For West Australian (WA) exposed companies, COVID continues to have an oversized impact on profitability. While closed borders have contributed to good health outcomes in WA, the restrictions on people mobility have been a significant issue for companies with WA exposure.
A smaller pool of skilled labour has resulted in higher costs, constrained production capacity and extended approval processes for growth projects.
Our basket of six WA exposed companies (S&P/ASX 200) have underperformed the market by >20% YTD, while valuations relative to the market are 30% below long-term levels, suggesting an opportunity is emerging. All companies have made mention of the WA borders impacting their business over 2020/21 and into 2022.
The two most exposed companies in our basket - Monadelphous (MND) and NRW Holdings (NRH) - have seen profit margins fall to a record low, pushing share prices to multi-year lows.
With the prospect of the WA border reopening in 1Q22, headwinds around labour issues could begin to reverse. This sets up an opportunity for a potential re-rate in the share prices in our basket of six WA exposed companies. In many cases, the CAPEX cycle and expectations of buoyant global growth imply growing order books of work, particularly if oil and gas sector activity accelerate post-COVID.
We explore the prospects of fortress WA reopening and assess the likelihood of whether earnings expectations in our basket of WA exposed companies have bottomed ahead of the February results season.
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John is a leading investment strategist with 20 years experience.