Event Core
On 26 May 2022, the Australian Bureau of Statistics (ABS) released a quarterly update on actual and expected private new capital expenditure on buildings and equipment by industry. In March 2022 quarter, the total new capital expenditure slipped marginally by 0.3% to $33.56 billion and remained above March 2021 quarter by 4.5%.
Key Parameters on Select Industries
Retail Turnover Reaching Record High Level in April 2022: Retail turnover, on a seasonally adjusted basis, stood at $33.92 billion, up by 0.9% sequentially and 9.6% on a PcP basis. Despite a dip in capital expenditure activities, the industry has maintained its turnover stance, clocking record levels. The strength in retail turnover is driven by consumer spending across the food industry and curtailed movement restrictions.
Contributions to Promoting Recycling Activities: The Australian government has invested around $190 million in the Recycling Modernization Fund to support states and territories to increase the capacity of recycling facilities across the country. The government is spending $83.1 million on waste and recycling capabilities to achieve the 2030 waste targets.
Favourable Prospects in Transportation and Warehousing: The capital expenditure activities in the transport, postal & warehousing industry increased by 7.8% QoQ and a significant 16.1% PcP. The government invests around $120 billion over ten years from FY23 in transport infrastructure through its rolling infrastructure pipeline.
Key Risks and Challenges
Rising inflation and global slowdown may hamper export growth. Freight costs have been a challenge, causing inflationary pressure on the global supply chain. In the December 2021 quarter, the value of engineering work edged down by 21.7%, manifesting obstacles for infrastructure investments. The shortage in labour supply and recent supply chain mismanagement have affected materials segment activities. The ferrous and non-ferrous metal prices have been in a volatile zone lately, affecting the revenue prospects.
Outlook
Positive Macro Parameters: In December 2021 quarter, the Australian economy advanced by 3.4% on seasonally adjusted measures and retail net disposable income surged by 1.7%. Domestic final demand contributed 2.9 ppts to GDP growth.
Advanced Household Spending: Household spending edged up by 6.3% in December 2021 quarter, exceeding the pre-pandemic benchmark for the first time. Spending on goods jumped by 6.3%, reflecting pent-up demand for apparel, furnishing, and recreational interests.
Favourable Capital Expenditure Estimates: For FY22, the ABS estimates a total capex of $142.8 billion, 1.4% higher than the previous estimate. For FY23, ABS estimates capex to clock $130.5 billion, 11.8% higher from the previous estimate.
Significant Investment for Infrastructure Development: The FY23 budget includes over $21 billion in investment to develop Australia’s regions, ensuring the placement of critical transport, water, and communications infrastructure.
Launch of Battery Stewardship Scheme (BSS): The BSS is a national battery collection network that will improve the recovery and recycling of end-of-life hand-held batteries and develop an efficient & innovative domestic battery recycling industry.
Considering the expansion in capital expenditure in selected industries, we have figured out three stocks on ASX that are set to see momentum.
(1) Harvey Norman Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.44 billion, Annual Dividend Yield: 8.00%)
Bottom-Line Improved Substantially as Household Spending Took a Hike: Harvey Norman Holdings Limited (ASX: HVN) is engaged in business activities of the integrated franchise, retail, property, and digital enterprise. In FY21, HVN registered PBT at $1.183 billion, up by a significant 78.8% YoY. The Australian franchising operations segment recorded a profit of $628.19 million, up by 80.2% from $348.59 million in the previous year. The offshore company-operated retail segment excelled in generating a profit of $240.79 million across seven overseas countries. The property segment remained robust, with real and tangible property assets exceeding $3 billion and achieving a profit of $291.54 million, up by 68.3%.
In H1FY22, HVN recorded a PBT of $612.24 million, down by $31.7 million or 4.9% on a PcP basis. Reported PAT after non-controlling interests stood at $430.91 million, down by $31.12 million or 6.7% PcP. Australian franchisees were negatively affected by heavy lockdowns throughout most regions and cities in the ACT, VIC, and NSW for up to 4 months. The property segment stood resilient, with real tangible property assets crossing the $3.5 billion mark, culminating in segment profits of $197.74 million, up by 81.3%.
Outlook: In FY22, HVN is focused on opening three franchised complexes in Australia and three overseas. HVN intends to commence two leasehold company-operated stores in Hungary during FY23. The board has recommended paying 20.0 cents/share as a fully franked interim dividend, which was paid on 2 May 2022.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs HVN (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of HVN went down by ~14.34%. The stock made a 52-weeks low and high of $4.290 and $5.930, 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, considering decent financial prospects after the lifted containment measures. For valuation purpose, peers like Wesfarmers Ltd (ASX: WES), Temple & Webster Group Ltd (ASX: TPW), and Mydeal.Com Au Ltd (ASX: MYD) have been considered. Given the organic growth prospects, low financial leverage, rising profitability, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $4.360, down by ~0.228% as of 30 May 2022.
(2) Sims Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.46 billion, Annual Dividend Yield: 3.99%)
Favourable Price and Volume Metrics Expanding Financial Position: Sims Limited (ASX: SGM) is engaged in buying, processing, and selling ferrous and non-ferrous recycled metals. The company is also providing environmentally responsible solutions for the disposal of post-consumer electronics. In FY21, SGM experienced material developments in market prices and increased proprietary sales volumes by 8.0%, with proprietary intake volumes edging up by 7.1% PcP.
In H1FY22, SGM registered sales revenue of $4,265.0 million, up by 73.9% PcP and statutory EBIT was inked at $341.4 million, up by a significant 334.9% PcP. The robust earnings growth was due to increased sales volumes and higher material prices, alongside disciplined margin management. Trading margin expanded by 45% via disciplined management of bid-ask spread as selling price improved.
Business Update: As announced on 19 May 2022, SGM acquired ~140,000m square strategic parcel of land situated in Pinkenba, QLD, at $88.0 million and $5 million in stamp duty.
Outlook: Momentum has continued to H2FY22 in the metal business. Intake volumes have stood firm as non-ferrous commodity prices increased relative to the HY22 average while ferrous prices remained elevated, despite high volatility.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs SGM (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SGM went down by ~14.25%. The stock made a 52-weeks low and high of $12.090 and $22.800, 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 cap-and-trade schemes and emission limits. For valuation purpose, peers like Mount Gibson Iron Ltd (ASX: MGX), BlueScope Steel Ltd (ASX: BSL), BCI Minerals Ltd (ASX: BCI), and others have been considered. Given surged Zorba prices, the expected rise in enterprise storage, the favourable outlook for repurposed units, current trading levels, and the upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $17.810, up to by ~0.225% as of 30 May 2022.
(3) Kelsian Group Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 1.64 billion, Annual Dividend Yield: 2.12%)
Strategic Acquisitions and Significant Reinvestment Promoting Growth: Kelsian Group Limited (ASX: KLS) is an integrated marine and land, public and tourism transport service provider. In FY21, the company clocked a revenue of $1.17 billion, substantially up by 88.1% YoY due to the impact of the TSG acquisition, new contract wins, and rebounds witnessed in Marine & Tourism. Underlying EBITDA stood at $167.5 million, up by 85.2%, with almost consistent margins. The underlying EBITDA excludes the one-off transaction and tender costs of $5.0 million, asset impairment of $3.8 million and insurance recoveries of $2.2 million.
In H1FY22, Australian Bus delivered increased EBITDA and margin expansion. Underlying EBITDA stood at $90.8 million, down by 4.1%, and underlying NPAT stood at $21.9 million, down by 27.5%. The deployment of $21.1 million of capex is made to replace the bus fleet and build an advanced new vessel. The company was awarded a new 25-year (up to) contract to operate ferries to Kangaroo Island beginning in July 2024.
Business Update: As announced on 27 May 2022, KLS entered an agreement to sell East London Bus Operations at a total consideration of GBP 20 million (~A$35 million).
Outlook: The company is pursuing the Kangaroo Island Ferry licence renewal and positioning itself for tender opportunities in international markets. The company seeks to scale up on the back of Position Tower Transit London.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs KLS (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of KLS went down by ~4.16%. The stock made a 52-weeks low and high of $6.185 and $10.330, 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 premium compared to its peers, considering capex in replacing the bus fleet and contract for operating ferry services in Kangaroo Island. For valuation purpose, peers like Lindsay Australia Ltd (ASX: LAU), Aurizon Holdings Ltd (ASX: AZH), and Camplify Holdings Ltd (ASX: CHL) have been considered. Considering the significant incline in operating cash flows, favourable leverage position, improved efficiency targets, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $7.600, up by ~0.795% as of 30 May 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. 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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