The pandemic changed the food consumption pattern. Due to mobility restrictions, households substituted home cooked foods over dining out. Food retailing topped the chart in overall retail sales of Australia during March 2020 and it continued until June 2020. Purchase of foods and non-alcoholic beverages from supermarkets has increased in 2019-20, as per the official data.

The data released by Australia Bureau of Statistics mentioned that daily consumption of foods and non-alcoholic beverages increased by 33 grams (or 2.2%) from 1,514 grams per capita in 2018-19 to 1,548 grams in 2019-20. Items that led to the increase include vegetable products, non-alcoholic beverages, and cereals and cereal products. Purchase of fruit products and infant formulae and foods were least preferred during COVID-19. Major sub-group food items that corresponded to the increase were soft drinks, flour, rice and other grains, and potatoes. Bottled water consumption decreased, following pome fruits, grapes, and melons.

Figure 1. Consumption of Selected Major Food Groups by Weights 

Source: Australia Bureau of Statistics, Chart Created by Kalkine Group

As households stocked-up pantries, per capita weight of daily food and beverages sold in the month of March 2020 increased by 308 grams over March 2019. Major food category items such as cereals and cereal products, vegetables, milk products and meat and poultry products led to this increase.

There is a mixed trend in consumption. Households subsequently reverse consumption of certain items that saw increase in March 2020. These included canned soups, baked beans, etc. While consumption of certain items was continued to increase in April and June 2020 as well. These includes herbs, seasonings, butters, jam & other sweet spreads, potatoes, and dairy milk substitutes.

Households consumed more energy in 2019-20 over prior year. Total dietary energy available per capita from foods and non-alcoholic beverages sold in 2019-20 have increased by 3.5% to 9,000 kJ. This was due to high calorie intake in cereals and cereal products, vegetable products, fats and oil, milk products and sugar products. Some of the sub-group items that led the increase was flour, rice, and other grains, plants oil, pasta and noodles, sugar, honey, potatoes, and dairy milk products.

In a separate release on supermarket turnover data, households switched to home cooking during the lockdown. As a result, supermarket spending on perishable, non-perishable goods and all other product categories have increased in March 2020. However, non-perishable products such as flour, sugar, canned fruit, canned vegetables, canned and dry mix soups, and confectionary products witnessed sharp increase in March 2020 over pcp as per the data by Australia Bureau of Statistics.

Figure 2. Spending on Non-perishables Topped the Chart in March 2020

Source: Australia Bureau of Statistics, Chart Created by Kalkine Group

The official data showed about 38.1% of dietary energy from the food and non-alcoholic beverages sales in 2019-20 was derived from discretionary foods such as cereal based products, confectionary, sugar products, meat and poultry, non-alcoholic beverages, and snack foods. The pandemic saw increase in consumption of non-discretionary foods far exceeding discretionary category. Its worth to mention that Australian Dietary Guidelines (ADG) recommended minimum consumption of non-discretionary foods for daily serves. However, consumption in certain discretionary food items showed an uptick in March 2020 over pcp which includes sugar, honey and syrups, pastries, butter, and processed meats.

Figure 3. Discretionary Foods were Less Preferred as it’s Considered as Poor Source of Energy

Source: Australia Bureau of Statistics, Chart Created by Kalkine Group

Within the basic foods category, daily per capita consumption increased in breads, flour, tomato, onion, starchy vegetables like potatoes, spinach, lettuce and orange vegetables. Consumption of non-alcoholic beverages increased by 5mL per capita to 328mL in 2019-20. Soft drinks, bottled water, fruit and vegetable juices and drinks led the volume increase. However, there was a marked divergence in bottled water consumption which fell by an average 5mL per capita between March to June 2019 to March to June 2020 period.

Australian economy gained momentum with retail sales increased by 7.1% in October 2020 over last year. The re-opening of stores led to increase in turnover at clothing, footwear, departmental stores, cafes and restaurants. Melbourne showed highest increase following easing of stay-at-home protocols and re-opening of Victoria. Cafes, restaurants and takeaways food services reported strong increase. 

Figure 4. Following Easing in Victoria, Cafes, Restaurants and Takeaways Reported Surge in Turnover

Source: Australia Bureau of Statistics, Chart Created by Kalkine Group

Key Risks: The onset of pandemic altered food consumption pattern. Sales at supermarkets and staples have surged in March 2020 as households stocked-up pantries. However, the trend has changed with sales at food retailing fell in October 2020 as per the data by Australia Bureau of Statistics. Consumption of certain food items like canned soups, baked beans were reversed from record high in March 2020. While consumption of certain other items like herbs, seasonings, butters, jam & other sweet spreads, potatoes, and dairy milk substitutes continue to increase in subsequent periods. The food consumption largely correlates to the macro-economic events. High unemployment rates and roll back of government schemes like JobsKeeper program may adversely affect the household spending.

The per capita daily consumption of foods and non-alcoholic beverages have increased by 2.2% to 1,548 grams in 2019-20. Supermarkets turnover data showed turnover for perishable goods increased by 4.7% in October 2020 over pcp, followed by non-perishable with 3.3%, and all other products by 2.7% over last year. Further, the nation-wide retail sales surged by 7.1% in October 2020 over last year. 

(1) A2 Milk Company Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 9.69 Billion, Annual Dividend Yield: 0%)

Surge in Consumption Drove Top-line Growth: A2 Milk Company Ltd. (ASX: A2M) produces milk and other dairy products which are distributed to Australia, New Zealand, China, other Asian markets, the United States, and the United Kingdom. A2M witnessed revenue growth in all product segments - Liquid Milk (+27.7%), Infant Nutrition (+33.8%) and Other Nutrition (+29.6%) over pcp. On geographic front, sales almost doubled in China to NZD 337.7 million. A2M showed resilient performance with topline growth unaffected by COVID-19. Households pantry stocking through online and retailers helped to report robust growth of 33.1% in total revenue to NZD 1,730.7 million in FY20 over pcp.

The company achieved EBITDA margin of 31.9% in FY20 in-line with guidance. Increased distribution reach in the US, improved price yields and favourable currency movements resulted in better profitability. The company spent lesser than forecasted in marketing and brand building programs. Its net profit grew by 34.1% to NZD 385.8 million. Even with additional inventories to tackle the pandemic, A2M reported surge in operating cash flows to NZD 427.4 million in FY20 over pcp. It had closed FYE with cash balance of NZD 854.2 million as of June 2020 aided by improved profit generation across its group companies. AZM had nil debt and no borrowing programs in-place.

Outlook: A2M expecting economic activity to show moderation resulting from COVID-19. This may impact consumer behaviour in core markets and supply chain specifically in China. It is expecting EBITDA margin of 30%-31% in FY21 (lower than achieved in FY20) due to higher material costs, increase in marketing spend and pantry stock-up trend may vanish. Capex is expected to increase to NZD 50 million due to fresh milk processing project in Australia.

During pandemic in March 2020, consumption of milk and dairy products surged as reported by Australia Bureau of Statistics. Consumption continued to increase in April and June 2020. Total dietary energy consumed also surged in 2019-20 with significant contribution from milk and dairy products. A2M experienced household pantry stock-up trend during Q3 FY20 which favourably affected the overall revenue growth. As A2M derives sizeable revenues from Australia, the company is strongly positioned to benefit from increase in consumption of milk products.

Valuation Methodology: Price/ Earnings Multiple Based Relative Valuation (Illustrative) 

Price/ Earnings 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 A2M (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock corrected 8.93% in last one month. A2M generated superior ROE aided by strong leadership in dairy milk products, resilient performance during COVID-19 and achievement of profitability in-line with guidance. The stock is well-positioned to benefit from increase in consumption of dairy milk products as per the official data. The stock performed better than market volatility index. We have valued the stock using the Price/ Earnings 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 $13.160, up by 0.765% on 14^th December 2020.

(2) Tassal Group Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 729.10 Million, Annual Dividend Yield: 5.21%)

Improvement in Consumption of Salmons and Prawns: Tassal Group Ltd. (ASX: TGR) is engaged in farming of Atlantic Salmon and Tiger Prawns and processing and marketing of salmon, prawns and other seafood. COVID-19 impacted sales in FY20, partly offsetting domestic sales mix and pricing. Export markets were strategically targeted with bigger salmon.

Salmon sales volume grew by 13.4% in Q4 FY20 over pcp. Its prawn sales was up by $32.3 million in FY20. Overall revenue increased marginally by 0.16% to $552.70 million in FY20. Favourable sales mix (high margin export sales), efficient farming and processing helped to report better EBITDA partly offsetting lower sales at domestic wholesale market due to store closures. Salmon division reported increase in EBITDA margin of $3.60 per kg (vs. $3.29 per kg in FY19) benefited from better pricing at export market. While its Prawn division posted slightly lower EBITDA margin of $6.11 per kg in FY20. Its net income increased by 18.3% to $69.1 million in FY20. TGR reported lower operating cash flows of $49.8 million due to incremental costs in inventory build-up at salmon and prawn divisions.

Overall cash balance stood at about $21.9 million as of June 2020. The company doubled its growth capex in prawn division. This significantly increased the yield on harvest and harvest tonnes in FY20. Cash balance was also affected by one-time acquisition costs of $5.2 million towards Exmoor Station acquisition. Its liquidity was supported by unused bank lines totalling $99.6 million as of June 2020. Debt levels increased on account of additional long-term debt secured to fund the pandemic. Average tenure of debt facilities was 2.5 years. TGR raised $125.8 million through equity financing.

Outlook: TGR reported improved sales in Q1 FY21 with domestic sales grew by 6.3% over pcp and export market with $27.1 million. Overall sales increased by 31.1% in Q1 Y21 over last year. TGR is expecting freight costs to remain elevated. The company’s various initiatives like smartfarms, wellboat, improved feed diets and other technology to improve survival, biomass and reduce cost per kg. Processing costs to decline significantly over last year. TGR secured additional debt facility of $100 million to fund planned capex of $125.1 million in FY21.  

TGR is expecting prawn and salmon per capita consumption to increase in FY21. This correlates to the data by Australia Bureau of Statistics. Consumption of meat products increased the dietary energy of Australians in 2019-20. With significant capex committed, TGR is strongly positioned to benefit from the development.

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 TGR (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock of the company yielded returns of +0.83% in last one month. TGR reported strong EBITDA margin fuelled by commitment to bring down cost per kg. It has doubled capex spend on prawn divisions. The company is expecting processing expenses to decline significantly in FY21 due to technological advancement. TGR is expecting prawn and salmon per capita consumption to increase in-line with official data release. Its Q1 FY21 sales surged by 31.1% driven by exports and wholesale segment. The stock generated annual dividend yield of 5.21%. The stock performed well over market volatility index. 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, key risks, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.650, up 5.797% on 14^th December 2020.

(3) United Malt Group Ltd. (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.28 Billion, Annual Dividend Yield: 0%)

Strong Liquidity Supporting Capex: United Malt Group Limited (ASX: UMG) provides malt, hops, yeast, adjuncts, and related products to craft brewers and distillers. UMG was demerged from Graincorp Ltd. and listed separately effective on March 2020. The company experienced divergence in demand pattern on the back of COVID-19.

On-premise alcohol consumption reduced especially for craft beer following the first wave of COVID-19 imposed restrictions. Off-premise consumption increased at home, with demand increased through grocery and liquor stores. Customers’ ordering pattern changed with reduced order size and increased order frequency. However, demand for base malts on high. Overall revenue declined by 2.1% in FY20 over pcp. Lower volume and change in product mix affected both Processing and Warehousing & Distribution segment revenues. Despite cost savings of $5.9 million in 2H FY20, UMG reported lower EBITDA margin of 11.5% in FY20 driven by increase in supply chain and freight overheads, and adverse mix impact.

Net profit of $45.6 million in FY20 was favourably impacted by lower financing costs following debt restructuring and reduced occupancy and repairs and maintenance costs. UMG reported operating cash flow of $101.7 million in FY20 (up from $93.0 million in FY19) driven by lower working capital requirements due to seasonal unwinding and lower barley prices. UMG posted healthy cash balance of $262.1 million (about 14% of total assets as of June 2020). UMG is investing in warehousing and processing facilities. It had invested about GBP 51 million in Scottish malting facilities increasing capacity by 79ktpa. UMG also invested in expansion - Arbroath facility (22ktpa) and new malting plant at Inverness (57ktpa). Debt levels reduced from $1,036 million in FY19 to $455.4 million benefited from restructuring and debt forgiveness post demerger from Graincorp. The company had no significant nearing debt maturities until November 2022. It had commodity inventory facility of $103 million and $160 million under working capital facilities undrawn as of September 2020.

Outlook: UMG has increased capacities to meet increased demand especially off-premise demand.  The company is continuing with product mix strategies with higher level of base malt usage. Volumes are currently at 90% of pre-COVID levels. Its Arbroath facility to commence full production by January 2021. Commissioning at Inverness facility is scheduled on December 2021. UMG is strengthening its Mexican market presence with two warehouses to be set-up by 2022-end. The company is expected capex to be $120 million (vs. $59.5 million in FY20).

The consumption trend is catching up as shown by Australia Bureau of Statistics. The off-premise consumption and easing restrictions on social distancing and gatherings to benefit the company’s top-line growth.

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 UMG (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock is corrected 4.03% in last one month. The company faced pressure in lower on-premise consumption following social distancing norms and restrictions on gatherings. But off-premise sales mostly mitigated the revenue fall in addition to sale of base malt products. UMG reported healthy cash balance and has adequate liquidity to support expansion plans. The company is increasing capacities to meet the revival in consumption pattern following re-opening of stores and easing restrictions. 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 “Hold” recommendation on the stock at the current market price of $4.290 as on 14^th December 2020.

(4) Graincorp Ltd. (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.0 Billion, Annual Dividend Yield: 1.59%)

Edible Oil Consumption to Drive Revenues: Graincorp Ltd. (ASX: GNC) is integrated grain and edible oils provider with a market leading presence on the East Coast of Australia (ECA). It is the largest grain storage and handling business in ECA and the leading edible oil processor and oilseed crusher in Australia and New Zealand.  Agribusiness revenues improved by 3.9% to $3,415.0 million in FY20 over pcp driven by increase in grain production. Total contracted grain sales increased to 8.2mmt (from 7.7mmt in FY19). Increase in demand for spreads and oils following stay-at-home protocol and adoption of home cooking trend drove revenue growth. Oil seeds crushing volumes increased which contributed to surge in Processing segment revenues by 14.8% over pcp.

Overall revenues grew by 3.6% in FY20 over pcp. Receipt of crop protection contract favourably affected EBITDA to the extent $47 million. Excluding discontinued operations, GNC reported negative EBITDA margin in FY20. It had demerged United Malt Group which had contributed profit after tax of $308.1 million in FY20. Overall profitability improved to $343.3 million in FY20. It had reported operating cash flows of $30.6 million benefited from lower inventories. Increase in capex was largely due to sustaining capex at Agribusiness. GNC closed FYE with cash balance of $124.7 million. It had about $1,870.1 million available under its commodity inventory financing and working capital facilities. Overall debt levels appears satisfactory with D/E at 0.54x.

Outlook: GNC is expecting weather conditions to remain favourable throughout autumn and winter. Increase in supply of canola seeds to support crushing margins. Further, crushing capacity expansion at Numurkah to benefit Processing business margin. Carry-out and receivables revenues to improve. Expansion in Canada, Ukraine, and India to fully materialize in FY22. 

With increasing urbanization and rising health-conscious consumers as denoted by dietary energy consumption data by Australia Bureau of Statistics, GNC to stand benefit from increasing edible oil consumption following stay-at-home and changing to home cooking preferences.  

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 GNC (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock generated one-month returns of 3.48%. Increasing home cooking trend accentuated demand for edible oils which increased the Processing segment revenues of GNC. It had reported negative EBITDA margin due to discontinued business. The company is expanding crushing capacity. Management is expecting favourable weather throughout  autumn and winter. The stock is well-positioned to gain from increasing health-conscious consumers and increasing dietary consumption as shown by Australian Bureau of Statistics. The stock generated dividend yield of 1.59%. 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). Considering the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $4.460, up 1.826% on 14^th December 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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