I. Sector Landscape and Outlook
The Consumer Staples and Discretionary Sector in Australia represent food and beverage manufacturing, household products, food retailing, clothing, footwear & accessories retailing, online retailing, and department stores. With high per capita income, retailing in Australia generated 4.5% of the nation’s Gross Value Added (GVA), translating to ~$81.36 billion in 2020. Australia serves as a top exporter of food and fibre to Asian countries, with exports stood at $47.5 billion in 2020. The Wholesale and Retail Trade sector is the fourth-largest recipient of foreign direct investment, amounting to $61.5 billion in 2020, growing at 3.4% on an annualized basis.
Spending by households continues to be in positive territory with +1.2% growth in March 2021 quarter, according to the data by the Australian Bureau of Statistics. However, spending remained below the pre-pandemic levels. Australians spent more on services than on goods, with a 2.4% increase in spending on hotels, cafes and restaurants, and transport services. While spending on food and beverages took a nosedive as Australians preferred dining out as restrictions eased. As the economy recovers, with the unemployment rate dropping to 5.1% in May 2021 and positive consumer sentiments, the household savings ratio made a sequential fall in March 2021 quarter with 11.6% from the highs of 22.0% posted in June 2020.
Figure 1: Sequential Drop in the Household Savings Ratio:
Source: Parliament of Australia, Analysis by Kalkine Group
In the latest release by the Australian Bureau of Statistics, the seasonally adjusted retail trade in Australia showed an almost flat change in May 2021, reaching $31.07 billion (on a sequential basis). It went up by 1.1% in April 2021. Department stores de-grew by 6.7% in April 2021. Cafes, food services showed a healthy growth of 2.3%, while food retailing rose 1.4%. Household goods made an uptick of 1.5%, and clothing, footwear & accessories retailing improved by 1.2%.
Figure 2: Momentum Continues in Retailing:
Source: Australian Bureau of Statistics, Analysis by Kalkine Group
Due to the ongoing virus spread, households continue to spend more on cleaning products. According to the supermarket spend data, spending on hygiene products and medicinal goods posted strong growth of 3.8% in April 2021 over the previous year. This was followed by spending on perishables such as fruit, vegetables, meat, and dairy recorded +3.0% over last year.
The Industry Value Added by the retail industry touched $79.62 billion in 2019-20, reflecting a 1.0% growth over the prior year. Growing millennials and rapid adoption of online sales and omni-channel sales initiatives by retailers saw the retailing sector posted a +3.1% in sales and 27.4% jump in EBITDA. The second half of the year saw the re-opening of stores that spurred demand. The food retailing made a 7.2% growth in sales owing to panic buying and stocking-up by the households. The household goods category posted a significant increase with 24.2% reaching $1.1 billion in sales in 2019-20. Social distancing norms and store closures saw employment declined by 2,000.
Figure 3: Industry Value Added by Sectors:
Source: Australian Bureau of Statistics, Analysis by Kalkine Group
The agriculture sector in Australia constituted ~2.1% of the nation’s GVA, amounting to $37.97 billion in 2020. The nation is known to produce clean and green premium agricultural commodities. Through 15 free trade agreements in place, Australia becomes the largest exporter to Asian countries. Agriculture production is expected to reach a record high of $66 billion in 2020-21, aided by livestock prices and higher production from the drought-affected areas. Global demand for the nation’s agricultural commodities remained strong, and the market outlook is positive. Favourable conditions for autumn to support planting in 2021. Exports of beef, wool and dairy products are expected to drive agricultural exports, which are forecasted to reach $49.7 billion in 2021-22.
Figure 4: Agricultural Exports to Remain Resilient:
Source: Department of Agriculture, Water and the Environment, Analysis by Kalkine Group
Index Performance:
The ASX 200 Consumer Staples (GIC) Index and the ASX 200 Consumer Discretionary (GIC) Index posted 5-year returns of ~+60.33% and ~+67.55%, respectively, as compared to ~+39.04% by the ASX 200 Index. Changing population demographics, increasing disposable income and wealth of Australians, and favourable government policies supporting agricultural exports are some of the supporting factors driving the sectoral gains.
Figure 5: The ASX 200 Consumer Staples (AXSJ) and the Consumer Discretionary Index (AXDJ) outperformed the ASX 200 Index in the past five years by whooping ~21.29% and ~28.51%, respectively:
Source: REFINITIV as on 01 July 2021
Key Risks & Challenges
An increase in inflation is expected to curtail household spending. As per The Australian Bureau of Statistics, the Consumer Price Index rose 0.6% in March 2021 quarter. On an annualized basis, CPI increased by 1.1%, led by a surge in prices of healthcare, alcohol and tobacco, and furnishings. The pandemic has impacted spending ability and household’s dependent on government support programs. The household debt-to-income ratio, according to the data by the Parliament of Australia, stood at 180.4% in December 2020 quarter, which implies that debt was far higher than income levels.
Figure 6: Key Risks and Challenges in the Consumer Staples and Discretionary Sector:
Source: Analysis by Kalkine Group
Outlook
The government’s ambitious $7.8 billion tax cuts to support over 10 million families in the low- and middle-income group is expected to boost spending. This is in addition to the $25.1 billion tax cut proposal under the Personal Income Tax plan in the 2021-22 budget. The Treasure government is expecting the plan to boost GDP by ~$4.5 billion in 2022-23 and will create 20,000 jobs by 2023-end. According to The Commonwealth Bank of Australia, household spending intentions continue to show positive momentum in May 2021. Retail spending appears stronger than last year, with categories such as personal care and clothing & footwear showed resilience.
II. Investment theme and stocks under discussion (CGC, NZK, TPW, ABY)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ method.
1. ASX: CGC (ASX Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.32 billion)
CGC is a grower, packer and marketer of fruits and vegetables in Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 21.43% on 1 July 2021. We believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple) given favourable performance in Berry business, substantial yields/volumes from China and strong cash flow position. For the said purposes, we have taken peers such as Tassal Group Ltd (ASX: TGR), Beston Global Food Company Ltd (ASX: BFC), Huon Aquaculture Group Ltd (ASX: HUO), to name a few. Considering the prudent working capital management, sustainable leverage, improved FCF, valuation, and trading levels, we give a “Buy” recommendation on the stock at the closing price of $3.280, down by ~0.907% on 1 July 2021. The stock has delivered an annualised dividend yield of 2.74%.
2. ASX: NZK (New Zealand King Salmon Investments Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$191.80 million)
NZK operates in fish farming services and engaged in the production and sales of salmon products on a global scale.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 21.37% on 1 July 2021. However, we believe that the stock might trade at a slight discount compared to its peer average EV/Sales (NTM trading multiple) given high price fluctuations in the salmon market, COVID-19 uncertainties and high freight costs. For the said purposes, we have taken peers such as Tassal Group Ltd (ASX: TGR), Bubs Australia Ltd (ASX: BUB), Huon Aquaculture Group Ltd (ASX: HUO), to name a few. Considering the improved financial standing at low debt levels, rebounding markets, expectations of demand to surpass supply, valuation, and trading levels, we give a “Speculative Buy” recommendation on the stock at the closing price of $1.375, down by ~0.363% on 1 July 2021.
3. ASX: TPW (Temple & Webster Group Ltd)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.29 billion)
TPW is a pure-play online retailer engaged in the furniture and homewares market.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 16.77% on 1 July 2021. However, we believe that the stock might trade at some discount compared to its peer average EV/Sales (NTM trading multiple), given the expected failure of working capital management and recovery in traditional retail. For the said purposes, we have taken peers such as Cettire Ltd (ASX: CTT), Kogan.com Ltd (ASX: KGN), Bikeexchange Ltd (ASX: BEX), to name a few. Considering the improved margins and strict controls on fixed costs, valuation, and trading levels, we give a “Hold” recommendation on the stock at the closing price of $10.440, down by ~3.244% on 1 July 2021.
4. ASX: ABY (Adore Beauty Group Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$402.85 million)
ABY is a pure-play online beauty products retailer in Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 12.14% on 1 July 2021. We believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple) given favourable market opportunities, strong fundamentals, and exponentially increasing customer base. For the said purposes, we have taken peers such as Mydeal.ComAu Pty Ltd (ASX: MYD), Cettire Ltd (ASX: CTT), Bikeexchange Ltd (ASX: BEX), to name a few. Considering the growing top-line, online BPC market growth forecasts, resilient cash flows, valuation, and trading levels, we give a “Hold” recommendation on the stock at the current market price of $4.400, up by ~2.803% on 1 July 2021.
Note: All the recommendations and the calculations are based on the closing price of 1 July 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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