I. Sector Landscape
Australia didn’t face food security issues during the height of the pandemic despite temporary shortages in some of the food items in supermarkets. As per The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Australia ranked 10th in the world for food availability and 7th for food affordability in the Global Food Security Index. The nation produces more than it consumes, with exports clocked at 71% of the agricultural produce. The majority of food and beverages consumed are locally sourced. Imports constituted merely 11% of food and beverage spend.
Retailing in Australia gained prominence during the lockdown with increasing online shopping and resurgence in spending on non-perishable goods and cleaning products. Retail trade achieved decadal growth of 3.4% in the gross value added, far ahead of the all-industry average of 2.9% per annum.
Key Statistics Supporting Consumer Staples:
The total value of exports of agriculture, fisheries, and forestry products reached $48.28 billion in 2019-20 (nominal value basis), slightly down from $48.58 billion reported in the previous year. Increasing livestock prices continue to drive export values. But this was overshadowed by drought conditions and bush fire incidents during 2020. As per the recent report, ABARES has upwardly revised the agricultural production by $400 million for 2021. Faster than expected grain exports following a near-record winter crop production may lift the production reaching over $66 billion in 2021.
Figure 1: Break-up of Agri Exports and Trend:
Source: Based on The Australian Bureau of Agricultural and Resource Economics and Sciences, Analysis by Kalkine Group
The gross value of crop production is expected to fall in 2021-22 to over $33 billion from the record numbers seen in 2020-21. Prices of all grains are forecasted to fall in 2021-22, according to ABARES. Nevertheless, increasing Chinese demand in the second half of 2021 and global production concerns have seen prices of wheat, barley and canola revised upwards since March 2021.
Figure 2: Prices of Crops and Livestock in 2021-22:
Source: Based on The Australian Bureau of Agricultural and Resource Economics and Sciences, Analysis by Kalkine Group
Key Statistics Supporting Consumer Discretionary:
Driven by a sequential dip in the unemployment rate and increase in compensation paid to employees, household spending rose 1.1% in June 2021 quarter, but it is yet to reach pre-COVID levels. Spending on services outpaced goods with 1.3% (on QoQ) growth led by spending on transport services, hotels, cafes, and restaurants. But the prevalence of delta variant and prolonged lockdown, particularly in New South Wales, affected consumer sentiments. Due to this, retail sales fell 2.7% in July 2021 (month-on-month basis). Takeaway food chains, clothing, footwear and personal accessories, and, department stores were the worst hit. Food retailing provided silver lining with +2.3% growth due to mobility restrictions.
Figure 3: Retail Sales by Industry Group:
Source: Based on The Australian Bureau of Statistics, Analysis by Kalkine Group
With the closure of physical stores, online sales gained traction. As per the data by The Australian Bureau of Statistics, total online sales rose 11.6% in June 2021 (month-on-month basis) to reach ~$3.1 billion. It should be noted that online sales deteriorated in May 2021 by 4.5%. Both food and non-food categories showed strong recovery, with online food sales inclined by 10.8%, and non-food was up by 12.0% over the preceding month.
Index Performance
The ASX 200 Consumer Staples (GIC) Index and The ASX 200 Consumer Discretionary Index (GIC) Index posted 5-year returns of +53.92% and +59.71%, respectively. Changing consumer preferences, increasing millennials, rising household income, and favourable agricultural prospects are supportive factors driving sector gains.
Figure 4: The ASX 200 Consumer Staples (AXSJ) and The ASX Consumer Discretionary (AXDJ) outperformed the ASX 200 Index in the past five years by whopping ~15.89% and ~21.68%, respectively.
Source: REFINITIV as on 09 September 2021
Key Risks and Challenges
The weekly ANZ-Roy Morgan Consumer Confidence Index fell slightly by 1.8% to 100.0 for the week ending August 29, 2021. It was lower than the four-week average of 101.1. Prolonged lockdown in Victoria and NSW pulled down the index. Total wages paid declined by 2.7% for the fortnight period ending July 31, 2021. In addition, payroll jobs fell 2.0% as compared to a decrease of 1.8% in the previous fortnight period. Lower wages and payroll may dissuade household spending. Livestock export volumes are expected to likely be affected by the herd and flock rebuilding activities impacting meat production to record lows. African swine fever and the Chinese import ban on meat are likely to affect the export growth.
Figure 5: Key Risks and Challenges in the Staples and Consumer Discretionary Sector:
Source: Analysis by Kalkine Group
Outlook
The gross value of agricultural production has been revised upwards by $1.7 billion to $65 billion in 2021-22, according to ABARES in the recent data. Crop and livestock production have been upwardly revised. There is a favourable outlook for seasonal conditions in the autumn of 2021 that supports crop prospects and pasture production. Farm cash income is projected to remain at record high levels at $21 billion in 2021-22 despite rising input costs. Agricultural exports are expected to reach $49.7 billion, an increase of 6% from 2020-21 levels, aided by an increase in beef, wool and dairy exports and recovery in cotton exports. In the data by Australian Post, online shopping surged 27% in the twelve months ending July 31, 2021, over the last year, aided by lockdowns and stay-at-home protocol. In the recent budget, the government has committed $1.2 billion with the aim of becoming a digital economy by 2030. This is expected to boost digital infrastructure and accelerate online shopping.
II. Investment theme and stocks under discussion (GUD, NZK, OLL, TGR)
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 methods.
1. ASX: GUD (G.U.D. Holdings Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.00 billion)
GUD is involved in automotive aftermarket products with operations spread across Australian and New Zealand markets.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.39% on 9 September 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given significant top-line growth and market share capture. For the purpose of valuation, peers such as Vmoto Ltd (ASX: VMT), Apollo Tourism & Leisure Ltd (ASX: ATL), Dusk Group Ltd (ASX: DSK) have been considered. Considering the strong market position, surging organic growth, and valuation, we give a “Buy” recommendation on the stock at the market price of $10.05, as of 9 September 2021, at 12:54 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 5.63%.
2. ASX: NZK (New Zealand King Salmon Investments Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$188.32 million)
NZK is involved in aquaculture production of the premium king salmon species.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 15.98% on 9 September 2021. The stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given NZK’s sales expectations. For the purpose of valuation, peers such as Tassal Group Ltd (ASX: TGR), Huon Aquaculture Group Ltd (ASX: HUO), Costa Group Holdings Ltd (ASX: CGC) have been considered. Considering the resurgence in supply chain, move into the open ocean, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.350, down by ~0.370% as of 9 September 2021.
3. ASX: OLL (Openlearning Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$23.78 million)
OLL is an Australian-based company that operates in online cloud learning platform.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 17.60% on 9 September 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given extensive product investments and improving top-line. For the purpose of valuation, peers such as Livetiles Ltd (ASX: LVT), Skyfii Ltd (ASX: SKF), Nearmap Ltd (ASX: NEA) have been considered. Considering the intakes in 2021, product investment strategy, inclination towards online platforms, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.125, down by ~13.79% as of 9 September 2021.
4. ASX: TGR (Tassal Group Ltd)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$768.67 million)
TGR is engaged in farming Atlantic salmon and tiger prawns and the processing and marketing of salmon, prawns, and other seafood.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 7.69% on 9 September 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given improved production levels and sustainable levels of inventory. For the purpose of valuation, peers such as Bubs Australia Ltd (ASX: BUB), Clean Seas Seafood Ltd (ASX: CSS), Huon Aquaculture Group Ltd (ASX: HUO) have been considered. Considering the cost-efficient strategies, improved cash flow scenario, and valuation, we give a “Hold” recommendation on the stock at the current market price of $3.560, down by ~1.66% as of 9 September 2021. In addition, the stock has delivered an annualised dividend yield of 3.93%.
Note: All the recommendations and the calculations are based on the closing price of 9 September 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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