I. Sector Landscape

Australian energy industry remained resilient from COVID-19 headwinds. For every petajoule of energy consumed, the country contributed $324 million in GDP. This is higher than the $50 million generated over the past decade. Australia continues to be a net exporter of energy. In FY20, the country exported (less imports) 70% of energy production. Coal accounted for most energy sources, with over 55% of energy generation from coal in 2019-20. In addition, Australia holds prominent mineral resources, with the mining business contributing 11.0% in total GVA of Australia in FY20 and further exhibiting a 4.2% growth rate. In addition, the Australian chemical industry holds 5,500 individual businesses, contributing over $38 billion to GDP in terms of industry value-added.

Key Macroeconomic Factors

Rising Macro Parameters: For the June 2021 quarter, Australia witnessed significant growth of 9.6% PcP and 0.7% QoQ accompanied by a 10.3% YoY incline in GDP. The real net national disposable income for the period edged up by an astonishing 17.3% PcP amidst favourable government relief plans.

Favourable Terms of Trade: Resilient export prices for mining commodities drove a 7.0% sequential incline in terms of trade, contributing 3.2% growth in nominal GDP in the June 2021 quarter. Retail trade inclined by 0.8%, and wholesale trade surged by 1.1%.

Proliferated Domestic Demand: In June 2021 quarter, the domestic demand contributed 1.6 ppts to the rising GDP. Both private and public demand inclined, primarily attributed to a 1.1% growth in household spending and a 7.4% uptick in public investment.

Robust Investment Contribution: Public investments inclined by 7.4%, primarily driven by state and local government infrastructure projects. Private investments edged up by 2.0%, with an incline in both housing and business investments.

Figure 1: Strong Growth in Quarterly Investment Contributors

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Critical Updates on Energy Segment

Increased Capacity from Renewable Resources: Over 90% of electricity generation investment since FY13 stood in renewable (solar and wind) capacity, partly driven by ARENA and CEFC funding and RET scheme subsidy. Above 10,400 MW of new solar, wind and battery capacity were added to the National Electricity Market (NEM) from June 2017 to March 2021.

High Price Volatilities Witnessed in FY21: Electricity spot prices slipped in all regions except for Queensland, with prices wandering from $45/MWh in Tasmania to $72/MWh in NSW. In NSW, Victoria, South Australia and Tasmania, the prices fell lowest since FY16. In addition, the financial year witnessed a considerable increase in negative price volume in mid-day, reflecting lower demand and growth in solar generation.

Material Developments in Metals and Chemicals Segment

Iron Ore Export Clocking Records: Australia’s iron ore export value registered a record of $48 billion in June 2021 quarter. The robust returns manifested soaring iron ore prices, with total exports value increasing by 25% QoQ or 70% PcP. Iron ore export to China represented around 84% of total Australian iron ore exports and clocked $40.3 billion in export value to China.

The uneven COVID-19 Wave to Advance Gold Prices: The COVID-19 infections in various parts of the world amidst a bumpy roll-out of COVID-19 vaccines is expected to drive gold prices to US$1,785/ounce in 2021. Australia has successfully replaced China as the world’s largest gold producer in the first half of 2021. As a result, demand for gold coins and bars surged strongly in the first half of 2021, up by 45% PcP.

Improved Financial Layout for Chemicals Industry: In FY20, the chemicals industry registered a total income of $35.97 billion, a considerable incline of 8.39% YoY. For the same period, industry value added edged up by 5.77% and was registered at $9.39 billion. Moreover, after improved technological changes and international demand, the industry’s EBITDA inclined by 9.99% and clocked at $4.16 billion.

Figure 2: Mineral Exploration Activities Manifesting Growth Consistency

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Index Performance:

The ASX 300 Metals & Mining Index posted 5-year returns of ~+88.40% compared to ~+34.56% by the ASX 200 Index. The increasing share of iron ore exports globally, rising gold production, stabilizing oil prices, rapid industrialization, and global commitment towards net zero emission targets contribute to the sector gains.

Figure 3: The ASX 300 Metals & Mining Index outperformed the ASX 200 Index in the past five years by a whopping ~53.84%:

Source: REFINITIV as of 14 October 2021

Key Risks and Challenges

The potential risk of deacceleration in investment growth may prevail as growth in total investments fell to 3.2% in June 2021 relative to 5.5% in March 2021. A medium-term downfall is forecasted in the agriculture industry in FY22, which may disrupt pesticides and other agriculture-related chemicals. In addition, gradual retrenchment of government policies may pose a potential risk of deaccelerating growth in the mining industry. Global gold demand contracted by 10% YoY to 1,833 tonnes in the first half of 2021, primarily driven by funds movement from safe assets to riskier assets amidst COVID-19 vaccine roll-out. China’s lower steel production from June may sustain in 2021 due to the potential economic downturn in China’s real estate industry.

Figure 4: Key Risks and Challenges

Source: Analysis by Kalkine Group

Outlook

Figure 5: Key Drivers for Energy, Metals and Chemicals Sector

Source: Analysis by Kalkine Group

Improved Commodity Prices Drove Operating Profit Surplus for Australia: Gross operating surplus plus gross mixed income inclined by 3.2%, primarily driven by the mining industry. Despite contracted production, mining operating surplus inclined 16.9% QoQ in the June 2021 quarter.

Favourable Export Volumes in Iron Ore: Australian iron ore export volumes are expected to witness a steady incline from 868 million tonnes in FY21 to 939 million tonnes by FY23. This justifies the commencement of various new mines in Western Australia.

Commendatory Uptick in Gold Commercials: Gold export earnings are estimated to clock $29 billion by FY22 due to expanded production from existing and new mines. Australian gold production is expected to incline at an annual average of 8.8% between FY22 and FY23.

Potential Stability in LNG prices: Asian LNG oil-lined contract and spot prices are expected to moderate in 2022 and 2023 due to stabilising oil prices above US$65/barrel and a well-supplied LNG market. Australian LNG export volumes are estimated to incline by 5.4% in FY22.

Improved Agricultural Production Driving Chemical Businesses: Australia's agricultural production is estimated to clock $73 billion in gross value by FY22. If realised, this would promote increased use of pesticides and other agriculture-related chemicals’ demand.

II. Investment theme and stocks under discussion (SGM, RSG, BPT, NUF)

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’ multiple method.

1. ASX: SGM (Sims Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.71 billion)

SGM is engaged in the business of buying, processing, and selling ferrous and non-ferrous recycled metals. The company is also providing environmentally responsible solutions for the disposal of post-consumer electronics.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 16.46% on 14 October 2021. Furthermore, the stock might trade at a slight premium compared to its peers’ average EV/EBITDA (NTM trading multiple), given considerable improvements in top-line and operating metrics. For valuation, peers such as Resolute Mining Ltd (ASX: RSG), Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK) are considered. Considering the surged Zorba prices, expected rise in enterprise storage, the favourable outlook for repurposed units, and valuation, we give a “Buy” recommendation on the stock at the current market price of $14.22, as of 14 October 2021, at 12:58 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 3.01%.

2. ASX: RSG (Resolute Mining Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$480.19 million)

RSG is a gold mining company operating multiple long-life, high-margin assets, including the Syama gold mine in Mali and the Mako gold mine in Senegal.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 19.33% on 14 October 2021. The stock might trade at some discount compared to its peers’ average EV/EBITDA (NTM trading multiple), given increased AISC and reduced demand for gold bars and coins. For valuation, peers such as Iluka Resources Ltd (ASX: ILU), Regis Resources Ltd (ASX: RRL), Perenti Global Ltd (ASX: PRN) are considered. Considering the improved guidance for gold production and at reasonable AISC and potential to curtail financial leverage, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.455, up by ~3.409% on 14 October 2021.

3. ASX: BPT (Beach Energy Limited)

(Recommendation: Hold, Potential Upside: Single High-Digit, Mcap: A$3.28 billion)

BPT is an Australian-based oil & gas exploration and production business. It primarily operates in exploration, development and production of hydrocarbons.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 7.78% on 14 October 2021. Furthermore, the stock might trade at some premium compared to its peers’ average EV/EBITDA (NTM trading multiple) given the well-diversified oil & gas production portfolio and favourable production expectations from Perth Basin & Victorian Otway. For valuation, peers such as Calima Energy Ltd (ASX: CE1), Whitehaven Coal Ltd (ASX: WHC), Santos Ltd (ASX: STO) are considered. Considering cash flows and top-line at elevated levels, increased investment avenues, and valuation, we give a “Hold” recommendation on the stock at the current market price of $1.430, up by ~0.350% on 14 October 2021. In addition, the stock has delivered an annualised dividend yield of 1.40%.

4. ASX: NUF (Nufarm Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.74 billion)

NUF is engaged in the manufacturing and distribution of crop protection products. Its operations are spread out in Australasia, Africa, America, and Europe.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 11.60% on 14 October 2021. However, the stock might trade at some discount compared to its peers’ average EV/EBITDA (NTM trading multiple), given the potential contraction of the agriculture business in FY22 and adverse climate conditions. For valuation, peers such as Clover Corporation Ltd (ASX: CLV), Scidev Ltd (ASX: SDV), Incitec Pivot Ltd (ASX: IPL) have been considered. Considering the diluted financial distress, expanding bottom-lines, momentum in bulk haulage business, and valuation, we give a “Hold” recommendation on the stock at the market price of $4.780, down by ~2.050% on 14 October 2021.

Note: All the recommendations and the calculations are based on the closing price of 14 October 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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