Event Core
On 21 January 2022, the Australian Bureau of Statistics (ABS) released the statistics on business turnover of published industries driven from monthly Business Activity Statements. In November 2021, ABS claimed an increase in business turnover in 12 out of the 13 published industries on a seasonally adjusted basis. The most significant increase was witnessed in the Accommodation and food services industry, up by 15.9% sequential.
Retail Industry on a Rise
Improved Business Turnover: Business turnover in the retail industry advanced by 7.4% sequentially (+9.2% PCP), primarily driven by non-food retailing. The retail trade business turnover index clocked 121.9 points in November 2021 relative to 113.5 points in October 2021. Additionally, business turnover in wholesale trade increased by 2.6% sequentially (+13.5% PCP).
Australian Retail Turnover Clocking Record Highs: As per ABS, retail turnover advanced by 7.3% in November 2021 and clocked $33.41 billion. The pent-up consumer demand and the November sales witnessed record sales in the clothing, footwear, and personal accessory retailing segment to $3.07 billion (+38.2% MoM) and household goods retailing segment to $6.39 billion (+11.6% MoM).
Figure 1: Monthly Total Retail Turnover
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Online Retailing Turnover: On seasonally adjusted terms, the total online retailing sales stood at $3.73 billion in November 2021. The value of online sales slipped by 8.7%, following a fall of 6.1% in October 2021. However, despite the resurgence of instore activities post lockdowns, online retailing turnover remains to maintain elevated levels. Relative to November 2020, online retail turnover increased by $692.1 million or up by a substantial 22.8%.
Improving Activities in Manufacturing, Administrative & Support, and Other Industrial Segment
Indicators on Monthly Business Turnover: The monthly turnover index of professional, scientific & technical services stood at 107.4 points, up by 3.9% sequentially and 14.1% PcP. Businesses in the manufacturing segment clocked a monthly business turnover increase of 1.9% sequentially and a 13.1% PcP increase. Administrative and supportive services rose 7.5% on a sequential basis and 23.5% compared to last year.
Private New Capital Expenditure: In September 2021 quarter, total new capex surged by 12.9% PcP and clocked $32.70 billion. Consequently, capital expenditure in buildings and structures advanced to $16.92 billion, up by 9.0% PcP, and equipment, plant, and machinery edged up to $15.78 billion, up by 17.4% PcP.
Figure 2: Total Private New Capital Expenditure
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Risks and Challenges
Household spending edged down by 4.8% in September 2021 quarter, and the household saving ratio increased to 19.8% from 11.8%, as private demand detracted by 2.4 ppts from GDP growth. Gross value added by manufacturing and retail trade witnessed a downside of 1.1% and 3.4%, respectively (on a QoQ basis). Recent disruption in the global supply chain may vastly affect both retail trade and manufacturing activities. Potential threats to business sentiments from recent disruption with Chinese trade may restrain Australian businesses in the short term. Gradual retrenchment of accommodative policies and rising inflation rates may affect economic expansion.
Figure 3: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Improved Capital Expenditure Estimates: As per ABS, total capital expenditure estimates for FY22 stand at $138.6 billion, up by 8.7% from the previous estimate. Consequently, capex on equipment, plant & machinery stood at $60.1 billion, an upward revision of 12.8%.
Easing Restrictions: Further easing of lockdown restrictions in south-eastern territories and states is advocating the recovery of the retail industry. The pent-up consumer demand and extended November sales will further boost the industry.
Improving Labor Supply: Employment increased by 65,000 people in December 2021, coinciding with a fall in the unemployment rate of 0.5 ppts clocking 4.2%, the lowest recognized since August 2008.
Digital Economy Strategy: The government is investing around $1.2 billion to culminate a comprehensive digital economy by investing in digital infrastructure and skills.
Business Tax Incentives: The government delivers $20.7 billion in tax relief by extending temporary loss carry-back and temporary full expensing for an extra year.
Considering the positive momentum in business turnover by selected industries, we have figured out four stocks on ASX that are set to see the momentum.
(1) Smartgroup Corporation Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 945.17 million, Annual Dividend Yield: 7.76%)
Improved Operational Efficiency: Smartgroup Corporation Limited (ASX: SIQ) is a specialist employee management services provider which provides salary packaging, fleet management, and various other employee management services to organizations across Australia. Despite COVID-19 turmoil, SIQ embarked upon steady operational metrics. In FY20, revenue clocked $216.3 million, edged down by 13% YoY, and NPATA clocked $65.2 million, which slipped by 20% YoY. FY20 witnessed 100% extension or renewal of top 20 client contracts.
In H1FY21, revenue reached $109.4 million, up by 4% sequentially. NPATA for the period stood at $33.5 million, up by 1% sequentially and by 5% PcP. Adjusted post-tax operating cash flows stood culminated a 107% conversion rate (relative to NPATA), and net debt as of 30 June 2021 corresponded to $4.5 million.
Outlook: SIQ estimated annual digital investment in a range of $5 million - $6 million for the next three years, primarily funded from operating cash flows. SIQ targets EBITDA uplift in the range of $15 million - $20 million from strategic initiatives, ~66% from revenue expansion, and the rest from sales and service efficiencies. SIQ’s largest client, the Department of Defence, extended its contract with a 5-year engagement, inclusive of extensive options.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
SIQ Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SIQ went down by ~8.938%. The stock made a 52-weeks’ low and high of $5.820 and $9.990, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at some premium compared to its peer’s average EV/Sales multiple, considering financial strength at elevated levels. For valuation, peers like Omni Bridgeway Ltd (ASX: OBL), IPH Ltd (ASX: IPH), Kelly Partners Group Holdings Ltd (ASX: KPG), and others have been considered. Given the improvements in topline figures, SIQ’s prudent cost-saving measures, rising investment for digital infrastructure, and valuation, we give a ‘Buy’ rating on the stock at the closing market price of $7.030, down by ~0.707%, as of 24 January 2022.
(2) Carbon Revolution Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 181.91 million, Annual Dividend Yield: 0.00%)
Top-Line Supported by Production Ramp-up and Commissioning Activities: Carbon Revolution Limited (ASX: CBR) is engaged in designing, manufacturing, and marketing single-piece carbon fibre wheels. In FY21, CBR struck a total revenue of $34.9 million, down by 4% YoY due to a challenging business environment under COVID-19 conditions and a semi-conductor chip shortage. Adjusted EBIT slipped by $5 million and committed a loss of $28.2 million. Adjusted EBITDA shrunk by $1.5 million and clocked a loss of $17.2 million.
In Q1FY22, CBR clocked a revenue of $6.2 million with total wheel sales of 2,100 units. Customer orders and individual forecast profiles support a full weighing of annual sales on H2FY22. The company’s H1FY22 work-in-progress inventory and finished inventory are required to keep sales growth expectations for H2FY22. Net cash outflow from operations stood at $11.8 million with a decent cash balance of $63.88 million.
Outlook: Launch activities for the customer program is expected to commence production during FY22. The Ferrari 296 GTB and 812 Competizione production ramp-up are progressing well. CBR is advancing the Mega-line project with equipment procurement, detailed design, and commencement of commissioning activities.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
CBR Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CBR went down by ~20.000%. The stock made a 52-weeks’ low and high of $0.805 and $2.860, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s average, considering production ramp-up and commencement of commissioning activities. For valuation purposes, peers like GUD Holdings Ltd (ASX: GUD), ARB Corp Ltd (ASX: ARB), Pwr Holdings Ltd (ASX: PWH), and others have been considered. Given the production ramp-up of Ferrari programs, operational efficiencies via technological changes, progress in Mega-line project, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.820, as of 24 January 2022, at 02:20 PM (GMT+10), Sydney, Eastern Australia.
(3) Mydeal.Com Au Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 165.64 million, Annual Dividend Yield: 0.00%)
Growth Prospects Attached to Developing Web and Mobile Traffic: MyDeal.com.au Limited (ASX: MYD) operates an online marketplace and offer products across categories such as furniture, tools and equipment, health and beauty, home and garden, electronics, and others. In FY21, MYD reported a 111% increase in gross sales and an 83% increase in active customers. Gross sales margin stood at 43.1%, primarily driven by expanded team and import & logistics specialists, buyers, and customer service. MYD’s seller base has grown, with 385 sellers onboarded to support a product range of +6 million SKUs.
In H1FY22, MYD clocked a record gross sale of $152.6 million up by 20.4% PcP and a record active customers to 963,882, up by 18.4% PcP. Revenue for the period stood at $32.9 million, up by 55.1% PcP. In Q2FY22, net outflow from operating activities stood at $6.0 million, primarily reflecting the allocation of IPO funds in line with the company’s disclosure on the use of funds. Operating cash flow for H1FY22 stood at $4.5 million. The cash balance stood at $40.1 million as of 31 December 2021.
Outlook: MYD plans to focus on customer acquisition and private label business expansion. The company expects considerable opportunity to translate web and mobile traffic to App visits and enhance the marketing ROI during FY22.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
MYD Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of MYD went up by ~17.333%. The stock made a 52-weeks’ low and high of $0.520 and $1.410, respectively. 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 discount compared to its peer’s EV/Sales average, considering its net loss and net cash outflows from operations in FY21. For valuation, peers like DW8 Ltd (ASX: DW8), Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW) have been considered. Considering the debt-free financial position plans on engaging multi-channel brands & campaigns to grow customers, App usage, and valuation, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.620, down by ~3.126%, as of 24 January 2022.
(4) JB Hi-Fi Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.48 billion, Annual Dividend Yield: 6.01%)
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 increased $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.
In H1FY22, total sales stood at $4.86 billion, down marginally by 1.6% PcP and up by 21.7% over two years. Online sales stood at $1.1 billion, up by 62.6% over last year, representing 22.7% of total sales. EBIT stood strong at $420.5 million, down by 9.1% over last year, up by 59.9% over two years. Sales momentum stood resilient with continued heightened customer demand for home appliances and consumer electronic products.
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)
JBH Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of JBH went down by ~3.484%. The stock made a 52-weeks’ low and high of $43.120 and $54.640, respectively. 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 discount compared to its peer’s EV/Sales average, considering unfavourable estimates for Australia and The Good Guys sales. For valuation purposes, peers like Mosaic Brands Ltd (ASX: MOZ), Vita Group Ltd (ASX: VTG), Lovisa Holdings Ltd (ASX: LOV), and others have been considered. Considering the e-commerce support, topline growth, improving operational efficiency, and valuation, we give a ‘Hold’ rating on the stock at the closing market price of $46.810, down by ~1.969%, as of 24 January 2022.
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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