According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) for the quarter ended 30th June 2020 fell by 1.9%, representing the largest decline in the 72-year’s history of the CPI. The fall was primarily due to the provision of free child-care, which led to a significant decline of 95% in the CPI childcare expenditure class. The decline was also a result of a 19.3% drop in the price of automotive fuel and a fall of 16.2% in the pre-school and primary education category.
Initially, the Government had announced the access of free childcare services for families from 6th April 2020 to 28th June 2020, which was later extended to 12th July 2020. According to the ABS, childcare contributes 1.2% of household expenditure in the CPI and is measured through changes in the out-of-pocket expenses for families. For most of the June quarter, childcare out-of-pocket expenses were reduced to zero. Free childcare also impacted preschool and primary education during the June quarter, with before and after school care services also being free.
CPI Components with Positive Price Movements: Excluding the three negative components, namely, childcare, automotive fuel, and pre-school and primary education, CPI is up by 0.1% during the quarter, primarily on the back of increased spending on some consumer goods. Notably, during the June quarter, cleaning and maintenance products witnessed a rise of 6.2% in prices, other non-durable household goods, including toilet paper witnessed an increase of 4.5% in prices. Furniture prices increased by 3.8%, as consumers began to spend more on household items. Prices for major household appliances also increased by 3%, which seems to be a result of an increase in demand as the major chunk of the population remained indoors during the lockdown. Audio, visual, and computing equipment also witnessed a notable price rise of 1.8%.
PPI Highlights: Producer Price Index (PPI) fell by 1.2% during the June quarter. Over the past twelve months, the index went down by 0.4%, attributable to a drop of 30.1% petroleum refining and petroleum fuel manufacturing, a 36.7% decline in the childcare services category and a fall of 6.4% in other agriculture categories. Some of the positives during the quarter included, transport equipment category witnessing a rise of 3.6%, computer and electronic equipment rising by 3.1%, and motor vehicle and motor vehicle part manufacturing category witnessing a rise of 1.2%.
PPI (Source: ABS)
Clearly, the components of the Consumer Price Index express the pain of the economy that suffered a major setback during the initial months of COVID-19. An outbreak during March 2020 has left the global economy in a state wherein the rippling effects will take time to settle. As a series of restrictions were imposed to contain the virus, businesses began to witness increased financial pressure due to a steep fall in demand. A slowdown in demand across multiple sectors led to a decline in prices, which continued in April as well. However, continuous efforts of the Government enabled a speedy recovery and reopening of physical stores in May and June. While the demand for consumer essentials remained favourable even during the lockdown, other products furniture, consumer electronics, clothing & accessories, etc, began to witness increased demand post reopening of the economy.
Similarly, the Producer Price Index, too had to bear the brunt of the pricing pressures brought forward by COVID-19. Although some of the components discussed above witnessed a significant fall in prices, leading to a decline in PPI, one can expect a gradual recovery as Australia continues to lead the race of combatting the negative effects of COVID-19. Both prices and demand were eclipsed by the unprecedented economic turmoil during most of the June quarter. Recent trends in the economy are now telling a tale of recovery and success through collaborative efforts. Considering the continuous financial support from the Government, optimistic trends across several businesses, rebound in demand, and a careful check on health and safety norms, Australia does not seem too far from bringing the economy back on track.
The recent positive trends, however, continue to be threatened by the risks with respect to the second wave of COVID-19, which can delay economic recovery. Moreover, a complete recovery may not be possible until global economic conditions improve, and other economies of the world recover from the adverse effects of the pandemic. In addition, bilateral tensions between countries can slowdown the process of recovery.
In light of the above factors, let us now have a look at few stocks that offer a decent potential for growth, backed by a resilient business model, diverse market presence, decent fundamentals and an optimistic outlook in long run.
1. Worley Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 4.27 Billion, Annual Dividend Yield: 4.88%)
WOR Rides on Acquisition Synergies: Worley Limited (ASX: WOR) is a leading global professional services company that provides engineering design and project delivery services to energy, chemical and resources sectors. In a recent update, the company stated that it has purchased Ferrovial’s 50% shareholding of TW Power Services Pty Ltd for a cash consideration of $20 million, boosting its interest to 100%. For H1FY20, the company reported an aggregated revenue of $5,998 million in H1FY20, up 134% from the pcp. Further, the company reported Underlying EBITA of $366 million, up 126% on the pcp. For the half-year period, the company declared an interim dividend of 25 cents per share, up 100% on pcp.
Outlook: The company has a diversified revenue base with exposure to oil & gas capex, opex based contracts, chemicals and increased business in North America and Europe. It has also strengthened its liquidity position. The company is currently focused on simplifying its business to support its customers in a better manner, to drive new ways of working, to support the execution of strategies to deliver value, and to reduce the cost base. With a strengthened balance sheet and diversified business, the company seems to be well-positioned for future global energy requirements. Moving forward, the company expects energy efficiency and decarbonization of assets to drive its operating expenditure. WOR has a target gearing range between 25-35% and expects cost synergies of approximately $175 million within 30 months post ECR acquisition.
The company has the global technical and financial strength to support its Energy, Chemicals, and Resources customers as they navigate through the changing world. Looking ahead, the company’s energy efficiency and decarbonization of assets are expected to drive operating expenditure. The company is focused on simplifying its business to support the execution of its strategy to deliver value and to reduce its cost base. The company expects to achieve an operational savings target of $275 million (run rate) by the end of December 2021. The current medium-to-long term picture indicates that the global energy transition will open opportunities across all markets that the company serves.
Key Risks: The company is currently exposed to the risks of COVID-19 and a decline in oil prices as these factors could significantly impact Worley’s business environment. The impact of COVID-19 has created acute supply chain issues that have slowed some projects. In order to place itself better for the future, WOR is actively taking measures to align the cost base and deliver savings.
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WOR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last six months, the stock has corrected by 46.19% on ASX and is currently trading below the average of its 52-week trading range of $4.63 - $16.45. The company is focused on simplifying its business to support the execution of its strategy to deliver value and to reduce its cost base. Despite the challenges in the oil market, the stock price has been resilient on the back of a resilient and diversified business. Moreover, the medium-to-long-term growth in the stock price is expected to be backed by a rebound in oil prices and demand. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $7.820, down 4.632% on 3rd August 2020.
2. Audinate Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 385.23 Million, Annual Dividend Yield: NA)
Higher Adoption of Dante Enabled Products: Audinate Group Limited (ASX: AD8) is involved in the development of digital Audio-Visual networking solutions through its technology platform, Dante®. The company has recently released a trading update for the 12 months to 30 June 2020, wherein it reported unaudited revenue of ~$30.3 million, retaining a gross margin of approximately 77%. It also reported an unaudited EBITDA of ~$2.0 million. At the end of the period, the company had $29.3 million cash on hand. The strong growth in revenue is attributable to further penetration of Dante-enable products in key market segments. As on 30 June 2020, the company had 2,804 Dante enable products available for sale, up 31% year over year.
Outlook: The company remains on track to advance the constant delivery of mature chips, cards & modules products. The move aided the company to meet the increasing demand for its newly launched 147 Dante enabled products. The company conducted 77 webinars, including 25 in Chinese and 23 in five other non-English languages. Notably out of 120,000 people who attended the webinars, 40,000 AV professionals undertook Dante certification. Heading into FY21, the company predicts cash operating costs and capital expenditure to be in accordance with FY20.
In response to COVID-19, the company unveiled a wide range of marketing campaigns highlighting the benefits of Dante networking. These campaigns will continue to run during the first quarter of FY21. AD8 increased the marketing & training resources in Europe, China, and Latin America. In addition, the company opened a new office in Manila, Philippines and has recruited five Finance and Operations personnel to support the software transition of the Audio-Visual sector. Notably, prices of audio, visual and computing equipment increased by 1.8% in the June quarter. The company stands to gain from a positive movement, given its record achievement and growing revenue. Moreover, continued expansion and investment in R&D, and consistent product upgradation, is likely to continue in FY21. The company seems to be well-positioned to drive innovation throughout the Audio-Visual (AV) industry and capitalise on growth opportunities and support software transition in the AV space.
Key Risks: The performance of the company is impacted by manufacturing customers’ exposure to various sectors directly affected by government restrictions due to the outbreak of COVID-19. Government decisions have the potential to delay projects and reduce the near-term demand for Audinate’s technology.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs AD8 (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last six months, the stock has corrected by 34.38% on ASX and is currently trading close to the average of its 52-week trading range of $2.51- $9.3. While the company faced headwinds associated with COVID-19 and recovery timing is uncertain, it is confident in the strength of its technology and business model. The stock price has resilient so far, with stable movements over the last couple of months. At current trading levels, the stock depicts decent potential for growth, given the performance of the business and expected growth through continuous marketing initiatives. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $5.15, down 1.905% on 3rd August 2020.
3. Bapcor Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.12 Billion, Annual Dividend Yield: 2.8%)
BAP Rides on Robust Demand from Burson Trade Segment: Bapcor Limited (ASX: BAP) is engaged in the sale and distribution of motor vehicle aftermarket parts and accessories, automotive equipment and services, and motor vehicle servicing. During 1H20, revenue of the company went up by 10.4% to $702.5 million and EBITDA witnessed a growth of 4.6% to $79.4 million. In May and June 2020, the company’s Retail segment witnessed a robust demand, with Autobarn same store sales rising over 45% on a year over year basis. The year over year growth was achieved in both the company-owned stores and franchised stores.
Outlook: For FY20, the company expects net profit after tax (before significant items) in the range of $84 million to $88 million on the back of a decent performance of the business in the last two months of the year. However, this guidance is subject to normal year-end audit procedures. Further, Autobarn same store sales are expected to rise ~8% in FY20. Burson Trade same store sales growth is expected to be ~5%, owing to robust demand experienced by the company in May and June this year. The company has scheduled to release its FY20 results on 19th August 2020.
Due to the uncertainty regarding the future impact of COVID-19, the company had withdrawn the previously announced FY20 guidance. However, the company stated that its businesses have been performing in-line with its expectations and are on track to meet the guidance. The core Burson trade segment continued to report strong sales, with the retail segment also reporting a decent performance. The company is performing in line with expectations and is on track to reach full-year guidance. Bapcor is a resilient and financially solid business and is focusing on continued service through these difficult circumstances.
Key Risks: BAP’s business is exposed to competition risk, which arises due to the competitive nature of automotive aftermarket parts and accessories distribution industry of ANZ. The company’s growth is also sensitive to the increased bargaining power of customers and supplier pressure or relationship damage.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs BAP (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock gave positive returns of 31.51% on ASX and is currently trading above the average of its 52-week trading range of $2.85 - $7.525. The company is aiming for increased levels of cash on balance sheet to provide liquidity and flexibility in the current operating environment. Overall, the company has a resilient and financially sound business to withstand the current crisis. The recovery in performance during May and June reflects well in the price movements over these months, as depicted in the chart above. Going forward, a further increase in demand for the company’s products is expected to positively impact Bapcor’s financial performance. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $6.150, down 1.757% on 3rd August 2020.
4. Super Retail Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2 Billion, Annual Dividend Yield: 5.63%)
Track Record of Sales Growth: Super Retail Group Limited (ASX: SUL) is engaged in the operation of specialty retail stores in the automotive, tools, leisure, and sports categories. The group has continued to deliver solid top-line growth and positive like for like sales growth in a challenging retail environment. Due to stronger than expected sales performance in the latter part of the year, the company reported robust FY20 sales performance. During the period, total group sales went up by 4.2%, whereas like for like sales growth was recorded at 3.6%, representing a significant uplift in domestic tourism and travel, personal fitness, and outdoor leisure activities.
Outlook: The strategy of the group revolves around (1) growing annual customer value, (2) becoming an efficient omni-retailer and (3) focusing on organic growth and capital discipline. The company expects FY20 unaudited total revenue to be ~$2.82 billion. Pro forma segment EBITDA is expected to be in the range of $327 million and $328 million, whereas, segment EBIT is expected to be in the ambit of $235 million and $236 million. Lastly, SUL expects pro forma normalised net profit after tax to be in the range of $153 million and $154 million. Notably, the company is set to release its FY20 results on 24th August 2020. The company remains on track to adapt quickly to changing consumer behaviour during COVID-19, given its omni-retail channel business strategy.
The company is focused on delivering a higher gross margin and cost savings from business simplification to offset higher labour and rental costs. The company is not expecting a material impact on the availability of products in the short-term given current inventory levels. Some CPI components such as cleaning and sanitary products, furniture, audio, visual and computing equipment, etc., recorded an increase in prices. Going forward, SUL’s diverse set of offerings is expected to drive business growth. The company has maintained a positive sales momentum and has benefitted from a diversified portfolio of businesses. The online business of the company is operating normally with continued usage of home delivery and click and collect services.
Key Risks: As the group operates in the retail space, the key risks to the business includes competition intensity, customer expectations, omni-retail transformation as well as supply chain and inventory agility for omni-retail to meet evolving customer expectations.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs SUL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock gave positive returns of 51.24% on ASX and is currently trading above the average of its 52-week trading range of $2.99 - $10.436. SUL provides products catering to diverse consumer needs and has demonstrated a robust performance despite these unprecedented times. The stock of the company has also depicted a robust performance, owing to growth in sales. Given the nature of the business and a strong market position, we see further potential in the stock. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $8.790, down 1.104% on 3rd August 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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