I. Sector Landscape and Outlook
The consumer staples sector encompasses food and beverage manufacturing, household and personal care products, and food and staples retailing. The sector carries the essential nature of economic activity in keeping supermarkets shelves stocked-up at all-times. Food and beverage accounted for a larger share of the economic output. It represented ~24.5% of total manufacturing Gross Value Added (GVA) (on a seasonally adjusted basis) as of December 2020, according to the data by The Australian Bureau of Statistics (ABS).
Rapid urbanization and change in lifestyle and preferences made foodservices sector (represents full-service restaurants, fast food outlets, caterers) the largest with ~70,000 outlets in Australia. As per Food Export Association, about one-third of Australia’s food and non-food alcoholic beverage budget is spent on eating outside of the home. The food and beverage sector accounted for ~10.0% of total exports (non-seasonal adjusted) in the month of January 2021, according to ABS. Stay-at-home protocol changed the consumption pattern and affected sales with cafes, restaurants, and foodservices chains remain closed during the pandemic.
As mentioned by the industry body, the Australian Food and Grocery Council, food, beverage, and grocery reported an annual turnover of $127.1 billion in 2018-19, an increase of 4.6% over the prior year. The industry employed 274,835 Australians. With as many foods and grocery products were made available from regional areas of Australia, the sector employs ~39.6% of labour force from regional Australia.
Figure 1. Strong Growth in Food, Beverage & Grocery Turnover in 2018-19:
Data Source: The Australian Food and Grocery Council, Chart Created by Kalkine Group
Lockdown at Victoria and closure of restaurants and other foodservices chains had severally impacted the industry output in June 2020 quarter. The industry outpaced the entire manufacturing sector in the September 2020 quarter with store re-openings following the ‘COVID Normal’ framework and a spike in consumption. Panic buying continues with fears of new waves of virus outbreak before it stabilized in the December 2020 quarter.
Figure 2. Food & Beverage Sector Stabilized Before It Peaked in September 2020:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Australia is well-known for meat, cereals, and wine exports which together accounted for 6.4% of total exports in the month of January 2021. Opening of export opportunities with new free trade agreements and efficient supply chain and infrastructure support by the government are the pillars of growth. According to Export Finance Australia, China is the largest export market worth $11.9 billion for food products with strong demand for sheep meat, beef, wine, and seafood. With rising trade tension, exports of wine and barley products were significantly affected in recent times. Japan is the second-largest partner with food exports totalling $4.7 billion. Key products include processed foods, wine, yogurt, etc. The United States stands the third position with food exports worth $3.8 billion for packaged foods, organic products, specialty cheese, and confectionery.
Food retailing showed moderation in recent times after it spiked during the lockdown period. Consumption of food increased due to the stay-at-home protocol. Spend on cleaning and hygiene products showed a sharp increase. As per the Supermarket Spend data by The Australian Bureau of Statistics, fresh fish & seafood, cleaning products, and water showed the largest rise in spending in January 2021 over the prior year. The re-opening of stores saw an increase in customer traffic for takeaways, cafes, and restaurants. An increase in household goods retailing by 1.3% (on a M-o-M basis) was supported by increased spend on home renovation with hardware, building products, and garden supplies showed improvement in January 2021 over the preceding month. The pandemic saw clothing sales continue to trend downwards, but footwear and personal accessories improved by 2.0%. By States, Darwin and Perth showed the largest increase in spending with 13.6% and 11.0%, respectively in January 2021 over a similar period of last year. While Sydney and Melbourne reported sequential declines in spending after it touched high during Christmas. New lockdowns affected supermarket spending in Brisbane.
Figure 3. Food Retailing Topped the Chart:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Index Performance:
ASX 200 Consumer Staples (GIC) Index generated 2-year returns of ~14.64% as compared to ~7.60% returns generated by the ASX 200 Index. Food manufacturing, being an essential activity, outpaced the overall manufacturing during the pandemic. Rapid urbanization, resilient exports, and changing consumer preferences are the cornerstone for growth. The index movement took cues from the inclusion of food manufacturing in the government’s $1.5 billion Modern Manufacturing Strategy.
Figure 4: ASX 200 Consumer Staples (GIC) outperformed ASX 200 Index by ~7.04% over the last two years:
Source: Refinitiv (Thomson Reuters) as on the close of 11 March 2021
Key Risks and Challenges:
The ongoing tariff wars may cripple Australian exports of food and beverage. China recently imposed anti-dumping duties and anti-subsidy duties to the extent of 80.5% for the export of Australian barley. In a similar fashion, it also imposed duties in the range of 107%-212% on wine products. Besides, China also placed restrictions on lobster and red meat imports from Australia. In the latest news, four Australian beef exporters were blacklisted. This may pulldown export growth and affect trade surplus going forward. The consumer staple sector is sensitive to household spending which is dependent on employment growth and wage hike. The unemployment rate although appears favourable at 6.4% but remains high to pre-COVID levels. Food manufacturers faced challenging environment in 2020 with drought and bushfire incidents that affected agricultural food product exports. As per the Bank of International Settlements, Australia has the highest household debt next to Switzerland and its debt-to-income ratio exceeded 100%. This may risk the wealth of Australians and may significantly affect spending.
Figure 5. Key Risks in Consumer Staples Sector:
Sources: Analysis by Kalkine Group
Outlook:
Australians expressed optimism about the economic prospects. The index developed by The Westpac Bank improved by 2.6% to 111.8 in March 2021, reaching closer to a ten-year high. The survey took the positive views expressed by Australians on favourable economic conditions and employment situation. The food manufacturing industry was placed as one of the country’s six National Manufacturing Priories by the Morrison Government towards the Modern Manufacturing Strategy. It was part of the 2020-21 budget to rebuild the economy with job creation and to set-up a new era of manufacturing in Australia. The government will invest ~$1.5 billion over the next four years in six identified growth sectors including food and beverage. According to the Department of Agriculture, Water, and the Environment, Australia’s exports of wheat is set to double to 21 million tonnes in 2020-21, the highest since 2016-17 driven by increasing exports to Indonesia and other South-East Asia markets. Prices improved that helped to regain market share in the globe. This may positively impact exports of food products.
II. Investment theme and stocks under discussion (DMP, PTL, GNC, CGC))
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ method.
1. ASX: DMP (Domino's Pizza Enterprises Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$7.59 Billion)
Domino's Pizza Enterprises Limited operates as a quick service restaurant with operations in Australia, New Zealand, France, Belgium, The Netherlands, and the Principality of Monaco.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 26.13% on 11 March 2021. We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) given the strong leadership in foodservices business and solid performance of franchisee business model. The management is optimistic about growth potential with store additions totaling 5,550 in the next five to eight years period. For the said purposes, we have taken peers such as Collins Foods Ltd. (ASX: CKF), Crown Resorts Ltd. (ASX: CWH), Redcape Hotel Group Pty Ltd. (ASX: RDC). The stock delivered annualized yield of 1.60%.
2. ASX: PTL (Pental Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$52.45 Million)
Pental Limited distributes personal hygiene products such as soaps, bath and shower gels, and oral care products. It also manufactures cleaning products for the laundry and kitchen.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 26.69% on 11 March 2021. We believe that the stock might trade at a slight discount as compared to its peer median EV/Sales (NTM Trading multiple) citing the investment risk as the company is highly exposed to China for exports. Trade restrictions or tariff imposition for the company’s products may invariably affect the sales performance. For the said purposes, we have taken peers such as McPherson's Ltd. (ASX: MCP), Asaleo Care Ltd. (ASX: AHY), Coles Group Ltd. (ASX: COL). The stock delivered an annualized yield of 6.49%.
3. ASX: GNC (GrainCorp Limited)
(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$1.00 Billion)
GrainCorp provides food ingredients and agribusiness. The company processes and distributes wheat, barley, and canola, as well as offers a range of malt products and service to brewers and distillers.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.39% on 11 March 2021. We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) as the 10-year crop protection deal will generate cash flows to the company and Australia is slowly returning from drought season. The recent winter season translated to the largest cropping season for Australia. The management is optimistic about crop production for FY21. For the said purposes, we have taken peers such as Ricegrowers Ltd. (ASX: SGLLV), Ridley Corporation Ltd. (ASX: RIC), Youfoodz Holdings Ltd. (ASX: YF2). The stock delivered annualized yield of 1.59%.
4. ASX: CGC (Costa Group Holdings Limited)
(Recommendation: Hold, Potential Upside: High Single Digit, Mcap: A$1.81 million)
Costa Group grows and markets fresh fruit and vegetables to supply to supermarket chains and independent grocers worldwide. It markets berries, mushrooms, glasshouse grown tomatoes, citrus and avocados.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.53% on 11 March 2021. We believe that the stock might trade at a slight premium as compared to its peer median EV/Sales (NTM Trading multiple) as the newly acquired farming operations of KW Orchards helps to gain position for citrus farming in South Australia. The management is focused on strengthening exports business. For the said purposes, we have taken peers such as United Malt Group Ltd. (ASX: UMG), Select Harvests Ltd. (ASX: SHV), Ridley Corporation Ltd. (ASX: RIC). The stock delivered annualized yield of 1.99%.
Note: All the recommendations and the calculations are based on the closing price of 11 March 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
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