I. Sector Landscape
Australia’s consumer staples and discretionary sector broadly encompasses food products, food processing, household products, food retailing, footwear & accessories, clothing, online retailing, and department stores. 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.
Pent-up Consumer Demand Highlighted by Soaring Retail Trade
Increased Retail Turnover: As per the Retail Trade issue released by the Australian Bureau of Statistics (ABS), the retail turnover increased by 7.3% sequentially (+5.8% PcP) and stood at $33.41 billion in November 2021. This follows a consecutive rise of 4.9% in October 2021 and 1.3% in September 2021, following a fall of 1.7% in August 2021.
Figure 1: Monthly Total Retail Turnover and Growth Rate
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Easing of Containment Restrictions: Continued easing of COVID-19 restrictions, including capacity limits and less strict density, New South Wales (NSW) experienced +5.1%, and Australian Capital Territory (ACT) experienced a 19.2% uptick in retail turnover, clocking record levels. Apart from Northern Territory, other jurisdictions also clocked record levels. Retail turnover in Northern Territory fell by 2.7% as lockdown restrictions were introduced.
Favourable Industry Specific Outcomes: Extended November sales period witnessed record sales, highlighting upside in retail turnover of 38.2% PcP increase in clothing footwear & personal accessory retailing, 11.6% increase in household goods retailing, 26.0% increase in department stores, and 7.3% increase in other stores retailing. Food retailing stood as the only industry with a downturn of 2.5%, primarily attributed to the post-lockdown pattern of sales cannibalization via cafes, restaurants & takeaway industry (up by 9.3%).
Figure 2: Monthly Turnover Growth by Industry
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Improved Performance Expected from Agricultural Industry
Agriculture Production Value to Clock Historic Heights: Despite the recent rain and flood damage, mostly in eastern states, the December 2021 quarter is estimated to embark upon a historic high in gross value agricultural production of $78 billion, revised upwards by $5.4 billion. Production is estimated to incline YoY for almost every major crop commodity and every major livestock commodity.
Indonesia’s Booming Food Market to Support Australian Agriculture: The Australian Bureau of Agricultural and Resource Economics (ABARES) expects food demand to quadruple by 2050 on the back of rapid growth in Indonesia’s demand for the higher value and more diverse foods such as dairy, meat, fruit, and vegetables. Additionally, Indonesia gradually recognizes that domestic production and food imports hold equally essential roles in food security.
Index Performance
The ASX 200 Consumer Staples (GIC) Index and The ASX 200 Consumer Discretionary Index (GIC) Index posted 5-year returns of +41.64% and +58.97%, respectively. Changing consumer preferences, increasing millennials, elevated household spending, and resilient online retailing are supportive factors driving sector gains.
Figure 3: The ASX 200 Consumer Staples (AXSJ) and The ASX Consumer Discretionary (AXDJ) outperformed the ASX 200 Index in the past five years by whopping ~11.80% and ~29.13%, respectively.
Source: REFINITIV as on 20 January 2022
Key Risks and Challenges
Household spending slipped by 4.8% in September 2021 quarter, and spending on services shrunk by 5.8%, affected by movement and trading restrictions. Gross value added by retail and wholesale trade witnessed a downside of 3.4% and 5.4%, respectively (on a QoQ basis). Recent disruption in the global supply chain may vastly affect retail and wholesale trade in both traditional retail and online marketplace. The limited availability of skilled and unskilled labour will challenge the Australian agriculture industry. Demand for skilled labour has elevated, adding additional pressure on Agribusinesses. Australia’s agricultural industry holds an under-diversified portfolio of trade partners while highly dependent on Chinese demand.
Figure 4: Key Drivers V/S Key Constraints
Analysis by Kalkine Group
Outlook
Total Online Retailing at Elevated Levels: Online retail turnover continues to maintain elevated levels despite the resurgence of brick-and-mortar stores following lockdowns. Online retailing turnover surged by 22.8% PcP in November 2021.
Increased Value of Agriculture Export: The agricultural exports value is forecasted to register $61 billion in FY22, an upward revision of $6.5 billion from previous estimates. Higher export prices and volumes are estimated for almost all the major export commodities.
Favourable Estimates for Winter Crop Production: The Australian winter crop production is estimated to record 58.4 million tonnes for FY22. Production in wheat and canola are estimated to register 34.4 million tonnes and 5.7 million tonnes, respectively.
Growing Ecommerce Market: Australia is estimated to clock US$32.3 billion in revenue in the e-commerce market by 2024, according to International Trade Administration U.S. Department of Commerce. The growth in the e-commerce space has delivered significant support to discretionary consumption.
Promoting Digital Infrastructure: The Government has announced several digital development initiatives, from an information technology and telecommunication standpoint, to boost e-commerce and online sales development.
II. Investment theme and stocks under discussion (ABY, ING, WEB, PTL)
After understanding the sector, let us now look at four 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: ABY (Adore Beauty Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$343.55 million)
ABY is a pure-play online beauty products retailer in Australia. Its products include skincare, make-up, haircare, fragrance, wellness, and other related beauty products.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.67% on 20 January 2022. The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given favourable market opportunities and an exponentially increasing customer base. For valuation, peers such as Temple & Webster Group Ltd (ASX: TPW), Redbubble Ltd (ASX: RBL), Mydeal.Com Au Ltd (ASX: MYD), and others are considered. Given the revenue uptick, growth estimates for the online BPC market, the turnaround in cash flows, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $3.360, down by ~7.946% as of 20 January 2022.
2. ASX: ING (Inghams Group Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.22 billion)
ING is engaged in producing and selling chicken and turkey products across its vertically integrated production system.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of 19.92% on 20 January 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple) considering the reduced net debt levels and process improvement measures. For valuation, peers such as Elders Ltd (ASX: Elders Ltd), Ridley Corporation Ltd (ASX: RIC), Tassal Group Ltd (ASX: TGR), and others are considered. Given the favourable financial performance, increased poultry volumes, production-specific initiatives, and upside indicated by valuation, we give a "Speculative Buy” recommendation on the stock at the current market price of $3.240, as of 20 January 2022, at 11:11 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 5.07%.
3. ASX: WEB (Webjet Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$2.05 billion)
WEB is engaged in the digital travel business of travel bookings, including flights and hotels. The company has two business segments, namely, WebBeds (B2B), Webjet OTA (B2C), and Online Republic (B2C).
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 11.12% on 20 January 2022. The stock might trade at some discount compared to its peers’ average EV/Sales (NTM trading multiple), given the potential risk of COVID-19 on the travel industry and changing consumer behaviour. For valuation, peers such as Jumbo Interactive Ltd (ASX: JIN), Aristocrat Leisure Ltd (ASX: ALL), Corporate Travel Management Ltd (ASX: CTD), and others have been considered. Given the prudent financial position, the structural shift towards online platforms, and valuation, we give a “Hold” recommendation on the stock at the closing market price of $5.210, down by ~3.519% on 20 January 2022. In addition, the stock has delivered an annualised dividend yield of 4.32%.
4. ASX: PTL (Pental Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$68.18 million)
PTL is engaged in the manufacturing and distributing personal care and home products.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of 8.38% on 20 January 2022. However, the stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple) given high working capital requirements due to the constantly changing product mix. For valuation, peers such as Metcash Ltd (ASX: MTS), Graincorp Ltd (ASX: GNC), Ricegrowers Ltd (ASX: SGLLV), and others are considered. Given high sales expectations, Duracell distribution agreement, low debt levels, and valuation, we give a “Hold” recommendation on the stock at the closing market price of $0.405, up by ~1.250% on 20 January 2022. In addition, the stock has delivered an annualised dividend yield of 6.50%.
Note: All the recommendations and the calculations are based on the closing price of 20 January 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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