Event Core
Event Headline: As announced on 12 November 2021 by the Department of Industry, Science, Energy and Resources, almost $33 million grants were administered to seven food and beverage manufacturers through the first round of Modern Manufacturing Integration and Translation streams. The grants objectify to open new export venues, create skilled jobs, and build Australia’s economic resilience.
Modern Manufacturing Initiative (MMI): The announcement follows the establishment of $1.3 billion MMI and National Manufacturing Priorities (NMP), which aims to scale up, collaborate and commercialise Australian manufacturers.
Figure 1: List of Applicants in Foods and Beverage Industry that have been Offered Grants Under the Modern Manufacturing Initiative (MMI)
Source: Department of Industry, Science, Energy and Resources, Analysis by Kalkine Group
Macro Trend in Manufacturing Activities
Soaring Capital Expenditure: For the June 2021 quarter, manufacturing capital expenditure in building and structure surged by a significant 23.1% PcP clocking $731 million (on a seasonally adjusted basis). Capital expenditure in plant, machinery & equipment widened by 6.3% PcP and stood at $1,920 million. The uptrend in private new capital expenditure since March 2021 quarter was substantially supported by proliferated government intervention to raise business sentiments.
Figure 2: Capital Expenditure Levels in Manufacturing Segment
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Momentum in Manufacturing Sales and Inventory: In June 2021, manufacturing sales clocked $89.27 billion (seasonally adjusted basis), up by 8.1% PcP, after experiencing a substantial dip in June 2020 at $82.58 billion COVID-19 discrepancies and supply chain disruptions. Inventory levels from the manufacturing segment stood at $46.18 billion, marginally down by 0.1% seasonally adjusted. Manufacturing companies well-timed inventory and sales levels keeping almost constant and elevated inventory levels of inventory.
Food and Beverage National Manufacturing Priority Road Map
Figure 3: Growth Opportunities and Goals in Food and Beverage Industry
Source: Department of Industry, Science, Energy and Resources, Analysis by Kalkine Group
Non-Cyclicity and Stability of Australian Food Retailing
Retail Trade Resurges: In September 2021, retail trade inclined by 1.3% MoM and 1.7% PcP and clocked a turnover of $29.67 billion on a seasonally adjusted basis. The food retailing turnover stood at $13.08 billion, a marginal monthly drop of 1.4%, but a 2.7% PcP uptick. The monthly decline was termed significant since the consistent incline from April 2021 to August 2021. The short-term discrepancy was primarily caused by restrictive containment measures in NSW and Victoria.
Figure 4: Retail Trade Supporting Uptrend in Monthly Demand
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Consistency In Food Retailing: Apart from recent COVID-19 discrepancies in capital market expectations, food retailing turnover has exhibited a straight-line upward trend while supportive industries like departmental stores retailing and café, restaurant & takeaway services turnover encountered sideways movement with seasonal challenges.
Key Risks and Challenges
Figure 5: Key Driving v/s Key Restraining Factors
Source: Analysis by Kalkine Group
Australia requires to broaden its horizons across trade partners due to the high reliance of trade surplus on the Chinese economy. Gross profits of manufacturing companies declined in June 2021 quarter by 3.2% to $9.37 billion, primarily due to increased seasonally adjusted wages. Supply chain disruptions may stay intact in the short term. Australia demonstrates high variable climatic conditions; considering the livestock and agricultural segments are in a rebuilding phase, any disruptions in seasonal conditions may drain significant export values for food and beverages. COVID-19 uncertainties exist due to the gradual onset of the delta variant in the past few months.
Outlook
Substantial Support to Manufacturing Activities in Food and Beverages: Australia’s food and beverage manufacturing segment seeks growth opportunities in smart manufacturing, innovative products and profound impact from food safety & traceability systems.
Improved Private New Capex Estimates: For FY22, the Australian Bureau of Statistics estimates the total new private capital expenditure to clock $127.70 billion, revised upwards by 12.5%.
Household Saving Ratio Dipped: Although the savings ratio stood at elevated levels at 9.7%, its decline from 11.6% suggests increased consumption propensity, growing sales volumes.
Non-Cyclicality Intact: Considering the online position of retail businesses, the sector has remained stable during COVID-19 scenarios, considering the large market volatilities witnessed on a global scale.
Improved Potential in Agricultural Production: The gross value of agricultural production is estimated to clock a record of $73.0 billion in FY22. Crop production is estimated to surge by 7%, and livestock production is forecasted to edge up by 8%.
Considering the developments in the food and beverage manufacturing, we have figured out four stocks on ASX that are set to see the momentum.
(1) The A2 Milk Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 4.55 billion, Annual Dividend Yield: 0.00%)
Increased Investments in Chinese and US Markets Unfold Growth Prospects: The A2 Milk Company Limited (ASX: A2M) is a nutritional dairy company that commercialises A2 protein type branded milk and related products in New Zealand Australia, China, and other Asian countries, and the United States. In FY21, the company reported a revenue of NZ$1,207 million, considerably down by 30.3% YoY, primarily affected by unprecedented uncertainties and volatility due to COVID-19 hampering English label infant nutrition channels. The gross margin stood at 42.3%, reflecting stock write-downs, adverse mix impact and higher COGS.
EBITDA dipped by 77.6% and clocked NZ$123.4 million due to higher distribution costs and a shredded top line. Cash balance surged marginally to NZ$875.2 million as of 30 June 2021 relative to NZ$854.2 million as of 30 June 2020, primarily driven by NZ$80.7 million contributions from NPAT and NZ$21.4 million from favourable movements in work capital, partially offset by NZ$39.8 million investment in Synlait and NZ$24.5 million investment in Intangibles and PP&E.
Outlook: In FY22, A2M plans to increase China’s marketing and brand investment to drive demand and improve brand health metrics. A2M expects robust underlying growth in key US liquid milk business accounts and incremental sales growth in Australian liquid milk for FY22.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A2M Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of A2M went down by ~6.845%. The stock made a 52-weeks’ low and high of $5.040 and $15.050, 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 some premium compared to its peers, considering prudent working capital management for CBEC and daigou/reseller channels in FY21. For valuation, peers like Bubs Australia Ltd (ASX: BUB), Australian Agricultural Company Ltd (ASX: AAC), Costa Group Holdings Ltd (ASX: CGC) have been considered. Considering the current trading levels, growth in Australian milk and Infant-Nutrition-China Label sales in FY21, increased marketing spending in China, upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing price of $6.260, up by ~2.120%, as of 15 November 2021.
(2) Inghams Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.25 billion, Annual Dividend Yield: 5.31%)
Business Streamlining Opportunities and Resilient Top-line Deliver Shareholders’ Returns: Inghams Group Limited (ASX: ING) is engaged in producing and selling chicken and turkey products across its vertically integrated production system. In FY21, revenue surged by 4.4% to $2.7 billion. The company reported an underlying EBITDA of $448.7 million, up by 9.6% and an underlying NPAT of $86.7 million, up by 57.4%. Core poultry volume surged by 4.2% to 446.9-kilo tonnes, primarily driven by robust demand across channels and overall trading volumes surpassing pre-COVID levels.
Cash flow from operations stood high at $450.4 million, up by 15.5% YoY, primarily driven by increased receipts from customers. Net debt for the period slipped to $240.2 million as of 26 June 2021, relative to $314.7 million as of 26 June 2020. As of 26 June 2021, cash equivalents surged to $158.1 million relative to $134.2 million registered in the prior period. ING focused on considerable process improvement and waste management, with 320 project opportunities identified for FY22.
Outlook: ING holds significant pipeline projects for FY22. As ING advance into FY22, ING seeks poultry volume to exhibit continuous growth, benefitting from new business across multiple channels. In addition, the three key workstreams launched across the business, i.e., brand architecture program, product portfolio program, and growth roadmap for poultry, may deliver significant growth prospects and business streamlining opportunities.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
ING Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of ING went down by ~10.336%. The stock made a 52-weeks’ low and high of $3.060 and $4.260, 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 discount compared to its peer’s average, considering high debt levels relative to industry standards and few market diversification initiatives relative to competitors. For valuation, peers like Select Harvests Ltd (ASX: SHV), Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD) have been considered. Considering the favourable financial performance, increased poultry volumes, production-specific initiatives, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.400, as of 15 November 2021, at 11:42 AM (GMT+10), Sydney, Eastern Australia.
(3) United Malt Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.25 billion, Annual Dividend Yield: 0.96%)
Approaching Pre-COVID Levels: United Malt Group Limited (ASX: UMG) operates in the distillery business and is involved in malt production, distribution, and warehousing. During FY20, revenue declined by a modest 2.1% and stood at ~$1.3 billion, and underlying EBITDA declined by 11.1% and stood at $156.1 million. The significant operational downgrade was warranted by changing the product mix to low margin products and lower sales volumes. However, despite EBITDA shortfalls, operating cash flows improved to $101.7 million from $93.0 million in FY19.
In H1FY21, revenue declined by 11% and stood at $590 million, and EBITDA declined by 26.4% and stood at $52.7 million. Unfavourable currency fluctuations and COVID-19 impact were the major deterioration factors. In addition, COVID-19 related costs, processing costs and container disruptions contributed $1.8 million, $6.9 million, and a $2.2 million increase in operating expenses. In contrast, operating cash flows improved significantly to $22.8 million with cash conversion of 43% because of favourable interest expenses and bettWiller working capital management.
Outlook: UMG witnessed an improving performance in the UK and North America and encouraged continuous counteractive COVID 19 disruptions affecting malt volumes in Australia/Asia. FY21 underlying EBITDA is forecasted to strike at ~$129-134 million. Significant items are expected to wander between $20 million and $22 million concerning grain storage inventory.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
UMG Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last one month, the stock of UMG went up by ~2.723%. The stock made a 52-weeks’ low and high of $3.530 and $4.970, 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, considering steady recovery to reach pre-COVID levels, high operating cash flows despite market turmoil and expansion strategies. For valuation purposes, peers like Elders Ltd (ASX: ELD), Huon Aquaculture Group Ltd (ASX: HUO), Ridley Corporation Ltd (ASX: RIC) have been considered. Considering the positive long-term prospects, expansion strategies in Victoria, penetration into the Mexican market, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $4.150, down by ~0.718%, as of 15 November 2021.
(4) Tassal Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 715.58 million, Annual Dividend Yield: 4.17%)
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 ~7.584%. 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 low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, 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 $3.290, down by ~1.792% as of 15 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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