Event Core
On 24 February 2022, the Australian Bureau of Statistics released quarterly statistics on actual and expected private new capital expenditure spent on buildings and equipment, categorized by industry. For December 2021 quarter, the total new capex surged by 1.1% (QoQ) and clocked $33.34 billion. Capex in buildings and structures edged up by 2.2% and registered $17.45 billion in investment. Capex in equipment, plant and machinery slipped marginally by 0.1% QoQ.
Figure 1: Uproar in Total New Capital Expenditure:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Diversified Finance Sector Bouncing Back to Clock New Highs
Favourable Investment Potential in Managed Funds: In December 2021 quarter, the total capital expenditure in Financial and Insurance Services surged by 14.1% PcP. The asset management and insurance industry has grown leaps and bounds post the COVID-19 crisis. During the September 2021 quarter, the managed funds industry grew by 1.4% (+$61.2 billion) and registered $4,390.3 billion in funds under management.
Growing Asset Levels: In the September 2021 quarter, managed funds’ consolidated assets edged by 2.1% (+$73.1 billion) and clocked at $3,515.4 billion. Consequently, the cross invested assets and unconsolidated assets increased to $571.2 billion (+2.9% QoQ) and $4,086.6 billion (+2.2% QoQ), respectively.
Figure 2: Managed Funds Industry Sustaining an Uptrend:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Favourable Prospects in the Materials and Transportation Sector
Capital Expenditure Status: For December 2021 quarter, the total private new capital expenditure in buildings and structures surged by 2.2% and clocked $17.45 billion. Capex in construction and manufacturing surged by 3.3% and 3.0% QoQ, respectively. Capital expenditure in Transport, Postal, and Warehousing slipped by 2.2% QoQ but sustained elevated levels by +13.5% PcP.
Resurging Labor Supply: For January 2022, the unemployment rate stood at 4.2%, while the participation rate increased to 66.2%. The employment to population ratio surged to 63.4%. The hours worked slipped by 8.8% between December 2021 and January 2022; the decline turned more pronounced, with employment increasing by almost 13,000 people.
Statistics Supporting Transportation Industry: In December 2021, the monthly business turnover of Transport, postal, and warehouse services surged considerably in the last four months and clocked a 5.6% monthly increase in December 2021. The import of freight transport edged up by $48 million and stood at $1.88 billion in import value.
Key Risks and Challenges
In September 2021 quarter, the GDP slipped by 1.9% due to curtailed economic activities amid lockdowns. Strikes have continued in Australian ports, giving rise to supply delays and surging prices. Construction activities have witnessed a recent hit, with the total value of construction work shrunk by 0.4%. Although managed funds have diversified into global assets, the pandemic crisis has not ceased yet, so systematic risks are dominant. The recent geopolitical stress between Russia and Ukraine has substantially impacted global ques.
Figure 3: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Favourable Capital Expenditure: For FY22, the ABS estimated $140.8 billion in total private new capital expenditure, revised upwards by 1.6% from the previous estimate. Total capex in buildings and structures is estimated to clock $79.4 billion, revised upwards by 1.0% of the prior estimate.
Improved Operating Surplus: For September 2021 quarter, the gross operating surplus plus gross mixed income (GOSMI) surged by 4.2%, primarily driven by the mining industry. The non-mining GOSMI also registered a rise, reflecting increased subsidies paid to businesses.
Improved Employment Prospects: On Seasonally adjusted terms, employment increased by 12,900 people or +0.1% in January 2022. Employment stood 2.0% higher than March 2020 levels. Employment to population ratio increased to 63.4%.
Infrastructure Investment Program: The government is investing nearly $110 billion over ten years from FY22 in land transport infrastructure via its rolling infrastructure pipeline, most of which falls under this program.
Resilient Wage Growth: In September 2021, the compensation of employees grew by 3.3%, culminating in a substantial contribution in superannuation funds, signalling a recurring incremental trend.
Considering the improvement in private capex spending, we have figured out three stocks on ASX that are set to see the momentum.
(1) CSR Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.72 billion, Annual Dividend Yield: 6.67%)
Resurgence in Commercial Construction may Deliver Top-Line Support: CSR Limited (ASX: CSR) is a leading building products company in Australia and New Zealand. On 9 February 2022, CSR announced the sale of 4.6 hectares of land at Badgerys Creek, NSW, for a value of $20.7 million. In FY21, CSR reported EBIT of $184.3 million in building products, up by 8% with margin expansion to 12.0% from 10.7% the previous year. After completing the next stage of industrial development at Horsley Park, property EBIT stood at $54.2 million. Aluminium EBIT slipped to $23.4 million relative to previous guidance of $59.6 million.
During H1FY22, CSR clocked $1.1 billion in trading revenue, up by 6% with EBIT of $132.6 million, up by 41%. The solid operational execution, favourable cost controls and detached market boosted building EBIT by 25%. Property EBIT clocked $6.6 million, driven by the sale of Moss Vale Site. Improved spot pricing and hedged positions supported Aluminium EBIT to clock $18.3 million, up from $6.2 million in H1FY21.
Outlook: Property EBIT for YEM22 is estimated to clock ~$34 million inclusive of competition of the next tranche of Horsley Park Stage 2. Aluminium EBIT for YEM22 is estimated to range between $35 million and $41 million.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
CSR Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CSR went up by ~4.380%. The stock made a 52-weeks low and high of $5.195 and $6.480, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering labour constraints and potential project delays. For valuation purposes, peers like Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), Boral Ltd (ASX: BLD), and others have been considered. Considering the decent potential in construction activities, improving capital expenditure in the industry, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $5.610, as of 28 February 2022, at 10:50 AM (GMT+10), Sydney, Eastern Australia.
(2) Pendal Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.77 billion, Annual Dividend Yield: 8.87%)
Disciplined Investment Strategy to Drive Sustainable Growth: Pendal Group Limited (ASX: PDL) is a global investment management company that offers a broad range of investment strategies to its individual and institutional customers. In FY21, PDL reported a statutory NPAT of $164.7 million, up by 42% PcP, reflecting fee revenue growth on surged funds under management (FUM). Underlying PAT increased to $165.3 million, up by 25% PcP. The increase reflected a considerable uplift in annuity income. Acquisition of TSW created immediate value and more than doubled PDL’s US FUM.
The total funds under management stood at $139.2 billion relative to $92.4 billion in FY20, up by 51%. The considerable FUM uptick was dedicated to TSW acquisition, improved market standing, investment performance, and favourable currency impact. For the period, margins stood at 48bps, supported by Inflows from higher-margin Australian Wholesale, and the US pooled funds stood robust. The cash balance increased by $90.2 million and stood at $297.7 million as of 30 September 2021.
Outlook: JOHCM performance fees is tracking at GBP6.7 million as of 30 September 2021. The short-term institutional flow pressures are expected to persist. PDL stands well-positioned to take advantage of the high-conviction culture and entrepreneurial spirit.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
PDL Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of PDL went down by ~4.742%. The stock made a 52-weeks low and high of $4.535 and $8.960, respectively. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering decent market opportunities and favourable global ques. For valuation purposes, peers like Pacific Current Group Ltd (ASX: PAC), Macquarie Group Ltd (ASX: MQG), Insignia Financial Ltd (ASX: IFL), and others have been considered. Considering the favourable global ques, a decent uptick in FUM, expanding bottom line, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.605, as of 28 February 2022, at 11:18 AM (GMT+10), Sydney, Eastern Australia.
(3) SG Fleet Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 889.16 billion, Annual Dividend Yield: 5.27%)
Stable Performance Across Geographies and Business Segments: SG Fleet Group Limited (ASX: SGF) provides vehicle leasing and fleet management services covering Australia, New Zealand, and the UK. SGF witnessed a 15% uplift in total net revenue (over expenses) to $198.2 million in FY21 over the prior year. Its underlying NPAT showcased a growth of 41.8% to $51.6 million. It had incurred $8.9 million towards the acquisition of LeasePlan. It had witnessed a strong performance in all geographies while novated business showcased strong recovery in customer orders.
In H1FY22, total net revenue stood at $153.8 million, up by 58.0% PcP, including a $41.6 million contribution from LeasePlan. SGF reported NPAT of $29.7 million, up by 16.6% PcP and underlying NPAT surged by 54.3% PcP. The NPAT included $8.1 million and $9.0 million four-month contributions from LeasePlan Australia and New Zealand businesses (recently acquired), respectively. The company continued to deliver strong momentum across all channels.
Outlook: SGF has continued to improve cost efficiencies by automation & digitalization, prospects for credit system replacement and potential securitization term-out. The company is betting on expanding higher value-add products & services, investment in new capabilities, growth in EV-related services, and expansion of mobility services.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
SGF Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SGF went up by ~11.111%. The stock made a 52-weeks low and high of $2.210 and $3.290, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering global supply chain constraints and better working capital management requirements. For valuation purposes, peers like BSA Ltd (ASX: BSA), Downer EDI Ltd (ASX: DOW), AMA Group Ltd (ASX: AMA), and others have been considered. Considering the improvement in cost efficiencies, favourable jump in fundamentals, high contribution from strategic acquisitions, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $2.500, down by ~3.847% as of 28 February 2022.
Note: Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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