Talk about going against the grain. While analysts have pared earnings expectations for this financial year, one ASX sector could be about to enjoy consensus upgrades!
The economic rebound from the COVID-19 fallout will take longer to eventuate than experts were predicting in the early days of the pandemic.
Most ASX stocks won't see earnings return to FY19 levels until FY22 at least. It's only our miners like BHP Group Ltd (ASX: BHP) that is driving much of the earnings growth on the S&P/ASX 200 Index (Index:^AXJO) for this financial year.
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Margin to fuel upgrade
Earnings upgrades will be hard to come by in this environment. Just ask Macquarie Group Ltd (ASX: MQG), which revealed a shock profit warning.
But ASX-listed petrol station operators look well placed to surprise on the upside, according to Morgan Stanley.
"Retail margins in 2H20 continue to outperform our forecasts, and with volumes likely recovering in late 2020 as Victoria comes out of lockdown," said the broker.
"Retail fuel margins for July (18c/L), August (17c/L) and September (21c/L) remain well above 2019 average margins of 14c/L."
Viva to benefit more than Ampol
The expanding margin benefits Viva more than Ampol. Every one cent a litre change in retail margins equates to around a 12%, or $24 million, movement in net profit for Viva. In contrast, Ampol's net profit will move by 7%, or $34 million.
The competition watchdog has been silent on the "profiteering" by fuel retailers so far, probably because these companies need bigger margins to offset the drop in volume to stay afloat.
VEA share price and ALD share price at turning point?
It's also worth noting that the Viva Energy Group Ltd (ASX: VEA) share price and Ampol Ltd (ASX: ALD) share price are lagging the market. Viva shed around 16% while Ampol tumbled 31% over the past year when the ASX 200 lost 12%.
But if Morgan Stanley is right, these stocks could see their fortunes turn and it isn't only the fatter than expected margin that will drive the re-rating.
Volume recovery in 2021
"Apple mobility data suggest that Australian driving volumes in September (down 10%) have improved since August (down 15%) from January base levels, weighed by Victoria (down ~50%)," explained Morgan Stanley.
"However, we think retail performance will accelerate in the next 12 months as volumes recover after Victoria eases lockdown restrictions."
Foolish takeaway
The reluctance for commuters to return to public transport due to worries about catching COVID-19 is also another positive trend for volumes.
It will be interesting to see if the ACCC starts to wave a big stick if margins don't narrow as volumes recover.
Morgan Stanley reiterated its "overweight" (or "buy") recommendation on Viva and Ampol.
