Event Core
On 18 May 2022, the Australian Bureau of Statistics released the seasonally adjusted Wage Price Index (WPI), which rose by 0.7% quarterly and 2.4% over the year. The WPI in the private sector increased by 0.7%, and the public sector edged up by 0.6%. Wage rise was evidend across the private sector. At the same time, the proportion of jobs recording dropped back to pre-pandemic March quarter levels, post assuming a kick from award-based jobs in March quarter.
Statistics on Consumer Discretionary Expanding with New Jobs
Improved Retail Turnover: In March 2022 quarter, the retail turnover stood at $93.19 billion, up by 1.2% sequentially and 4.9% on a PcP basis. Household goods retailing surged by 3.4% in March 2022, and clothing, footwear, & personal accessory retailing advanced by 0.5% to $14.3 million. Consumer spending advanced across both discretionary and non-discretionary sectors.
Improved Prospects in Online Retaining: Total online retailing sales stood at $3.72 billion in March 2022, on seasonally adjusted terms, up by 1.4% or $52.7 million, partially recovering lost sales in last month’s dip. The return to shopping in-store has seen a marginal fall in online sales from the high rises witnessed during Delta Outbreak.
Oil and Gas Industry Seeking a Gradual Uptick
Improved Statistics in Mining: The total new private capital expenditure in mining for December 2021 quarter stood at $9.44 billion, substantially higher than the $8.57 billion witnessed in December 2020. Mineral exploration expenditure stood at $921.5 million in December 2021 quarter relative to $743.1 million in December 2020 quarter, and meters drilled stood at 3.15 million meters in December 2021 relative to 2.97 million in December 2020.
Prospects for LNG and Oil: Australia’s export volumes are estimated to increase to 82 million tonnes in FY22, as technical issues offset capacity utilization at other plants. Export volumes should further fluctuate from 79 to 81 million tonnes over the outlook period. Moreover, soaring oil prices are expected to lift export earnings by 86% to $13.8 billion in FY22, with steady earnings in FY23.
Key Risks and Challenges
The consumer price index (CPI) advanced by 2.1% in March 2022 quarter and 5.1% PcP. The continued shortages of building supplies and labour, amplified freight costs and ongoing robust demand contributed to inflationary pressures. Oil demand is expected to drop later in the outbreak period, reflecting a decline in transport demand. The Bayu-Undan field supplying Darwin LNG is in a decline stage. LNG export volumes are estimated to gradually decline to under 80 million tonnes in 2025 as backfill projects fail to bridge the shortfall.
Outlook
Improved Capital Expenditure in Retail Trade: The total private new capital expenditure in retail trade for December 2021 quarter inclined by 2.9% sequentially and 8.5% PcP. For the same period, total capital expenditure in wholesale trade expanded by 9.0% PcP.
Robust Household Spending: Household spending advanced by 6.3% in December 2021 quarter, recovering from the 4.8% decline in September and exceeding pre-pandemic levels. Spending on goods edged up by 6.3%, reflecting pent up demand for clothing & footwear and furnishing & recreational goods.
Improved Australian Export Prospects: Australian crude oil and feedstock exports in FY22 are estimated to advance by 1.7% to 281k barrels/day. Exports are estimated to lift later as several new oil projects come online.
Improved Global Demand: Global oil consumption in CY21 averaged 98 million barrels/day, 6.1% higher than CY20. The recovery in oil consumption is set to continue in CY22, with consumption forecasted to increase by 2.2% and reach 100 million barrels/day.
Improved LNG Export Earnings: Australia’s LNG export earnings are estimated to clock $70 billion in FY22 from $30 billion in FY21 and is expected to register $82 billion in FY23 as oil-price linked contract prices improved.
Considering the wage expansion in private payroll in selected industries, we have figured out three stocks on ASX that are set to see momentum.
(1) Lovisa Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.66 billion, Annual Dividend Yield: 3.55%)
Growing Top Line and Bottom Line with the New Stores: Lovisa Holdings Limited (ASX: LOV) operates in the retail business and sells fashion jewellery and accessories in Australia. In FY21, the revenue was up by ~18.9% Y-o-Y and reported as $288 million, and online stores grew by ~178%. The EBIT of the company increased by ~39.4%, and NPAT grew at ~43.4% on a PcP basis, to $42.7 million and $27.7 million, respectively.
In H1FY22, with an uptick of ~21.5% in comparable-store sales, the company clocked a ~48.3% hike in its revenue to $217.8 million, reflecting growth in the store network and strong comps. The company opened 42 net new stores and maintained CODB (Cost of Doing Business) at 51.8% to sales, despite facing temporary store closures and sales disruption. Available liquidity stands at $52.7 billion, and statutory NPAT showed a hike of ~70.3% to $36.7 million.
Outlook: The company might face some cost pressures in global logistics due to worldwide shipping capacity constraints. However, the first eight weeks of the second half showed a ~12.1% growth over FY21 in its comparable-store sales.
Valuation Methodology: EV/EBITDA Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs LOV (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LOV went down by ~10.41%. The stock made a 52-weeks low and high of $13.230 and $23.070, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/EBITDA 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 cost pressures in global logistics and high competition. For valuation purpose, peers like City Chic Collective Ltd (ASX: CCX), Adore Beauty Group Ltd (ASX: ABY), Temple & Webster Group Ltd (ASX: TPW), and others have been considered. Given the decent fundamentals, revenue growth witnessed in the initial eight weeks of H2FY22, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the closing market price of $15.490, up by ~0.194% as of 23 May 2022.
(2) Karoon Energy Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.04 billion, Annual Dividend Yield: 0.00%)
Project Developments and Sanctions to Place Top-Line in Expansionary Zone: Karoon Energy Limited (ASX: KAR) operates as an oil & gas exploration company with investments in hydrocarbons covering Australia, Brazil, and Peru. In FY21, oil production from the Bauna Field clocked 3.14 million barrels at an average rate of 13,317 barrels of oil/per day. Oil revenue for the period stood at US$170.8 million, and the unit production cost was registered at US$25.11 per barrel. KAR recorded a statutory NPAT of US$4.4 million and an underlying NPAT of US$33.4 million.
In Q3FY22, oil sales stood at 0.99 million barrels, produced at an average rate of 11,723 barrels/day. Oil production from the Bauna Field in Brazil totalled 1.05 million barrels. The production stood 14% lower than the previous quarter, primarily attributed to the eight-day shutdown for scheduled maintenance and natural decline. Cash and cash equivalents as of 31 March 2022 stood at US$200.4 million, and undrawn & available debt stood at US$130.0 million, catering for total liquidity of US$330.4 million.
Outlook: The unit production costs in H2FY22 are expected to increase relative to H1FY22, reflecting curtailed production due to shutdown for maintenance, natural decline, and the commencement of Bauna intervention work. In H1FY22, KRA recognised a surge in the fair value of the contingent consideration payable to Petrobras for Bauna to US$183.8 million (pre-tax) due to rising oil price expectations.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs KAR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of KAR went down by ~12.50%. The stock made a 52-weeks low and high of $1.100 and $2.420, respectively. The stock underperformed the market volatility index. 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 premium compared to its peers, considering significant uptrend witnessed in crude oil prices. For valuation purpose, peers like Woodside Energy Group Ltd (ASX: WPL), Calima Energy Ltd (ASX: CE1), and Armour Energy Ltd (ASX: AJQ) have been considered. Given the decent production performance, improved activities in Bauna Fields, current trading levels, and upside indicated by valuation, we give a 'Speculative Buy' rating on the stock at the closing market price of $1.960, up by ~4.255% as of 23 May 2022.
(3) Beach Energy Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.67 billion, Annual Dividend Yield: 1.24%)
Improved Investment Activities in Various Projects Shall Diversify Revenue Streams: Beach Energy Limited (ASX: BPT) is an oil & gas exploration and production company headquartered in Adelaide, South Australia. In FY21, NPAT stood at $317 million, affected by $177 million of non-cash and pre-tax impairment. Underlying EBITDAX stood at $1,010 million, and underlying EBITDA stood at $953 million, driven by the favourable outcome from carbon liability associated with a Kupe GSA.
In Q3FY22, quarterly revenue climbed by 15% to $458 million at a production level of 5.2 MMboe, primarily driven by higher realised oil prices at $176/barrel, up by 51% and surged gas prices to $8.4/GJ, up by 10%. At the same time, offset by lower production levels and curtailed oil lifting. Otway Gas Plant capacity increased to support the increased winter customer demand with a 152 TJ/day average supply.
Outlook: LNG Supply & Purchase Agreement with BP is progressing well and is expected to be culminating in Q4FY22. The final investment decision has been made with Otway Gas Plant in H2FY23. Major growth projects, for instance, Thylacine West 1 and Waitsia Stage 2, remain on schedule and budget.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BPT (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BPT went down by ~2.11%. The stock made a 52-weeks low and high of $1.010 and $1.770, respectively. The stock outperformed the market volatility index. 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 challenges from high oil price volatility and potential funding risk. For valuation purpose, peers like Santos Ltd (ASX: STO), Woodside Energy Group Ltd (ASX: WPL), and Cooper Energy Ltd (ASX: COE) have been considered. Given the decent financial performance, sufficient liquidity, prompt investment activities, and upside indicated by valuation, we give a 'Hold' rating on the stock at the closing market price of $1.620, up by 0.621% as of 23 May 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. 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 for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the Valuation has been achieved and subject to the factors discussed above.
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