The RBA is now widely expected to deliver its first of several interest rate cuts when it meets next week on the 18th of February.
The combination of looming interest rate relief – and possibly pre-election fiscal stimulus – should provide a tailwind for the earnings of cyclical businesses that are exposed to the ebbs and flows of Australian consumer spending, including parts of the retail, consumer goods and consumer services sectors. These sectors are the focus of this report.
Consistent with the improving macro outlook, consensus estimates suggest that retail sector earnings growth will accelerate over 2H25/FY26. However, at the index level, valuations have become demanding following significant PE multiple expansion over the last 12 months.
While the ASX retail sector has outperformed the ASX 300 in four of the last five RBA easing cycles with an average relative return of ~13% in the 12 months following the first rate cut, currently full valuations suggest investors have already largely ‘priced in’ the prospect of interest rate cuts.
The market’s initial reaction to JB Hi-Fi’s interim result is a good case in point, as the stock fell ~5% on the day of the result despite its solid 1H25 NPAT beat and strong January trading update which showed sales growth accelerating to +7.4% (vs +2.5% in January 2024).
Due to generally demanding valuations, the Focus Portfolio maintains only relatively selective positioning in domestic consumer cyclicals, with our primary exposure being to Collins Foods (explored below).
Screening the ASX for RBA Rate Cut Beneficiaries
Figure 4 displays a screen of companies on the ASX 300 with domestically focused earnings that are leveraged to changes in the RBA cash rate and discretionary spending patterns.
While valuations are demanding at the index level – driven by index heavyweights Wesfarmers and JB Hi-Fi – beneath the surface there are select ‘out-of-favour’ domestic cyclicals that offer attractive value and appear well positioned to benefit from a cyclical recovery in consumer spending as the RBA eases monetary policy.
Broadly speaking, the companies that are the most leveraged to RBA rate cuts are those that: a) have faced significant earnings pressure from the soft consumer environment over FY22-24, and: b) trade at depressed valuations relative to history.
Focused on quality
The Focus Portfolio is exposed to this thematic through its position in Collins Foods where the risk/reward remains highly compelling, which is explored in the remainder of this report.
Given our overarching quality bias, when investing in cyclicals our focus is primarily on businesses with quality attributes (i.e. brand strength, high or improving ROE, robust balance sheets) and attractive bottom-up structural growth stories (i.e. product/market/store expansion strategies, market share gains).
Outside of the Focus Portfolio, other companies that meet this criteria and are screening relatively attractively from a valuation perspective include ARB and Accent Group.
ARB trades on a discount to its five-year average PE multiple and is poised to deliver sustained double-digit earnings growth over the medium and long-term, supported by the ongoing structural shift to SUVs, expanded distribution globally, and new product launches.
Meanwhile, Accent Group also trades on a discount to its historic average, at a PE of ~14x, which offers compelling value in the context of consensus EPS growth of ~16% over FY26/7. This will be driven by a recovery in top-line growth (and associated operating leverage) and profitability tailwinds (e.g. Glue store closures, cost-out program, vertical product growth)
On the other hand, Wesfarmers and JB Hi-Fi are unappealing at current levels due to their elevated valuations relative to history (and sector peers), notwithstanding the quality of these businesses.
Collins Foods – Improving Macro Supports Earnings Recovery
Collins Foods (CKF) is poised to benefit from improvements in consumer spending, which we expect to underpin significant earnings growth over the medium-term.
There are several key macro factors that keep us positive towards the business, alongside the strength of the KFC brand and longer-term growth opportunities from store rollouts (particularly in Europe).
1. Rate cuts to support top-line growth
KFC Australia’s like-for-like (LFL) sales growth has been impacted by consumer spending headwinds over the last ~18 months, as households have cut back on ‘dining out' amidst interest rate and cost-of-living pressures. This has resulted in challenging trading conditions in the QSR (Quick Service Restaurant) market.
However, we expect interest rate relief to drive greater consumer spending on fast food (including KFC), which will be supportive of CKF’s top-line growth over the medium-term. This view was reaffirmed by Yum! Brands’ (global KFC franchisor) 4QCY24 result last week, which implied that KFC Australia’s LFL sales growth has sustained (if not improved on) the +0.8% growth reported in the first seven weeks of 2H25.
Read Collins Foods (CKF) | YUM 4QCY24 Result Read-through
The positive read-through from Yum’s result suggests LFL sales growth is trending in the right direction, which presents upside risks to consensus revenue growth of +1.7% in 2H25 (year ending 30 April). We expect LFL sales to return to mid-single digit growth in FY26/7, driven by a 50/50 split of volumes and pricing.
2. Menu price increases to drive margin recovery
Given the soft consumer backdrop, Yum (as the franchisor of KFC) has been focused on enhancing consumer value, with increased investment into price/promotional activity to maintain brand health and drive customer count/transaction volumes, which has resulted in restaurant margin compression.
Looking forward, as the consumer environment improves, KFC will be better placed to implement menu price increases, which combined with CKF’s natural operating leverage will be supportive of the expansion of the company’s margins over FY26/7.
3. Easing input costs will also support margins
Following a period of significant cost inflation, CKF’s underlying cost profile is unfolding as commodity costs deflate across the value chain. While energy and wage costs are expected to remain sticky, easing chicken feed input costs and increased poultry production should drive deflation in poultry prices (CKF's largest COGS component) which should provide further relief to CKF's margins.
Still in the bargain bucket
CKF’s valuation is fundamentally ‘cheap’, with the company trading on a forward PE multiple of ~16x, which represents a ~17% discount to its five-year average. On a relative basis (vs ASX All Industrials), CKF is also trading at deeply discounted levels (see figure 8).
This is highly attractive in the context of an improving macro outlook (with rate cuts looming) and consensus EPS growth of ~31% (CAGR) between FY26/7 (see figure 4). We expect CKF’s PE multiple to re-rate higher as it demonstrates improving top-line growth and margin expansion (in line with consensus expectations).
With that being said, the delivery of consensus EPS growth alone can drive significant share price appreciation over the medium-term (even without multiple expansion).
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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