Event Core
As per the Australian Bureau of Statistics (ABS) data, Australia’s private new capital expenditure for June 2021 quarter has gone bells and whistles with an overall +4.4% QoQ and +11.5% PcP surge. Primary drivers include escalated capital investments in building & structures and equipment, plant & machinery. In addition, the capex has been illustrating sequential growth since September 2020 quarter amidst government support and increased global trade.
Figure 1: Surging Capex Activities:
Source: Based on the Australian Bureau of Statistics Data, Analysis by Kalkine Group
Investments and Drivers in Construction Activities
Momentum in Capex and Value of Work Done: Construction activities have uplifted with +4.6% QoQ and +6.5% PcP capital expenditure growth. Engineering construction activities accounted for a 1.8% growth support to sequential growth, and residential work done accounted for an 8.9% growth support through the year for total construction value.
Propulsion in Construction Commencements: For the March 2021 quarter, the total number of dwelling units’ commencements inclined by 0.2% QoQ and 13.1% PcP, primarily attributed to incline in private sector house by 5.9% QoQ and a significant +40.2% PcP, clocking 35,869 dwellings, and partially offset by a decline in commencements in other residential dwellings by 11.3% QoQ and 23.8% PcP.
Update on Dwellings Approved: Total dwellings approved in June 2021 declined by 6.7% MoM to 18,911 units, after clocking a record high of 23,099 in March 2021 since December 2017. The MoM declined was vastly attributed to an 11.8% decline in private sector houses, partially offset by a 0.8% incline in private sector dwellings apart from houses.
Figure 2: Favorable Policies to Support Residential Construction:
Source: Analysis by Kalkine Group
Investments in Equipment, Plant & Machinery (EPM) and Mining Activities
Soaring Investments in EPM: In June 2021 quarter, the total new private capital expenditure in EPM was 4.3% QoQ and clocked $15,786 million. The EPM investments in the mining industry inclined marginally by 0.4%; it remains the highest contributing industry in terms of total private new EPM investments.
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: Capital Expenditure in EPM Inclined Significantly Post Government Aid and Improving Macro Factors:
Source: Based on the Australian Bureau of Statistics Data, Analysis by Kalkine Group
Update on Investments in Mining Activities
Key Statistics in Mineral Exploration Activities: Economic growth and industrial production are considerably rebounding amongst Australia’s key trading partners, raising demand for ferrous and non-ferrous metals. Total expenditure in mineral exploration has surged by 3.7% QoQ in June 2021 quarter and stood at $878.3 million. Drilling activities clocked 3.47 million meters, up by 5.5% on a sequential basis.
Resources Primarily Drove Manufacturing Input Costs: 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.
Update on Investments in Retail Trade and Telecommunication
Significant Capex Activity Witnessed in Retail Trade: Total private new capital expenditure in retail trade incurred a significant 13.9% QoQ and 33.6% PcP growth. Post the COVID-19 discrepancies; most investors have inclined to high resilience businesses, for instance, retail trade supported by online platforms and gained significant popularity during the government’s containment measures.
Aggregate Retail Statistics: For July 2021, total retail turnover clocked $29,778.6 million, marginally down by 2.7% month-on-month. Total online sales peaked at $3,632.1 million in November 2020, relative to $1,712.5 million in January 2020 (pre-COVID period) and fell by 3.2% month-on-month in April 2021 amidst the resurgence of traditional retail activities.
Capex in Information Media and Telecommunication Services Rebounded: Total capex activities in the industry spiked by 14.5% QoQ amidst towering demand-pull and significant technological changes. Digital media advertisement revenues continue to increase holding 68% of total advertising revenue in FY20 relative to 61% in FY19.
Key Risks and Challenges
The impact of potential decline in household spending and wage growth may negatively affect capital expenditure due to strong macroeconomic links. Economists have warned the weak lending practices, and low mortgage rates are goofing up the prices artificially. The recent uptick in mining activities was primarily attributed to inflated commodity prices, hence potential risks of high price volatility looms upon the industry. All mass media segments, except digital media, witnessed sharp revenue declines due to significant alterations in the Australian population’s viewing and listening habits. The delta-variant may call for a nationwide lockdown scenario which may, in turn, curtail consumer spending activities.
Figure 4: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
For FY22, ABS revised total capital expenditure estimates upwards by +1.7%, clocking $125,724 million and EPM capex by +5.6%, computed to strike $52,998 million. Australia’s energy and resources exports are estimated to strike $310 billion in FY21 and $334 billion in FY22. In NBN wholesale markets, the total number of services and total acquired capacity of the Connectivity Virtual Circuit stood at 8.4 million (up by 1.2%) and 23.0 Tbps (up by 9.2%), respectively, illustrating a favourable outlook. As a result of favourable impacts of tax relief for households and temporary loss of carry-back facilities, retail trade may witness a surge in capex activities. Considering a spurt in the private new capital expenditure, we have figured out four stocks on ASX that are set to see the momentum.
(1) Newcrest Mining Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 20.04 billion, Annual Dividend Yield: 2.98%)
Free Cash Turns to Positive Territory Amidst Favourable Price and Volume Impact: Newcrest Mining Limited (ASX: NCM) is a metals and mining company engaged in the exploration, operations, development, and sale of gold and gold or copper concentrate. In FY21, NCM’s revenue inclined to US$4.576 billion, up by 17% PcP. Top-line improvements were primarily attributed to favourable copper and gold prices and a 4% growth in copper production. Reported EBITDA stood at US$2.443 billion, a 33% incline, while All-in Sustaining Cost inclined marginally by 6% and stood at US$911/ounce. Free cash flow stood at US$1.104 billion.
Progressive Growth Projects: In FY21, Cadia Expansion Project work stays on track with stages 1 & 2. Further, the moly plant has commenced, with the first production expected to start by the end of September 2021. Havieron Project assumes significant progress with Initial Inferred Mineral Resource estimate of 160kt of copper and 3.4Moz of gold. Construction progressed in Red Chris with Initial Newcrest Measured & Indicated Mineral Resource estimate of 3.7Mt of copper and 13Moz of gold.
Outlook: Copper and gold prices have witnessed sharp inclines. The trend may continue with increased construction activities and jump in the jewellery industry as China and India gradually phase out from the COVID-19 impact. NCM’s production guidance for copper and gold stands at 125-130kt and 1,800-2,000koz, respectively, with an AISC range of US$1,720-1,920 million.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs NCM (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of NCM went down by ~5.889%. The stock made a 52-weeks' low and high of $23.085 and $33.320, 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 stock can trade at a slight premium compared to its peer's median, considering the construction & production progress of various projects and favourable commodity market. For this purpose, few peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Rio Tinto Ltd (ASX: RIO) have been considered. Considering the favourable free cash flow position, commending operational results, inclined production volumes in copper & gold, and valuation, we give a 'Buy' rating on the stock at the market price of $24.810 as of 30 August 2021, 11:56 AM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 2.98%.
(2) JB Hi-Fi Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.23 billion, Annual Dividend Yield: 6.29%)
Increased Consumer Demand and Online Sales Expands Top-line Growth: JB Hi-Fi Limited (ASX: JBH) is engaged in retailing home consumer products, particularly electronics and home appliances, in Australia. In FY21, total sales got swollen by 12.6% and stood at $8.9 billion amidst continued consumer demand. Online sales inclined to $1.1 billion, up by an astonishing 78.1% PcP. Gross profit inclined by 13.4% and stood at $1.33 billion with gross margins up by 27bps to 22.2%, primarily driven by key growth categories – computers, communications, games hardware, small & visual appliances.
Despite top-line growth, cash from operations (CFO) declined to $558.7 million relative to $981.3 million recorded in FY20. Unfavourable CFO was primarily affected by increased working capital, mainly inventory, to satisfy the increasing demand. As a result, the interest coverage ratio inclined to 228.4x relative to 40.4x and return on invested capital inclined to 71.1% relative to 51.3% in FY20. Capex is inclined to $57.7 million, including investments in store portfolio, strategic initiatives and online offering.
Outlook: For FY22, JBH estimates 8.4% PcP sales growth in New Zealand but remains bearish for Australia and The Good Guys with an estimated sales decline of 14.9% and 8.6%, respectively, as a result of state-based COVID-19 restrictions.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs JBH (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of JBH went down by ~4.663%. The stock made a 52-weeks' low and high of $42.300 and $55.250, 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 stock can trade at a slight discount compared to its peer's average, considering unfavourable estimates for Australia and The Good Guys sales. For valuation, peers like Super Retail Group Ltd (ASX: SUL), Michael Hill International Ltd (ASX: MHJ), Dusk Group Ltd (ASX: DSK) have been considered. Considering the e-commerce support, top-line growth, improving operational efficiency, and valuation, we give a 'Buy' rating on the stock at the market price of $45.355 as of 30 August 2021, 12:25 PM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 6.29%.
(3) Ooh!Media Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.00 billion, Annual Dividend Yield: 0.00%)
Momentum in Media Market and Bulging Top-line Unfolds Growth Prospects: Ooh!Media Limited (ASX: OML) is an out-of-home media company engaged in digital marketing at public places. In FY20, revenue declined by 34% YoY and stood at $426.5 million. Consequently, gross profit shrunk by 36% YoY and stood at $180.2 million, primarily driven by containment measures, social-distancing norms and closure of public places. However, despite drained top-line, free cash flow inclined by 140% YoY and stood at $83.5 million due to reduced capex activities and favourable changes in working capital.
In H1FY21, OML’s revenue climbed by 23% PcP and stood at $251.6 million, amidst strong recovery across critical formats – Road, Retail and Street Furniture – in Australia and New Zealand. Gross margins inclined by 8.8 percentage points and stood at 42.5%. Leveraging margin expansion and top-line uplift, underlying EBITDA surged by 209% and stood at $33.3 million. OML’s financial position has strengthened with the gearing ratio down to 1.1x relative to 1.8x, and net debt has significantly shrunk by 16% relative to 31 December 2020. Free cash flow inclined by 75% and stood at $19.7 million due to favourable growth in critical formats.
Outlook: OML projects 38% PcP revenue growth in Q3FY21 and 74% relative to Q3FY19. The overall media market has strengthened relative to Q2FY20 levels. As a result, FY21 capex is expected to be at or lower than $25 million, focusing on concession renewals and growth opportunities.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs OML (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of OML went up by ~7.034%. The stock made a 52-weeks' low and high of $0.965 and $1.950, 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 stock can trade at a slight premium compared to its peer's average, considering low financial leverage and improving operational efficiency. For the purpose of valuation, peers like IVE Group Ltd. (ASX: IGL), HT&E Ltd (ASX: HT1), Nine Entertainment Co Holdings Ltd (ASX: NEC) have been considered. Considering OML’s dominance in the media market, bulging top-line, low leverage levels, and valuation, we give a 'Speculative Buy' rating on the stock at the market price of $1.725 as of 30 August 2021, 01:17 PM (GMT+10), Sydney, Eastern Australia.
(4) GDI Property Group Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 642.25 million, Annual Dividend Yield: 6.54%)
GDI Assets Seek High Upside Potential: GDI Property Group Limited (ASX: GDI) is involved in property and funds management. In FY21, revenue from ordinary activities declined to $54.8 million, down by 22.0%, primarily attributed to FFO decline in Westralia Square at $14.2 million, relative to $18.8 million in FY19. Consequently, total FFO declined to $29.07 million, down by 34.7% PcP. In addition, high debt drawings amplified net interest expense to $3.7 million relative to $2.1 million in FY19. As a result, total AFFO shrunk to $15.8 million relative to $22.0 million in FY19.
As of 30 June 2021, drawn debt clocked $168.8 million from the principal facility. Amidst significant financing support, the cash balance inclined to $11.2 million relative to $10.1 million in FY19. GDI successfully settled the acquisition of 180 Hay Street, Perth, assuming an immediate uplift of $2.2 million in value during the period. The sale of 50 Cavill Avenue for $113.5 million, ~$8.0 million above book value, is expected to settle around 31 August 2021.
Outlook: Recent government programs to boost residential construction shall provide momentum to GDI projects. GDI holds WS2 (development), Westralia Square (leasing), Hay Street (leasing) and Mill Green (leasing and development) assets with high upside potential.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs GDI (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GDI went up by ~4.867%. The stock made a 52-weeks' low and high of $1.000 and $1.300, 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 high single-digit (in percentage terms). The stock can trade at a slight discount compared to its peer's average, considering declining FFO. For the purpose of valuation, peers like ALE Property Group (ASX: LEP), Arena REIT No 1 (ASX: ARF), Home Consortium Ltd (ASX: HMC), have been considered. Considering the high upside potential in GDI assets, government support to the real estate market, and valuation, we give a 'Hold' rating on the stock at the current market price of $1.185 as of 30 August 2021.
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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