The Australian Bureau of Statistics released trade surplus data for February 2021. Exports have been upward trending in the past three months and Australia reported a steady trade surplus since the beginning of 2021, implying the prospects of an economic recovery. The drivers are strong global demand and a sharp rebound in industrial production in China. Favourable crop production following the La Nina event lifted the sentiments of Australian agricultural goods.
Exports improved to $32.11 billion in February 2021, up by 1.6% over the preceding month and 16.7% on a YoY basis. Exports stayed above the 3-year average of $30.86 billion. On an M-o-M basis, exports of meat, cereals, petroleum, coal, non-ferrous metals, transport equipment, and gold led to an increase in exports. With the increase in consumption following recovery in domestic spending, Australia posted an increase of 2.5% in imports to $24.01 billion in February 2021. Imports increased for the first time in 2021 after declining for three straight months. Nevertheless, Australian imports stayed below the 3-year average of $25.14 billion. Imports of transport vehicles (road, airplanes), textiles, chemicals & fertilizers, and petroleum products are some of the positive contributors.
Figure 1. 3-Year Trend of Exports and Imports:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Australia continues to be a net exporter compared to other emerging Asia-Pacific economies. The imposition of series of lockdown tampered with the trade surplus during August 2020 but subsequently recovered due to the resurgence of global demand. As imports increased, the trade surplus fell from the record high in January 2021. It had declined by 20.1% in February 2021 to $8.10 billion (on an M-o-M basis), but far higher than last year’s levels (of $2.89 billion). It is worth mentioning that export growth far outpaced growth in imports since December 2020.
Figure 2. Trade Surplus Declined After Peaked in January 2021:
Data Source: Department of Foreign Affairs and Trade, Chart Created by Kalkine Group
Production cuts in major exporting countries impacted coal exports by Australia. The slowdown in China softened metallurgical coal prices, touching four-year lows in December 2020. The Australian premium hard coking coal is estimated to average US $125/tonne in 2020, down from US $179/tonne in the prior year. As Asian economies emerged from COVID-related containment measures, exports for thermal coal picked-up in the past three months to February 2021.
Demand for aluminium has returned to pre-COVID levels. An increase in consumption has led to a drop in aluminium inventories in the LME market. Zinc holds steady price gains driven by the government’s infrastructure stimulus spending. Zinc production is forecasted to increase to 1.6 million tonnes by 2021-22. Australia’s lithium exports showed robust growth led by the government’s carbon-free emission norms and transition to electric vehicles which drove the demand for battery storage systems.
Meat exports flocked on the back of strong demand for red meat from international markets due to increased re-stocking activity and demand for protein-rich food following the outbreak of African swine fever. An increase in rainfall following the La Nina positively impacted wheat production, particularly in New South Wales and Victoria.
Figure 3. Exports of Selected Goods Driving Trade Surplus:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
In a separate report by the Reserve Bank of Australia, the Index of Commodity Prices showed an upward trend since August 2020 led by prices of bulk commodities and base metals. Bulk commodities representing iron ore, metallurgical coal, and thermal coal showed a steep increase in the last three months to February 2021. Recovery in industrial production in China and parts of Asia is supporting the price movements. The ramp-up of mines and a steady rise in prices of copper are expected to support export earnings, going forward.
Figure 4. Upward Movement in Commodity Prices:
Data Source: The Reserve Bank of Australia, Chart Created by Kalkine Group
Key Risks: The Australian dollar is showing a steady increase. The Australian dollar index reached 63.70 per US dollar on March 26, 2021, as compared to 53.89 levels seen in last year’s comparable period. Appreciating home currency means lower export earnings and may distort the export growth. Increasing virus outbreaks will slow down the economic recovery and dampen the capex investment and influence the overall trade surplus. As China serves as the largest trading partner to Australia, the ongoing trade wars impacted the trade surplus, with exports to China declined by 8.0% in February 2021 (on an M-o-M basis). It should be mentioned that China imposed import tariffs on Australia’s wine and barley products and restricted coal, lobsters, red meat, and cotton exports. Prices of base metals and bulk commodities are driven by macro-economic demand and supply situation. Inflation, monetary policy, and currency movements impact purchase parity and export growth. Agricultural goods exports are season-based and bushfire incidents and other catastrophic events have a serious impact on crop production.
Figure 5: Key Risks Affecting Exports and Trade Surplus:
Source: Analysis by Kalkine Group
Outlook: In the latest release by the Australian Bureau of Statistics, Australian miners showed increased mining activity with mineral exploration expenditure rose 2.5% to $718.4 million in December 2020 quarter. Base metals showed the record highest in exploration activity. On the capex front, mining capex to recover gradually from the lows in H2 FY20 and capex spend for 2020-21 to stay in-line with the prior year’s $35 billion as projected by the Department of Industry, Science and Energy and Resources. The re-opening of mines, strong prices for gold, iron ore, and other minerals are some of the drivers. Strong investments in nickel, cobalt, rare earth materials and lithium are likely to drive the battery revolution in Australia. The Department of Industry, Science and Energy and Resources has upwardly revised its resources exports estimates for 2020-21 and 2021-22 to $279 billion and $264 billion, respectively. The gross value of agricultural production is forecasted at $66 billion for 2020-21, according to the Department of Agriculture, Water, and the Environment. Larger harvests in every state are likely to hit the record highest winter crop production. Grains, oilseeds, and pulses are expected to drive the trend. Considering the developments in exports and trade surplus in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
1. Pilbara Minerals Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.99 Billion, Annual Dividend Yield: 0%)
Tantalum Projects Showed Resilient Performance: Pilbara Minerals Limited (ASX: PLS) is a mining and exploration company engaged in the development of lithium and tantalum projects. PLS saw a moderation in the production of its spodumene and tantalite concentrates. It currently has a nameplate capacity of ~330ktpa. The company is undergoing phase 2 expansion which will increase capacity to ~800-850ktpa. PLS has partnered with POSCO for downstream opportunities in a chemical conversion facility with a capacity of 40,000 tpa. It has shipped 116,256 dmt of spodumene and 143,336 lbs of tantalite concentrate in FY20. PLS continue to incur EBITDA losses with EBITDA margin of -40.3% in FY20 (vs. -29.4% in FY19). PLS has entered into an agreement to acquire Altura Mining Ltd. for consideration of US $175 million. This helps to consolidate lithium mining and processing operations at Greater Pilgangoora.
In H1 FY21, PLS shipped 114,239 dmt of spodumene concentrates as compared to 53,222 dmt in pcp. Improved market demand helped to achieve sales growth of 56.5% over pcp. PLS reported a positive EBITDA margin of 5.1% in H1 FY21 vs. -63.70% reported in pcp. This was achieved through improved plant performance and utilization rates which helped to report lower operating costs. It had refinanced a US $100 million bonds with a new low-cost US $110 million facility. Cash balance increased to $248.0 million as of December 2020 driven by equity fund raising of $173.6 million to acquire Altura Mining Ltd.
Outlook: PLS will have expanded production capacity following the acquisition of Altura Mining Ltd, which also helps to drive down production costs. The company targets to achieve operating costs of US $320-350/ dmt once the operation is stabilised. The acquisition also drives its plans to strengthen capabilities in electric vehicles.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 PLS (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month positive returns of ~18.18% and ~254.40%, respectively. It is currently trading above to the average of 52-week high price of $1.467and 52-week low price of $0.144. The stock outperformed the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a premium as compared to its peer median EV/EBITDA (NTM trading multiple), citing the positive developments from the acquisition of Altura Mining Ltd., which will boost its position in Lithium assets with the capacity to serve the electric vehicles market. For this purpose, we have taken peers such as Panoramic Resources Ltd. (ASX: PAN), Galaxy Resources Ltd. (ASX: GXY), Orocobre Ltd. (ASX: ORE) to name a few. Considering the resilient performance, positive half-year performance, equity fund raising, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.040, up by 0.483% on 29th March 2021.
2. Deterra Royalties Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.07 Billion, Annual Dividend Yield: 0.0%)
Strong Performance of Royalty Model from Iron Ore Assets: Deterra Royalties Limited (ASX: DRR) generates royalty income from the portfolio across most bulk commodities, base and precious metals, battery minerals, and energy assets. DRR derives royalty from operations of Mining Area C (MAC) which predominantly into iron ore mining. The MAC assets were operated by BHP that has a long-life and high-grade iron ore. Its royalty income consists of annual production-related capacity payments and ongoing quarterly revenue payments. The demerger of Deterra from Iluka Resources Limited saw revenue loss in FY20. DRR reported a 43.5% drop in EBITDA to $44.6 million in FY20 over pcp.
In H1 FY21, DRR witnessed revenue growth of ~22% owing to royalties from MAC and Yoongarillup and Wonnerup assets. The company took measures to identify new opportunities for royalties. It had implemented a lean cost structure resulting into increase in net profit by 18.2% in H1 FY21 over pcp. The company decided to distribute 100% of its net profit to its shareholders as dividends. It had received $4.8 million towards demerger-related adjustments to receivables. The company’s Yoongarillup mine is in decommissioning, and production will be replaced by the development of the Yalyalup mine. The company’s Tronox mineral assets are undergoing stage 2 environmental approvals.
Outlook: DRR is expecting sales volumes at MAC iron ore mine to more than double by 2023 due to BHP’s South Flank expansion with a production schedule is slated to commence in mid-2021. This will significantly boost revenues to DRR. DRR continues to identify projects to diversify its portfolio.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 DRR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted negative 1-month and 3-month returns of ~12.53% and ~17.60%, respectively. It is currently trading below the average of 52-week high price of $5.350 and 52-week low price of $3.850, implying accumulation opportunity. The stock underperformed the market volatility index due to slowdown in the mining activity following the pandemic. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median EV/EBITDA (NTM trading multiple) as the MAC iron ore mine volume is expected to more than double by 2023, which will significantly boost the royalty income in the near-term. For this purpose, we have taken peers such as Red 5 Ltd (ASX: RED), Strandline Resources Ltd. (ASX: STA), Metals X Ltd. (ASX: MLX), to name a few. Considering the resilient business model, consistent performance of its iron ore mining assets, liquidity, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.980, up by 1.530% on 29th March 2021.
3. Nufarm Limited (Recommendation: Hold, Potential Upside: Low Double Digit)
(M-cap: A$ 1.95 Billion, Annual Dividend Yield: 0.0%)
Good Rainfall Improved Crop Production: Nufarm Limited (ASX: NUF) is engaged in the manufacturing of agricultural chemicals for crop protection against damage caused by weeds, pests, and disease. Improved seasonal conditions in Australia, Indonesia, the US, and Canada improved revenues in H2 FY20. But was partially offset by hot and dry conditions in northern and eastern Europe. NUF entered into the first sales of omega -3 canola oil. Overall revenues up by 6.5% in FY20 over pcp. Performance improvement programs lifted Australia revenues by 24% in FY20 over pcp. Drought-breaking rain in the second half of FY20 drove revenues. EBITDA declined by 13.8%, led by weak European earnings and lower earnings in Seed Technologies business. Increase in forex losses, impairment and, restructuring costs resulted in net loss of $456.1 million in FY20. Sales proceeds of South American business were helped to deleverage its balance sheet. Cash from operations improved driven by favourable working capital movements. NUF has adequate liquidity with a cash balance of $687 million and undrawn facilities of $648 million.
NUF changed its financial year to September month. Based on two months performance from July 2020 to September 2020, the company experienced revenue growth of 23% for the second half of the last financial year on a pro-forma comparable period basis. Australia showed strong performance following by Europe. Underlying EBITDA improved by 9% owing to lower corporate costs.
Outlook: NUF is expecting new product launches to support earnings for FY21. Asia business to combine with ANZ business to deliver efficiencies in sourcing and manufacturing capabilities. Its North American business to benefit from the Greenville formulation facility.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 NUF (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month positive returns of ~23.56% and ~28.18%, respectively. It is currently trading below the average of 52-week high price of $5.770 and 52-week low price of $3.370. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a discount as compared to its peer average EV/EBITDA (NTM trading multiple), citing the dependence on rainfall and seasonality risks. The company’s H1 FY20 results were impacted by drought and dry weather conditions. For this purpose, we have taken peers such as Orica Ltd. (ASX: ORI), Incitec Pivot Ltd. (ASX: IPL), Salt Lake Potash Ltd. (ASX: SO5), to name a few. Considering the growth plans, strong liquidity, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $5.140, down by 0.195% on 29th March 2021.
4. Qantas Airways Limited (Recommendation: Hold, Potential Upside: Low Double Digit)
(M-cap: A$ 9.63 Billion, Annual Dividend Yield: 2.64%)
Border Closures Severely Impacted the Profits: Qantas Airways Limited Interactive Limited (ASX: QAN) provides airline services for international and domestic air transportation services, as well as offers freight services. The border closure impacted revenues in 2H FY20 by $4.0 billion. Reduction in operating expenses helped to preserve liquidity. It had implemented a 3-year recovery plan which aims to deliver cost savings of $1.0 billion per year through 2023. It had raised $1.43 billion in equity funding to support the plan. It had reported an underlying PBT of $124 million in FY20 (vs. $1,326 million in pcp) with losses of $647 million in 2H FY20 and profit of $771 million in 1H FY20. Operating unit costs increased by 4.3% even after excluding fuel.
During H1 FY21, domestic airlines generated positive cash flows, with the flying capacity reached 30% to pre-COVID levels. Its freight operations made record profit. The Qantas Loyalty remained resilient with positive cash flow contribution. The company’s net debt stood at $6.05 billion above its target range, plans were implemented to bring down the leverage. It is on-track to bring structural cost benefits of $0.6 billion in FY21. Committed undrawn limits have been increased to $1.6 billion. QAN reported H1 FY21 underlying EBITDA of $86 million led by rigorous cost-cutting measures.
Outlook: QAN is expecting to turn to positive free cash flows in FY21 with capex of ~$750 million. Net debt to peak in H2 FY21 and QAN may begin deleveraging in Q4 FY21. The recovery plan is expected to bring savings of $0.6 billion in FY21. Domestic border closures to impact 2H FY21 underlying EBITDA of $350-$450 million. Group domestic capacity is expected to increase to 60% to pre-COVID levels in 3Q FY21 and 80% in 4Q FY21.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 QAN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~3.68% and ~22.76%, respectively. It is currently trading above to the average of 52-week high price of $5.790 and 52-week low price of $2.910. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a discount as compared to its peer median EV/EBITDA (NTM trading multiple) given the severe exposure to economic downturn wherein which the restrictions such as border closures impacted its profitability. For this purpose, we have taken peers such as Austal Ltd. (ASX: ASB), PTB Group Ltd. (ASX: PTB), Quickstep Holdings Ltd. (ASX: QHL), to name a few. Considering the 3-year plan implemented, ongoing cost synergies, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $5.070, down by 0.783% on 29th March 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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