Event Core
On 10 February 2022, the Australian Bureau of Statistics (ABS) released figures on the business turnover indicator for December 2021, derived from the monthly business activity statement. The indicator portrayed a rise in 7 out of 13 published industries on a seasonally adjusted basis. Accommodation and food services witnessed the most significant monthly surge, up by 10.1%, and Mining noticed the most significant uptick of 25.3% on a PcP basis.
Figure 1: Monthly and PcP Movements in Published Industries
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Latest Trends in Transport, Postal, and Warehousing Industry
Key Supporting Statistics: The transport industry’s consumer price index (CPI) surged by 2.8% in December 2021 quarter amid a 6.6% rise in automotive fuel due to surged demand and limited supply, and by 1.9% rise in motor vehicles due to disrupted global supply chain. Over the past twelve months, the industry’s CPI rose by 12.5%. In a separate release, for December 2021, total goods and services imports surged by 5%, primarily driven by imports of non-industrial transport equipment. Similarly, imports of freight transport increased by $41 million.
Raised Capital Expenditure: For September 2021 quarter, the total new capital expenditure surged by 12.9% PcP to $32.70 billion. Capital expenditure of buildings and structures and equipment, plant, and machinery advanced to $16.92 billion (up by 9.0% PcP) and $15.78 billion (up by 17.4% PcP), respectively delivering substantial support to supply chain requirements. Capital expenditure involved in equipment & machinery of Transport, Postal and Warehousing industry advanced by 60.7% PcP.
Improved Prospects on Accommodation and Food Services
Lockdown Recovery Driving Record Retail Sales: Australian retail sales volumes edged up by a record of 8.2% in the December 2021 quarter as easing restrictions continued during the quarter. But retail turnover (on a seasonally adjusted basis) posted a decline of 4.4%. The 8.2% growth was the most vigorous quarterly growth ever recorded, outperforming the previous record set in September 2020.
Return of Discretionary Spending: Consumers enthusiastically returned to discretionary spending after containment measures in December 2021 quarter. On a QoQ basis, clothing, footwear, and personal accessory retailing witnessed the most considerable uptick in volumes with 43.1% upswing, followed by café, restaurants, and takeaway food services (+18.8% QoQ), household goods retailing (+9.0% QoQ), department stores (+25.0% QoQ), and other retailing (6.8% QoQ).
Figure 2: Trend of Total Retail Turnover
Source: Analysis by Kalkine Group
Key Risks and Challenges
For FY21, the curtailed private demand weakened by 2.4% points from GDP growth, driven by a contraction in household final consumption expenditure. Retail support from online platforms is gradually fading away, as suggested by a 4.9% fall in December 2021, a third straight monthly decline. Spending on services slipped by 5.8% during the same period, and transport services edged down by 40.8%. The recent global supply chain disruptions have primarily affected retail trade and professional services. Strikes have remained consistent at Australian ports, bolstering supply delays and surging prices.
Figure 3: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Improved Capex Prospects: As per the Australian Bureau of Statistics, the total capital expenditure is estimated to clock $138.6 billion for FY22 (+8.7% over the previous estimate). Consequently, capex in equipment, plant and machinery is estimated to clock $60.1 billion (+12.8% over the previous estimate).
Strength in Retail Turnover: Despite a 4.4% monthly fall in Australian retail turnover, retail turnover stood firm, up by 4.8% over December 2020 (YoY). Victoria clocked the most significant fall of any state, however only partly unwinding the state’s robust rise in November 2021.
Positive Discretionary Spending: Consumers have enthusiastically returned to elevated discretionary spending following the end of Delta related lockdowns in October 2021. Australian retail sales volumes recorded an 8.2% surge in December 2021 quarter.
Improving Labor Supply: In December 2021, unemployment slipped by 4.2%, and consequently employment to population ratio edged up to 63.3%. The participation rate remained at 66.1% during the period, and the underemployment rate shrunk to 6.6%.
Supply Chain Resilience Initiative: Round 2 of the supply chain resilience program has been initiated, under which businesses are equipped with up to $2 million funds for scaling or establishing manufacturing capacity.
Considering the improvement in monthly business turnover, we have figured out three stocks on ASX that are set to see the momentum.
(1) Eagers Automotive Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.31 billion, Annual Dividend Yield: 4.09%)
Cost Focus and Integration of AHG Drove Results: Eagers Automotive Limited (ASX: APE) is an automotive retailer operating in the franchised and independent used car markets. Its FY20 result represents the full-year contribution of the merged entity - AHG Refrigerated Logistics. Significant growth prospects were seen in the car retailing segment covering Australia and New Zealand. The Truck segment delivered an underlying operating profit before tax of $19.8 million, aided by robust performance in the second half and AHG’s contribution. The company’s property portfolio increased to $356.5 million in contrast to $260 million in PcP.
Its H1FY21 revenue surged from $4,155 million in PcP to $4,699.2 million. Sustained demand for car retailing business and incremental internal income from the acquired properties drove the topline growth. It had realized $41.1 million from profit on the sale of assets. Its focused cost reduction measures resulted in annualized savings of $100 million compared to the pre-COVID levels. Car retailing delivered an underlying operating profit of $211.6 million in H1FY21 in contrast to $38.6 million in PcP. As of June 30, 2021, APE had available liquidity of $661 million that includes cash of $295 million, an unused term facility of $342 million, and undrawn capital facilities of $24 million.
Outlook: APE is expecting underlying operating profit before tax in the range of $390-395 million for the year ending December 31, 2021. This was in contrast to $209.4 million in FY20. Its statutory profit before tax is expected to be $440-445 million. The company is expecting to release its full-year results by the end of February 2022.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
APE Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: The stock of APE has been corrected by ~3.48% over the past three months. The stock made a 52-weeks low and high of $11.600 and $17.665, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering the supply chain disruptions affecting its truck segment. For valuation purposes, peers like MotorCycle Holdings Ltd. (ASX: MTO), Autosports Group Ltd. (ASX: ASG), Premier Investments Ltd. (ASX: PMV), and others have been considered. Given the integration benefits of AHG, cost-cutting strategies, ample liquidity, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $12.910, as of 14 February 2022, 12:15 PM (GMT+10), Sydney, Eastern Australia.
(2) APM Human Services International Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.54 billion, Annual Dividend Yield: 0%)
Building Capabilities through Inorganic Strategy: APM Human Services International Limited (ASX: APM) provides human services such as disability and aged care support services, health & wellbeing, vocational training, and employment assistance, and community-based support services catered to over 10 countries with 800 sites. It was listed in ASX on November 12, 2021. During the nine months period from March 9, 2020, to June 30, 2021, APM clocked revenue of $1.29 billion through operations in Australia and overseas. It had posted a profit before tax of $8.68 million with substantial costs attributed to personnel expenses and financing costs. It had made a net loss of $1.92 million.
On December 29, 2021, APM announced that it had completed the acquisition of Early Start Australia, MyIntegra, and Mobility. It also announced the acquisition of Clustera AB with the transaction got completed on January 31, 2022. The acquisitions help to ramp-up its capabilities in the infant, early, and youth sectors. MyIntegra and Mobility unlock significant opportunities in Disability and Aged Care Support Services in Australia. These acquisitions involve an upfront payment of $101.5 million through cash payment and the issue of shares. On December 3, 2021, APM made an agreement to acquire Lifecare. The acquisition enhances APM’s offerings from injury to illness and boosts strategy to build Allied Health services across the lifespan. Total consideration amounted to $68 million will be paid using existing cash reserves.
Outlook: The company is on par to realize FY22 pro forma revenue forecasts of $1.3 billion, pro forma EBITDA of $295 million, and pro forma NPAT of $155 million. APM is expected to announce six month results ending December 31, 2021, on February 25, 2022. International expansion remains the key focus area with reform underway in Sweden supplemented by aided by the acquisition of Clustera AB.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
APM Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: The stock is trading below the average of the 52-week high price of $3.50 and the 52-week low of $2.410, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering the scale benefits from the recently acquired entities, the company might trade at a slight premium to its peers. For valuation, few peers like SML Corporation Ltd. (ASX: SOP), Future First Technologies Ltd. (ASX: FFT), Kelly Partners Group Holdings Ltd. (ASX: KPG), and others have been considered. Given the ramp-up of capabilities, international expansion, modest outlook, current trading levels, and upside indicated by valuation, we give a “Buy” rating on the stock at the current market price of $2.750, as of 14 February 2022, 02:19 PM (GMT+10), Sydney, Eastern Australia.
(3) SG Fleet Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 854.96 million, Annual Dividend Yield: 5.03%)
Stable Performance Across Geographies and Business Lines: SG Fleet Group Limited (ASX: SGF) provides vehicle leasing and fleet management services covering Australia, New Zealand, and the UK. SGF witnessed a 15% uptick in total net revenue to $198.2 million in FY21 over the prior year. Its underlying NPAT showcased a growth of 41.8% to $51.6 million. It had incurred $8.9 million towards the acquisition of LeasePlan. It had witnessed a strong performance in all geographies while novated business showcased strong recovery in customer orders. It had experienced multiple contract renewals. Used vehicle values remained at exceptional levels. The Australian market had seen increased demand from large customers for the eStart electric vehicles.
The company won new contracts in SME, Corporate, and Employee Benefits segments that resulted in strong offtake in the UK business. On September 1, 2021, SGF announced the completion of the Australian and New Zealand businesses from LeasePlan Corporation N.V. for consideration of $273 million and 13% equity interest in SG Fleet. In Q1FY22, SGF witnessed high sales activity in Australia despite lockdown. NSW government retained the lease contract for an extended period. Its Novated business saw 25 new accounts and the order pipeline remains at record levels. For FY21, the company closed the period with a cash balance of $231.12 million, up from $111.11 million in PcP.
Outlook: Its Car Subscription business to expand benefited from the LeasePlan acquisition. New vehicle lead times of up to 12 months due to ongoing supply chain disruptions. The integration of LeasePlan is going as per the plan. The company to witness strong conversion levels in its Novated business. The company to release its H1FY22 results on February 16, 2022.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
SGF Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: The stock of SGF has been corrected by ~6.13% over the past three months. The stock made a 52-weeks low and high of $2.210 and $3.290, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering the capital-intensive nature of business and funding risks. For valuation purposes, peers like Mader Group Ltd. (ASX: MAD), Millennium Services Group Ltd. (ASX: MIL), AMA Group Ltd. (ASX: AMA), and others have been considered. Given the impact of LeasePlan on the Car Subscription business, stable profitability, increase in cash balance in FY21, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $2.450, down by ~2.0% as of 14 February 2022.
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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