Event Core
On 29th April 2022, the Australian Bureau of Statistics released figures on producer price indexes for March 2022 quarter, comprising price indexes in the mining, manufacturing, construction, and services industry. As per the release, the final demand advanced by 1.6% sequentially and 4.9% on a PcP basis, which is the strongest witnessed since December 2008.
Industry-Specific Price Movements
Construction Industry Output Prices: The building construction prices advanced by 2.9% in March 2021 quarter due to robust activity in the residential sector alongside ongoing private and public investment in infrastructure projects boosting demand.
Manufacturing Industry Output Prices: Output prices of the manufacturing industry advanced by 4.1% QoQ, owing to increased global crude oil prices as demand for fuel recovered, surged investment demand in response to U.S. inflation, and reduced availability of processed beef from herd re-building and labour shortages.
Mining Industry Output Prices: Prices received for domestic gas extraction advanced by 9.3%, owing to surged contract prices, LNG spot, and global crude oil price increase. Over the last 12 months, domestic gas extraction increased by 31.9%.
Key Risks and Challenges
Due to the ongoing timber shortages and surged metals prices, the construction cost has increased, adding to the upward price pressure on material costs. The curtailed oil production and supply disruptions from the geopolitical stress between Russia and Ukraine have aggravated oil & gas prices. The input costs for manufacturing chemical and chemical products increased by 13.9% amid a reduced international supply of caustic soda and ammonium nitrate and soaring energy costs amid global demand. Office of the Chief Economist’s Resource and Energy Price Index jumped by 24% in March 2022 quarter, arising from energy shortages and supply deficit concerns. Labour shortage has become a severe concern affecting key industries – construction, manufacturing, and mining.
Outlook
Increased Private New Capital Expenditure: For December 2021 quarter, the total new private capital expenditure edged up by 1.1% QoQ, clocking $33.34 billion, and capex in building & structures stood at $17.45 billion, up by 2.2% QoQ.
Building Approvals Increasing: For February 2022, the total number of dwellings enlarged by 43.5%, wherein private sector houses surged 16.5%, and private sector dwellings (excluding houses) advanced 78.3% compared to the preceding month.
Increased Residential Property Price Index (RPPI): The RPPI of the eight capital cities edged up by 4.7% in December 2021 (QoQ) and 23.7% (YoY), with total value of residential dwellings in Australia increased by $512.6 billion to $9,901.6 billion.
Resource & Energy Export Earnings to Hit a Record: For FY22, Australia’s resource & energy export earnings are set to clock a record of $425 billion as per the estimations made by the Department of Industry, Science, Energy and Resources.
LNG Export Earnings on an Upward Trajectory: Australia’s LNG export earnings are expected to rise from $30 billion in FY21 to $70 billion in FY22 and $82 billion in FY23 as oil-price linked contract prices surge.
Considering the uptick in producer price indexes, we have figured out three stocks on ASX that are set to see the momentum.
(1) Ingenia Communities Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.91 billion, Annual Dividend Yield: 2.28%)
Increased New Loan Settlements Supporting Fundamentals: Ingenia Communities Group (ASX: INA) is a owner, operator and developer of communities that provide quality rental and holiday accommodation in Australia’s seniors’ market. In FY21, INA recorded a revenue of $295.6 million (+21%) and EBIT of $94.4 million (+31%). The period's operating cash flow increased substantially by 105% and stood at $137.6 million, primarily driven by increased rental sites, surged new home settlements, and robust performance from INA’s holiday communities.
For H1FY22, INA announced a statutory profit of $39.8 million, up by 23% PcP and an underlying profit of $28.1 million, down by 14% PcP, as new home settlements were affected supply chain challenges. Total revenue increased by 8% to $131.4 million, while EBIT took a hit of 16%, setting at $33.9 million. INA achieved 139 new home settlements, with a record of culminating 465 contracts and deposits on hand, underpinned by near-term settlements.
Outlook: FY22 guidance suggests EBIT growth of 20-25% and underlying EPS growth of 3-6% over FY21. INA holds over $500 million in completed acquisitions, contributing to future returns. The portfolio increased to over 15,000 income yielding sites, up by 26% over the past six months. The development pipeline expanded to 6,270 new home sites by nearly 50% by June 2021.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs INA (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of INA went down by ~9.80%. The stock made a 52-weeks low and high of $4.510 and $6.999, respectively. The stock underperformed the market volatility index. 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, considering a decent uptrend in construction activities and increased new home settlements. For valuation, peers like Stockland Corporation Ltd (ASX: SGP), Aspen Group Ltd (ASX: APZ), Mirvac Group (ASX: MGR), and others have been considered. Considering the decent fundamental prospects, increased settlement rate, substantial development pipeline, current trading levels and upside indicated by valuation, we give a 'Buy' rating on the stock at the closing market price of $4.510, down by ~3.84%, as of 02 May 2022.
(2) Lifestyle Communities Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.58 billion, Annual Dividend Yield: 0.62%)
Increased New Home Settlements and Decent Development Pipeline Unfolding Growth Prospects: Lifestyle Communities Limited (ASX: LIC) is a property development and management company in Australia. The company builds, owns, and operates land lease communities and provides affordable housing options to Australians aged over 50. In FY21, the company’s property portfolio advanced by $108.6 million due to new home settlements, continued compression in capitalisation rates, and movements in the residential property market. New home settlements stood at 255 units, and resale settlements stood at 105 units.
In H1FY22, LIC delivered 166 new home settlements and resold 68 settlements. The company clocked an NPAT of $27.5 million relative to $14.1 million in H1FY21. Surged homes primarily drove the continued portfolio growth under management (2,958 units) and increased resale settlements. The company hiked its existing debt facility by $100 million to $375 million to support the acquisition of three new sites.
Outlook: The company expects to continue its development pipeline for the next 3-5 years. LIC reaffirmed its plans to deliver 1,100-1,300 new home settlements and 450-550 resale settlements. The digital transformation plant stands in full swing, and LIC is expected to launch its new website by October 2022.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs LIC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LIC went down by ~10.69%. The stock made a 52-weeks low and high of $13.260 and $23.850, respectively. The stock underperformed the market volatility index. 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 discount compared to its peers, considering labour shortages and supply chain constraints. For valuation, peers like LendLease Group (ASX: LLC), Cedar Woods Properties Ltd (ASX: CWP), Eureka Group Holdings Ltd (ASX: EGH), and others have been considered. Given the decent fundamental upticks, surged housing demand, proper development pipeline, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a 'Speculative Buy' rating on the stock at the closing market price of $14.780, down by ~2.51%, as of 02 May 2022.
(3) Washington H Soul Pattinson and Company Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 10.03 billion, Annual Dividend Yield: 2.33%)
Surged Construction Activities Raising Growth Prospects: Washington H Soul Pattinson and 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 registered $273 million in statutory NPAT, down 71% PcP. Profitability was primarily attributed to growth in building products and favourable land revaluations, which increased Brickworks’ contribution by almost 95%. Substantial improvements in Round Oak, supported by $103 million, and robust recovery in the coal process bolstered New Hope’s profit contribution by almost 45% PcP. This was offset by $1.0 billion one-time gain in FY20 due to derecognition of TPG as an equity accounted associate.
IN H1FY22, SOL registered a regular group PAT of $343.7 million, up by 281% PcP and pre-tax net asset value advanced to $9.0 billion from $5.2 billion. Net cash flow from investments surged substantially to $182.6 million relative to $85.3 million. Brickworks, New Hope, and Round Oak Metals were significant contributors to the improved fundamentals. Higher dividends form the Large Cap equities portfolio, which expanded by $2.7 billion due to Milton acquisition.
Outlook: SOL is focused on building an actively managed portfolio of diversified businesses. The company remains active in portfolio transactions surpassing $5 billion in acquisitions and asset sales in H1FY22. SOL was a net seller ahead of recent volatility, improving liquidity levels by nearly $350 million.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs SOL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SOL went down by ~3.438%. The stock made a 52-week low and high of $24.760 and $40.800, respectively. The stock underperformed the market volatility index. 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, considering net seller status and high portfolio transactions. For valuation, peers like Peninsula Energy Ltd (ASX: PEN), New Hope Corporation Ltd (ASX: NHC), Whitehaven Coal Ltd (ASX: WHC), and others have been considered. Considering the diversified business portfolio, decent fundamentals, expanding net asset value, current trading levels, and upside indicated by valuation, we give a 'Hold' rating on the stock at the closing market price of $27.250, down by ~2.013%, as of 02 May 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
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 for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the Valuation has been achieved and subject to the factors discussed above.
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