telecom.


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