Event Core
On 8th April 2022, the Australian Bureau of Statistics published the statistics on the monthly business turnover indicator driven by monthly business activity statements. On seasonally adjusted terms, the indicator showcased a surge in business turnover for all 13 published industries in February 2022. Transport, postal and warehousing clocked the most significant rise with 31.5% over the same period last year. Retail Trade, Information Media & Telecommunication, and Construction industries outperformed by 13.8%, 10.2%, and 8.1%, respectively, illustrated by the business turnover indicator.
Decent Uptick in Retail Trade and Media Industry
Surged Retail Turnover: The Australian retail turnover advanced by 1.8% in February 2022. With the lower COVID-19 case numbers in February, followed by the easing of monthly restrictions, consumer spending returned to pre-COVID levels. Total retail turnover stood at ~$33.09 billion on a seasonally adjusted basis.
Clothing, Footwear, & Personal Accessory Retailing: Considering the no lockdowns and easing restrictions, most states and territories witnessed a surge in retail sales in February 2022. The clothing, footwear & personal accessory retailing clocked an 11.2% increase, owing to businesses overcoming staff shortages and closures.
Media Policy Statement: The Australian government has recently released its Media Policy Statement, which incorporates a $7.3 million Television Research and Policy Development Program to embark upon a transition to modernized television delivery arrangements.
Rebound in Construction Activities
Engineering Construction Activity: For December 2021 quarter, the total engineering construction advanced by 6.7% PcP and 2.0% QoQ and stood at $23.58 billion. The value of work commenced during the quarter stood at $19.35 billion in original terms.
Dwelling Units and Value of Buildings Approved: The seasonally adjusted estimate for the total dwellings approved advanced by 43.5% in February 2021. The private sector houses surged by 16.5%, and the value of non-residential buildings approved advanced by a considerable 132.0%.
Key Risks and Challenges
With surging crude prices and commodity inflation on geopolitical stress between Ukraine and Russia, the international trade and global supply chain may be hit. The limited availability of skilled and unskilled labour will considerably challenge the construction industry. Significant hurdles for retailers involve integration & automation process across the supply chain and comprehending actual channel costs. The surging real estate prices may outweigh government initiatives, signalling affordability as a primary concern.
Outlook
Surged Domestic Final Demand: The final domestic demand contributed 2.9% to GDP growth in December 2021 quarter with a 3.2% contribution from final household consumption.
Surged Household Spending: In December 2021 quarter, household spending advanced by 6.3%, recovering from a fall of 4.8% witnessed in September 2021.
Estimates on Capital Expenditure: The FY22 total private new capital expenditure for buildings and structures stood at $79.4 billion, up by 1.0% from the previous estimate.
Increased Gross Value Added: In December 2021 quarter, the gross value added by Retail Trade, Information Media & Television, and Construction advanced by 10.2%, 8.9%, and 1.3% on a PcP basis, respectively.
Government Initiatives for Media Industry: The government is now taking an array of funding and regulatory actions via the Media Policy Statement to modernize television services.
Considering the surge in monthly business turnover, we have figured out three stocks on ASX that are set to see the momentum.
(1) Lovisa Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.92 billion, Annual Dividend Yield: 3.07%)
Growing Top Line and Bottom Line with the New Stores: Lovisa Holdings Limited (ASX: LOV) operates in the retail sector 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 during the period and maintained CODB (Cost of Doing Business) at 51.8% to sales, despite facing temporary stores closures and sales disruption. Available liquidity stands at $52.7 million, and statutory NPAT showed a hike of ~70.3% to $36.70 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 in FY21 in its comparable-store sales.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs LOV (Source: REFINITIV)
Stock Recommendation: The stock of LOV made a 52-weeks low and high of $12.650 and $23.070, 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 some discount compared to its peers, considering global logistics costs and high competition costs. For valuation purposes, peers like Premier Investments Ltd (ASX: PMV), Nick Scali Ltd (ASX: NCK), and Beacon Lighting Group Ltd (ASX: BLX) 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 $17.840, down by ~0.168% as of 11th April 2022.
(2) Seven West Media Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.02 billion, Annual Dividend Yield: 0.00%)
Upgradation of EBITDA Guidance with Operating Costs in line with the Guidance: Seven West Media Limited (ASX: SWM) operates through television, The West and Other Business and New Ventures. In FY21, the total revenue stood at $1,269.61 million, up by 4% Y-o-Y and converted its net losses from continuing operations of $201.18 million in FY20 to net profit after tax of $318.12 million. The improvement in the balance sheet was reflected by the reduction of net debt by more than $320 million and a cash balance of $253.33 million at the end of 26th June 2021.
In H1FY22, SWM clocked an underlying revenue of ~$820 million, up by ~27% PcP, with an accolade of first audience position in the TV advertising market. The operating costs tracked the mid-range of guidance (before Prime Media Group assets acquisition) and increased by ~26% to $604 million. The company reported an uptick of ~48% in underlying Net Profit to $129 million with a net asset position of $218.4 million, including available cash of $246.6 million and net debt of $116.7 million.
Outlook: With the continued strength of the Broadcast and Broadcast Video on Demand (BVOD) market, the company is targeting a two-percentage point increase in revenue share in 2H22. On the other hand, WAN revenue is expected to grow low in FY22.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs SWM (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SWM went up by ~4.065%. The stock made a 52-weeks low and high of $0.360 and $0.815, 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 premium compared to its peers, considering its continued strength in the BVOD market. For valuation purposes, peers like Pureprofile Ltd (ASX: PPL), IVE Group Ltd (ASX: IGL), GTN Ltd (ASX: GTN), and others have been considered. Given the decent fundamentals, prudent financial backing, strengthening market demand, current trading levels, and upside indicated by valuation, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.640, down by ~0.776%, as of 11th April 2021.
(3) CSR Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 2.92 billion, Annual Dividend Yield: 6.22%)
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 9th February 2022, CSR announced the sale of 4.6 hectares of land at Badgerys Creek, NSW, for $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 the previous year 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 the 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 for 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)
A-VIX vs CSR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CSR went up by ~4.696%. The stock made a 52-weeks low and high of $5.195 and $6.480, 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 Australia’s recent slowdown in construction activities. For valuation purposes, peers like Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), and Boral Ltd (ASX: BLD) have been considered. Given the decent potential in construction activities, improving capital expenditure in the industry, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $6.020, as of 11 April 2022.
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 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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