The Australian Bureau of Statistics reported preliminary international trade figures for the month of August 2020, wherein the value of exports and imports came in at $28,935 million and $25,811 million, respectively. Over the recent months, changes in international trade have been mostly a factor of an increase in exports of metals and minerals, including iron ore and non-monetary gold. This was due to a rapid COVID-19 spread across other countries that supplied these commodities to the world coupled with improved industrial activity across nations, especially China.
August 2020 Trade Highlights: According to the preliminary ABS data, the value of exports in August 2020 declined by 2% on July 2020. This represented a decline of $616 million in absolute terms from July 2020 exports value of $28,935 million. The value of imports declined by $1,785 million or 7% on July 2020 imports value of $25,811 million. In comparison to August 2019, the figures declined by 16% and 7%, respectively. Overall, Australia recorded a trade surplus of $4,294 million in the same month.
Details on Exports: The decline of 2% in exports was majorly driven by non-monetary gold (excluding gold coin), which reported a decline of 64% or $2,270 million, against a record high value of exports in the previous month. In July, exports of non-monetary gold increased by 53% with a value of $1,252 million. Some other categories that reported a decline on the previous month were gas and textile fibres. Coming to the positives during the month, the exports of metalliferous ores and petroleum went up by 9% and 52%, respectively. Metalliferous ores have positively impacted trade numbers due to increased demand from Asian countries as a result of resumption of manufacturing and construction industries. The top 5 destination countries for Australia’s goods and services, included China, Japan, South Korea, India, and the US.
Top 5 Destinations for Exports (Source: Australia Bureau of Statistics)
Exports to China increased slightly in comparison to July 2020 on the back of increased exports of metalliferous ores and non-ferrous metals. Metalliferous ore exports to Japan increased by 44% driving an increase of 8% in overall exports to the nation. The increase was also driven by a 366% rise in fish exports. Exports to South Korea witnessed a rise of 9%, driven by non-monetary gold and metalliferous ores. India stood among the top 5 due to its demand for coal and metalliferous ores, which increased by 57% and 301%, respectively, driving an overall increase of 69% in Australian exports to the country.
Details on Imports: Decline in imports was driven by reduced imports of transport equipment, which went down by 55% in August. Other categories that witnessed a decline were office and ADP machines, electrical machinery, non-monetary gold, textile yarn, fabrics, and related products, etc. The decline was partially offset by an increase in imports of road vehicles, up 14% in comparison to July 2020.
Key Risks: In August 2020, the increase in exports was driven by increased manufacturing and industrial activities across Asian countries. Such activities may get negatively impacted due to the potential adverse impacts of COVID-19 if the number of infections increase in the future. A second outbreak in China can be detrimental to Australia as it forms a key destination for exports of metalliferous ores, which have been driving the export value over the recent few months. Moreover, bilateral tensions may aggravate the situation and can affect the movement of goods and services across borders.
Notwithstanding the above factors, Australia has been a key supplier to countries in Asia and is expected to benefit from the improving economic conditions, subject to potential disruptions from the pandemic. Moreover, as conditions improve further, the demand for goods and services from other categories such a gas and textile fibres may also witness a rise in the future. Considering the positive drivers of exports in August 2020, let's have a look at few companies on ASX which have a diverse geographical footprint with presence in Asia.
1. Whitehaven Coal Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.04 Billion, Annual Dividend Yield: 14.36%)
Equity Coal Sales in-line with PCP: Whitehaven Coal Limited (ASX: WHC) is a leading Australian producer of premium-quality coal. In FY20, the company reported revenue amounting to $1,721.6 million, down 31% on FY19 revenue of $2,487.9 million. Underlying EBITDA and NPAT declined by 71% and 95%, respectively, due to softening of gC Newcastle thermal prices and the impact on run of mine (ROM) production of previously reported labour shortages and dust events at the largest mine. Net debt at the end of the period stood at $787.5 million. The company paid $312.2 million as dividends for the period. Equity coal sales, including purchased coal, were in-line with pcp at 16.6Mt and equity own metallurgical coal sales were 17% of total FY20 sales.
Outlook: In FY20, the company continued to expand its business, geared towards increased production, and is expecting to diversify its product mix through its key development projects, Vickery, and Winchester South. The company has maintained strong relationship with its customers and retains a robust business position with the right assets, people, and strategy.
In FY21, the company expects managed ROM coal production in the range of 21.0 – 22.8 Mt and managed coal sales of 18.5 – 20.0 Mt. Despite the negative impact of COVID-19, the company has witnessed positive signs across affected markets, resulting in the resumption of term contract shipping schedules and increasing spot demand. The increased exports of coal to India is another positive indicator of improving trends. Notably, in FY20, the company generated ~7.83% of its revenue from India.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WHC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has corrected by 18.88% on ASX. The stock of the company is currently trading at attractive levels and retains further potential for growth on the back of its diverse footprint and resumption of industrial activity across markets. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $1.055, up 4.455% on 28th September 2020.
2. Sandfire Resources Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 750.44 Million, Annual Dividend Yield: 4.51%)
Record Operational Performance at DeGrussa Operations: Sandfire Resources Limited (ASX: SFR) Is a leading mid-tier mining and exploration company that operates the high-margin DeGrussa Copper-Gold Mine, located in Western Australia. In FY20, total sales revenue stood at $656.8 million, up 11% on the previous year, backed by payable metal sales totalling 69,593 tonnes of contained copper and 40,004 ounces of contained gold. Decent operational and sales performance across the DeGrussa Operations led to an increase of 13.4% in EBITDA to $414.4 million. Cash flow from operating activities for the year stood at $273.6 million, up from $210.4 million in FY19. The company declared a final dividend of 14 cents per share, taking FY20 dividends to 19 cents per share.
Outlook: During the year, the company made significant investments in long-term growth and diversification projects, including the acquisition of MOD Resources Ltd and securing 100% ownership of the T3 Copper-Silver Project and expansion area. The performance at DeGrussa Operational places the company in a good position to take advantage of the recovery in copper price and unlock the potential of its development pipeline.
The company derives its revenue from customers in Asia. Notably, in FY20, the company sent 93% of the product for processing in China, with the remainder sent into Japan and Philippines. As per the latest export data released by the Australian Bureau of Statistics, export of non-ferrous metals (including copper, aluminium, etc.) to China, increased by 67%.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs SFR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock has corrected by 15.46% on ASX. As on 30th June 2020, the company had a cash balance of $291.14 million. The stock is trading at attractive levels and depicts potential for growth supported by SFR’s strong business position. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $4.180, down 0.713% on 28th September 2020.
3. Woodside Petroleum Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 17.6 Billion, Annual Dividend Yield: 6.52%)
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Decent Balance Sheet Position: Woodside Petroleum Limited (ASX: WPL) is a leading energy in Australia, primarily involved in the development and exploration of gas, oil and condensate reserves. In 1HFY20 ended 30th June 2020, the company reported a record production of 50.1 MMboe despite the challenges posed by the pandemic. Operating revenue for the six months period came in at US$1,907 million. For the first half, the company reported an EBITDA loss of US$4,295 million and net loss after tax of US$4,067 million, owing to impairment losses and onerous contract provision. Interim dividend came in at 26 US cents per share, representing a payout ratio of ~80% on underlying NPAT.
Outlook: The company planned a 50% cut in expenditure in 2020 to deal with the impacts of COVID-19. WPL also delayed final investment decisions for its Scarborough, Pluto Train 2 and Browse developments. Total production for FY20 is estimated to be between 97mmboe – 103mmboe. Investment expenditure is expected in the range of US$1,500 million- US$1,700 million. At the end of the first half, the company had liquidity amounting to $7,552 million.
In geographical terms, Woodside Petroleum Limited has a diverse client base with its revenue coming from multiple locations, including. In August 2020, the exports of petroleum went up a whopping 52% and were valued at $305 million.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WPL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock has corrected by 11.37% on ASX. The stock of the company has demonstrated a resilient performance and retains decent potential for growth on the back of a decent balance sheet with high liquidity and decent cash flow. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $18.330, up 0.055% on 28th September 2020.
4. Rio Tinto Limited (Recommendation: Expensive)
(M-cap: A$ 36.38 Billion, Annual Dividend Yield: 5.78%)
Resilient Iron Ore Demand: Rio Tinto Limited (ASX: RIO) is engaged in the exploration, development, and production of minerals and metals. The company reported a resilient performance in 1H 2020 and reported an underlying EBITDA of US$9.6 billion. Underlying EBITDA margin and ROCE for the period stood at 47% and 21%, respectively. Group revenue amounted to US$20.3 billion, down 7% on the prior corresponding half and cash flow from operations went down by 12% to US$5.6 billion. During the period, the company generated a free cash flow of US$2.8 billion, with net debt at the end of the period amounting to US$4.8 billion. The company paid an amount of US$3.8 billion to shareholders, comprising US$3.6 billion in dividends and US$0.2 billion in share buybacks.
Outlook: During 1H 2020, the company there was rebound in demand from China. Demand from other markets, including Europe, Japan, Korea, Taiwan, and the US remained weak during the period. Strong performance and resilient pricing of iron ore led to a consistent iron ore EBITDA and margin for the first half at US$7.7 billion and 72%, respectively. For 2020, the company expects iron ore shipments in the range of 324-334Mt. Over the next three years, the company expects a sustaining capex of up to US$3 billion per year, with US$1.0-1.5 billion per year for Pilbara Iron Ore.
The company enjoys a strong foothold in China which has been the main destination for Australian exports. In August 2020, exports to China increased by $54 million on the back of increased exports of metalliferous ores and non-ferrous metals.
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs RIO (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last six months, the stock has given positive returns of 16.92% on ASX. The stock of the company has witnessed decent price movements in the past few months and will be supported by its diversified customer base and a strong balance sheet position. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a price correction of low single-digit (in percentage terms). Considering the above valuation, the stock seems overvalued at the current juncture. Hence, we give an “Expensive” rating on the stock at the current market price of $96.550, down 1.48% on 28th September 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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