Event Core
Australian government initiates their co-funded grants of $800 million to uphold innovation, collaboration, and economies of scale within Australian manufacturing businesses. The grant’s commercial presents one-third of funding of eligible projects, delivering benefits in one or more of the six National Manufacturing Priority areas, as outlined below, costing between $20 million and $200 million.
After analyzing Australia’s competitive advantages, the Australian government has identified six national manufacturing priority industries that align with Australia’s strategic interest. National manufacturing priorities covering -
- Resources Technology & Critical Minerals Processing
- Food & Beverage
- Medical Products
- Recycling & Clean Energy
- Defence
- Space
Sneak Peek at Macro Indicators
Robust National Accounts: Amidst easing containment restrictions in Australia, GDP stood resilient and surged by 1.1% PcP in March 2021 quarter. Australia’s terms of trade improved 7.4% QoQ with GDP contribution being +3.5% with favorable export prices.
Surging Capital Expenditure: In line with the statistics by The Australian Bureau of Statistics for the March 2021 quarter, total capital expenditure in the manufacturing industry stood at $2,815 million, up by 14.0% PcP, primarily driven by a 15.2% PcP uptick of capex in plant, equipment & machinery within manufacturing activities. In addition, investments in manufacturing activities stood resilient in the face of strong COVID-19 adversities due to extensive government support.
Figure 1: Capex Uptrend Sought in Manufacturing Activities:
Source: Based on Australian Bureau of Statistics (ABS) Data, Analysis by Kalkine Group
Household expenditure signaled recovery: Aggregate household expenditure surged 1.2% PcP in March 2021 quarter but remained below by 1.5% against December 2019 quarter levels (pre-pandemic period). Improved run-rate at hotels, cafes, restaurants and transport services drove a +2.4% surge in spending on services. Spending on goods marginally declined by 0.5% and remained at elevated levels.
Resources Technology and Critical Minerals Processing
Overview of Constrictive Developments: Resource and energy industry exports are estimated to register $310 billion in FY21, a robust appraisal in the context of COVID-19 discrepancies. Iron ore earnings soared by around 50%, marking an all-time high on the back of uninterrupted production and a significant price surge. As a result, base metal prices have recovered to pre-pandemic levels.
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.
Industry Vision: Global mining equipment is estimated to spawn US$165.8 billion in revenue by 2027. In June 2020, the government expanded the ‘exploring for the future program’ for four years with $125 million in funding to streamline industry exploration and investment activities.
Potential for Copper Metals: Copper has assumed benefits from ’green’ stimulus spending and infrastructure-focused stimulus spending. After tapping $10 billion in FY20, copper export earnings are estimated to progress amidst favorable price levels. In addition, copper exploration value reached $103 million in March 2021 quarter, up by +31% QoQ and by +8% YoY, broadly attributed to robust capex records in Western Australia.
Figure 2: Exploration Activities have Remained Resilient Amidst Significant International Demand:
Source: Based on Australian Bureau of Statistics (ABS) Data, Analysis by Kalkine Group
Food & Beverage
Broad Industry Overview: In FY20, the food and beverage industry yielded $28.4 billion in gross value added amidst 14,400 businesses and delivering 229,000 employment positions. Inputs that feed the food & beverage industry are derived from Australia’s premium, reliable agriculture, fisheries, and forestry sector. The gross value production of the sector has inclined by a real rate of 7% in the last two decades to $67 billion in FY20. In addition, the food and beverage industry is the single largest manufacturing sector accounts for 27.9% of aggregate manufacturing turnover.
Key Statistical Updates on Crops: The gross value of crops declined by 5% and stood at $28 billion, primarily driven by unpropitious YoY results from wheat (down 20%), vegetables (down 4%) and cotton (down 78%), and predominantly supported by 9% uptick in fruit & nuts, stable barley, and 1% uptick in canola values.
Information Technology (IT)
IT Support to Industries: The Australian government is harnessing technological opportunities for building digital capabilities for businesses, in line with improvements in cyber data security. In FY19, Australian Mining Equipment, Technology, and Services (METS) segment delivered $97 billion in revenue, upholding ~200,000 jobs. Further, resources technology remains to be an untapped manufacturing area that exhibits high leverage potential on innovation.
Demand-Pull Support from E-commerce: During the COVID-19 turmoil, consumers and businesses were bailed out via online market space through retailers’ swift move from brick-and-mortar to online platforms. During the pandemic, online sales witnessed exponential growth from $1,854.4 million in January 2020 to ~$2,809.9 million in April 2020, a surge of 51.5%. On recent updates from the ABS, total online sales clocked $3,090.1 million in June 2021, up by 10% PcP.
Key Risks and Challenges
The country is largely dependent on China for trade; the lack of diversification may hamper trade surplus. A decline in consumer sentiments led by extended lockdowns may affect the pace of economic recovery and may halt consumer spending. Cybercrime rates may skyrocket with compromised data protection infrastructure possibilities, which may negatively impact IT. With high price sensitivity, energy and resources products exhibit high susceptibility to volatile commodity prices. Australia demonstrates highly variable climatic conditions; considering the livestock segment is in the rebuilding phase, any disruption in seasonal conditions may drain significant export values in the agriculture, fisheries, and forestry sector.
Figure 3: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
The Australian government has brought forward a $1.5 billion modern manufacturing strategy to amplify the manufacturing industry with innovation and economies of scale. Further, the manufacturing activities to stay afloat with the introduction of the Supply Chain Resilience Initiative. Australia’s exploration activities have increased substantially post 2015, and resources and energy exports are revised upwards to $334 billion in FY22 and $304 billion in FY23. The gross value of agricultural production is estimated to tap a record of surpassing $66 billion in FY21. Despite a surge in input costs, the sector’s cash income is expected to widen to $21 billion in FY22. For the Budget FY22, the government aimed at improving digital facilities in regional and remote Australia via an $84.8 million investment to expand the Regional Connectivity Program. Considering the improvement in Australia’s manufacturing, resources, food and beverage, and technology sector, we have figured out four stocks on ASX that are set to see the momentum.
(1) Data#3 Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 699.04 million, Annual Dividend Yield: 3.10%)
Improved Profitability Supported by Favorable Top-Line Growth: Data#3 Limited (ASX: DTL) provides hardware and software licenses, data center infrastructure, and networks through its product division. In addition, the services division caters to consultancy, managed solutions, maintenance contracts, and workforce recruitment and contracting services. For FY20, DTL reported $1,625.9 million in total revenue, up by 14.9% YoY due to robust growth in both product and service divisions. In addition, the company’s gross profits surged to $188.0 million, up by 8.1% YoY.
In H1FY21, total revenue spiked by 19.2% and stood at $856.7 million, fuelled by the robust growth of 37.4% in public cloud revenue. Sales mix optimization and strong growth in public cloud revenues and software licensing delivered a 1.2% growth in total gross profits, at $89.7 million. Amidst favorable top-line growth, NPBT increased by 10.2% and stood at $13.9 million. The cash balance as of 31 December 2020 stood at $67.88 million.
Outlook: In line with DTL’s market update, the expected PBT for FY21 approximates to $36.8 million, up by 8% YoY. DTL remains optimistic about the Australian IT market. However, DTL predicts increased product delivery delays due to supply chain disruptions. It is worth to mention that DTL holds ~62% revenue under long-term contracts to deliver stability in operating cash flows.
Valuation Methodology: Price/Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs DTL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of DTL went down by ~18.440%. The stock made a 52-weeks’ low and high of $4.470 and $7.300, respectively. The stock underperformed the market volatility index. The stock has been valued using Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some premium compared to its peers’ average, considering top-line growth amidst high competition. For the purpose of valuation, few peers such as Infomedia Ltd (ASX: IFM), Computershare Ltd (ASX: CPU), Integrated Research Ltd (ASX: IRL), have been considered. Considering the growth potential in IT services, rising demand for cloud storage, and valuation, we give a ‘Buy’ rating on the stock at the market price of $4.580, as of 16 August 2021, 02:36 AM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 3.10%.
(2) Carbon Revolution Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 221.23 million, Annual Dividend Yield: 0.00%)
Cost Saving Programs in Place to Achieve Positive Cash Flows: Carbon Revolution Limited (ASX: CBR) is a Geelong-based global technology company involved in auto ancillaries, specifically carbon fiber wheels. In FY20, total revenue increased to $38.9 million, up 158% PcP, consequent to increased wheel sales volume to 13,942. Gross margins improved with favorable product mix impact and increased sales volume. However, operating cash outflow increased to $30.9 million in FY20 relative to $19.9 million outflow in FY19 due to increased working capital to satisfy business growth.
In H1FY21, revenue declined by 14.1% PcP and stood at $17.2 million due to a drop in the sales volume of wheels. Loss after tax decreased by 85% PcP to $14.8 million relative to $98.6 million in H1FY20. The cash balance, as of 31 December 2020, stood at $15.4 million.
While wheel sales surged by 2.7% QoQ, revenue declined by 3.2% QoQ and stood at $8.7 million in Q4FY21, primarily due to altered product mix and engineering services & tooling revenue. CBR’s cash balance stood at $87.3 million. Changes in trading terms with production programs delivered cash outflow from operating activities of $8.5 million relative to an inflow of $1.2 million in Q3FY21.
Outlook: Despite COVID-19 discrepancies, the company made considerable progress in the commercialization of new fascia technologies. CBR explores cost-saving measures with its investments in industrialized equipment. With the global demand of EV segments, CBR expects to underpin strong sales growth in FY21.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs CBR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CBR went down by ~7.273%. The stock made a 52-weeks’ low and high of $0.985 and $3.048, respectively. The stock underperformed the market volatility index. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium compared to its peers’ median, considering the commercialization of new fascia technologies. For the purpose of valuation, few peers such as GUD Holdings Ltd (ASX: GUD), ARB Corp Ltd (ASX: ARB), PWR Holdings Ltd (ASX: PWH), have been considered. Considering the recoveries in wheel sales, cost-saving measures, rising EV demand, and valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.020, down by ~5.117% as of 16 August 2021.
(3) OZ Minerals Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 7.69 billion, Annual Dividend Yield: 1.12%)
Favorable Volume and Price Driving Top-line and Bottom-line with Margins Intact: OZ Minerals Limited (ASX: OZL) is engaged in the mining and processing copper, gold, and silver ore. For FY20, total revenue increased to $1,342 million relative to $1,107 million in FY19 due to favorable gold volumes and prices. Consequently, underlying EBITDA stood at $606 million relative to $463 million in FY19. NPAT increased substantially by 30% PcP and stood at $213 million. Apart from surged volumes and price, a $99.8 million production cost decrease in Prominent Hill and Carajas lead to improved NPAT results.
For Q2FY21, total copper production surged to 32,681 tonnes compared to 24,577 PcP, and total gold production declined to 57,875 ounces compared to 68,740 ounces. OZL maintains a debt-free cash position of $134 million. All-in Sustaining Costs stood at 134.5 US cents/lbs.
Outlook: Drilling has commenced in three ways, funded by OZL, which exhibits high conductance targets, promising revenue pipeline. Production guidance for total copper and gold shall vary around 120,000 – 145,000 tonnes and 205,000 – 228,000 ounces. Global demand for copper remains robust with increasing requirements for infrastructure and technology.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs OZL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of OZL went up by ~2.967%. The stock made a 52-weeks’ low and high of $12.500 and $27.150, respectively. The stock outperformed the market volatility index. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium compared to its peers’ average, considering the high demand for copper in industrial activities. For the purpose of valuation, few peers such as Resolute Mining Ltd (ASX: RSG), Alkane Resources Ltd (ASX: ALK), Poseidon Nickel Ltd (ASX: POS) have been considered. Considering the favorable copper and gold production, substantial improvements in bottom-line, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $22.210, down by ~3.895% as of 16 August 2021. The stock had generated an annualized dividend yield of 1.12%.
(4) Tassal Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 760.18 million, Annual Dividend Yield: 4.57%)
The Company Witnessed Significant Operational Efficiency: Tassal Group Limited (ASX: TGR) is a fishery business that involves processing, marketing, and distributing Atlantic salmon and other seafood. In FY20, while revenue remained almost steady at $562.54 million (up by 0.3% YoY), operating EBITDA significantly inclined by 23.4% and stood at $138.55 million. Subsequently, Operating EBIT and NPAT increased by 12.7% and 13.3%, respectively, due to optimized biomass and size of salmons, unaffected salmon prices, strong export markets for prawns, and lease benefits.
In H1FY21, revenues stood firm at $292.5 million, up by 6.6% PcP. On the other hand, statutory EBITDA declined by 4.3%, and NPAT declined by 32.3% while registering $77.5 million and $27.6 million, respectively. The operating results diminished as a result of non-controllable price factors of salmon and prawns. However, reported operating cash flows stood resilient at $41.39 million relative to $40.98 million due to solid harvest and biomass growth, offset by increased working capital costs.
Outlook: In FY21, Salmon harvest volume is expected to be ~41,000 hog tonnes supported by higher salmon biomass. Capex for replacement and upgrades is expected to range between $45 million and $50 million annually. Forecasted prawn production for FY22 is expected to be around 4,500 to 5,000 tonnes. Additional strategic takes include Proserpine farm development & footprint expansion, and disinvestment of surplus land in Exmoor Station.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs TGR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of TGR went up by ~2.041%. The stock made a 52-weeks’ low and high of $3.160 and $3.970, respectively. The stock outperformed the market volatility index. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium compared to its peers’ average, considering high operational efficiency. For the purpose of valuation, few peers such as Bubs Australia Ltd (ASX: BUB), Clean Seas Seafood Ltd (ASX: CSS), Huon Aquaculture Group Ltd (ASX: HUO), have been considered. Considering the cost-saving measures, high production estimates, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $3.500, down by ~2.235% as of 16 August 2021. The stock had generated an annualized yield of 4.57%.
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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