I. Sector Landscape
Considering the recent disruption caused by COVID-19, the spending patterns shifted substantially as households adapted to containment measures. Goods consumption increased as consumers substituted away from services. Groceries for household cooking replaced restaurant visits, sports equipment substituted for gym subscriptions, and home office equipment filled in for commuting to workplaces. Online retail supported households to adapt to restrictions; hence, online sales accounted for 10 to 15% of the total value of retail sales in the second half of CY21.
Retail Trade Picked Up
Improved Volumes: Australian retail sales volumes surged 1.2% in the March 2022 quarter, as per the Australian Bureau of Statistics (ABS) figures. This follows a 7.9% uptick in December 2021 quarter and a 4.3% downside in September 2021 quarter. More discretionary spending industries experienced a volume surge, despite inflationary pressures.
Australian Retails Sales Touching Record Levels: Australian retail turnover surged 1.6% in March 2022, registering a new record level of $33.62 billion. The inflationary environment and continued restrictions easing across the country have bolstered retail turnover. Consumer spending surged across both discretionary and non-discretionary industries and leading the surge across all industries was household goods retailing, up by 3.4%.
Meat Production in Australian on a Rise
Beef and Veal Production to Pent up: The gross value of production for beef and veal is estimated to increase by 8% to $15.7 billion in FY22, driven by record cattle prices. High rainfall across most eastern Australia has led to widespread restocking and greater pasture availability. Export earnings are estimated to increase by 11% to register $9.1 billion in FY22.
Higher Meat Consumption Reinforcing Poultry Industry: Chicken meat production stood at 1.28 million tonnes in FY21 and is estimated to surge to 1.35 million tonnes, with the series trending upwards. Chicken meat consumption for FY21 was inked at 47.8 kg/person, and for FY22, it is estimated to climb to 48.8 kg/person. Export earnings for FY21 stood at $67.6 million, expected to jump substantially higher to $92.9 million.
Index Performance
The ASX 200 Consumer Staples (GIC) Index and The ASX 200 Consumer Discretionary Index (GIC) Index posted 5-year returns of +38.34% and +28.75%, respectively. Changing consumer preferences, increasing millennials, elevated household spending, and resilient online retailing are supportive factors driving sector gains.
The ASX 200 Consumer Staples (AXSJ) and The ASX Consumer Discretionary (AXDJ) outperformed the ASX 200 Index in the past five years by a whopping ~19.42% and ~9.83%, respectively.
Source: REFINITIV as of 12 May 2022
Key Risks and Challenges
Food retailing is increasing slower, with a marginal 0.5% growth in March 2022 compared to other retail industries. Food retailing volume slipped by 1.5% in March 2022, with inflated prices for fresh food and grocery items. The consumer price index (CPI) for March 2022 quarter climbed by 2.1% QoQ and 5.1% YoY, leaving a canopy of inflationary pressures on the consumer sector. High freight costs and skilled trade shortages have affected the agricultural business.
Outlook
Increased Capex in Retail Trade: The total private new capital expenditure, for December 2021 quarter, towards retail trade, increased by 2.9% QoQ and 8.5% YoY. For the same period, total capex in wholesale trade increased by 9.0% PcP.
Improved Consumption Expenditure: The total final consumption expenditure recorded in the December 2021 quarter increased by 4.4% QoQ and 4.0% YoY, showcasing the resilience of the consumer sector and improved household spending.
Favourable Estimates for Beef & Veal: In FY27, the gross value of beef & veal is expected to clock $19.9 billion amid robust world prices and surged beef production.
Increased Exports for Beef & Veal: Exports are estimated to advance by 11% to $9.1 billion in FY22 amid rising beef production and falling domestic cattle prices to make Australian beef more competitive against other exporters.
Decent Forecasts for Chicken Production Value: As per the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), the gross value of poultry farm production is estimated to increase to $3.105 billion in FY23 from an estimate of $3.063 billion in FY22.
II. Investment theme and stocks under discussion (ING, ALL, AAC)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.
1. ASX: ING (Inghams Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.08 billion)
ING is engaged in producing and selling chicken and turkey products across its vertically integrated production system.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 16.40% on 12 May 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given the gradual easing of over-supply in the wholesale market and decent inventory control. For valuation purposes, peers such as Bubs Australia Ltd (ASX: BUB), Nuchev Ltd (ASX: NUC), East 33 Ltd (ASX: E33), and others are considered. Given the decent fundamental upgrades, curtailed financial leverage, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.890, down by ~1.03% on 12 May 2022. In addition, the stock has delivered an annualised dividend yield of 5.36%.
ING Daily Technical Chart (Source: REFINITIV)
2. ASX: ALL (Aristocrat Leisure Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$21.30 billion)
ALL is an Australian gaming provider and game publisher. Product categories include casino management systems, electronic gaming machines, and digital social games.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 18.93% on 12 May 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given curtailed travel restrictions and reopening of borders. For valuation, peers such as Jumbo Interactive Ltd (ASX: JIN), Tabcorp Holdings Ltd (ASX: TAH), Ainsworth Game Technology Ltd (ASX: AGI), and others have been considered. Given the substantial top-line improvement, strong profitability, decent liquidity position, curtailed financial leverage, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the closing market price of $30.580, down by ~3.896% on 12 May 2022. In addition, the stock has delivered an annualised dividend yield of 1.28%.
ALL Daily Technical Chart (Source: REFINITIV)
3. ASX: Australian Agricultural Company Limited (AAC)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.10 billion)
AAC operates as a cattle and beef producer with customers in Asia, Australia, North America, Europe, and the Middle East.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 10.27% on 12 May 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given favourable meat price and demand impact. For valuation, peers such as Bubs Australia Ltd (ASX: BUB), Murray Cod Australia Ltd (ASX: MCA), Cobram Estate Olives Ltd (ASX: CBO), and others are considered. Given the decent financial position, global beef demand, improved operational efficiency, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $1.780, down by ~3.26%, as of 12 May 2022.
AAC Daily Technical Chart (Source: REFINITIV)
Comparative Price Chart:
Source: REFINITIV
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: All the recommendations and the calculations are based on the closing price of 12 May 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the aforementioned factors.
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