Last night Treasurer Josh Frydenberg unleashed a $7.1 billion surplus for this year and yet still managed to spend $302bn on us, the people.

It’s based on estimated revenue of about $513.8bn.

A solid chunk of that, however, is going to make its way into smallcap-land.

So who has won in the annual Budget lolly scramble? Read on for the Cliff Notes version of which sector won in the 2019-20 accounts.

The lay of the land: this is where we’re coming from

Frydenberg is promising $45bn of surpluses over the next four years and the far off dream of paying off Australia’s net debt by 2030.

It’s based on a reasonably positive view of the global economy: wages rising in countries like the US and high employment in advanced economies, and demand for Aussie exports and services.

And a rosy picture of Australia’s economy as it comes into the 28th consecutive year of growth: strong employment rates, hopes that wage growth will pick up, and expectations the consumer spending will continue rising, despite the housing downturn.

That view didn’t take much heed of bearish fears that a downturn might be on the way, as noted by the RBA yesterday when it held interest rates again and suggested it might even cut in May to support the economy.

The RBA noted weaker international trade and softer global investment intentions and didn’t include a reference to any expected pickup in domestic household income to support consumption, but did refer to the impact of drought on farm output.

RBC Capital Markets Australia/NZ fixed income and currencies head Su-Lin Ong said they expect another downward revision to GDP forecasts in May.

Energy

We largely knew what was coming in energy but there were two surprises: $8.4m for feasibility studies around opening the massive Beetaloo gas field in the Northern Territory for the east coast market, and a plan to support the energy grid.

There is no other detail about how that money will be spent, which has bemused at least one industry exec Stockhead spoke to after the Budget dropped.

Empire Energy (ASX:EEG) and Blue Energy (ASX:BUL) have acreage in the Beetaloo, which is estimated to hold about 70 per cent of the NT’s shale gas resource, those most of it is held by Origin (ASX:ORG), Santos (ASX:STO) and Pangaea Resources.

Changes to the NT’s fracking policy last year opened shale exploration up, but it’s been slow going — Origin has two wells planned for this year for the Beetaloo but not much else is happening yet.

Some $3.2m is going to set up a taskforce to make sure the Australian Energy Market Operator’s projects to develop the National Energy Market (NEM) grid, recommended in its Integrated System Plan, are done in a timely manner.

This is a massively complex task and is affecting all power generators and grid network operators, from wind, solar and pumped hydro developer Genex (ASX:GNX) in northern Queensland, to wind power companies Tilt (ASX:TLT) and Windlab (ASX:WND), and network operator AusNet Services (ASX:AST).

A $50.5m spend on microgrid feasibility studies for regional and remote communities could benefit a so-far little covered section of the energy market.

Tag Pacific (ASX:TAG), Renu Energy (ASX:RNE), Pacific Energy (ASX:PEA) and battery maker Redflow (ASX:RFX) all work in the off-grid sector, supplying energy to small sites such as in the mining sector and, as in the case of Tag, already builds microgrids for remote communities.

And then there’s the $400,000 for a national electric vehicle strategy roll-out: that kind of money buys three Telsas in Australia.

Water and agriculture

It’s been a rough 18 months for farmers and the government is promising a number of methods offering respite.

However, the ones that could affect smallcaps are a $9.6m spend over five years to establish the North Queensland Water Infrastructure Authority to develop water infrastructure in the region.

That’ll be news for water rights investors like Blue Sky (ASX:BLA), and for cattle farmers such as Webster (ASX:WBA), Wellard (ASX:WLD) and Australian Agricultural Company (ASX:AAC).

There’s also $9.5m for “initiatives to enhance engagement between Australia and China on agricultural, regulatory and food safety”.

Australian food exports to China cover milk powder and products — check out the comprehensive list in this story — to beer, wine, fish and shellfish.

Medical research

The Budget includes a big splash on medical research and as Stockhead readers will know, Australia is a hot bed for this kind of stuff.

The key expense is $5bn on a 10 year investment plan for the Medical Research Future Fund.

This is broken down into spending on a variety of areas, but the ones important to small cap investors are:

  • clinical trials for rare cancers and diseases
  • tackling antimicrobial resistance and drug resistant tuberculosis
  • support for medical researchers inside industry and out
  • a brain cancer centre
  • dementia, heart, and traumatic brain industry research
  • and a major spend on stem cell research announced in March
  • $400m on genomics research

Australia is already a prime global location for clinical trials because of the cumulative effects of the R&D tax rebate, which made it affordable to run trials here, turned leading hospitals into research centres as they accumulated experienced medical staff, and has supported hundreds of biotechs which run their trials here.

For example, pot stock Zelda (ASX:ZLD) is running cannabis clinical trials in Australia and will sell the outcomes to a partner in the US — where formal cannabis clinical trials are almost impossible.

A few of the ASX companies involved in trials in Australia include Patrys (ASX:PAB) which is working on brain cancer, Actinogen (ASX:ACW) which is working on dementia/Alzheimers, and Reva Medical (ASX:RVA) which is working on heart scaffolds.

The stem cell field is also growing, with Cynata (ASX:CYP), Mesoblast (ASX:MSB), Orthocell (ASX:OCC) and Regeneus (ASX:RGS) forming a vanguard.

Preschool

No panda babies time this, just lots of moolah as the government spends $453.1m over two years to provide 15 hours of preschool each week.

There are two childcare stocks, G8 Education (ASX:GEM) and Think Childcare (ASX:TNK).

Think CEO Mathew Edwards told Stockhead in March that the extra preschool funding, as well as changes to the childcare subsidy last year, would be a huge benefit, as it meant they’d have more kids through the doors and have extra funding to fulfil their statutory requirements to have specific numbers of qualified staff.

Tax cuts

Sure there are a bunch of goodies for “working families” and so forth, but a cut in the company tax rate to 27.5 per cent for companies with an annual turnover of less than $50m will be great for microcaps.

The government anticipates lowering that rate to 25 per cent by 2021-22.

Defence

There are a bunch of defence-related stocks that could be in line to tap some of the $200bn the government is spending — click here for the 24 Stockhead keeps tabs on — but the key ones could be those which already have either government support or contracts.

These include Electro Optic Systems (ASX:EOS), Xtek (ASX:XTE), Austal (ASX:ASB), Quickstep (ASX:QHL), Bisalloy Steel (ASX:BIS) and Alexium (ASX:AJX).

Most intriguingly though was the Budget spend on cyber security — a top secret amount they wouldn’t reveal to the revolting public.

Where some of this cash might end up — although you’d never know, because, top secret — is at Ava Security (ASX:AVA), archTis (ASX:AR9), Elsight (ASX:ELS), Codan (ASX:CDA), Speedcast (ASX:SDA), Etherstack (ASX:ESK) and Livetiles (ASX:LVT), all of which provide cyber security, communications or process management software for military use.

ArchTis already has contracts with the federal government and plastered ‘TOP SECRET’ across various parts of its prospectus last year, so they may be a shoe-in for some of that.

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