I. Sector Landscape
Australia’s materials and chemicals sector broadly encompass chemicals, metals & mining, and the construction materials industry. In 2020, construction contributed 7.4% in total GAV of $1,808 billion, vastly attributed to high supply-side resilience from the robust metals & mining industry. The Australian chemical industry holds 5,000 individual businesses, contributing over $38 billion to GDP in terms of industry value-added.
Key Macroeconomic Factors
Rising GDP and Income Levels: The Australian economy remained resilient with GDP inclined by 1.4% YoY in June 2021 quarter. On a QoQ basis, GDP edged up 0.7% on a seasonally adjusted basis. Compensation paid to employees surged by 1.3% as a result of increased employment levels and hours worked.
Rising Aggregate Demand: In June 2021, final consumption expenditure inclined by 1.3% of general government and by 1.1% of households on a QoQ basis. Consequently, gross fixed capital formation inclined by 3.2% with 7.4% rise in public sector.
Rising Aggregate Sale Activities: In June 2021, sales of goods and services by Australian manufacturing companies witnessed astonishing growth of 8.1% compared to the prior year.
Rising Corporate Returns: Despite an 8.1% PcP increase in wages and salaries in June 2021, aggregate gross profits of businesses inclined by 5.5% PcP amidst recovery stage, as Australia is phasing out of COVID-19 turmoil.
Favorable Momentum Captured in Chemicals Industry
Spike in Manufacturing Activities: In June 2021 quarter, total new private capital expenditure in the manufacturing industry inclined by 11.5% PcP. Further, expenditure on equipment & machinery inclined by 8.0% PcP and on building & structures inclined by a considerable 21.3% PcP. On top of this, manufacturing activities reported $1.283 billion in total EBITDA in FY20, up by 3.3% over the prior year.
Chemical Industry from Commercial Standpoint: In FY20, the chemical industry’s total income inclined considerably by 8.39% YoY and aggregated to $35.97 billion. For the same period, Industry value added inclined by 5.77% and was registered at $9.39 billion. After improved international demand and technological changes, the industry’s EBITDA inclined by 9.99% and stood at $4.16 billion.
Figure 1: Total Income of Businesses in Basic Chemical and Chemical Product Manufacturing:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Momentum in Construction Materials Industry
Aggressive Construction Activities in Place: Construction material demand has increased construction activities in residential and building space across the country. In June 2021, the total value of completed construction work has surged by 0.4% PcP and 0.8% QoQ. Significant support was extended by the residential and building segment work, which increased by 8.9% and 2.8%, respectively.
Figure 2: Uptrend Sought in the Value of Work Done:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Building Approvals Increased Through the Year: In June 2021, total dwelling units approved inclined by 21.5% PcP and stood at 17,601 units, primarily attributed to a 28.0% PcP increase in private sector houses 12.4% PcP increase in other private sector dwellings. Considering momentum in private sector dwellings, private capex in buildings and structures inclined by 4.6% MoM or 6.5% PcP and stood at $16.89 billion.
Australian Increasing Infrastructure Investments: Australian government made heavy investments towards infrastructure and mining activities, exhibiting a direct impact on construction materials. Top 2019-20 developments include approval of 163 projects under the Building Better Regions Program, managing a $100 billion infrastructure pipeline encompassing NorthLink, Midland Highway Upgrade, Monaro Highway Upgrade, and Monash Freeway Stage 2. Furthermore, the approval of 2,294 projects under the Stronger Communities Program represents $21.3 million in expenditure. As proposed in the FY22 budget, the government plans an investment of $110 billion over ten years in the country’s transport infrastructure projects.
Figure 3: Government Infrastructure Investments Develops Pathway for Construction Materials:
Source: Analysis by Kalkine Group
Index Performance
The ASX 200 Materials (GIC) Index posted 5-year returns of ~+91.77%, as compared to ~+39.33% by the ASX 200 Index. Increasing engineering activities and manufacturing support, and favorable government policies supplementing construction activities are some of the supporting factors driving sector gains.
Figure 4: The ASX 200 Materials (AXMJ) outperformed the ASX 200 Index in the past five years by whopping ~52.44%:
Source: REFINITIV as on 02 September 2021
Key Risks and Challenges
Although the government has dispensed remunerative support via Supply Chain Resilience Initiative (SCRI), the supply chain disruptions may stay intact in the short term. Australia’s engineering and construction industry may face mounting risks from concurrent changes in technology, and structural shifts post COVID-19. In June 2021, total dwelling units in the private sector have assumed a significant decline of 8.6% on a sequential basis. As part of COVID-19 relief measures, the retrenchment of government policies may pose a significant reversion of outperforming indicators. A medium-term downfall is expected in the agriculture industry in FY22, which may disrupt pesticides and other related-chemical businesses.
Figure 5: Key Risks and Challenges in the Materials and Chemical Sector:
Source: Analysis by Kalkine Group
Outlook
Modern Manufacturing Strategy: In support of recoveries and scale-up competition among Australian manufacturers, the Morrison Government rolled out the Modern Manufacturing Strategy to infuse $1.5 billion in new funding in the next four years.
Government Spending Towards Housing Affordability: The government estimated $8.4 billion to cushion the distressed housing factors and facilitate affordable and secure housing access.
The Australian Bureau of Statistics (ABS) seeks favorable outlook in capex activities: For FY22, ABS revised total capital expenditure estimates upwards by +1.7%, clocking $125,724 million and equipment, plant & machinery capex by +5.6%, computed to strike $52,998 million.
Government Infrastructure Investment Plan: The government holds a robust infrastructure roadmap for Australia that can amplify tender offers for the construction materials industry.
Rising Crop Production Supporting Chemical Demand: Total value of crop production is estimated to incline by 17% in FY21, reaching $25 billion, which may support pesticide and fertilizers in the chemical industry.
II. Investment theme and stocks under discussion (BLD, NUF, WGN, CLV)
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/Sales’ multiple methods.
1. ASX: BLD (Boral Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$6.64 billion)
BLD is a producer and distributor of building and construction materials in Asia, the US and Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.67% on 2 September 2021. The stock might trade at a slight premium compared to its peer average EV/Sales (NTM Trading multiple), given a favourable liquidity position with diluted financial distress. For the purpose of valuation, peers such as Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), CSR Ltd (ASX: CSR) have been considered. Considering the improved infrastructure outlook, ongoing non-residential construction, high FCF levels, and valuation, we give a “Buy” recommendation on the stock at the market price of $5.940, as of 2 September 2021, at 11:47 AM (GMT+10), Sydney, Eastern Australia.
2. ASX: NUF (Nufarm Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.69 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 stock has a potential upside of 18.97% on 2 September 2021. The stock might trade at some premium compared to its peer average EV/Sales (NTM Trading multiple), given top-line growth and operational efficiency. For the purpose of valuation, peers such as Orica Ltd (ASX: ORI), Scidev Ltd (ASX: SDV), Incitec Pivot Ltd (ASX: IPL) have been considered. Considering the growing volume and economies of scale, prudent liquidity profile, and valuation, we give a “Buy” recommendation on the stock at the market price of $4.380, as of 2 September 2021, at 11:00 AM (GMT+10), Sydney, Eastern Australia.
3. ASX: WGN (Wagners Holding Company Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$336.95 million)
WGN is involved in constructing roads, tunnels, bridges, airports, mining and gas plants, dams, and other infrastructure projects.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 9.78% on 2 September 2021. The stock might trade at some premium compared to its peer average EV/Sales (NTM Trading multiple) given extraordinary working capital management and prudent liquidity position. For the purpose of valuation, peers such as Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), Boral Ltd (ASX: BLD) 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 $1.810, up by ~0.555% on 2 September 2021.
4. ASX: Clover Corporation Limited (CLV)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$266.09 million)
CLV is an Australian based company engaged in the business of refining and sale of natural oil.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 9.57% on 2 September 2021. The stock might trade at some premium compared to its peer average EV/Sales (NTM Trading multiple), given the substantial increase in company stakes. For the purpose of valuation, peers such as Orica Ltd (ASX: ORI), Scidev Ltd (ASX: SDV), Incitec Pivot Ltd (ASX: IPL), have been considered. Considering the growth prospects in the USA, EU and Asia, prudent cost management, and valuation, we give a “Hold” recommendation on the stock at the market price of $1.620, up by ~1.250% on 2 September 2021. In addition, the stock has delivered an annualised dividend yield of 1.85%.
Note: All the recommendations and the calculations are based on the closing price of 2 September 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions 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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