I. Sector Landscape

Australia’s Industrials and Materials sector broadly encompass metals & mining, logistics and transportation, and building & construction industries. In 2020, the mining industry delivered a dominant contribution to Australia’s Gross Value Added (GVA), 11.0% contribution. Construction and manufacturing industries accounted for 7.4% and 5.9% contributions to a total GVA of $1,808 billion. During extreme pandemic times, the Australian government made heavy investments towards infrastructure and mining activities to hold the country’s GDP afloat.

Improved Economic Factors

Surged Private New Capital Expenditure: In December 2021 quarter, the total new private capital expenditure (capex) clocked $33.34 billion, up by 9.8% YoY. Capex in buildings and structures surged by 11.16%, and capex in equipment, plant and machinery inclined by 8.38% YoY. The improved capital expenditure in the Australian economy is estimated to contribute significant returns in the construction and mining industry.

Figure 1: Upward Trending Private New Capital Expenditure:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Gross Value Added by Industry: In the September 2021 quarter, the mining industry’s Gross Value Added (GVA) grew quarterly by 1.7%. The GVA of the manufacturing industry inclined by 1.2% relative to the December 2019 quarter. The gross operating surplus delivered by private non-financial corporations expanded by 4.7% due to improved surplus in the mining industry, reflecting an increase in LNG and coal prices and improved surplus in construction, reflecting improved government subsidy.

Key Growth Contributors for Selective Industries in the Sector

Resurging Labor Supply: For January 2022, the unemployment rate stood at 4.2%, while the participation rate increased to 66.2%. The employment to population ratio surged to 63.4%. The hours worked slipped by 8.8% between December 2021 and January 2022; the decline turned more pronounced, with employment increasing by almost 13,000 people.

Figure 2: Unemployment Rate Sustaining Record Lows:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Statistics Supporting Transportation Industry: In December 2021, the monthly business turnover of Transport, postal, and warehouse services embarked on the second-largest rise (on a YoY basis), clocking 24.5%. The import of freight transport edged up by $48 million in December 2021 and stood at $1.88 billion in import value. Freight transportation costs surged in December 2021 quarter owing to congestion delays, particularly in Asia and Europe on the back of the pandemic and cost inflation in fuel and wages.

Growth Prospects in Lithium Industry

Demand for Electric Vehicles (EVs): The global EV sales have surged by 18% quarterly in September 2021 and turned 93% higher on a PcP basis. The International Energy Agency and Bloomberg New Energy Finance have projected EV demand to increase to nearly 30% of vehicle sales annually by 2030. The global demand for lithium is estimated to surge to 486k tonnes of lithium carbonate equivalent (LCE) in 2021.

Price Appreciation Reinforced Production: In September 2021, the Australian spodumene concentrate output surged by 35% QoQ and stood at 79k tonnes of LCE. Pilbara Minerals production enhanced by 11% during the quarter, while the Pilgan plant has undergone substantial modification to improve and debottleneck production.

Index Performance

The ASX 200 Materials (GIC) have generated a 2-year return of ~23.30%, compared to ~0.28% return by the ASX 200 Index. Increased capacity expansion by miners, strong export growth, supportive government policies, and a low-interest rate regime are favourable factors driving sector gains.

Figure 3: The ASX 200 Materials (GIC) outperformed ASX 200 Index in the past two years by whooping ~23.02%.

Source: REFINITIV as of 24 February 2022

Key Risks and Challenges

In September 2021 quarter, the Gross Domestic Product (GDP) slipped by 1.9% amid curtailed activities owing to extended lockdowns. Strikes have continued in Australian ports, bolstering supply delays and surging prices. Construction activities have witnessed a recent hit, with the total value of construction work done contracted by 0.4%. The forecast for lithium demand is susceptible to more significant than usual uncertainty, owing to the semiconductor shortage disrupting the auto industry. As announced by Tesla and Volkswagens, the global supply chain constraints have substantially affected the automobile industry.

Figure 4: Key Drivers v/s Key Challenges

Source: Analysis by Kalkine Group

Outlook

Improved Estimates for Capital Expenditure: In FY22, the total private new capital expenditure is expected to clock $140.8 billion, upwardly revised by 1.6%. Capex in buildings and structures is estimated to clock $79.4 billion, 1.0% higher than the previous estimate.

Improved Employment Prospects: On Seasonally adjusted terms, employment increased by 12,900 people or +0.1% in January 2022. Employment stood 2.0% higher than March 2020 levels. The employment to population ratio increased to 63.4%.

Infrastructure Investment Program: The government is investing nearly $110 billion over ten years from FY22 inland transport infrastructure via its rolling infrastructure pipeline, most of which falls under this program.

Export Values for Lithium Forecast to Increase: The surged spodumene price is expected to bolster export revenue from $1.1 billion in FY21 to $3.3 billion in FY22, with production at lithium hydroxide refineries to clock a total export revenue of $4.2 billion by FY23.

Increased World Demand for Lithium: The global lithium demand will increase to 486k tonnes of LCE in 2021. Increasing electric vehicle uptake is primarily driven by government measures, increasing model choices, and lower vehicle prices.

II. Investment theme and stocks under discussion (SEK, AKE, BXB)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.

1. ASX: SEK (Seek Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$9.79 billion)

SEK offers online employment marketplace services to candidates and recruiters, education services to working professionals and students, and invests in early-stage ventures (ESVs) involved in human resource management.

 Valuation

The illustrative valuation model suggests that stock has a potential upside of 16.57% on 24 February 2022. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given the improved cash levels due to divestment in Zhaopin and favourable operational performance. For valuation, peers such as REA Group Ltd (ASX: REA), Carsales.Com Ltd (ASX: CAR), Uniti Group Ltd (ASX: UWL), and others have been considered. Given the favourable operating conditions, high revenue, and EBITDA expectations from FY22, decent capital expenditure structure, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $26.200, as on 24 February 2022, at 01:52 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 1.55%.

SEK Daily Technical Chart, Data Source: REFINITIV

2. ASX: AKE (Allkem Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$5.97 billion)

AKE is a speciality lithium chemicals company and a producer of borates.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 17.29% on 24 February 2022. However, the stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple) given the recent geopolitical tensions and curtailed production in the EV segment due to semiconductor shortages. For valuation, peers such as Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), OZ Minerals Ltd (ASX: OZL), and others have been considered. Given the favourable production estimates, substantial growth in lithium space, decent financial performance, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $8.650, down by ~7.783%, as on 24 February 2022.

AKE Daily Technical Chart, Data Source: REFINITIV 

3. ASX: BXB (Brambels Limited)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$14.51 billion)

BXB is engaged in the global logistics business. Through its circular business model, the company is involved in the sharing and reusing of the world's largest pool of reusable pallets and containers.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 9.92% on 24 February 2022. However, given the recent geopolitical tensions and market penetration challenges, the stock might trade at some discount compared to its peers’ average EV/Sales (NTM trading multiple). For valuation, peers such as SG Fleet Group Ltd (ASX: SGF), Cleanaway Waste Management Ltd (ASX: CWY), Qube Holdings Ltd (ASX: QUB), and others have been considered. Given the improved free cash flow position, favourable supply chain channels, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $9.89, down by ~2.273% of 24 February 2022. In addition, the stock has delivered an annualised dividend yield of 2.69%.

BXB Daily Technical Chart, Data Source: REFINITIV 

Note: All the recommendations and the calculations are based on the closing price of 24 February 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.  

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.

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