Event Core
On 26 November 2021, the Australian Bureau of Statistics (ABS) released updates on October 2021 retail trade. As per the release, total retail turnover clocked 5.2% YoY growth and 4.9% sequential growth for October 2021 and stood at $31.13 billion (on a seasonally adjusted basis). The upside in retail trade follows September’s rise of 1.3% after falls of 1.7% in August 2021 and 2.7% in July 2021.
Figure 1: Monthly Retail Turnover
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Economic Factors Affecting Retail Trade
Improved Aggregate Demand: The easing restrictions and improved business sentiments drove a 0.9% uptick in Gross Value Added (GVA) in June 2021 quarter, with wholesale trade hiking 1.1% and retail trade delivering 0.8% growth (on a QoQ basis).
Rising Household Expenditure: For June 2021 quarter, household spending surged by 1.1%; however, it remained below pre-COVID levels (December 2021 quarter). Spending on goods surged by 0.9%, sustaining elevated levels. Spending surged across all states, with Victoria surging 0.1% (the weakest rise).
Household Saving Ratio Declined: The household-to-income ratio edged down to 9.7% from 11.6% in June 2021 quarter. Savings slipped due to a surge in household consumption and marginal downside in gross disposable income by 0.3%.
Industry-Specific Changes
Returning to Discretionary Spending: Consumers have diligently returned to discretionary spending, with an uprise sought in five major industries. Reopening of physical stores and improved mobility & foot traffic presented a solid boost to clothing, footwear & personal accessory retailing (+27.7%), department stores (+22.4%), café restaurants & takeaway food services (+12.3%), household goods retailing (+4.5%), and other retailing (+2.2%).
Marginal Downfall in Food Retailing: Food retailing was the only industry to witness a fall in October 2021, marginally down by 0.5%. This was mainly in line with the recurring pattern of previous post-lockdown periods, where food retailing was partially cannibalized by consumer spending in cafes, takeaways, and restaurants.
Figure 2: Industries Rising on Retail Support
Source: Analysis by Kalkine Group
Key Updates on Retail Trade
Retail Performance as Lockdown Lifts: The retail trade continues to be tied to containment restrictions in states. This month’s recovery was primarily driven by the end of lockdowns in NSW, Victoria, and the Australian Capital Territory. As lockdown ended on 11 October 2021, NSW sales surged by 13.3%, resurging to the levels witnessed in the months before the Delta breakout.
Further Developments Post Lockdown: After containment measures were lifted, a strong uprise in retail trade was sought in Victoria (up by 3.0%) and Australia Capital Territory (up by a significant margin of 20.2%. This broadly implies that consumers have returned to discretionary spending.
Figure 3: Monthly Turnover by State and Territory
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Risks and Challenges
For October 2021, the unemployment rate edged up to 5.2%, and employment slashed to ~12.84 million from ~12.88 million registered in September 2021. Potential threats to business sentiments from supply chain disruptions and a recent downturn in the Chinese economy may constraint retail trade in the short term. The noticeable incline in inflation levels and surging affordability concerns may translate into a shortfall in food retailing and department stores turnover growth. Growth in household spending on services deaccelerated in June 2021 to 1.3% from 2.5% assumed in March 2021, raising concerns of a potential downtrend. The fears of rising new delta variant may trigger lockdowns affecting retailers.
Figure 4: Key Drivers and Key Constraints
Source: Analysis by Kalkine Group
Outlook
Resurgence in Wage Hikes: The gradual wage hikes shall deliver a favourable incline in disposable income, pushing household spending to pre-COVID levels. Employment may gear up as the participation rate for October 2021 increases to 64.7%.
Household Saving Ratio Dipped: ABS reported a decline in household saving ratio to 9.7% from 11.6%, suggesting improvements in consumption propensity and rising household spending, specifically retail trade.
Non-Cyclicality Intact: Considering the intact online position of retail businesses, the retail industry has manifested stability during COVID-19 scenarios, considering significant volatilities witnessed in other industries.
Improved Capital Expenditure in Retail Trade: In September 2021 quarter total capital expenditure in retail trade surged by 13.44% PcP and equipment and machinery investment in retail trade surged by 10.0% PcP. These developments manifest improved productivity prospects in retail space.
Substantial Support to Manufacturing Activities in Food Industry: Australia’s food industry seeks growth opportunities in smart manufacturing, innovative products, and profound impact from food safety & traceability systems.
Considering the developments in retail sales, we have figured out four stocks on ASX that are set to see the momentum.
(1) BWX Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 727.21 million, Annual Dividend Yield: 0.90%)
Rising Distribution Points Delivering Sustainable Top-Line Growth: BWX Limited (ASX: BWX) is a vertically integrated beauty and personal care production and distribution firm. In FY21, BWX embarked upon 11.5% growth in underlying EBITDA on the back of increased sales and profit despite continuous global turbulence. Its adjusted revenue stood at $203.9 million, reporting 8.6% YoY growth. In addition, health H2FY21 sales performance from core brands – Sukin, Mineral Fusion, and Andalou Naturals - stood resilient. As a result, from an operating standpoint, gross margins improved by 134 bps and clocked 59.3%.
Financial liabilities include bank debt of $52.4 million and deferred consideration and payments on acquisition. Working capital was well maintained to support sales growth in line with new product development and global retailer launches. The group significantly developed its cash position to $70.5 million as of 30 June 2021 from $28.6 million the previous year. The cash conversion ratio for the period stood at 74.1%, highlighting a sustainable approach to working capital management.
Outlook: BWX is striving to deliver 2 million global distribution points by FY22. The company expects 47% growth in Sukin, 36% growth in Andalou Naturals, and 38% growth in Mineral Fusion. In addition, the omni-channel approach is expected to enhance brand presence; BWX holds over 50 global E-tailer partnerships, 19,860 points of online distribution, and 12 owned e-commerce sites operating globally.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BWX (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BWX went down by ~5.36%. The stock made a 52-weeks’ low and high of $3.680 and $5.630, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s EV/Sales average, considering consistent growth in the omni-channel framework and improved operational efficiency. For valuation purposes, peers like McPherson’s Ltd (ASX: MCP), Blackmores Ltd (ASX: BKL), Lovisa Holdings Ltd (ASX: LOV) have been considered. Considering the improved omni-channel presence, 50+ partnerships, significantly rising distribution points, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing price of $4.400, down by ~2.655% as of 29 November 2021.
(2) Adairs Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 615.81 million, Annual Dividend Yield: 6.31%)
Rising Omni-Channel Presence and Broad Market Penetration Unfolds Growth Opportunities: Adairs Limited (ASX: ADH) is an omni-channel speciality retailer that offers homewares, furniture, and home furniture through both retail stores and online channels. ADH sales surged by 28.5% and stood at $499.8 million. Online sales stood at $187.0 million, contributing 37.4% of total sales. Store sales surged by 18.1%, with LFL store sales up by 7.4%. As a result, underlying gross margin improved by 520 bps to 66.7%. Underlying EBIT almost doubled and stood at $96.7 million.
Supply chain strategy completed with the new DHL-operated national distribution and annualised cost savings of circa $3.5 million/annum. Net cash for the period stood at $26.0 million with the debt-free balance sheet. Inventory stands at planned levels with improved working capital management. Linen Lover membership growth was the key driver of sales. Linen Lover members account for over 80% of Adairs sales and spend circa 1.5x over non-members on each transaction. Growing store floor space through upsized and new stores will continue to drive store sales. The average annual growth in floor space was 7.5% over the last five years.
Business Update: As announced on 25 November 2021, ADH agreed to purchase Focus on Furniture at an enterprise value of $80 million with free debt. Focus on furniture is a vertically integrated Australian omni-channel furniture retailer.
Outlook: Mocka and Adairs continued to benefit from increased customers focus on their homes. ADH operates in a significant addressable market and being omni-channel means broad market penetration is available. The online performance continues to support and maintain a resilient top-line.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs ADH (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of ADH went down by ~0.27%. The stock made a 52-weeks’ low and high of $3.100 and $4.970, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s EV/Sales average, considering improved operational performance and financial stability. For valuation purposes, peers like Michael Hill International Ltd (ASX: MHJ), Autosports Group Ltd (ASX: ASG), Universal Store Holdings Ltd (ASX: UNI) have been considered. Considering the improved presence on the omni-channel platform, growing store floor space, and upside indicated by valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.640, as of 29 November 2021, at 02:46 PM (GMT+10), Sydney, Eastern Australia.
(3) JB HI-FI Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 5.44 billion, Annual Dividend Yield: 6.05%)
Increased Consumer Demand and Online Sales Expands Top-line Growth: JB Hi-Fi Limited (ASX: JBH) is engaged in retailing home consumer products, particularly electronics and home appliances, in Australia. In FY21, total sales got swollen by 12.6% and stood at $8.9 billion amidst continued consumer demand. Online sales inclined to $1.1 billion, up by an astonishing 78.1% PcP. Gross profit inclined by 13.4% and stood at $1.33 billion with gross margins up by 27bps to 22.2%, primarily driven by key growth categories – computers, communications, games hardware, small & visual appliances.
Despite top-line growth, cash from operations (CFO) declined to $558.7 million relative to $981.3 million recorded in FY20. Unfavourable CFO was primarily affected by increased working capital, mainly inventory, to satisfy the increasing demand. As a result, the interest coverage ratio inclined to 228.4x relative to 40.4x and return on invested capital inclined to 71.1% relative to 51.3% in FY20. Capex is inclined to $57.7 million, including investments in store portfolio, strategic initiatives, and online offering.
Outlook: For FY22, JBH estimates 8.4% PcP sales growth in New Zealand but remains bearish for Australia and The Good Guys with an estimated sales decline of 14.9% and 8.6%, respectively, because of state-based COVID-19 restrictions.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs JBH (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of JBH went down by ~5.41%. The stock made a 52-weeks’ low and high of $42.300 and $55.250, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). The company can trade at a slight discount compared to its peer’s EV/Sales average, considering unfavourable estimates for Australia and The Good Guys sales. For valuation purposes, peers like Super Retail Group Ltd (ASX: SUL), Vita Group Ltd (ASX: VTG), Mosaic Brands Ltd (ASX: MOZ) have been considered. Considering the e-commerce support, top-line growth, improving operational efficiency, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $47.750, up by ~0.695% as of 29 November 2021.
(4) Bega Cheese Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 1.70 billion, Annual Dividend Yield: 1.77%)
Synergies Promoting Top-Line and Operational Efficiency: Bega Cheese Limited (ASX: BGA) is a diversified branded food business company with an integrated value chain from farm to consumer. The company is involved in receiving, processing, manufacturing, and distributing dairy and other food-related products. In FY21, revenues stood at $2.07 billion, up by 39% YoY, supported by product exports and prudent product categorisation growth. With bulged top-line, EBITDA expanded by 108% and stood at $182.7 million due to favourable commodity prices. As of 30 June 2021, BGA held $217.5 million in working capital, up by 132% from the previous year.
As of 30 June 2021, BGA reported $324.9 million in net debt, up by $93.7 million. However, the leverage ratio declined to 2.25x relative to 2.35x reported on 30 June 2020. The movement in net debt mainly occurred from net proceeds from borrowings to partly fund the acquisition of Lion Dairy and Drinks. The increase was partially offset by a $111.4 million increase in operating cash inflow. In addition, BGA experienced a softening in infant formula demand due to preference shifts in the Chinese market.
Outlook: FY21 witnessed improved seasonal conditions, boosting demand. For FY22 milk supply outlook remains stable to positive as per the Australian dairy export index. During the period, BGA may witness higher milk prices reflecting intense competition and market improvements.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BGA (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BGA went up by ~3.51%. The stock made a 52-weeks’ low and high of $5.030 and $6.600, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s EV/Sales average, considering improved price forecasts for milk and prudent synergies established with Lion Dairy and Drinks. For valuation, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Inghams Group Ltd. (ASX: ING) have been considered. Considering the improved financial performance, increased creditworthiness, favourable milk pricing, added synergies, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $5.650, up by ~0.355% as of 29 November 2021.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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