I. Sector Landscape

Australia’s industrial and logistics sector is prospering on the back of surged construction, transport, and manufacturing activities. Construction activities amplified in 2021 with the rising development of non-residential and new-residential buildings. The improved value of work reinforced engineering activities commenced in roads, highways & subdivisions, bridges, and railways. The modern manufacturing strategy, a whole-of-government strategy, is well-positioned to scale Australian manufacturing activities.

Key Driving Factors from Macro Perspective

Improved Final Demand: Australia's final demand, measuring the price change of products, expanded by 1.3% in the December 2021 quarter and increased by 3.7% over the past 12-months. Building construction output increased by 2.9% amid ongoing high demand for housing and builders, passing the burden of rising labour and material costs. Heavy and civil construction surged by 1.4% amid a rise in oil, steel, and labour costs.

Figure 1: Increased Final Demand on the Back of Growth in Construction and Petroleum Industries

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

Resilient Business Turnover Indicator: In November 2021, ABS claimed an increase in business turnover in 12 out of the 13 published industries on a seasonally adjusted basis. Businesses in the manufacturing segment clocked a monthly business turnover increase of 1.9% sequentially and a 13.1% PcP increase. Transport, postal, and warehousing rose 7.0% on a sequential basis and 28.4% compared to last year.

Raised Employment: Employment increased in December 2021 by 65,000 people; as a result, employment shrunk by 0.5 ppts or 4.2%. This was the lowest unemployment rate witnessed since August 2008. The increased employment was followed by similar-sized unemployment of 62,000 people or a 9.8% decline. As a result of similar movements in employment and unemployment, the participation rate stood steady at 66.1%.

Improved Statistics on Construction and Materials Industries

Private New Capital Expenditure: In September 2021 quarter, total new capital expenditure advanced by 12.9% PcP and clocked $32.70 billion. Subsequently, capital expenditure in buildings and structures advanced to $16.92 billion, up by 9.0% PcP, and equipment, plant, & machinery edged up to $15.78 billion, up by 17.4% PcP.

Figure 2: Rebound in Capex Activities from September 2020 Low

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

Surging Buildings Approval: On a seasonally adjusted basis, the total dwellings approved surged by 8.2% and clocked 17,698 units. On a monthly basis, private sector houses fell by 1.8%, while private sector dwellings (excluding houses) inclined by a significant 27.5%. The total value of residential building approved stood at $7.46 billion, up by 7.8% sequentially.

Substantial Updates in Price Indices: In December 2021 quarter, the export price index of coal, coke and briquettes advanced substantially by 51.9%, primarily driven by inclining global demand for coking and thermal coals. The export price index for non-ferrous metals surged by 9.5%, owing to improved manufacturing demand as mobility constraints gradually lifted.

Resurgence Sought in Logistics

Key Statistics Favoring Transportation Industry: In December 2021, the import of freight transport surged by $48 million and clocked $1.88 billion in import value. The monthly business turnover of transport, postal, and warehouse services increased substantially in the past four months and clocked a 7.0% monthly increase in December 2021.

Increased Freight Costs: In December 2021, water freight transport prices expanded by 34.4% (or +150.9% over the past 12-months), owing to the ongoing congestions at ports caused by COVID-19 related delays, especially across Asian and European regions. Moreover, road freight transport prices surged by 1.5% sequentially or 3.9% over the past 12-months, owing to surged labour and fuel costs.

Index Performance:

The ASX 200 Industrials (GIC) Index posted 10-year returns of ~+72.19% compared to ~+66.73% by the ASX 200 Index. Increasing government spending on infrastructure, expansion in private capital spending, improving construction output, and favourable economic stance has contributed to the sector growth.

Figure 3: The ASX 200 Industrials Index (GIC) outperformed the ASX 200 Index in the past ten years by ~5.46%:

Source: REFINITIV as of 3 February 2022

Key Risks and Challenges

The Australian materials industry may witness a gradual decline in business turnover due to decreasing Chinese coal consumption and dampened steel production. Construction activities took a recent hit, as illustrated by a 0.3% decline in September 2021 quarter, wherein building work fell by 0.9%. The current supply chain disruptions are expected to stand intact in the short term. Strikes have continued in Australian ports, bolstering supply delays and surging prices. Primary metal and metal production has shrunk due to increased input costs and decarbonisation policies in China, promoting supply pressures.

Figure 4: Key Drivers V/S Key Constraints

Source: Analysis by Kalkine Group

Outlook

Improved Estimates for Capital Expenditure: As per the Australian Bureau of Statistics, the total private new capital expenditure is expected to clock $138.6 billion, an upward revision of 8.7% over the previous estimate.

Improved Labor Supply: In December 2021, the unemployment rate was shredded to 4.2% and the employment to population ratio expanded to 63.3%. During the period, the monthly hours worked increased by 18 million hours.

Modern Manufacturing Strategy: To support industrial resurgence and up-scale international competition, the government rolled out the Modern Manufacturing Strategy and infused $1.5 billion in new funding for the next four years.

Government Infrastructure Investment Plan: The government holds a robust infrastructure roadmap for Australia to amplify tender offers for the construction and materials industry.

Supply Chain Resilience Initiative: Round 2 of the Supply Chain Resilience Initiative has commenced, under which businesses are facilitated with up to $2 million to scale or establish a manufacturing capacity.

II. Investment theme and stocks under discussion (SEK, FBU, RWC, AZJ)

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: SEK (Seek Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$10.47 billion)

SEK offers online employment marketplace services to candidates and recruiters, education services to working professionals and students, and invests in early-stage ventures (ESVs) involved in human resource management.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 17.39% on 03 February 2022. Moreover, the stock might trade at a slight premium compared to its peers' average EV/Sales (NTM trading multiple), given the improved cash levels due to divestment in Zhaopin and favourable operational performance in FY21. For valuation, peers such as REA Group Ltd (ASX: REA), Carsales.Com Ltd (ASX: CAR), Uniti Group Ltd (ASX: UWL) have been considered. Given the favourable operating conditions, high revenue, and EBITDA expectations from FY22, decent capital expenditure structure, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $28.855, as on 03 February 2022, at 01:13 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 0.67%.

SEK Daily Technical Chart

Source: REFINITIV

2. ASX: FBU (Fletcher Building Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$4.95 billion)

FBU is engaged in the manufacturing and distributing of building materials for residential and commercial construction.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 16.14% on 03 February 2022. However, the stock might trade at some discount compared to its peers' average EV/Sales (NTM trading multiple), given the potential increase in interest rates and recent decline in construction work done. For valuation, peers such as CIMIC Group Ltd (ASX: CIM), Monadelphous Group Ltd (ASX: MND), NRW Holdings Ltd (ASX: NWH), and others have been considered. Given the favourable top-line, efficient operating metrics, diversification across the ANZ region, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $6.040, down by ~1.308% on 03 February 2022. In addition, the stock has delivered an annualised dividend yield of 3.95%.

                                            

FBU Weekly Technical Chart

Source: REFINITIV

3. ASX: RWC (Reliance Worldwide Corporation Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$4.13 billion)

RWC is engaged in designing, manufacturing, and supplying water flow control and monitoring products and solutions for the plumbing & heating industry.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 17.48% on 03 February 2022. However, the stock might trade at a slight discount compared to its peer average EV/Sales (NTM Trading multiple) given high input costs and potential decline in volume. For valuation, peers such as CIMIC Group Ltd (ASX: CIM), GWA Group Ltd (ASX: GWA), Monadelphous Group Ltd (ASX: MND), and others have been considered.  Given the surge in operating cash flows, higher cash dividends, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $5.170, as of 03 February 2022, at 2:25 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.48%.

RWC Daily Technical Chart

Source: REFINITIV

4. ASX: AZJ (Aurizon Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$6.68 billion)

AZJ is one of Australia’s leading rail freight operators that provide integrated freight and logistics solutions across an extensive national rail and road network.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 11.21% on 03 February 2022. Moreover, the stock might trade at a slight premium compared to its peers' average EV/Sales (NTM trading multiple), given improved infrastructure support from the government and mounting growth in the bulk segment. For valuation, peers such as Qube Holdings Ltd (ASX: QUB), Kelsian Group Ltd (ASX: KLS), Camplify Holdings Ltd (ASX: CHL), and others have been considered. Given the growth expectations in the coal and bulk segment, favourable bottom-line guidance, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $3.660, up by ~0.826% on 03 February 2022. In addition, the stock has delivered an annualised dividend yield of 7.93%.

AZJ Weekly Technical Chart

Source: REFINITIV

Note: All the recommendations and the calculations are based on the closing price of 03 February 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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