With easing lockdown restrictions and improved business sentiments, Australia reported growth in exports for the month of October 2020.
Improvement in Exports: Data released by Australia Bureau of Statistics showed that exports improved by 6% in October 2020 over preceding month. Exports of rural and non-rural goods recorded an increase of 13% and 8% respectively. In rural goods, meat and meat preparation products showed an increase of $217 million (+21%) over preceding month. In non-rural goods, metalliferous ores holds the strongest gains with an increase of $833 million (+7%). This was followed by gas with an increase of $360 million (+18%). Non-monetary gold exports to UK witnessed an increase although overall gold exports declined over last month.
Figure1. Summary of International Merchandise Trade
Source: Australia Bureau of Statistics
Figure 2. Chart Showing Exports Trend by Heavy-weight Product Categories
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
Figure 3. Overall Exports Trend (M-o-M basis)
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
Exports by Top Countries: Exports witnessed a sharp revival in the month of October after underpinned by COVID-19 impacting business sentiments and household consumption. China serves as a largest trading partner for iron ore. Exports to China surged by 7% in October 2020 over preceding month. Japan was the second largest export destinatio, witnessing an increase of 11%. Exports of iron ore increased in Japan as well. Coal and metalliferous ores drove the increase of 35% in exports to South Korea. UK being a global trading hub for gold, continues to see uptick in gold imports from Australia. US exports increased by 5% led by meat specifically export of beef.
Figure 4. Exports by Top Countries
Source: Australia Bureau of Statistics
Mining encompasses coal, oil and gas, iron ore, copper and gold. Mining is the core sector to the Australian economy contributing about 10.4% of GDP in 2020. Although the economy contracted, mining sector posted +1.1% growth led by strong demand for iron ore and increased exports to China. Australia secures high-grade hematite iron ore from Western Australia. It serves as the largest exporter of iron ore to Asian countries. With increased mining exports, the economy reported trade surplus of $4,840 million in October 2020.
Figure 5. GDP Growth Contribution by Industry for 2020
Source: Australia Bureau of Statistics
Figure 6. Mining GVA Break-up and Trend
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
Key Risks: China is the top export market for iron ore. Growing trade tension between Australia and China may weaken the export growth. China already imposed tariff hikes on barley trade, wine products and cotton from Australia. The fact that China is pursuing alternative markets for imports like Brazil, Canada, Ukraine, etc., may significantly affect the Australian exports. Further, the Australian miners may face intense pressure as Chinese companies are increasingly looking to develop the Simandou iron ore mine in Guinea.
Demand for packaged foods or meat products may get affected by stagnation in household spending. With unemployment and absence of wage hikes, household consumption touched record low in June quarter.
Data from ABS showed that iron ore, meat products, coal and non-monetary gold accounted for 65% of overall exports in October 2020. With increase in exports, these sectors contributed to trade surplus in October 2020. Considering these developments, we have figured out 4 stocks on ASX that might take cues from increase in exports and trade surplus.
1. Newcrest Mining Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 22.12 Billion, Annual Dividend Yield: 1.31%)
September Quarter Production In-line with Expectations: Newcrest Mining Limited (ASX: NCM) is engaged in the exploration, mine development, mine operations and the sale of gold and gold/copper concentrate. The company recently announced that its withdrawal from the Euro Project Farm-in Agreement established in July 2018 to deploy funds on competing projects. In another update, the company announced the commencement of drilling at the Antipa – Newcrest Wilki Farm-in Project, comprising ~6,000 metres of reverse circulation drilling. In its September quarter exploration report, the company stated that drilling results at the Havieron Project returned the best intercepts with 120.7m @ 9.3g/t Au & 0.18% Cu from 1349.3m, including 26.6m @ 34g/t Au & 0.23% Cu from 1384.4m. Group gold production in the September quarter stood at 503koz and copper production stood at 35kt, in line with expectations and on track for meeting annual guidance. The company’s Cadia asset reported its lowest ever quarterly AISC of US$113 per ounce, equating to an AISC margin of US$1,724 per ounce for the quarter.
Outlook: The company expects gold and copper production to increase in the December quarter. During Q1FY21, NCM’s Cadia and Lihir growth projects moved into execution phase with attractive rates of return and short payback. Initial Inferred Mineral Resource from Havieron is expected in the December 2020 quarter.
In October 2020, UK was one of the five top destinations for Australia’s exports, with a year-on-year increase of 26% and an export amount of $367 million. The increase is attributable to the demand for non-monetary gold with UK being a global trading hub for gold. NCM, being an exported of gold to the UK, stands to benefit from the above trend. Notably, the company generated revenue of US$115 million from the United Kingdom in FY20.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E 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 NCM (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has corrected by ~7.90% in the last one month. In the September quarter, NCM received net cash flows of ~$9 million from the stream facility in and offtake agreement in respect of Fruta del Norte mine. The stock of the company is currently trading at attractive levels and demonstrated stability in relation to COVID-19 led market volatility due to the resilient nature of the business. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $26.93, down 0.591% on 30th November 2020.
2. Whitehaven Coal Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.51 Billion, Annual Dividend Yield: 21.50%)
Strong Managed Coal Sales in September Quarter: Whitehaven Coal Limited (ASX: WHC) is engaged in the development and operation of coal mines in New South Wales and Queensland. During the quarter ended 30th September 2020, the company reported total managed coal sales of 6.0Mt, up 13% on pcp. The period also saw record total equity coal sales 5.0Mt, up 13% on pcp. Managed saleable coal production was up by 2% on pcp and came in at 4.9Mt. During the quarter, the company realised an average price of US$52/t for sales of own thermal coal. FY20 EBITDA stood at $800.9 million, down on FY19 value of $1,471.1 million, due to decrease in global COAL Newcastle Index price, SSCC prices, increased costs and decreased sales volumes.
Outlook: The company ended FY20 with diversified source of capital, no near-term maturities & strong liquidity position. With strong managed coal sales in the September quarter, the company remains on track to meet FY21 sales guidance (excluding purchased coal) of 18.5 – 20.0Mt. As on 30fth September 2020, the company had US$51.66 million in forward A$/US$ exchange contracts deliverable between October 2020 and March 2021. The company also stated its refined unit cost FY21 guidance range of A$69-A$72/t, reflecting the impact of strong sales performance in the September quarter.
In October 2020, exports to South Korea increased by a whopping 35%, driven by an increase in exports of metalliferous ores and coal. Coal exports to the country increased by 47% to $168 million. Notably, Whitehaven Coal supplies coal to customers in South Korea, and hence, is a beneficiary of increasing coal demand from the region. Throughout the pandemic, the company continued to sell coal products under long term contracts to the cornerstone high-energy, low-impurity coal markets of Japan, Korea, and Taiwan.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales 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 WHC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has corrected by 25.14% in the last six months, gained ~24.41% in the last one month. While the stock price suffered a setback due to decline in coal demand on account of COVID-19, resumption in activity across the globe has supported a rise in price recently, as depicted in the chart above. As activity levels pick up and demand for coal improves further, the company will benefit from its diverse geographical footprint and committed operations. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.325, down 9.557% on 30th November 2020.
3. Australian Agricultural Company Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 687.15 Million, Annual Dividend Yield: 0.00%)
Beefing-up the Market with Branded Products: Australian Agricultural Company Limited (ASX: AAC) operates as a cattle and beef producer with customers in Asia, Australia, North America and Europe/ Middle East. The company owns feedlots, farms and a processing facility that comprises of around 6.4 million hectares of land. In FY20, the company reported drop in revenues from both meat and cattle sales segments. AAC experienced severe drought in Queensland and Northern Territory due to which its herd count for Wagyu and non-Wagyu breed reduced. Further, gulf flood in Feb 2019 resulted in loss of herd count of breeding cattle. Its overall revenue dropped by 8.2% in FY20 over last year. Increased penetration of branded beef consumption in developing countries provided some relief. Its negative EBITDA margin of 61.6% was due to fair value adjustment for livestock. AAC achieved cost savings of $30.8 million in FY20 predominantly from lower feed and transportation costs. The company posted net income of $31.3 million in FY20 after two consecutive years of losses. This was despite write-off on account of gulf flood event. Its operating cash flows stood at $20.1 million as compared to $13.0 million in FY19. AAC reported lower revenues during H1 FY21. Its net losses however were narrowed to $1.67 million. The company had strong liquidity with cash balance of $14.165 million as of September 2020. Debt levels seems manageable with moderate capex. AAC has $190 million unused under bank credit facilities.
Outlook: AAC is successful in pursuing branded beef strategy that increased dollar value per kg of meat sold in H1 FY21. AAC plans to sustain margin and increase penetration in Australia and international markets specifically the US and Europe with Wagyu and Westholme brands. Management continue to prioritize resource allocation and integrate distribution channels to improve operating costs going forward.
AAC derives about 6% of meat sales from North America. Its strategy to expand sales through gourmet butchers, large supermarket chains and online retailers paid-off with 20% growth in North America sales in H1 FY21 over prior year.
Valuation Methodology:P/BV Multiple Based Relative Valuation (Illustrative)
Price to Book Value 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 AAC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock yielded positive returns of 2.87% in the last three months and +2.38% in the last six months. The company reported net income in FY20 after two consecutive periods of losses. Management’s intention to increase branded beef penetration started to pay-off. The stock was down 0.90% in the last one month. We have valued the stock using the price to book value multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $1.075, down 5.702% on 30th November 2020.
4. Mount Gibson Iron Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 889.43 Million, Annual Dividend Yield: 4.00%)
Surge in Ore Sales with Resumption of Koolan Island Mine: Mount Gibson Iron Limited (ASX: MGX) is engaged in production of hematite iron ore at the Extension Hill mine site in the Mid-West and the Koolan Island mine site in the Kimberley region of Western Australia. As of June 2020, the company had 69.4 million tonnes of mineral resources and 18.7 million tonnes of ore reserves. During FY20, MGX clocked 56% increase in ore sales to 4.9 million Mwmt. The company achieved first full-year of production from its high-grade Koolan Island mine. Revenue growth of 56.2% in FY20 was driven by strong iron prices across all product types as demand from China remained elevated and lower exchange rate. With average price realization increased to $84/wmt FOB (vs. 73/wmt FOB), EBITDA margin stood at 37.9% in FY20. This was despite increase in production costs related to waste stripping requirements at the Koolan Island mine and costs incurred on weather disruptions. Net income dropped by 36.9% over previous year on account of increase in taxes. MGX reported operating cash flow of $160.1 million in FY20 providing adequate funding to capex requirements. Its Q1 FY21 opened positive with increase in ore sales to 1.4 Mwmt (up by 215 Kwmt) from Q4 FY20. It had adequate liquidity with cash balance of $445 million as of September 2020 and no borrowings.
Outlook: MGX is on-track to reach projected ore sales of 2.8-3.3 Mwmt in FY21 at cash cost of $60-65/wmt FOB. During Q1 FY21, the company completed airstrip at its Koolan Island mine in an effort to reduce costs with direct flights from Perth. The company completed stage 1 reserve estimate for its Shine Iron Ore project in the Mid-West. It is targeted to achieve production by mid-2021. Its low-grade sales program at Extension Hill mine site extended to late 2020.
MGX is the leading producer of high-grade iron ore with strong mineral reserve base. It plans to increase ore production with waste stripping activity at Koolan Island and operational of Shine Iron Ore project. The company predominantly caters to customers in China.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
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EV/Sales 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 MGX (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock started to recover with one month returns of +10.29%. There are positive developments impacting the stock price. The management’s commitment on Shine Iron Ore project is on-track and is expected to commercialize by mid-2021. Its Q1 FY21 results opened positive with increase in ore sales and solid cash balance. The stock, however, suffered from negative returns of 21.46% since the beginning of the year due to volatile iron ore prices and increased trade tension with China. We have valued the stock using the EV/Sales multiple based on based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $0.750 as on 30th November 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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