Event Core

On 27 January 2022, the Australian Bureau of Statistics released the international trade price indexes, measuring price changes in imports and exports of merchandise. The export price index advanced by 3.5% in December 2021 quarter and 38.3% PcP. Similarly, the import price index jumped by 5.8% in December 2021 quarter with a 13.8% PcP uptick.

Figure 1: Quarterly Change in Export and Import Price Index

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

Suspected Outperformance in Materials and Construction Industry

Substantial Updates in Price Indices: In December 2021 quarter, the export price index of coal, coke and briquettes surged by 51.9%, owing to inclining global demand for coking and thermal coal. The export price index for gas natural & manufacturers surged by a considerable 36.1%, driven by the increased count of oil-linked contracts captured by the continued rise in oil prices in 2021. The export price index for non-ferrous metals expanded by 9.5%, bolstered by surged manufacturing demand as mobility constraints gradually lifted.

Consequential Update on Construction Front: In November 2021, the seasonally adjusted estimate for total approved dwellings surged by 3.6%, as private sector houses edged up by 1.4% and the value of non-residential building agreed edged up by 28.3%, sequentially. In December 2021 quarter, the output of building construction outpaced by 2.9%, owing to strong demand for housing projects and builders passing on the surging labour and material costs. Heavy and civil engineering construction advanced by 1.4% sequentially and 5.6% PcP.

Figure 2: Sustainable Resilience in the Construction and Petroleum Industries Bolstering Final Demand Prices

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

Favorable Takeaways from Food Products Industry

Agriculture Production Value and Volume: For the December 2021 quarter, the export price index for meat and meat preparations surged by 4.5% due to robust beef demand and constrained global supply. Despite recent damage from floods and rain in the eastern states, the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) is forecasting a record agricultural gross production value of $78 billion in FY22, revised upward by $5.4 billion from the previous estimate.

Favourable Retail Trend: The Australian Bureau of Statistics (ABS) reported a 7.3% uptick in retail turnover for November 2021, following a consecutive surge of 4.9% in October 2021 and a 1.3% increase in September 2021 after a 1.7% decline in August 2021. The continued easing of mobility restrictions in New South Wales and Australian Capital Territory led to a rise in turnover and clocked record highs.

Key Risks and Challenges

Gradual decline in Chinese coal consumption owing to government’s announcement on curtailing coal use in the long-term under the ‘blue sky’ and decarbonisation targets. Australian iron ore earnings are forecasted to descend considerably due to a sharp reduction in Chinese steel production, causing substantial price declines. The robust recovery in industrial output and world trade in 2021 had put considerable pressure on the supply chain, as the rebound in international demand has consistently outweighed the recovery in supply. The persistence of price pressures has caused the International Monetary Fund (IMF) to increase its inflation forecast to 3.8% in 2022.

Outlook

Record Forecasts on Resources and Energy: The Australian resources and energy exports are estimated to clock a record of $379 billion in FY22, substantially up from $310 billion witnessed in FY21.

Favourable Forecasts for Thermal Coal: Australian thermal coal exports declined from 213 million tonnes in FY20 to 192 million tonnes in FY21 but are expected to rebound to 204 million tonnes by FY23.

Improved Capital Expenditure: As per ABS, the private new capex in buildings and structures is estimated to clock $78.6 billion (upward revision of 5.8%). The capex in mining is estimated to clock $41.8 billion (upward revision of 5.1%) in FY22.

Commending Agriculture Production: The gross value of agricultural production is estimated to record $78 billion in FY22 ($5.4 billion upward revision), owing to improved logistics, downgrades for key international competitors driving prices higher, and enhanced domestic conditions.

The surge in Agricultural Export Values: The agricultural export value is forecasted to hike by 27% and surpass $61 billion in FY22. Improved export volumes and inflated prices are estimated for almost all major export commodities.

Considering the improvement in export price index, we have figured out four stocks on ASX that are set to see the momentum.

(1) ­­­Transurban Group (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 38.52 billion, Annual Dividend Yield: 2.93%)

Portfolio Reconstruction and Traffic Resurgence Producing Favourable Outlook: Transurban Group (ASX: TCL) owns, operates, and develops electronic toll roads using intelligent transport systems. On 24 January 2022, TCL published that the shareholders, holding a 2.30% stake in issued capital, have opted to participate in the Distribution Reinvestment Plan (DRP) to distribute 15 cents/stapled security at $13.2912/stapled security for six mints ended 31 December 2021. In FY21, average daily traffic (ADT) slipped by 0.4% YoY, or by around 0.7% adjusted for the contribution from M8/M5 East and NorthConnex (new assets), which have performed ahead of expectations.

Free cash was slashed by 13.5% YoY, primarily reflecting the effect of curtailed traffic in North America and Melbourne amid COVID-19 related mobility restrictions, coupled with surged costs regarding strategic growth projects. FY21 distribution stood at 36.5 cents/stapled security (cps) with a final distribution of 21.5 cps for H2FY21. Statutory profits stood at $3,272 million, including a $3,726 million gain on asset sale (Transurban Chesapeake assets).

Outlook: TCL has embarked upon significant business growth in Greater Washington Area during FY21, committing to 50% stake sale in TCL’s 495, 95, and 395 Express Lanes assets. TCL expects FY22 distribution to align with Free Cash Flow, excluding capital releases.

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

TCL Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of TCL went down by ~3.873%. The stock made a 52-weeks’ low and high of $12.030 and $14.930, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering the substantial impact of mobility restrictions and recent shrinkage in the bottom line. For valuation purposes, peers like Qube Holdings Ltd (ASX: QUB), Atlas Arteria Group (ASX: ALX), Dalrymple Bay Infrastructure Ltd (ASX: DBI), and others have been considered. Given the recent resurgence in traffic levels, portfolio reconstruction strategy, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $12.450, down by ~0.797%, as of 31 January 2022.

(2) ­­­ Northern Star Resources Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 9.79 billion, Annual Dividend Yield: 2.29%)

Favourable Production and Demand Bolstering Financial Metrics: Northern Star Resources Limited (ASX: NST) is engaged in exploring, mining and processing gold deposits and selling refined gold. It owns and operates Kalgoorlie Operations and Yandal Operations. In FY21, NST recorded $2,761 million in revenue, up by 40% YoY and $2,268 million in EBITDA, up by 216% YoY, primarily driven by increased average realised gold price, 12% increase in annualised gold sold and reliable delivery of cost guidance and production. Underlying EBITDA stood at $1,159 million, up by 47% YoY. Cash earnings stood at $648 million, up by 10% YoY, and operating cash flows bulged to $1,077, up by 52%. Underlying NPAT for the period clocked $372 million, up by 28%.

In Q2FY22, gold sales stood at 392,655 ounces at an AISC of $1,631/ounce. The average Realised price stood at $2,429 per ounce for sales revenue of $950 million. In line with the hedging strategies, 404,999 ounces of hedging was added at $2,506 per ounce. As of 31 December 2021, cash and bullion stood at $588 million, and net cash stood at $288 million.

Outlook: For FY22, NST expects 1.55 – 1.65M ounces at an AISC of $1,475 - $1,575 per ounce. Gold production is weighted towards H2FY22, primarily driven by surging grades at Yandal and mining rates at Pogo edging up. NST’s net growth capital for net exploration and growth capital budget remains unchanged at $710 million for FY22.

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

NST Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of NST went down by ~34.929%. The stock made a 52-weeks’ low and high of $7.955 and $13.180, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering stable cash flow generation and quality assets, the company might trade at a slight premium to its peers. For valuation, few peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Given the upsurge in gold production during Q2FY22, healthy balance sheet, revised dividend policy, and upside indicated by valuation, we give a “Buy” rating on the stock at the closing market price of $8.290, down by ~1.427%, as of 31 January 2022. 

(3) ­­­­­­Washington H Soul Pattinson & Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 9.75 billion, Annual Dividend Yield: 2.27%)

Improved Portfolio Performance Manifesting Opportunities: ­­­Washington H Soul Pattinson & Company Limited (ASX: SOL) is an Australian-based investment company, driving revenue through stakes in coal mining, gold, and copper mining, refining operations, and consulting services. In FY21, SOL clocked $273 million in statutory NPAT, an uptick of 71% PcP. Bottom-line was primarily driven by growth in building products and favourable land revaluations, which increased Brickworks’ contribution by almost 95%. Significant improvements in Round Oak, increased by $103 million, and robust recovery in the coal process bolstered New Hope’s profit contribution by almost 45% PcP.

SOL’s net asset value was primarily attributed to a 21.5% increase in New Hope Corporation and a 48.5% surge in Brickwork’s portfolio, partially offset by a 22.5% downshift in the telecommunication portfolio. SOL’s portfolio value increased by 12% PcP to $5.8 billion; on the other hand, net cash from investments slipped 29% PcP to $180 million. Despite the shortfall in TPG value, net asset value achieved 12% growth. Resilient FY21 cash generation from portfolio enabled a higher return to investors, primarily driven by a 6% incline in cash generation on a PcP basis.

Outlook: The merger with Milton Corporation is estimated to increase the large-cap portfolio by over $3.5 billion. SOL targets higher long-term shareholders’ returns via building capital growth and steady improvements in dividend payout.

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

SOL Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of SOL went down by ~0.472%. The stock made a 52-weeks low and high of $25.990 and $40.800, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at some discount compared to its peers, considering fluctuations in coal supply, changes in macroeconomic factors, etc. For valuation purposes, peers like Santos Ltd (ASX: STO), Woodside Petroleum Ltd (ASX: WPL), Beach Energy Ltd (ASX: BPT), and others have been considered. Given the diversification benefits, potential merger synergies, improved net asset value, current trading levels, and upside indicated by valuation,  we give a ‘Buy’ rating on the stock at the current market price of $27.160, as of 31 January 2022, at 10:27 AM (GMT+10), Sydney, Eastern Australia.

(4) ­­­­­­Tassal Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 751.90 million, Annual Dividend Yield: 3.97%)

Favourable Outlook on Prawn and Salmon to Clock High Production Levels: Tassal Group Limited (ASX: TGR) is engaged in farming Atlantic salmon and tiger prawns and the processing and marketing salmon prawns and other seafood. During FY21, revenue was registered at $594.04 million, an increase of 5.6% YoY. The top-line was primarily supported by increased salmon domestic retail sales and prawn contribution. Statutory EBITDA for the period slipped by 17.7% and stood at $119.8 million, resulting from global & domestic pricing pressures and increased export supply chain costs. Operating EBITDA surged by 0.6% to $139.4 million due to reductions in the cost of efficiencies and growth in salmon and prawns to $0.33 per kg and $1.43 per kg, respectively.

Reported net debt surged by 60.7% and clocked at $317.8 million with upscaled leverage of 2.5x, up from 1.6x in the previous year. Gearing surged to 40.9% from 25.0% PcP, and undrawn debt facilities stood at $118.6 million out of the total available facility of $467.0 million. Cash and cash equivalents for the period was registered at $30.6 million. Considering the current financial position, TGR holds substantial headroom availability in cash and undrawn debt facility, focusing on maintaining appropriate financial access and minimising refinancing risk.

Outlook: Salmon production is expected to clock 41,000 hog tonnes in FY23 with salmon replacement and upgrade capex of approximately $50 million/annum. Prawn production remains on track to clock ~5,000 tonnes in FY22 as sales volume is supported by the Coles contract.

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

TGR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of TGR went up by ~1.437%. The stock made a 52-weeks low and high of $3.160 and $3.970, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering bottom-line variability and high drawn facility. For valuation purposes, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Australian Agricultural Company Ltd (ASX: AAC), and others have been considered. Considering the cost-efficient strategies, improved cash flow scenario, and valuation, we give a ‘Hold’ rating on the stock at the closing market price of $3.530, up by ~0.284% as of 31 January 2022.

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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