Motley Fool Australia

Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?

The federal government’s $688 million cash handout to stimulate the home construction sector will benefit several S&P/ASX 200 Index (Index:^AXJO) stocks. But there’s at least one ASX small cap that’s also well placed to cash in.

This small cap is Beacon Lighting Group Ltd (ASX: BLX) and Citigroup believes the lighting retailer is better placed to outperform its peers in the post COVID-19 world.

Best small cap retailer?

“The introduction of the government’s $680 million HomeBuilder scheme, further entrenches Beacon Lighting as our top pick in small cap retail,” said the broker.

“In our view the HomeBuilder scheme means that Beacon is well placed to continue outperforming the broader discretionary retail sector once JobKeeper ends.”

That’s a big plus as there are worries about what would happen to discretionary spending in September.

Not only will the JobKeepter wage supplement come to an end, but other support measures, like JobSeeker and the moratorium on evictions, ends.

Beyond the HomeBuilder boost

There are a few other reasons why Citi believes the $235 million small cap ASX stock will outperform most other retailers.

Beacon’s outlets remained open throughout the coronavirus outbreak when many other retailers shut their doors. This means it faced less competition.

Another reason is that consumers were actively engaging in home improvement projects during the lockdown, and that bodes well for Beacon.

“We expect FY21e LFL [like-for-like] sales of 2% to be underpinned by renovation activity, noting that ~60% of Beacon’s customers are home renovators,” added Citi.

“However, benefits from HomeBuilder may be skewed towards 2H21 given eligible building contracts can be executed up until 31 December 2020 and lighting is typically purchased at the later stages of a renovation.”

Beacon shares on sale

The stock is looking cheap too on the broker’s forecasts. Beacon’s shares are trading on an undemanding FY22 price-earnings multiple of 13 times, which is a 15% discount to its Australian housing retail peers.

Citi is recommending the stock as a “buy” and lifted its price target to $1.24 from $0.95 a share. This implies a 16% plus return over the next 12-months if dividends are included.

Foolish takeaway

The way the HomeBuilder program is designed will benefit larger companies more than smaller ones.

This is one of the criticisms of the stimulus as eligible projects have to be worth between $150,000 to $750,000. Small contractors and sole traders are likely to miss out.

The same can be said about ASX companies. The grants will disproportionately benefit large cap stocks.

Some of these companies that I’ve highlighted include building materials supplier James Hardie Industries plc (ASX: JHX), Bunnings owner Wesfarmers Ltd (ASX: WES) and property developer Stockland Corporation Ltd (ASX: SGP).

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Motley Fool contributor Brendon Lau owns shares of James Hardie Industries plc. The Motley Fool Australia owns shares of Wesfarmers 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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