Event Core
On 10 December 2021, the Australian Bureau of Statistics released an experimental indicator of business turnover derived via a monthly business activity statement. For October 2021, the monthly business turnover showcased a surge in 9 out of 13 published industries. The largest uptick was assumed in accommodation and food services, witnessing a 13.8% bulge.
Figure 1: Change in Monthly Business Turnover Across Industries:
Developments in Retail Trade
Returning to Discretionary Spending: Business turnover in retail trade surged to 113 points in the business turnover index, up by 2.2% sequentially or +9.5% PcP. Reopening of retail stores and improved foot traffic & mobility presented a resilient boost to clothing, footwear & personal accessory retailing (+27.7%), department stores (+22.4%), café restaurants & takeaway food services (+12.3%), household goods retailing (+4.5%), and other retailing (+2.2%).
Marginal Downfall in Food Retailing: Food retailing was the only industry to witness a short-term fall in October 2021, down by 0.5%. This was primarily in line with the recurring pattern of previous post-lockdown periods, where food retailing was partially cannibalized by consumer spending in cafes, takeaways, and restaurants. However, accommodation and food services delivered a sequential upswing of 7.6% in the business turnover index.
Businesses in Information Technology Exploring Opportunities
Business Turnover Update: In October 2021, information media & telecommunication clocked 99.6 points in the business turnover index, up by a marginal 0.3% on a sequential basis and a considerable 8.9% PcP. The pandemic's profound development in digital infrastructure caused by the pandemic drove IT businesses, resulting in strong revenue generation from job creation and overseas markets. Industry collaboration, government incentives, global talent acquisition, and surged diversity will be critical for keeping the industry’s global growth trajectory at elevated levels.
Key Trends Driving the Industrials and Mining Industry
Business Turnover Indicator for the Industry: Business turnover index points took a minor dip of 1.9% MoM to reach 121.7 points, whilst considerable upshift of 28.5% PcP. Similarly, the construction industry slipped by 2.7% to reach 103.7 points but remained sufficiently up by 6.0% PcP.
Favourable Long-term Business Sentiments for the Industry: With strict lockdown measures in Sydney and Melbourne, the construction activity was affected, with the construction value falling 0.3% sequentially in September 2021 and clocking $53.93 billion. The decline is not as much to fear, indicating the recovery is underway. Moreover, the engineering activity remained robust, with the value of engineering work done surging 0.4% in the September 2021 quarter on a sequential basis and clocking $23.49 billion.
Figure 2: Engineering Construction Showing Resurgence:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Gaining Momentum in Capex: Companies increasingly spend on buildings and structures and plants and equipment, improving sentiments. Total capital expenditure swelled 12.9% PcP in September 2021 to reach A$32.70 billion. Capex on buildings and structures increased 9.0% PcP to reach $16.92 billion in September 2021 quarter.
Key Risks and Challenges
For October 2021, the unemployment rate advanced to 5.2%, and employment slipped to ~12.84 million from ~12.88 million registered in September 2021. Potential threats to business sentiments from supply chain disruptions and a recent downturn in the Chinese economy may include constraints on Australian businesses in the short term. Government intervention to cap energy use & emissions and softening construction activity in China has pulled down iron ore prices. Gradual retrenchment of accommodative policies following increasing inflation rates may affect the global economic expansion. COVID-19 uncertainties exist due to the gradual onset of delta variants in the past few months.
Figure 3: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook
The gradual wage hikes shall deliver a favourable incline in disposable income, pushing household spending to pre-COVID levels. For September 2021 quarter, net trade contributed 1.0 ppts to GDP, primarily driven by exports of rural commodities and mining, manifesting surged global demand for coal and LNG. A recent spurt in demand for electric vehicles (EVs) and new energy technologies is expected to upscale demand for copper, aluminium, lithium, and nickel. Australia’s mineral export earnings for 2021-22 are forecasted to edge up by 14% to reach $349 billion in the recent forecast by the Department of Industry, Science, Energy and Resources. In the FY22 budget, the Australian government has committed $15.2 billion to new infrastructure projects. This will create over 30,000 jobs directly or indirectly across the nation. This is a subpart of a $110 billion investment package for the next ten years to build the nation’s infrastructure. Considering the monthly business turnover developments covering diverse sectors, we have figured out four stocks on ASX that are set to see the momentum.
(1) Smartgroup Corporation Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.02 billion, Annual Dividend Yield: 7.18%)
Improved Operational Efficiency Delivered Endurance: Smartgroup Corporation Limited (ASX: SIQ) is a specialist employee management services provider, which provides salary packaging, fleet management and various other employee management services to organizations across Australia. SIQ strived for steady operational performance during a disrupted environment. In FY20, revenue reached $216.3 million, down by 13% YoY, and NPATA stood at $65.2 million, down by 20% YoY. FY20 witnessed 100% extension or renewal of top 20 client contracts.
In H1FY21, revenue clocked $109.4 million, edged up by 4% sequentially and slipped by 2% PcP. NPATA stood at $33.5 million, up by 1% sequentially and 5% PcP. SIQ’s largest client, the Department of Defence, extended its contract with a 5-year engagement, inclusive of extensive options. Adjusted after-tax operating cash flows stood at a 107% conversion rate (relative to NPATA), and net debt as of 30 June 2021 corresponded to $4.5 million. Leasing settlement volumes stood up by 2% PcP and 4% sequentially.
Outlook: SIQ estimated annual digital investment in a range of $5 million - $6 million for the next three years, primarily funded from operating cash flows. SIQ targets EBITDA uplift in the range of $15 million - $20 million from strategic initiatives, ~66% from revenue expansion, and the rest from sales and service efficiencies.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
SIQ Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SIQ went down by ~2.66%. The stock made a 52-weeks’ low and high of $5.820 and $9.990, 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 peer’s average EV/Sales multiple, considering financial strength at elevated levels. For valuation, peers like SML Corporation Ltd (ASX: SOP), Future First Technologies Ltd (ASX: FFT), Kelly Partners Group Holdings Ltd (ASX: KPG) have been considered. Given the improvements in topline figures, SIQ’s prudent cost-saving measures, rising investment for digital infrastructure, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $7.590, as of 13 December 2021, at 12:20 PM (GMT+10), Sydney, Eastern Australia.
(2) BWX Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 682.16 million, Annual Dividend Yield: 0.95%)
Rising Distribution Points Delivering Sustainable Topline Growth: BWX Limited (ASX: BWX) is a vertically integrated beauty and personal care production and distribution firm. In FY21, BWX witnessed 11.5% growth in underlying EBITDA owing to increased sales and profit despite continuous global turbulence. Revenue stood at $203.9 million on a constant currency basis, registering 8.6% YoY growth. As a result, from an operating standpoint, gross margins improved by 134 bps and clocked 59.3%.
Working capital was well maintained at sustainable levels to support sales growth in line with global retailer launches and new product development. The group substantially improved its cash position to $70.5 million as of 30 June 2021 from $28.6 million the previous year. The cash conversion ratio for the period clocked 74.1%, showcasing a sustainable approach to working capital management.
Outlook: BWX strives to deliver 2 million global distribution points by FY22. The company expects 47% growth in Sukin, 36% growth in Andalou Naturals, and 38% growth in Mineral Fusion. BWX holds over 50 global E-tailer partnerships, 19,860 online distribution points, and 12 owned e-commerce sites.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
BWX Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BWX went down by ~6.332%. The stock made a 52-weeks’ low and high of $3.680 and $5.630, 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 peer’s EV/Sales average, considering consistent growth in the omni-channel framework and improved operational efficiency. For valuation purposes, peers like McPherson’s Ltd (ASX: MCP), Blackmores Ltd (ASX: BKL), Pental Ltd (ASX: PTL) have been considered. Considering the improved omni-channel presence, 50+ partnerships, significantly rising distribution points, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.230, as of 13 December 2021, at 11:38 PM (GMT+10), Sydney, Eastern Australia.
(3) Gentrack Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 172.93 million, Annual Dividend Yield: 0%)
GTK Continues the Build-up of its ARR via New Project Deliveries: Grentrack Group Limited (ASX: GTK) develops, integrates, and facilitates enterprise and customer management software solutions for the utility and airport industry. In FY21, GTK clocked EBITDA of NZ$12.7 million, up by 5.0% PcP with net cash position improved by NZ$9.2 million and reached NZ$26.0 million. Utilities revenue edged up by 8.8% YoY, primarily driven by strong non-recurring revenue (NRR), up by 68%, on successful project deliveries, supporting future annual recurring revenue (ARR). Veovo (Airport Business) stands profitable with ARR up by 7.7%.
ARR for the period stood at NZ$70.7 million, marginally down by 0.3% YoY. Due to surged investment in personnel, operating costs bulged by 5.2%, partially offset by continued savings in non-personnel costs. Cash balance for the period increased to NZ$26.0 million as of 30 September 2021 due to improved EBITDA and favourable working capital flow, partially offset by outflows owing to taxes, property issues and other adjustments.
Outlook: GTK reconfirms its FY22 group revenues ahead of the FY21 top line of NZ$105.7 million. Over the intervening eight weeks, GTK may seek turbulence in the UK energy market, including the particular administration of Bulb.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
GTK Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GTK went down by ~6.183%. The stock made a 52-weeks' low and high of $1.200 and $2.080, 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 peers, considering B2C suppliers' failure in the UK energy market. For valuation purposes, peers like Reckon Ltd (ASX: RKN), Infomedia Ltd (ASX: IFM), Integrated Research Ltd (ASX: IRI), and others have been considered. Considering the improved cash position, relatively high cash conversion rate, cost-saving measures, and valuation, we give a Speculative Buy' rating on the stock at the current market price of $1.725, as of 13 December 2021, at 11:39 AM (GMT+10), Sydney, Eastern Australia.
(4) Deterra Royalties Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 2.18 billion, Annual Dividend Yield: 3.35%)
MAC Delivering High Volume Growth Potential: Deterra Royalties Limited (ASX: DRR) operates in a royalty business model that involves managing and investing a portfolio of royalties across bulk commodities, base metals, and battery metals in Australia. In FY21, DRR clocked revenue of $145.2 million with an NPAT of $94.3 million. Underlying EBITDA stood at $135.5 million at a margin of 96% (post-demerger). During the period, MAC South Flank achieved its first ore; growth potential of 80 million wet metric tonne/annum (Mwmtpa) capacity, bringing together a total MAC capacity of 145 Mwmtpa.
DRR is streamlining capital management and shareholders’ return with low debt levels, scalable corporate structure and 100% NPAT payout. MAC royalty outperformed in a backdrop of the robust incline in iron ore prices. As a result, MAC quarterly receipts have inclined since September 2020 quarter, standing at $253.7 implied sales price/dmt.
Outlook: DRR holds low-risk exposure to a low cost, large iron ore mining complex (MAC), which is set for growing its volumes by almost 2.4x. DRR expects to ramp up production volume to 145 million Mwmtpa in the next three years.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
DRR Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of DRR went up by ~3.218%. The stock made a 52-weeks’ low and high of $3.520 and $4.990, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). Considering a low-risk business model, the company can trade at a slight premium compared to its peer’s average EV/Sales multiple. For valuation, peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), OZ Minerals Ltd (ASX: OZL), and others have been considered. Considering high growth potential from MAC, low debt levels, streamlined corporate structure, and valuation, we give a ‘Hold’ rating on the stock at the closing market price of $4.170, up by ~0.968% as of 13 December 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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