I. Sector Landscape
Australia’s Industrials and Materials sector broadly encompass metals & mining and building & construction industries. In 2020, the mining industry assumed a dominant contribution to Australia’s gross value added (GVA), 11.0% contribution. Construction and manufacturing industries accounted for 7.4% and 5.9% contributions to a total GVA of $1,808 billion. During extreme pandemic times, the Australian government made heavy investments towards infrastructure and mining activities to hold the country’s GDP afloat.
Construction and Building Activities
Capital Expenditure: In consequence of government-led infrastructure revival and other measures, the total private new capital expenditure surged by 6.3% QoQ in March 2021 quarter, and private new capex in buildings and structures surged by 3.8% QoQ, stood at $16.19 billion.
Key Statistics Illustrating Strength in Engineering Construction: Australia’s improved capital expenditure statistics across both private and public sectors provided engineering and construction activities support. For the March 2021 quarter, work done for the private sector rose by 3.6% PcP and stood at ~$13.40 billion. However, with the diversion of funds toward COVID-19 recovery, work done for the public sector declined by 1.8% on a sequential basis and stood at ~$8.34 billion. On an aggregate front, total work done in engineering construction grew to $21.75 billion, up by 0.4% on a sequential basis.
Construction Commencements Showcase Upswing in Building Activities: For the March 2021 quarter, the commencements of the new private-sector house increased by 5.9% QoQ and a significant +40.2% PcP. Thus, an exponential upswing was witnessed in private house dowelling commencements post-June 2020 quarter. For June 2021 quarter, the value of total dwelling units approved stood at ~$18.91 billion, a surge of 48.9% PcP, primarily driven by increased private sector projects.
Figure 1: Significant Government Support Boosting Building Activities:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
An Overview of Mining and Resources
Global Revival in Industrial Production Extends Support to Mining Industry: In March 2021 quarter, mining value-added surged by 0.7%, broadly from improved price supports in commercial metals. In the June 2021 quarter, The Office of the Chief Economist’s (OCE) resources and energy volume index rose 33% YoY.
Key Statistics in Mineral Exploration Activities: Total expenditure in mineral exploration has surged by 13.7% QoQ in March 2021 quarter and stood at $843.9 million. Drilling activities clocked 3.26 million meters, up by 10.6% on a sequential basis. Industrial production and economic growth are considerably rebounding amongst Australia’s key trading partners, raising demand for ferrous and non-ferrous metals.
Favourable Prices Exhibit a Significant Driving Factor: Prices of resources and energy products have driven significant export earnings for the industry. For example, iron ore outpaced the US$200/tonne mark, registering an all-time high, primarily due to the resurgence sought in the global steel industry, especially in China, and increased infrastructure investments.
Figure 2: Mining Exploration Soaring New Highs:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Transport and Supply Chain Infrastructure
Major Infrastructure Development Projects and Investments – Top 2019-20 developments include approval of 163 projects under the Building Better Regions Program, managing a $100 billion infrastructure pipeline encompassing NorthLink, Midland Highway Upgrade, Monaro Highway Upgrade and Monash Freeway Stage 2. Furthermore, the approval of 2,294 projects under the Stronger Communities Program represents $21.3 million in expenditure. As proposed in the FY22 budget, the government plans an investment of $110 billion over a ten-year period in the country’s transport infrastructure projects.
Figure 3: Key Investments and Initiatives towards Rail and Road Infrastructure:
Source: Analysis by Kalkine Group
Index Performance:
The ASX 200 Materials (GIC) Index has generated a 5-year return of ~103.97% as compared to ~37.20% by the ASX 200 Index. Increasing exports of resources sector, favourable support from the government to boost infrastructure, and recovering business sentiments drove the sector gains.
Figure 4: The ASX 200 Materials (GIC) Index Outperformed ASX 200 Index over a 5-yr Period with a Whopping ~66.77%:
Source: REFINITIV as on 12 August 2021
Key Risks and Challenges
Although the government has dispensed lucrative support via Supply Chain Resilience Initiative (SCRI), the supply chain disruptions may stay intact in the short term. Australia’s engineering and construction industry may face mounting risks from concurrent changes in technology and structural shifts post COVID-19. Mining revenues are highly sensitive to commodity prices which have recently fallen into a high volatility zone. An undiversified portfolio of trade partners may present high systematic risks for international trade. The growing use of scrap steel in China is expected to neutralize the soured demand for iron ore, adversely affecting export volume and price.
Figure 5 – Key Risks and Challenges in Industrials and Materials Sector:
Source: Analysis by Kalkine Group
Outlook
Figure 6 – Key Growth Drivers Presenting a Favourable Outlook:
Source: Analysis by Kalkine Group
Potential Up-tick in Total Capital Expenditure as per Estimates: The Australian Bureau of Statistics (ABS) amended an upward revision of total capital expenditure estimates to ~$124 million for FY21, up by 2.2% from previous estimates.
Modern Manufacturing Strategy: In support of recoveries and scale-up competition among Australian manufacturers, the Morrison Government has rolled out the Modern Manufacturing Strategy to infuse $1.5 billion in new funding in the next four years.
Recovery Sought in Transportation: As per a post-COVID report from Infrastructure Australia, the commute is on recovery with semi-permanent changes to mode choice and work-from-home with freight getting expensive with an increase in last-mile deliveries.
Positive Feedback on CRA: The 2020 Commonwealth Rent Assistance (CRA) data witnessed positive signs with as much as 1.7 million income units were receiving rental assistance from the government programs signifying financial assistance as a safety net.
Government Spending Towards Housing Affordability: The government estimated $8.4 billion to cushion the distressed housing factors and facilitate access to affordable and secure housing.
II. Investment theme and stocks under discussion (SGF, AMA, AZJ, MND)
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: SG Fleet Group Limited (SGF)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$889.21 million)
SGF is engaged in motor vehicle fleet management, consumer vehicle finance, leasing, and salary packaging services.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 17.24% on 12 August 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple), given the favourable impact of social distancing norms. For the said purposes, we have taken peers such as Brambles Ltd (ASX: BXB), Cleanaway Waste Management Ltd (ASX: CWY) and Ai-Media Technologies Ltd (ASX: AIM). Considering the improved operational efficiency, low leverage levels, and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.930, down by ~2.007%, as on 12 August 2021. In addition, the stock has delivered an annualised dividend yield of 3.42%.
2. ASX: AMA (AMA Group Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$362.06 million)
AMA is engaged in the auto repair and automotive parts market in the ANZ region.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.80% on 12 August 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple) given its wide geographic reach and benefits from acquisitions. For the said purposes, we have taken peers such as Brambles Ltd (ASX: BXB), BSA Ltd (ASX: BSA), Downer EDI Ltd (ASX: DOW), to name a few. Therefore, considering the lowering debt levels, strong liquidity position, the high realisation of synergies, and valuation, we give a “Speculative Buy” recommendation on the stock at the market price of $0.500, as on 12 August 2021, 11:18 AM (GMT+10), Sydney, Eastern Australia.
3. ASX: AZJ (Aurizon Holdings Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$7.27 billion)
AZJ is engaged in rail freight operations to connect miners, primary producers with international and domestic markets.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 10.63% on 12 August 2021. However, we believe that the stock might trade at a slight discount compared to its peer average EV/Sales (NTM trading multiple) given potential disruption in the supply chain. For the said purposes, we have taken peers such as Qube Holdings Ltd (ASX: QUB), Dalrymple Bay Infrastructure Ltd (ASX: DBI), and Camplify Holdings Ltd (ASX: CHL). Considering the prudent liquidity position, top-line incline amidst COVID-19 discrepancies, contract wins & acquisitions, and valuation, we give a “Hold” recommendation on the stock at the current market price of $4.000, up by ~1.265% as on 12 August 2021. In addition, the stock has delivered an annualised dividend yield of 7.20%.
4. ASX: MND (Monadelphous Group Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.08 billion)
MND is a major Australian engineering group engaged in providing construction, maintenance, and industrial services to the resources, energy and infrastructure sectors.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 11.96% on 12 August 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple), given the improved potential of resources and the engineering construction sector and decent revenue projections. For the said purposes, we have taken peers such as CIMIC Group Ltd (ASX: CIM), Lycopodium Ltd (ASX: LYL), Service Stream Ltd (ASX: SSM), to name a few. Considering the resilient cash flow, improved top-line, high growth prospects from engineering construction, and valuation, we give a “Hold” recommendation on the stock at the current market price of $11.140, down by ~2.708% on 12 August 2021. In addition, the stock has delivered an annualised dividend yield of 3.32%.
Note: All the recommendations and the calculations are based on the closing price of 12 August 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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