Event Core

As per a recent Australian Bureau of Statistics (ABS) publication, aggregate domestic demand of Australia surged by 0.7% QoQ and 2.2% YoY in June 2021 quarter. The surge was broadly attributed by +1.8% QoQ uptick in civil & engineering construction, +1.8% QoQ uptick in building construction, and +12.1% uptick in petroleum refining & petroleum fuel manufacturing. The change in consumer requirements, improved public sector investments, and resurgence in global crude oil prices were the primary drivers of aggregate domestic demand.

Figure 1: Building Construction Prices Lifting Aggregate Final Domestic Demand Index

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

The upswing in Building Activities:

• Surging Producer Price Index in the Construction Industry: Input prices of house building augmented by 4.0% YoY for June 2021 quarter due to discrepancies in augmented house demand and shortage in building material. Prices of construction metal products and plumbing products increased by 3.8% and 6.0%.
• Construction Commencements: For the March 2021 quarter, the commencements of the new private-sector house increased by 5.9% QoQ and a significant +40.2% PcP. Contrarily, commencements in other new residential dwellings in the private sector nosedived by 11.3% and stood at 14,667 units. Thus, an exponential upswing was witnessed in private house dowelling commencements post-June 2020 quarter.
• Capital Expenditure: In consequence of government-led infrastructure revival and other measures, the total private new capital expenditure surged by 6.3% QoQ, and private new capex in buildings and structures surged by 3.8% QoQ, stood at $16.19 billion.

Figure 2: Supportive Government Policies

Source: National Housing Finance and vestment Corporation (NHFIC), Prime Minister of Australia, Analysis by Kalkine Group

Vital Driving Forces of Manufacturing Activities

The Changing Commercials of the Manufacturing Industry: Input prices of manufacturing surged by 3.7% QoQ and 6.6% YoY primarily driven by tight global supplies coupled with increasing demand for steel & copper, supply shortages of materials amidst strong global demand, and continuously increasing global crude oil prices from recoveries in transport fuel demand and OPEC+ production cut-downs.

Soaring Capital Expenditure: During March 2021 quarter, total new private capital expenditure clocked at ~$31.5 billion, up by 6.3% on a sequential basis and 0.8% on a YoY basis. Capital expenditure in equipment, plant & machinery stood at $15.3 billion, up by 9.1% in March 2021 on a sequential basis and an astonishing 5.6% on a YoY basis. Further, private capex in equipment, plant, and machinery is estimated to reach $57.2 billion for FY21, revised upwards by 6.4%.

Modern Manufacturing Strategy: In support of recoveries and scale-up competition among Australian manufacturers, the Morrison Government rolled out the Modern Manufacturing Strategy to infuse $1.5 billion in new funding in the next four years. The strategy includes $107.2 million in the Supply Chain Resilience initiative to identify and address supply chain vulnerabilities and a $52.8 million expansion of the Manufacturing Modernization Fund to address competitiveness among priority sectors.

Figure 3: Improved Manufacturing Output Price Index Supporting Aggregate Domestic Demand

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Uproar in Agri-Business Exports

Rising Exports: For the June 2021 month, merchandise exports for cereals & cereal preparations and vegetables and fruits significantly surged to $1,283 million relative to $571 million PcP and $427 million relatives to $352 million PcP, respectively. Grain exports have outpaced expectations as followed by near-record winter crop and assumed an upward revision of $400 million.

Production Update: In FY20, GVA of the agriculture industry showcased a modest improvement to $61 billion amidst drought conditions. The gross value of crops declined by 5%. It stood at $28 million, primarily driven by unpropitious YoY results from wheat (down 20%), vegetables (down by 4%), and cotton (down by 78%), and predominantly supported by a 9% uptick in fruit & nuts, stable barley, and 1% uptick in canola values.

Figure 4: Key Risks and Challenges

Source: Analysis by Kalkine Group

Key Risks and Challenges

Possibilities of a decrease in housing demand may prevail with the gradual phase-out of government support amidst the easing of containment measures. The worldwide requirement for environmental operating controls and shortage of shipping containers have significantly impacted the global supply chain, especially in China (a prominent trade partner). Prices are estimated to fall for major Australian crops in FY22 due to excessive supply over demand, causing a disequilibrium. The commodity market has recently witnessed extreme volatile events, which may drain builders’ bargaining power. Housing activities in metropolitan cities have diluted with significant crowd movement to regional or outer metropolitan areas amidst significant alterations in housing preferences.

Outlook

As per the Australian Industry Group, Australian PMI® climbed 1.4 points and stood at 63.2 points in June 2021; the highest monthly PMI® recorded since the commencement of Australian PMI® in 1992. Australian Government’s 10-year infrastructure program is expected to infuse $110 billion investment, including $15.2 billion in new projects for FY22. For FY22, the gross value of production of Agribusiness is expected to descend from the record high to a still magnificent level of $65 million, and the gross value of exports is forecasted to heighten to $49.7 billion. Private dwellings value and units have increased significantly, which dampened pandemic effects to a great extent. Australian Bureau of Statistics (ABS) amended an upward revision of total capital expenditure estimates to ~$124 million for FY21, up by 2.2% from previous estimates.

(1) Costa Group Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

Improved Free Cash Flows due to Upswing in International Demand and Favourable Climate: Costa Group Holdings Limited (ASX: CGC) is a horticulture company and provides fresh produce to major Australian food retailers. In FY20, CGC warranted an 11.2% PcP jump in revenue, from $1,047.8 million to $1,164.9 million, underpinned by solid global yields, especially in China from Banna farms and Bailang, and significant volume upticks in Avocado and Citrus. EBITDA-SL improved by 47.2% and stood at $205.2 million amidst a strong Chinese harvest and recovery from drought challenges. Free cash flows improved by $47.8 million and stood at $116.5 million.

CGC’s net assets increased by $39.9 million on the financial position front due to increased cash flows for the period. Although receivables and payables increased, the net working capital for the period stood at -$7.2 million relative to +3.3 million in FY19, reflecting the tightly managed operational capital needs. In addition, the strong operating cash flows enabled borrowings paydown of $38.5 million.

Recent Business Updates: On 02 August 2021, CGC closed the acquisition of 2PH Farms, funded by a retail entitlement offer of ~$190 million, which was announced completed on 23 July 2021. The synergies of the acquisition include a 60% increase in CGC’s total planted citrus hectares and additional 11 farming locations.

Outlook: Pricing and demand across the product portfolio are expected to remain robust in FY21. Favourable climatic conditions are expected to sustain. International segment performance in the early season has remained resilient with strong price support from China.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

A-VIX vs CGC (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of CGC went down by ~1.223%. The stock made a 52-weeks' low and high of $2.784 and $4.811, respectively. The stock underperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at some premium compared to its peer's average, considering strong operating cash flows and diluted financial risk. For this purpose, we have taken peers like Elders Ltd (ASX: ELD), Tassal Group Ltd (ASX: TGR), Youfoodz Holdings Ltd (ASX: YFZ), to name a few. Considering the favourable climatic conditions, increased price and volume support from International Segment, and valuation, we give a 'Buy' rating on the stock at the current market price of $3.230, up by 0.937% as of 02 August 2021.

(2) ­­­Vmoto Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

Secured Orders and Improved Cost Synergies Drives Profitability: Vmoto Limited (ASX: VMT) is engaged in the manufacturing and global distribution of electric two-wheel vehicles (EV). For FY20, total revenue increased to $61 million, up by 34% YoY, and NPAT increased to $3.7 million, up by 174% YoY. In addition, cash flows from operating activities clocked $4 million, up 139% YoY. All attributed to improved domestic and international demand, 4,300 units order secured with Go Sharing and 5,904 units with Greenmo Group, and JV partnership with Super Soco had unfolded cost synergies.

On the balance sheet front, VMT is debt-free as of 31 December 2020 and has secured Nanjing Facility – to be used against debt security if required. VMT stands at a working capital surplus of $20.64 million as of 31 December 2020 relative to $9.40 million the previous year. The company holds a cash balance of ~$15.00 million as of 31 December 2020, up from ~$6.65 million as of 31 December 2019.

Outlook: VMT continues to build a strong B2C and B2B distribution network globally. The launch of 3 new B2C models in February 2021 and planning of a new B2B two-wheel electric vehicle delivery in upcoming months are focused on tapping broader markets. Furthermore, as announced on 15 June 2021, VMT signed a marketing and sponsorship agreement to supply scooters and promote its brands at a motorcycle-racing event – FIM ENEL MotoE World Cup for 2021 – 2023 seasons.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

A-VIX vs VMT (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of VMT went down by ~1.351%. The stock made a 52-weeks' low and high of $0.335 and $0.670, respectively. As a result, the stock underperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering the potential edge in promotion activities. For this purpose, we have taken peers like GUD Holdings Ltd (ASX: GUD), ARB Corp Ltd (ASX: ARB), Apollo Tourism & Leisure Ltd (ASX: ALT), to name a few. Considering the increased demand for EVs, substantial contract build-up, expansion in the product range, and valuation, we give a 'Speculative Buy' rating on the stock at the current market price of $0.365, down by 2.667% as of 02 August 2021.

(3) ­­­CIMIC Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 6.41 billion, Annual Dividend Yield: 4.94%)

Financial Recovery Witnessed from Unwinding of COVID-19 Impact on Project Awards: CIMIC Group Limited (ASX: CIM) is primarily involved in engineering-led constructions, mining, and public private partnerships (PPPs) and servicing. Amidst COVID-19 turmoil in FY20, award of new projects delayed and slowed revenue generation across all activities, the company’s diluted underlying revenue reduced from ~$14.7 billion in FY19 to ~$12.61 billion FY20. As a result, CIM registered a higher EBITDA margin of 15.2% in FY20 from 14.6% in FY19. In addition, operating cash flow declined significantly from $1,714.3 million in FY19 to $53.1 million in FY20 amidst high variation in factoring of $525.5 million.

For H1FY21, CIM generated $7,127.4 million in group revenue, up by 10.6% PcP due to a growing order book. EBITDA and PBT stood at $464.5 million (up by 5.1% PcP) and $247.1 million (up by 4.0% PcP), respectively. In consequence of lower average debt levels and reduced use of working capital investment, net finance costs declined by 21.7%. Work in hand has spiked by 10.7% to $33.3 billion, with the unwinding of COVID-19 impact and commencement of delayed pipeline.

Outlook: The FY21 guidance for NPAT stands at $400 – 430 million, subject to market conditions. CIM acquired Innovative Asset Solutions in Q2FY21 to complement UGL’s asset maintenance offering. In addition, the exploitation of numerous stimulus packages in core construction and services markets has unfolded a strong PPP pipeline.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

A-VIX vs CIM (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of CIM went up by ~3.509%. The stock made a 52-weeks' low and high of $16.860 and $27.510, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). However, we believe that the company can trade at some discount compared to its peer's average, considering probable bottlenecks in the pipeline from the unwinding of COVID-19 impact. For this purpose, we have taken peers like Monadelphous Group Ltd (ASX: MND), Service Stream Ltd (ASX: SSM), Lycopodium Ltd (ASX: LYN), to name a few. Considering the improved top-line, dampened financial risk, tightened working capital spend, and valuation, we give a 'Hold' rating on the stock at the current market price of $20.650, up by 0.194% as of 02 August 2021.

(4) ­­­GDI Property Group (Recommendation: Hold, Potential Upside: High Single-Digit)

(M-cap: A$ 612.44 million, Annual Dividend Yield: 6.73%)

Improved Leasing Structure to Strike Outperformance: GDI Property Group Limited (ASX: GDI) manages properties and funds management. In FY20, total revenue from ordinary activities declined from ~$77.81 million in FY19 to ~$70.29 million. Subsequently, net profit from continued operations declined to ~$66.74 million from ~$85.07 million in FY19. During the period, GDI purchased a $98 million portfolio (fully leased) of metropolitan Perth properties occupied by service centres on major arterial roads and high-profile car dealerships.

In H1FY21, total FFO declined to $14.252 million relative to $23.811 million in H1FY20 due to COVID-19 related write-offs, departure of UGL from Westralia Square and high net interest expenses. Relative to H1FY20, total revenue declined to $26.037 million from $36.212, and PAT declined to $10.476 million from $59.546 million. Funds management FFO inclined to $3.7 million relative to $2.0 million in H1FY20, followed by distributions from office trust and property trust.

Outlook: Improved leasing structure of Westralia Square with level 11 leased for ten years to cash converters and level 12 wanders under agreement for 6.5 years lease, commencing in early 2022. A major tenant of 50 Cavill Ave extended for five years and is expected to double occupancy. Developments on the funds' management front include two new leases of peripheral sites, a draft of a 3-year lease at Stanley Place, and an 8-year lease at 1 Adelaide Terrace.

Valuation Methodology: EV/EBITDA Value Multiple Based Relative Valuation (Illustrative)

A-VIX vs GDI (Source: REFINITIV)

Stock Recommendation: Over the last months, the stock of GDI went up by ~0.877%. The stock made a 52-weeks' low and high of $1.000 and $1.300, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). However, we believe that the company can trade at a slight discount compared to its peer's average, considering top-line and FFO decline. For this purpose, we have taken peers like BWP Trust (ASX: BWP), Mirvac Group (ASX: MGR), ALE Property Group (ASX: LEP), to name a few. Considering the improved leasing structure with investment-grade counterparts and improved occupancy expectations, and growth strategy, we give a ‘Hold’ rating on the stock at the current market price of $1.150, up by 1.769% as of 02 August 2021.

Comparative Price Chart (Source: REFINITIV)

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.

---

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.