For the year 2019-20, the Australian economy saw gains from the number of drivers amidst the pandemic crisis. The economy experienced an increase in labour productivity, a surge in household net worth and household saving ratio, and a rise in public investments. Amongst industries, mining, financial and insurance services, health care and social assistance, construction and professional, scientific, and technical services contributed higher to the country’s gross value added (GVA) than others.
Economic Overview: The 2019-20 GDP growth contracted by 0.3% in chain volume terms and by 1.7% on a per capita basis on account of the severe impact of COVID-19 and bushfires. The GDP rose by 1.7% in nominal terms and by 1.9% chain price index wise. However, it is the slowest GDP growth in nominal terms in the last 5 years. In productivity terms, GDP per hour worked rose marginally to 0.5%.
Key Economic Parameters (Source: ABS)
Insights into Investment, Consumption & Savings: The contraction in private demand diminished the GDP by 2.4% points. The household final consumption expenditures declined by 3% in chain volume terms for the first time in the history. The spending on discretionary services reduced owing to a shift in household consumption and behaviour. Private investment also slowed down due to reduced demand for establishments. Domestic final demand reduced 1% from GDP, while household consumption and private investment detracted 1.6 and 0.8 percentage points. The household consumption as a share of GDP stood at 53.7% in 2019-20 due to the impact of COVID-19. The household saving ratio stood at 10.3%, the highest in 34 years and the first rise in five years. This translated into a steep decline in household spending and a moderate rise in total disposable income. Given this, the household net worth rose to $11.1 trillion in 2019-20, reflecting the impact of recovering property prices and slow growth in loan liabilities.
Industries that Contributed to Growth: The net worth of non-financial corporations surged to $177.3 billion, up by 76.3% in 2019-20 and they contributed the largest share of current price GVA. These gainers were spread across mining, financial and insurance services, health care and social assistance, construction, and professional, scientific and technical services. The growth rates recorded for 2019-20 for mining and financial services were 4.9% and 1.8%, respectively. Healthcare and social assistance performed well and recorded a growth of 4.4% (yoy). Despite COVID-19, these industries had a robust year due to drivers such as higher capacity at oil and gas extraction facilities, higher iron ore demand from China, growth in loans and deposits due to higher savings and government support to boost the economy. The COVID-19 scenario increased the public expenditure on health and disability services. While these industries stand to gain, there were 12 of 16 industries that recorded a fall, leading to a decline of 1.2% in market sector GVA. Industries that were adversely impacted due to COVID-19 are - transport, postal and warehousing, & accommodation and food services.
Industry Shares of Gross Value Added (Source: ABS)
Increase in National Net Saving: For 2019-20, total national net saving stood at $125.2 billion up on $101.5 billion in the previous year, with all sectors recording positive net saving except general government. The general government registered a fall of $113.4 billion in net savings to -$83.7 billion in 2019-20. This was due to higher spend on COVID-19 related support via JobKeeper and Boosting Cash Flow to Employers’ programs. The gross disposable income rose 5.4% due to growth in social assistance and compensation packages to employees. Given such levels of savings for consecutively 4 years and prudent capital investment decisions both by households and corporates, Australia stood as a net lender to the world in 2019-20.
Key Risks: As per 2019-20 indicators, household consumption and investment are at low levels. Household consumption at 53.7% fell for the fourth consecutive years and remained at the lowest since 1973-74. The investment as a % of GDP has continued the downward trend and currently is at the least level since 1959-60. Though household savings ratio has risen and touched the highest rate for over the last 3 decades, consumption, and investment demand need to pick up to provide requisite fuel and momentum to economic growth. This will occur as a further wave of COVID-19 infections reduce, vaccine for the pandemic develops soon, and restrictions regarding travel, people movement, lockdowns are lifted. Higher or prolonged business closures or longer restrictions due to pandemic may adversely impact economic activity. With government savings in negative, there will be reduced support to businesses and households. Prolonged shutdowns may impact employment levels in the industries thereby posing threat by way of loss of income, consumption, and investment levels.
Notwithstanding the above risks, continuous fiscal support to households and businesses and a gradual lifting of restrictions are expected to drive a slow but decent growth in the economy. Australia’s mining sector has proved to be resilient during the crisis and is currently supporting significant business activity and employment. Similarly, other industries like construction and healthcare have also proved to be resilient against the pandemic. Considering the above factors, let us have a look at few companies that are set to experience decent business prospects despite current economic conditions.
1. Origin Energy Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 7.04 Billion, Annual Dividend Yield: 6.25%)
Long-term Contracts to Support Growth: Origin Energy Limited (ASX: ORG) is Australia’s leading energy company with two strong cash-generating businesses- Energy Markets and Integrated Gas. During the September 2020 quarter, the company’s commodity revenue came in at $373.9 million, as compared to $610.2 million in the June 2020 quarter. Electricity sales for the quarter went up by 11% and natural gas sales went up by 7%. Notably, Sep-20 production and sales volume are down by 3% and 9% from the September 2019 quarter. In FY20, the company’s underlying profit was in line with the previous year and free cash flow increase from $1,539 million in FY19 to $1,644 million in FY20.
Outlook: Majority of the company’s sales are under long-term contracts, providing protection against soft LNG spot prices. Spot LNG prices began to recover in September due to improvement in global gas demand and reached above US$6.50/mmbtu for December deliveries. The company expects prices to recover further in Q2FY21.
Australia has witnessed increased capacity at oil and gas extraction facilities. As a result, the mining sector recorded a growth of 4.9% in 2019-20, offsetting the negatives impacting economic growth. Considering the long-term contracts and potential improvement in LNG spot prices, the company may witness improvement in its financial performance in upcoming periods while contributing to Australia’s overall economic growth.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs ORG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock has corrected by 27.61% in the past three months. The company has a disciplined capital management approach and announced cost reduction initiatives to respond to COVID-19. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the strong free cash flows in FY20, modest outlook for LNG Spot prices, improved electricity sales, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.010, up 0.249% on 2nd November 2020.
2. CIMIC Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 6.79 Billion, Annual Dividend Yield: 3.30%)
Growth in 3Q20 Revenue: CIMIC Group Limited (ASX: CIM) is engaged in providing construction, mining and operation and maintenance services for infrastructure. The company recently announced that Sedgeman, CIMIC Group’s minerals processing company, has been awarded two contract extensions by QCoal, which will generate $166 million in revenue for Sedgeman. In October, the company also entered into an agreement regarding the acquisition of 50% equity interest in Thiess by Elliott Advisors (UK) Ltd, with CIMIC retaining the other 50% equity interest strengthening its balance sheet by generating cash proceeds of A$1.7 to A$1.9 billion. For the 9 months ended 30th September 2020, the company reported revenue amounting to $9.3 billion, as compared to $10.7 billion in pcp. Revenue returned to growth in 3Q20, increasing by 8% in comparison to 2Q20.
Outlook: The company is optimistic about the outlook of its core businesses and is currently bidding on some major projects, which offer decent growth prospects. Improved operating conditions in 3Q20 are providing momentum going into 4Q20. Moreover, numerous stimulus packages in core Construction and Services markets offer additional opportunities for the business.
The mining market is proving resilient, which may improve the work in hand for the company. Notably, the contribution of the construction sector in Gross Value Added has increased to 7.7%, being one of the largest shares among all industries.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs CIM (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock has provided a return of 2.28% in the past three months and 16.78% in the last one month. As on 30th September 2020, the company reported a strong liquidity position with gross cash of $3.6 billion. 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 upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $21.50 on 2nd November 2020.
3. Adbri Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 1.84 Billion, Annual Dividend Yield: 3.44%)
Strong Balance Sheet Position: Adbri Limited (ASX: ABC) is engaged in the manufacturing of cement, lime, concrete, and aggregates and concrete masonry products. In the first half ended 30th June 2020, net profit after tax stood at $29.1 million and revenue stood at $700.7 million. Underlying EBIT for the period stood at $75.2 million, down on the prior corresponding period. The company reported stronger underlying earnings margins in wholly-owned operations. The period ended with a strong balance sheet position, with a gearing of 25.7% and leverage ratio of 1.5x, well within the target range and covenants. The company also declared an interim dividend of 4.75 cents per share, with a payout ratio of 65% on underlying earnings.
Outlook: The company’s cost-out program is on track to deliver annual savings worth $30 million in FY20. The company is in a decent position to benefit from demand for construction materials as a result of Federal and State Government stimulus measures and from a rising demand for cement and lime from a growing mining sector. FY20 capital expenditure is estimated to be ~$130 million.
During 2019-20, the construction sector was among the top five industries with the largest share of current price Gross Value Added. As COVID-19 restrictions ease further and activity levels return to normal, the sector will be at the forefront of promoting Australia’s economic growth through both domestic and international demand.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs ABC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock has provided a return of 33.48% in the past three months and 3.14% in the last one month. The company possesses a strong balance sheet with available funds of $481.7 Million. 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 upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $2.950, up 4.24% on 2nd November 2020.
4. BHP Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 99.51 Billion, Annual Dividend Yield: 5.17%)
Major Projects Tracking Well: BHP Group Limited (ASX: BHP) is involved in the exploration, production, and processing of minerals including coal, iron ore, copper and manganese ore and hydrocarbon. During the quarter ended 30th September 2020, group copper equivalent production increased by 2% due to strong performances in metallurgical coal and iron ore, with record production achieved at Jimblebar. The third phase of the drilling program at Oak Dam in South Australia delivered encouraging results in copper exploration. Petroleum production for the quarter increased by 1% to 27 MMboe on the June quarter. Copper production remained flat and iron ore production declined by 1% on the June quarter.
Outlook: The company’s major projects under development in petroleum, copper and iron ore are tracking well. In July 2020, Atlantis Phase 3 achieved first production and first production from the Spence Growth Option is expected between December 2020 and March 2021. Capital and exploration expenditure guidance is targeted at approximately US$7 billion for FY2021. Petroleum production in FY21 is expected between 95 – 102 MMboe and iron ore production is estimated at 244 – 253 Mt.
The mining sector has been a key contributor to Australia’s economic growth. In 2019-20, the sector reported a growth of 4.9% on the back of increased capacity at oil and gas extraction facilities. The sector has also been an important contributor to exports in 2019-20 due to the increased demand for iron ore.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs BHP (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock has provided a return of 13.15% in the past six months. BHP reported decent production results in the September quarter and reported a strong free cash flow in FY20 ensuring net debt at the low end of the target range. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $33.810, up 0.09% on 2nd November 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.