I. Sector Landscape and Outlook

The Australian economy stood resilient in the face of COVID-19 solid adversities, riding on the back of firm fundamentals of the resources sector. Australia’s resources and energy exports escalated fivefold in the last two decades while footing on the largest reserves of iron ore, uranium and gold. Australia stands fourth-largest in rate earth elements production, holding a 3.4% share in the world’s rare earth resources. As per the Australian Energy Regulator, the total asset value of the electricity network business surpassed a record-breaking $100 billion mark in 2020.

Figure 1: Key Growth Drivers

Source: Analysis by Kalkine Group

Capital Expenditure Activities

Rising Capital Expenditure: For the March 2021 quarter, total capital expenditure inclined by 6.3% QoQ and closing the COVID-19 capex gap. Capex in mining activities inclined by 4.12% on QoQ and 0.7% on a PcP basis. Electricity, Gas, Water, and Waste industry capex rose by 2.3% on a QoQ basis but nosedived by 9.7% on a PcP basis.

Government Support: The Australian government’s introduction of full expensing and temporary loss carry-back policies in the FY21 budget has established a tax-favourable business environment and further pushed capex activities.

Figure 2: Movements in Total Capital Expenditure

Source: Australian Bureau of Statistics, Analysis by Kalkine Group

International Trade

Australia facilitates its principal export partners in Northeast and Southeast Asia with a grid of 15 free trade agreements. Total international export in goods accounted for ~$35.95 billion in Apr 2021, up by 16% on a PcP basis. Coal exports increased by 8% (on an MoM basis) in April 2021, with exports to India up by 167%. Metalliferous ores export touched a record high of $16.47 billion in April 2021.

December 2020 Quarter Updates:

• World trade widened by 4% (QoQ basis), counteracting COVID-19 global pandemic and positioning 2020 growth at 1.3%.
• World industrial output fell by 4% in 2020, amidst stymied demand and international trade resulting from COVID-19 related worldwide restrictions and lockdowns.
• China’s industrial output, a decent proxy for commodity demand, recovered from pandemic aftermaths by September 2020.

Figure 3: Strong Global Links delivers Sustainable Growth in International Trade

Source: Australian Bureau of Statistics; Analysis by Kalkine Group

Metals and Mining Industry – Overview

For the December 2020 quarter, value-added from mining fell by 1.0% QoQ and 3.6% PcP. The marginal downfall is expected to be redundant with the global phase-out from COVID-19 turmoil. Capital expenditures into the mining industry edged up to 7.7% on a QoQ basis for December 2020 quarter.

Iron Ore Market Developments: Iron ore export volume hit a record high in FY20 with the FY21 forecast of over $136 billion. Iron ore price clocked $US140/tonne – highest registered since 2011. BHP is set to bring its South Flank project to reach 80 million tonnes/year in 2021. Exploration expenditure stood at $111 million in December 2020 quarter, up by 31% PcP.

Metallurgical Coal Market Developments: Prices sought recovery in line with a resurgence in global industrial production. Australia’s metallurgical coal exports are estimated to decline to 173 million tonnes for FY21. Australia may assume a competitive edge amidst low production levels in the US, Brazil and EU.

Figure 4: Quarterly Export Movements in Iron Ore and Metallurgical Coal

Source: Office of the Chief Economist; Analysis by Kalkine Group

Oil & Gas Industry

Insights into Oil Demand and Supply: Global oil consumption slipped by 6.7% to 93 million barrels per day in 2020. Oil prices are expected to surge by 1.8% in 2021. The recent COVID-19 pandemic had a significant impact on road activities and hence the oil & gas industry. Oil consumption for the manufacturing of petrochemicals and plastics manifest significant resurgence.

Output Levels: For FY21, Australian crude and condensate output are estimated to slip marginally to 370,000 barrels/day. In FY20, LPG and condensate accounted for 22% and 47% of aggregate Australian oil output. Santos's additional capacity buildup is expected via FID on the Dorado oil project in 2022 – estimated to add 85,000 barrels/day.

LNG Trade and Industry Insights: In 2020, international LNG trade clocked 349 million tonnes, marginally up by 1%. In December 2020, Australia’s export earnings from LNG surged to $7.3 million, up 21% QoQ. However, weak oil-linked contract prices significantly affected export proceeds.

Figure 5: Movements in Petroleum Products

Source: Office of the Chief Economist, Analysis by Kalkine Group

Electricity Network Industry

Consumption and Price Trend: Electricity consumption by an average residential consumer surged 0.8% YoY in 2020 from the distribution network. In the year 2020, prices declined significantly by 23% - 58% YoY across all regions. As a result, the annual average price slipped below $70 MWh – the lowest since 2015.

Government Focus: The government’s Renewable Energy Target (RET) scheme has incentivized large- and small-scale energy supply. RET scheme led large scale renewable projects electricity generation to 33,000 GWh in 2020. Australian Renewable Energy Agency (ARENA) invested $1.7 billion across 550 projects (valued at $6.9 billion) to integrate renewables into the electricity distribution system.

Figure 6: Key Risks and Challenges

Source: Analysis by Kalkine Group

Key Risks and Challenges

Australia holds an undiversified portfolio of trade partners, which may result in high systematic risks. Metallurgical coal exports are expected to nosedive with souring import restrictions in China and potential supply chain shift in China from Australia to Mongolia. ABS data on exploration spending suggest recovering capex in mining but at a marginal pace followed by downfall in COVID-19. Deferral of final investment decisions (FID) for multiple gas projects is expected to downgrade LPG and condensate production. Electricity prices are estimated to remain low for 2022 and 2023 with possibilities of temporary rate suspensions.

Outlook

According to the IMF, Australia is on track to generate US$1.5 trillion, accounting for 1.6% of the global economy. The Australian Bureau of Statistics estimated ~$36.94 billion in new capital expenditure in the mining industry, a 1.5% increase from previous estimates. Australia’s energy and resources exports are estimated to strike $296 billion and $292 billion in FY21 and FY22, respectively. Australia’s export earnings forecast for metallurgical coal has been upgraded by $0.2 billion for FY21; however, downgraded by $1 billion for FY22 following Chinese import restrictions. Global LNG trade is forecasted to widen by 6.0% annually as demand approaches supply capacity. Maximum grid demand is expected for the next 10 years in NSW, South Australia, and Queensland, and to remain stable in Tasmania.

II. Investment theme and stocks under discussion (BPT, CRN, SKI, VEA)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/EBITDA’ method

1. ASX: BPT (Beach Energy Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.89 billion)

BPT is involved in the mining and exploration of hydrocarbons operating in South Australia and Western Australia.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 24.65% on 8 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average EV/EBITDA (NTM Trading multiple) given favourable commodity prices and resilient cash position. For the said purposes, we have taken peers such as Cooper Energy Ltd (ASX: COE), Calima Energy Ltd (ASX: CE1), Australis Oil & Gas Ltd (ASX: AST), to name a few. Considering the favourable price fluctuations, surged investments, valuation, and trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.260, down by ~0.788% on 8 July 2021. In addition, the stock has delivered an annualised dividend yield of 1.58%.

2. ASX: CRN (Coronado Global Resources Inc.)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.51 billion)

CRN is an Australian-based material company engaged in the production, marketing and exports of metallurgical coals.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 19.85% on 8 July 2021. However, we believe that the stock might trade at some discount compared to its peer average EV/EBITDA (NTM Trading multiple) given challenging fundamentals, Chinese import restrictions and price declines. For the said purposes, we have taken peers such as Alkane Resources Ltd (ASX: AKL), Red 5 Ltd (ASX: RED), Imdex Ltd (ASX: IMD), to name a few. Considering the favourable production guidance, price recovery expectations, rising demand from India, valuation, and trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.920, up by ~1.657% on 8 July 2021.

3. ASX: SKI (Spark Infrastructure Group)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$4.00 billion)

SKI is a holding company with a diversified portfolio of quality essential service infrastructure.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 10.27% on 8 July 2021. However, we believe that the stock might trade at a slight discount compared to its peer average EV/EBITDA (NTM Trading multiple), given uncertainties from price fluctuations and extensively regulated business conditions. For the said purposes, we have taken peers such as Delorean Corporation Ltd (ASX: DEL), Peninsula Energy Ltd (ASX: PEN), Viva Energy Group Ltd (ASX: VEA), to name a few. Considering the stable fundamentals, marginal impact from exogenous factors, diversification into renewable projects, valuation, and trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.300, up by ~0.877% on 8 July 2021. In addition, the stock has delivered an annualised dividend yield of 5.54%.

4. ASX: VEA (Viva Energy Group Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$3.12 billion)

VEA is engaged in the manufacturing, distribution and supply of petroleum products to retail and commercial customers.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 12.54% on 8 July 2021. We believe that the stock might trade at some premium compared to its peer average EV/EBITDA (NTM Trading multiple), given diversification across profitable non-refining businesses and improved alliance sales. For the said purposes, we have taken peers such as Ampol Ltd (ASX: ADL), Washington H Soul Pattinson and Company Ltd (ASX: SOL), Woodside Petroleum Ltd (ASX: WPL), to name a few. Considering the sales volume recoveries, expectations on positive NPAT, long-term view over capex, valuation, and trading levels, we give a “Hold” recommendation on the stock at the current market price of $1.970, up by ~1.285% on 8 July 2021.

Note: All the recommendations and the calculations are based on the closing price of 8 July 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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