Event Core

On 29 October 2021, the Australia Bureau of Statistics published quarterly and monthly estimates for September 2021, highlighting volumes and turnover for retail businesses, including online sales and stores. On a seasonally adjusted basis, retail turnover surged to $29.67 billion, up by 1.3% MoM and 1.7% PcP.

Key Marco Factors for Consumption and Spending

Domestic demand Improved: Australia’s domestic economy contributed 1.6ppts to GDP growth in June 2021 quarter. Public and private demand surged, which was indicated by 7.4% of public investment growth and a 1.1% surge in household spending. As a result, gross value added (GVA) of retail trade incline by 0.8% QoQ and GVA of wholesale trade climbed by 1.1% QoQ.

Household Spending Returns to Elevated Levels: Household spending on services drive the quarterly rise with a 1.3% incline in June 2021 quarter. Transport services edged by 25.4%, and hotels, cafes & restaurants hiked by 2.2%, reflecting a rebound in tourism activities. Total spending on goods augmented by 0.9%, primarily driven by a 7.5% surge in vehicle purchases, due to asserted social distancing norms, reflecting resilient demand and supply attributes.

Household Savings Ratio: The household saving to income ratio dipped from 11.6% to 9.7% in June 2021 quarter. The broad decline was primarily driven by 0.3% contracted gross disposable income and surged household consumption. In addition, COVID-19 relief payments and benefit recipient count shrined, partly offset by a 1.2% uptick in compensation of employees.

Figure 1: Household Spending Rebounds to Pre-Covid Trend Line

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

Retail Trade Performance

Aggregate Retail Turnover: Total retail turnover at current prices stood at $29.67 billion, up by 1.3% QoQ and 1.7% PcP. On assessing monthly performance, clothing footwear & personal accessory retailing outperformed by 5.9%, followed by a 5.0% uptick in cafes, restaurants & takeaway food services, and a 4.3% incline in household goods retailing.

Recent Impact of Containment Measures: A complete month of lockdowns imposed in Victoria and the Australian Capital Territory (ACT) asserted plunged sales level in both states. Sales in Victoria fell by 2.1%, clocking to the lowest levels since October 2020. New South Wales (NSW) witnessed a 2.3% uprise amidst eased containment measures. However, turnover in NSW remained 11.9% lower.

Performance of Retail Industries: Easing restrictions uplifted non-food industries, primarily attributed to 4.3% of household goods sales (dollar terms). The only non-food sector to witness a downturn was department stores, which slipped by 0.3%. Food retailing countered the most significant fall of 1.4%, consistent with previous post-lockdown results.

Figure 2: Total Retail Turnover Enters Green Zone Since May 2021

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

Substantial Support from Online Sales and E-Commerce

Total Online Sales Uplifted: The aggregate online sales widened by 11.6% MoM in June 2021 as pure-play retailers became increasing popular under COVID-19 restrictions. Rising constraints on brick-and-mortar retail operations delivered online retailers and eCommerce businesses a cannibalisation opportunity.

E-Commerce Activities Continues to Grow: Australia Post’s data shows that online shopping has maintained elevated levels, with purchases up by 26.9% YoY for year-to-date 31 July 2021. In addition, online shopping in NSW, Northern Territory, and Western Australia all surged over 10% YoY. As a result, approximately 5.6 million households made an online purchase, up by 4.9% sequentially.

Online Share of Total Retail Stands Robust: Online share of total retail trade has remained stable at 16.3% in FY21. Further, the online share is anticipated to surge in recent months due to strict restrictions imposed in August and September. Overall, retail witnessed turbulent growth amidst state restrictions and a global pandemic. However, despite these challenges, retail turnover for FY21 manifested its non-cyclical trait with a 9.5% YoY uptick (excluding turnover from cafes and restaurants).

Figure 3: Driving Factors Vs Restraining Factors

Source: Analysis by Kalkine Group

Key Risks and Challenges

Companies have shown contraction in gross operating profits from 11.7% in March 2021 contracted to 5.5% in June 2021, indicating turbulence in business sentiments. Growth of household spending on services deaccelerated in the June 2021 quarter to 1.3% from 2.5% witnessed in March 2021, suggesting a potential continued to decline. A shortfall in turnover growth for food retailing and departmental stores may persist, considering widened inflation levels and rising affordability concerns. Recent disruption in the global supply chain may vastly affect retail and wholesale trade in both traditional retail and online marketplace. COVID-19 uncertainties may pose potential containment measures, which may substantially dampen retail turnover.

Outlook

They proliferated Household Expenditure: Total final expenditure by households broadened by 15.4% PcP in June 2021, signalling decent retail turnover growth potential.

Household Saving Ratio Dipped: Although the savings ratio remains at elevated levels at 9.7%, its decline from 11.6% suggests increased propensity to consume, in turn building up retail volumes.

Inclined Production in Retail and Wholesale Trade: Aggregate production in retail and wholesale trade surged by 9.3% and 14.7% in June 2021 over PcP, respectively. Companies are maintaining high inventory levels for domestic demand as the economy phases out of containment restrictions.

Retail Industry is Well Diversified: The retail industry in Australia is well segmented into food, household goods, apparel, departmental stores, and cafes, restaurants & takeaway food services.

Favourable Gross Value Added: The Gross Value Added (GVA) of retail trade inclined by 0.8%, for wholesale trade it edged up 1.1%, and for accommodation and food services, GVA held up by a considerable 2.8%, justifying the high resilience of the retail industry.

Considering the developments in the retail trade, we have figured out four stocks on ASX that are set to see the momentum.

(1) ­­­Bega Cheese Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.64 billion, Annual Dividend Yield: 1.84%)

Synergies Promoting Top-Line and Operational Efficiency: Bega Cheese Limited (ASX: BGA) is a diversified branded food business company with an integrated value chain from farm to consumer. The company is involved in receiving, processing, manufacturing, and distributing dairy and other food-related products. In FY21, revenues stood at $2.07 billion, up by 39% YoY, supported by product exports and prudent product categorisation growth. With bulged top-line, EBITDA expanded by 108% and stood at $182.7 million due to favourable commodity prices. As of 30 June 2021, BGA held $217.5 million in working capital, up by 132% from the previous year.

As of 30 June 2021, BGA reported $324.9 million in net debt, up by $93.7 million. However, the leverage ratio declined to 2.25x relative to 2.35x reported on 30 June 2020. The movement in net debt mainly occurred from net proceeds from borrowings to partly fund the acquisition of Lion Dairy and Drinks. The increase was partially offset by a $111.4 million increase in operating cash inflow. In addition, BGA experienced a softening in infant formula demand due to preference shifts in the Chinese market.

Outlook: FY21 witnessed improved seasonal conditions, boosting demand. For FY22 milk supply outlook remains stable to positive as per the Australian dairy export index. During the period, BGA may witness higher milk prices reflecting intense competition and market improvements.

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

A-VIX vs BGA (Source: REFINITIV)

Stock Recommendation: Over the past one year, the stock of BGA went up by ~11.642%. The stock made a 52-weeks' low and high of $4.848 and $6.600, 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 company can trade at a slight premium compared to its peers’ average EV/Sales multiple, considering improved price forecasts for milk and prudent synergies established with Lion Dairy and Drinks. For valuation, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), GrainCorp Ltd (ASX: GNC), have been considered. Considering the improved financial performance, increased credit worthiness, favourable milk pricing, added synergies, and valuation, we give a 'Buy' rating on the stock at the current market price of $5.475, as of 01 November 2021, at 12:34 PM (GMT+10), Sydney, Eastern Australia. 

(2) ­­­MyDeal.com.au Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 205.76 million, Annual Dividend Yield: 0.00%)

Growth Prospects Attached to Developing Web and Mobile Traffic: MyDeal.com.au Limited (ASX: MYD) operates an online marketplace and offer products across categories such as furniture, tools and equipment, health and beauty, home and garden, electronics, and others. In FY21, MYD reported a 111% increase in gross sales and an 83% increase in active customers. Gross sales margin stood at 43.1%, primarily driven by expanded team and import & logistics specialists, buyers, and customer service. MYD’s seller base has grown, with 385 sellers onboarded to support a product range of +6 million SKUs.

During the period, the average monthly website visitation surged to 6.4 million with increased app usage. MYD reduced fixed costs as a proportion of net transaction value (NTV), which reached 4.5% relative to 5.6% in FY20. The company increased its marketing investment from 9.1% to 11.3% of NTV as its customer acquisition strategy. The cash balance surged to $42.7 million as of 30 June 2021 relative to $16.8 billion in 2020. Closing cash surged due to $32.0 million net IPO proceeds, partially offset by $4.9 million in inventory investments.

Outlook: MYD witnessed growth commencing the first eight weeks into FY22. MYD plans to focus on customer acquisition and private label business expansion. The company expects considerable opportunity to translate web and mobile traffic to App visits and enhance the marketing ROI during FY22.

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

A-VIX vs MYD (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of MYD went up by ~6.122%. The stock made a 52-weeks' low and high of $0.520 and $1.495, 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’ average EV/Sales multiple, considering its net loss and net cash outflows from operations in FY21. For valuation, peers like Adore Beauty Group Ltd (ASX: ABY), Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW), have been considered. Considering the debt free financial position, plans on engaging multi-channel brand & campaigns to grow customers and App usage, and valuation, we give a 'Speculative Buy' rating on the stock at the closing price of $0.780, ~down by 1.887% as of 01 November 2021.

­­­(3) ­­­G8 Education Limited (Recommendation: Hold, Potential Upside: High Single-Digit)

(M-cap: A$ 932.12 million, Annual Dividend Yield: 0.00%)

Elevated Levels Established as Occupancy Rates Resurge: G8 Education Limited (ASX: GEM) operates in childcare centres and manages its franchises in Australia. As announced on 1 October 2021, GEM completed the acquisition of Leor Pty Ltd. In FY20, revenue shrunk by 14.4% and stood at $788.1 million. Elevated levels under COVID-19 impact were underpinned by facilitated investment and government support in educational resources and centre quality. Underlying EBIT stood at $105.2 million, down by 11.9%, which includes a $12 million employee payment remediation program. However, the balance sheet stood firm with net cash to debt of 21.8x. During the period, GEM completed its refinancing activity in February 2021, delivering increased flexibility, lower interest costs and increased tenor.

In H1FY21, core occupancy surged to 68.0% relative to 65.1% in H1FY20. As a result, operating revenues hiked to $421.5 million relative to $308.2 million PcP. Operating EBITDA for the period stood at $102.4 million relative to $88.9 million PcP, underpinned by good wage performance. Net cash position stood at $6.5 million, supported by COVID-19 affordability measures for families and investment in team retention and attraction. Regional centres outperformed with occupancy rates up by 1.9ppts relative to PcP. Divestment in 25 centres in FY19 drove improved occupancy rates in Western Australia.

Outlook: GEM is focused on regaining and attracting families to maximise the anticipated increase in occupancy. The company has executed a lease agreement for ten greenfield centres and expect to open during FY22.

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

A-VIX vs GEM (Source: REFINITIV)

Stock Recommendation: Over the past year, the stock of GEM went down by ~3.111%. The stock made a 52-weeks’ low and high of $0.922 and $1.315, 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 high single-digit (in percentage terms). The company can trade at a slight discount compared to its peers’ average EV/Sales multiple, considering COVID-19 uncertainty and contracted net margins. For valuation purposes, peers like 3P Learning Ltd (ASX: 3PL), IDP Education Ltd (ASX: IEL), Mayfield Childcare Ltd (ASX: MFD) have been considered. Considering the current trading levels, strategic programs, robust financial status, critical focus on increasing occupancy, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $1.090, down by ~0.910% as of 01 November 2021. 

(4) Synlait Milk Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 730.06 million, Annual Dividend Yield: 0.00%)

Key focus on Top-line Improvements to Bring Operating Performance to Pre-COVID Levels: Synlait Milk Limited (ASX: SM1) is engaged in manufacturing, packaging, and commercialising dairy and nutritional products. As announced on 5 October 2021, SM1 publically launched its first consumer foods product under its brand. In FY21, revenue inclined to $1.4 billion, up by $65 million PcP. EBITDA stood at $37.3 million, considerably down by $132 million PcP due to contraction in volume. NPAT for the period stood at a loss of $28.5 million, considerably down by the profit of $74.3 million committed in FY20. Primarily responsible factors for the drained bottom-line are a $55.7 million decline in infant volumes, a $33.3 million decline in stock balancing, and a $20.5 million decline in ingredient performance.

The period’s operating cash flows eroded to $15.9 million, down by $87.9 million, due to reduced volumes in consumer-packaged infant formula and inventories exceeding target levels by circa 13,000MT. Net debt decreased to $479.4 million, primarily due to a $196.1 million equity raise, partially offset by $136.8 million net capex. Investment activities declined to $86.4 million following the Dairyworks and Talbot Forest Cheese acquisitions in FY20.

Outlook: New total debt/EBITDA covenant limit stands at 4.5x for FY22, and SM1 estimates to remain below 4.0x. The working capital facility is expected to renew on 1 October 2022, and the revolving facility will be extended for two years. SM1 expects improved ingredients margin performance, inventory sell-down, increased Dairyworks contribution and benefits from sale and leaseback of Synlait Auckland.

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

A-VIX vs SM1 (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of SM1 went down by ~6.197%. The stock made a 52-weeks’ low and high of $2.640 and $5.550, 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 company can trade at some premium compared to its peers’ average EV/Sales multiple, considering significant market standing and improved product diversification. For valuation purposes, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Clean Seas Seafood Ltd (ASX: CSS) have been considered. Considering the high expectations from margin performance and Dairyworks’ contribution, decent debt levels, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $3.330, down by ~0.300% as of 01 November 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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