Event Core
On 4 November 2021, the Australian Bureau of Statistics released figures on international trade in goods and services on an international trade basis and the balance of payments. Over the September 2021 period, the balance on goods and services surplus took a sequential hit and declined by $2,496 million and stood at $12,253 million. Exports plunged by 6% to $44,969 million, primarily driven by a substantial fall in iron ore prices. Imports slid by 2% to $32,725 million in consequence of continued global supply chain disruption.
Latest Updates on International Trade in Goods and Services
The shortfall in Balance of Goods and Services Surplus: During September 2021, the balance of goods and services shrunk by $2,496 million, considerably driven by a 6% sequential fall in total goods exports which stood at $44.97 billion, partially offset by diminished imports of goods and services by 2%.
Export Tailed Off as Metal Prices Plunge: The 6% shortfall in total goods exports was considerably driven by a 6% plunge in non-rural goods, primarily attributed to a 23% decline in metal exports (excluding non-monetary gold) and 16% decline in metal ores and minerals exports. However, rural goods remained at elevated levels and clocked $5,158 million.
Imports Tumbled in the Back of Consumption Goods: The total goods import slipped by $777 million or 3% and stood at $28.22 billion. The substantial impact was driven by a 10% decline in consumption goods led by non-industrial transport equipment, which plunged by $971 million relative to a record high in August 2021. On the other hand, total services imports increased by $191 million, primarily driven by $176 million from freight transport.
Figure 1: Balance of Goods and Services Maintains an Upward Move Despite Short-Term Disruptions
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Australia’s Resilient Export Industries
Australia’s Links Across the Asian Region: Australian trade accounts for 40% of nominal GDP, and 12 of Australia’s top 15 trading partners are from the Asian region. China remains Australia’s largest trading partner, accounting for circa 31% of total trade in 2020. In addition, Japan and Korea continue to be crucial trade partners, contributing circa 13% of total trade.
Australia is Diversifying Exports with Technology Industry: As per the Export Council of Australia, technology turned into the fourth-largest export sector, valued at $8 billion in 2018. The new research by Accenture and the Tech Council claims that the technology industry generated $167 billion for the economy in 2021, making technology now the third-largest contributor to exports behind mining and finance.
Industries to Resume Uptrend Post Short-run Hiccups
Resources and Energy Exports in Expansionary Zone: As per the Office of the Chief Economist, Australian resource and energy exports are expected to clock $349 billion million in FY22 from a high of $310 billion in FY21. However, a potential downturn in metal and oil prices may disrupt the recent peaks.
Figure 2: Volumes are Well Supported by Surging Mining Exploration Activities
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Contribution of Australian Agricultural Exports: Exports to Australia’s eight most important export markets in Asia increased by 62% and accounted for $33 billion over the last 20 years to FY20. China remains Australia’s largest export market for agricultural, fisheries, and forestry products, exporting $16 billion export value in FY20.
Travel Industry Enters Recovery Phase: Total count of arrivals for September 2021 stood at 20,860, a decline of 6,120 trips on a sequential basis as concerns over Delta virus surges. A positive trajectory in travel was witnessed between March 2021 and May 2021 due to the gradual easing of containment measures. Total overseas departures were recorded at 31,760 in September 2021 relative to a recent peak of 107,230 in May 2021.
Key Risks and Challenges
Recent lockdowns and concerns over the Delta-variant of COVID-19 have posed a negative cascading effect on all Australian industries. The semiconductor shortage is expected to sustain until FY23 affecting auto manufacturing and hence metal demand. China’s manufacturing PMI trend continued downward, reaching 51.1 in August 2021, vastly affecting Australia’s international trade. The pandemic-related turmoil has significantly increased the shipping industry’s transit times and freight costs. Between May 2020 and June 2021, the global shipping prices for containers almost doubled. Recent unrest in the travel and tourism industry has disrupted the targeted labour market. Therefore, businesses like hotels, restaurants and transport might consider increased expenditures on building and educating their human resources.
Figure 3: Driving Factors Vs Restraining Factors
Source: Analysis by Kalkine Group
Outlook
Rebuilding Global Supply Chain: The connected and open two-way supply chains receive continued support from the $110 million investment allocation to International Freight Assistance Mechanism (IFAM) have kept vital trade links operational during the closed international doors.
Pursuit of FTAs with New Partners: Negotiations with potential trading partners, particularly with the European Union, United Kingdom, and India, to establish new Free Trade Agreements (FTAs) are underway. This would equip Australian markets with reduced tariffs and competitive products.
Significant Uplift in Energy Export Values Index: In September 2021 quarter, the Office of Chief Economist’s Resources and Energy Export Values Index surged by 49% PcP amidst a 3% increase in volumes and 47% gains from favourable price impact.
Improvements in Agricultural Exports: The value of agricultural exports is estimated to clock a record high of $54.7 billion in FY22, up by 12%. Crop exports are projected to make the most significant contribution to Agri-growth due to improved forecasted volumes and processes.
Support Package for Tourism and Aviation Sector: The Australian government announced a relief package of $1.2 billion for the aviation and tourism industry. The relief package is expected to support international passenger airlines in maintaining over 8,000 core international jobs.
Considering the developments in the balance of trade and exports, we have figured out four stocks on ASX that are set to see the momentum.
(1) Washington H Soul Pattinson & Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 11.65 billion, Annual Dividend Yield: 1.91%)
Merger with Milton Corporation Unfolds Diversification Benefits: 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 reported $273 million in statutory NPAT, up by 71% PcP. Primary bottom-line drivers were significant growth in building products and favourable land revaluations, which increased Brickworks’ contribution by almost 95%. In addition, substantial improvements in Round Oak, up by $103 million and robust recovery in the coal process improved New Hope’s profit contribution by 45% PcP.
SOL’s portfolio value rose by 12% PcP to $5.8 billion, while net cash from investments plunged 29% PcP to $180 million. Despite the decline in value of TPG, net asset value clocked 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. SOL’s net asset value was primarily driven by a 48.5% increase in Brickwork’s portfolio, 21.5% uptick in New Hope Corporation, partially offset by a 22.5% decline in the telecommunication portfolio.
Outlook: A merger with Milton Corporation will potentially improve net asset value by 56% to $9.08 billion and net cash flow from investments by 54% to $277 million on a pro forma basis. Further, the merger is expected to amplify diversification benefits via contracting the reliance on Brickwork’s, telecommunications, and New Hope portfolios with Large Caps.
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 ~10.503%. The stock made a 52-weeks’ low and high of $26.130 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 of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers’ average EV/Sales multiple, considering improved net asset value and bulged bottom-line. For valuation, peers like Santos Ltd (ASX: STO), Ampol Ltd (ASX: ADL), Woodside Petroleum Ltd (ASX: WPL) have been considered. Given the improved net asset value, potential diversification benefits bulged pro-forma net cash flow from investments, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $31.970, as of 08 November 2021, at 11:26 AM (GMT+10), Sydney, Eastern Australia.
(2) Castillo Copper Limited (Recommendation: Speculative Buy)
(M-cap: A$ 46.72 million, Annual Dividend Yield: 0.00%)
Improved Project Developments Pushes CCZ Close to Commercialization Opportunity: Castillo Copper Limited (ASX: CCZ) is engaged in exploring base metals such as copper, nickel, and cobalt. In FY21, CCZ’s drilling at the Big One Deposit explored high-grade shallow copper mineralisation. During the period, CCZ reported a net loss of 1.624 million relative to 1.842 million in FY20. The company reported a $10.855 million cash balance as of 30 June 2021 relative to $3.130 million as of 30 June 2020. Comprehensive soil sampling campaigns across Mkushi Projects and Luanshya delineated numerous areas for copper mineralisation. Cangai Copper Mine and BHA Project are fully optimised to ensure the New South Wales assets. Substantial support from current and the new UK and Australian shareholders for fund-raising activities exceeded expectations.
Key Business Updates: On 27 October 2021, CCZ announced a comprehensive site visit for testing all known pegmatites at the Picasso Lithium Project. As announced on 25 October 2021, up to 14 drill targets were identified at the Luanshya Project post-IP survey. As announced on 20 October 2021, CCZ ran a comprehensive surface sampling campaign at Litchfield Lithium Project. As announced on 18 October 2021, CCZ inaugurated a drilling campaign at Arya Copper Prospect following a massive logistical effort in preparing and heli-lift the rig and other supporting equipment and drill pads.
Outlook: Copper value has inclined significantly due to the resurgence in manufacturing activities, especially in China. Increased sales of electric vehicles have proliferated lithium demand substantially. Favourable developments in Luanshya Project and Litchfield Lithium Project pushes CCZ near commercialisation targets.
CCZ Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CCZ went up by ~6.061%. The stock made a 52-weeks’ low and high of $0.028 and $0.083, respectively. On a TTM basis, the stock of CCZ is trading at a Price/Book Value multiple of 2.6x lower than the industry average (Basic Materials) of 318.8x. This indicates the stock is undervalued. Considering surged demand for lithium, favourable copper price movements, and TTM valuation, we give a “Speculative Buy” recommendation on the stock at the closing price of $0.035, down by ~2.778%, as of 08 November 2021. However, investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and consider associated risks such as absent top-line and high liquidity risk.
(3) Qantax Airways Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 10.59 billion, Annual Dividend Yield: 0.00%)
Recovery in Tourism and Travel Industry Unfolds Resurgence Opportunities: Qantas Airways Limited (ASX: QAN) operates in the aviation industry and provides airline services for international and domestic travel and offers freight services. In FY21, QAN reported $5.934 billion in revenue and other income, relative to $14.257 million in FY20. Strict containment measures and border closures primarily drove the loss of revenue. Consequently, the operating margin stood negative at 25.7% relative to +2.8% in FY20. Total unit costs increased to 15.94c/ASK from 8.87c/ASK.
QAN stood at $3.8 billion of total liquidity and $5.9 billion in net debt. Underlying EBITDA stood at $410 million. Cash balance contracted to $2.221 billion as of 30 June 2021 relative to $2.606 billion as of 31 December 2020. The contraction was primarily driven by $557 million debt repayments, $837 million in one-off payments, partially offset by $1.312 billion in underlying operating cash flows.
Business Update: As announced on 22 October 2021, Jetstar and QAN are set to restart and increase international flights frequency to popular destinations from Sydney and commence regular flight operations to Delhi. As announced on 15 October 2021, QAN entered into sale agreements for the $802 million worth of 13.8 hectares of land in Mascot. Settlements for the same are expected to occur in H1FY22.
Outlook: Domestic demand stood firm in Q421, signalling rebound as borders reopen. Domestic travel initiation in the next 12 months has rebounded considerably at 96% of customers surveyed. Partnership with Emirates will deliver an extended customer base and improved capacity share.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
QAN Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of QAN went up by ~4.651%. The stock made a 52-weeks’ low and high of $4.200 and $5.970, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a high single-digit (in percentage terms). The stock might trade at some premium compared to its peers' average EV/Sales (NTM trading multiple). given a positive signal from demand rebound in Q4FY21 and prudent liquidity position. For valuation, peers like Alliance Aviation Services Ltd (ASX: AQZ), Wiseway Group Ltd (ASX: WWG), Silk Logistics Holdings Ltd (ASX: SLH) have been considered. Given profound rebound signals, secured deal for Mascot land sale, initiative with Jetstar to improve international flights’ frequency, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $5.850, up by ~4.092% as of 08 November 2021.
(4) Tassal Group Limited (Recommendation: Hold, Potential Upside: Single High-Digit)
(M-cap: A$ 747.62 million, Annual Dividend Yield: 4.00%)
Financial Results: Tassal Group Limited (ASX: TGR) is engaged in farming Atlantic salmon and tiger prawns and processing and marketing salmon, prawns, and other seafood. During FY21, revenue touched $594 million, up by 5.6% because of a 16.3% surge in the salmon harvest, which touched 40,000 tonnes. Retail volume growth for MAP and smoked salmon stood at 27.7% and 19.5%, respectively. As a result of infrastructure upgrades and operation optimisation strategies, development costs stood at $0.33/kg, and production savings clocked $1.45/kg across prawns and salmon.
Operating EBITDA was marginally up by 0.6% and stood at $139.4 million. The uptick was primarily driven by an increase of $6.8 million in export salmon volume, $8.3 million in prawns’ volume and an astonishing $12.4 million in production cost efficiencies, offset by $21.4 million salmon price variance and $3.0 million in prawn price variance. Operating cash flows were up by 22.4%, recording $61.0 million due to biomass growth translating to a higher top-line. Inventory balance stood high as a sustainable level of prawn inventory was built, and frozen hog in salmon was held. As a result, capex reduced to $105.9 million relative to $138.7 million in FY20.
Outlook: The company expects prawns’ production to remain on track for 5,000 tonnes in FY22 with a limited growth capex requirement. TGR expects to achieve ~40,000 hog tonnes of salmon production in FY22 and ~41,000 in FY23. TGR involved the salmon replacement and capex upgrade of ~$45-50 million/annum to house the expected production levels.
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 down by ~3.371%. 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 high single-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s average EV/Sales multiple, considering improved production levels and sustainable inventory levels. For valuation, peers like Elders Ltd (ASX: ELD), Bubs Australia Ltd (ASX: BUB), Australian Agricultural Company Ltd (ASX: AAC) 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 price of $3.440, down by ~1.715% as of 08 November 2021.
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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