I. Sector Landscape
Australia’s consumer sector broadly encompasses food products, processing, food retailing, and agribusiness. Amidst soaring disposable income and resilient consumer spending, Australian retail activities generated 4.5% of the nation’s total Gross Value Added (GVA) in 2020, amounting to ~$81.36 billion. In addition, the wholesale and retail trade industry secured $61.5 billion or 6.0% of foreign direct investment in Australia in 2020.
Key Trends in Current Retail Activities
Surged Retail Turnover: In January 2022, the total retail turnover clocked $32.49 billion and advanced by 1.8% sequentially and 6.4% compared with January 2021. Food retailing edged up by 2.2% and stood at $13.26 billion. In January 2022, food online sales stood at $1,065 million, up by $3.1 million or 0.3% over the preceding month.
Figure 1: Retail Turnover Showing Recovery:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Online Retail Support: On seasonally adjusted terms, the total online retailing sales stood at $3,893 million in January 2022. Online sales surged by 7.9%, or $285.6 million, the first uptick clocked since the end of October 2021 lockdown. Despite recent shortfalls, the January 2022 uptick sees that total online retailing turnover remains elevated.
Rising Agriculture Business Feeding the Sector
Improved Forecasts for Agriculture Production: As per the Australian Bureau of Agricultural and Resource Economics (ABARES), the gross value of agricultural production is expected to set a record of $81 billion in FY22, beating the previous record by almost $12 billion. The unprecedented results stem from the highest commodity prices for Australian agricultural produce in 32 years and record-high crop production.
Figure 2: Total Farm Production in an Uptrend:
Source: Based on Australian Bureau of Agricultural and Resource Economics Data, Analysis by Kalkine Group
Favourable Climatic Conditions: Following a wet spring across much of Australian regions, rainfall continued to be on the scale of average to extremely high between November 2021 and January 2022. This rainfall supported pasture growth on a scale of average to above average across eastern, central and northern Australia.
Surged Global Meat Consumption: The world meat consumption advanced by 58% over the past 20 years to 2018 to clock 360 million tonnes. Population growth accounted for 54% of this hike, and per person growth accounted for the remainder 46%. Between 2019 and 2024, meat consumption is estimated to increase, primarily driven by population growth and increasing income in developing countries.
Index Performance
The ASX 200 Consumer Staples (GIC) Index posted 2-year returns of +~20.06%. Changing consumer preferences, improved industry production levels, elevated household spending, and resilient online retailing are supportive factors driving sector gains.
Figure 3: The ASX 200 Consumer Staples (AXSJ) outperformed the ASX 200 Index (AXJO) in the past two years by whopping ~13.92%.
Source: REFINITIV as on 10 March 2022
Key Risks and Challenges
The agricultural input costs have increased, augmenting the cost of operations. The extremely high rainfall in November 2021 across most Australia, causing widespread flooding, signifies potential unfavourable climatic conditions. Recent disruption in the global supply chain may significantly affect the retail and wholesale trade in both traditional and online retail marketspaces. The current geopolitical stress among Russia and Ukraine may affect the Australian international trade in food supplies. The Australian agriculture business holds under-diversified trade partners, highly dependent on Chinese exports.
Figure 4: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Surged Gross Value Added: A bumper grain harvest drive a 9.0% hike in Agriculture, Forestry & Fishing Gross Value Added (GVA). The impacts of this flowed via the supply chain, including a 3.5% GVA increase in wholesale trade and a 3.0% increase in transport, postal & warehousing.
Household Spending Recovered: In December 2021 quarter, household spending advanced by 6.3% QoQ, recovering from a dip of 4.8% in September 2021 quarter, exceeding pre-pandemic levels for the first time.
Improved Capital Expenditure: In December 2021 quarter, the total new private capital expenditure in accommodation & food services and retail trade was increased by 17.5% and 2.9% QoQ, respectively.
Increased Quarterly Production: In December 2021 quarter, the production in the agriculture, forestry & fishing industry advanced by 9.0% sequentially and a significant 19.4% compared to the prior comparable period.
Agriculture Production Expectations: In FY23, the production value is forecasted to clock $76 billion – the second highest on record. The agricultural process could sustain higher levels in the slower global recovery.
II. Investment theme and stocks under discussion (WOW, BGA, ELD)
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.
- ASX: WOW (Woolworths Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$43.38 billion)
WOW is engaged in retail operations. Its segments include Australian Food, New Zealand Food, Endeavor Drinks, BIG W, and Hotels.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 16.69% on 10 March 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given the retail and eCommerce sales growth. For valuations, peers such as Metcash Ltd (ASX: MTS), Graincorp Ltd (ASX: GNC), Coles Group Ltd (ASX: COL), and others have been considered. Given the decent fundamentals, new store rollout plan, favourable support from eCommerce, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $35.610, as of 10 March 2022, at 11:56 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.62%. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
WOW Daily Technical Chart (Source: REFINITIV)
- ASX: BGA (Bega Cheese Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.45 billion)
BGA is a diversified branded foods business company with an integrated value chain from farm to consumer.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 17.52% on 10 March 2022. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given the industry's decent fundamentals and high non-cyclicity nature. For valuations, peers such as Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Inghams Group Ltd (ASX: ING), and others have been considered. Given the surged top-line, expansion via Lion Dairy and Drinks acquisition, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $4.840, up by ~1.043%, as of 10 March 2022. In addition, the stock has delivered an annualised dividend yield of 2.19%. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
BGA Daily Technical Chart (Source: REFINITIV)
- ASX: ELD (Elders Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.86 billion)
ELD is engaged in the provision of livestock, real estate & wool agency services, services & farm inputs, financial services, real estate franchise, live export operations, feed lotting of cattle, grain trading, and red meat supply chain.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 10.73% on 10 March 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given favourable commodity price support and decent fundamentals. For valuations, peers such as Ridley Corporation Ltd (ASX: RIC), Bega Cheese Ltd (ASX: BGA), Inghams Group Ltd (ASX: ING), and others have been considered. Given the increased crop produce expectations, surged top-line, stable cost to income parameters, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the current market price of $12.040, up by ~1.091% on 10 March 2022. In addition, the stock has delivered an annualised dividend yield of 3.52%.
ELD Daily Technical Chart (Source: REFINITIV)
Note: All the recommendations and the calculations are based on the closing price of 10 March 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 from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.
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