Event Core
In line with emphasis on productivity boost and increased global demand, the Australian Bureau of Statistics reported a record high of $13.3 billion in merchandise trade surplus in June 2021. Exports for the month climbed 8% and stood at $41.3 billion. The global demand consequentially backed the surplus for minerals and resources. In parallel, imports soared by 8% and registered a value of $28.0 billion.
Figure 1: Key Trading Partners of Australia:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Present Economics of the Key Trading Partners
China’s Stabilizing Economic Recovery: Amidst the COVID-19 crisis, China remained the only country to warrant positive GDP (2.3%) in 2020. As per International Monetary Fund (IMF) predictions, China is expected to expand by +8.4% GDP in 2021 and stabilize to 5.6% in 2022. China’s manufacturing and industrial activities are strongly supported by industrial spending, building a solid appetite for international trade. For the march 2021 quarter, China registered a 14% YoY growth in industrial production, and since April YTD, China’s manufacturing PMI has remained above 50, implying expansionary phase.
Japanese Reaching Expansionary Territory: Japan was substantially hit by COVID-19 turmoil and subsequent containment measures. In Match 2021 quarter, Japan’s GDP contracted by 1.3% QoQ and 5.1% YoY. With the increasing pace of vaccination, the country is phasing out of lockdown constraints and tending to normalcy. Japan’s manufacturing PMI manifested a slow recovery relative to other developed economies. Japan’s PMI reached 53.6 in April, and in March 2021, the industry production surged 2.4% MoM.
South Korea assumes a rebound with strong fundamentals: In March 2021, South Korea’s GDP surged by 1.6% QoQ, withstanding pre-COVID levels on the back of fiscal stimulus and strong exports. The country’s manufacturing PMI in April stood at 54.6 – in expansionary territory. The IMF forecasts the country’s GDP to widen by 3.6% in 2021.
Figure 2: Significant Uptrend Witnessed in Total Export Value:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
An Upward Trend Witnessed in Iron Ore Demand
Reinforced Global Demand: Metalliferous ores have set a record of $20,494 million in the month of June 2021, representing almost one-half of Australia’s total exports value. Driving the surge was a 6% increase in iron ore which stood at $17,553 million in export value. Iron ore export volume hit a record high in FY20 with the FY21 forecast of over $136 billion. Iron ore price clocked $US200/tonne – record highest in 2021.
Improving Production: In 2020, Iron ore annual production stood at ~916Mt, and annual export stood at 858Mt relative to ~917Mt and ~818Mt in 2019, respectively. Rising Chinese demand and supply chain disruptions in Brazil closed 2020’s iron ore price at $US140/tonne – highest recorded since 2011.
Uproar in Agri-Business Exports
Rising Exports: For the June 2021 month, merchandise exports for cereals & cereal preparations and vegetables and fruits significantly surged to $1,283 million relative to $571 million PcP and $427 million relatives to $352 million PcP, respectively. Grain exports have outpaced expectations as followed by near-record winter crop and assumed an upward revision of $400 million.
Production Update: In FY20, GVA of the agriculture industry showcased a modest improvement to $61 billion amidst drought conditions. The gross value of crops declined by 5%. It stood at $28 million, primarily driven by unpropitious YoY results from wheat (down 20%), vegetables (down by 4%), and cotton (down by 78%), and predominantly supported by a 9% uptick in fruit & nuts, stable barley, and 1% uptick in canola values.
Transportation Infrastructure Requirements
Imports to Support Transportation Infrastructure is Expected to Surge: The Australian government has heavily invested in road and rail infrastructure to enhance transport access, safety, and efficiency. For instance, $405 million in Northern Road in New South Wales and $274 million in North East Link in Victoria.
Recent Projects: Top 2020 developments include approval of 163 projects under the Building Better Regions Program, management of a $100 billion infrastructure pipeline that encompasses NorthLink, Midland Highway Upgrade, Monaro Highway Upgrade, and Monash Freeway Stage 2. Furthermore, the approval of 2,294 projects under the Stronger Communities Programme represents $21.3 million in expenditure.
Key Risks and Challenges
The worldwide requirement for environmental operating controls and shortage of shipping containers have significantly impacted the global supply chain, especially in China. In light of unprecedented times, there are high possibilities of global inflationary build-up. Ambiguity across delta-variant and the potential resurgence of COVID-19 may derange infrastructure operations. China’s potential investment in multiple iron ore mines in Africa may pressure iron ore export volumes. The resurgence of Brazilian iron ore may have an unfavorable impact on global iron ore prices. Prices are estimated to fall for major Australian crops in FY22 due to excessive supply over demand, causing a disequilibrium.
Figure 3: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
Australia’s major international trade partners are estimated to register a 7% GDP growth in 2021. Global industrial production improved by 2.7% in March 2021 quarter. As per the Australian Industry Group, Australian PMI® climbed 1.4 points and stood at 63.2 points in June 2021; the highest monthly PMI® recorded since the commencement of Australian PMI® in 1992. Australia’s iron ore export volumes are estimated to expand from 871 million tonnes FY21 to 954 million tonnes in FY23. Australian Government’s 10-year infrastructure program is expected to infuse $110 billion investment, including $15.2 billion funding in new projects for FY22. For FY22, the gross value of production of Agribusiness is expected to descend from the record high to a still magnificent level of $65 billion, and the gross value of exports is forecasted to heighten to $49.7 billion. Considering the improvement in the Australia’s exports and trade surplus, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Nickel Mines Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.87 billion, Annual Dividend Yield: 0.00%)
Robust Top-line Substantially Improved Cash Flows: Nickel Mines Limited (ASX: NIC) is engaged in mining nickel ore and nickel pig iron in Australia. In FY20, the company registered sales revenue of US$523.49 billion relative to US$236.06 billion PcP. As a result of resilient top-line and proliferated production, net income increased to US$153.70 million relative to US$91.28 million PcP. In addition, the cash balance substantially increased to US$351.45 million relative to US$49.82 million PcP due to improved cash receipts from customers.
In Q1FY21, NPI production assumed a modest decline from 38,389.6 tonnes the previous quarter to 36,811.4 tonnes. For the period, the average cost of production declined to US$22.78/wmt relative to US$25.30/wmt previous quarter.
Business Update: On 3 May 2021, NIC entered into an MoU with Shanghai Decent Investment (Group Co., Limited) to modify RKEF lines to produce nickel matter products suitable for entering the electric vehicle battery market. On 21 April 2021, NIC announced its 100% ownership in RKEF lines and 380MW power stations.
Outlook: NIC has successfully initiated development activities at Hengjaya mine in Indonesia Morowali Industrial Park. NIC further explores diversification opportunities in customer base by entering into EV battery markets. NIC has improved its expectations from RKEF assets.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs NIC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of NIC went up by ~18.091%. The stock made a 52-weeks' low and high of $0.541 and $1.535, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at some premium compared to its peer's average, considering 100% ownership in RKEF assets and top-line diversification. For this purpose, we have taken peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Newcrest Mining Ltd (ASX: NCM), to name a few. Considering the diversification activities, increased top-line & production, and valuation, we give a 'Buy' rating on the stock at the current market price of $1.175, up by 2.620% as of 26 July 2021.
(2) Nufarm Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.67 billion, Annual Dividend Yield: 0.00%)
Top-line shoots with favorable seasonal conditions and commodity prices: Nufarm Limited (ASX: NUF) is a manufacturer and developer of seed technologies and crop protection. Despite COVID-19 challenges, NUF registered a revenue growth of 6.5% to ~$2.85 billion, followed by top-line growth in North America, the ANZ region, and seed technologies. On the contrary, operational efficiency took a hit, and EBITDA declined by 21%, stood at $236 million, and EBIT declined by 75%, which stood at $34 million.
In H1FY21, NUF posted $1.65 billion in revenues and $234 million in underlying EBITDA, a growth of 20% and 118% on a PcP basis, respectively. NUF’s top-line improved by PcP growth of $85 million in APAC, $62 million in Europe, $13 million in North America, and $39 million in seed technologies operations. The performance improvement program reduced SG&A expenses by ~$24.6 million and other discretionary expenditures. Free Cash Flow stood at $9 million, primarily attributed to $63 million in operating cash flow.
Outlook: In FY21, NUF expects a full-year run rate of $25 million. The average NWC/Sales matric is expected to remain range-bound between 35% - 40%. FY21, capital expenditure is expected to remain below $180 million. Growing volumes and economies of scale are warranted by rising grain prices, market share gains, and early solid demand from APAC, Europe, and seeds technologies business.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
A-VIX vs NUF (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of NUF went down by ~9.446%. The stock made a 52-weeks’ low and high of $3.370 and $5.600, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight discount compared to its peer's average, considering the higher supply over demand which may drive prices down. We have taken peers like Incitec Pivot Ltd (ASX: IPL), Orica Ltd (ASX: ORI), and Salt Lake Potash Ltd (ASX: SO4). Considering the outperformance in H1FY21, relatively high FY21 run-rate expectations, controlled average NWC/Sales matric, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.410, down by ~0.227% as on 26 July 2021.
(3) Atlas Arteria (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 6.03 billion, Annual Dividend Yield: 3.87%)
Rebound in Top-line as Traffic Approaches Pre-COVID Levels: Atlas Arteria (ASX: ALX) is engaged in operating and developing toll roads. The company’s asset portfolio includes APRR toll (France), ADELAC (France), Dulles Greenway (USA), and Warnow Tunnel (Germany). In FY20, the company reported $95.3 million in toll revenue, a decline of 37% YoY as a result of COVID-19 movement restrictions. In line with top-line erosion, NPAT declined by 61% and stood at $69.6 million. Amidst containment measures, the EBITDA margin assumed a modest decline to 71.4% from 74.4% PcP. The balance sheet position remained flexible with EUR9.2 billion in total debt with Net Debt/EBITDA of 4.5x compared to 7.0x default covenant.
For Q2FY21, weighted average traffic was recorded 68.5% higher, and weighted average toll revenue was recorded 57.3% higher from Q2FY20 levels. ADELAC and APRR assumed a strong performance from heavy vehicle traffic that approached pre-COVID levels during the period.
Outlook: APRR and ADELAC are into ongoing dialogues with French State for improvements in road development projects and completion of RCEA arrangements underway in FY21. ALX is focused on building sustainable cash flows and enhancing its value proposition.
Valuation Methodology: Price/Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs ALX (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of ALX went down by ~3.281%. The stock made a 52-weeks' low and high of $5.390 and $6.980, respectively. The stock outperformed the market volatility index. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering pre-COVID normalcy in traffic levels. For this purpose, we have taken peers like Lindsay Australia Ltd (ASX: LAU), Qube Holdings Ltd (ASX: QUB), Dalrymple Bay Infrastructure Ltd (ASX: DBI), to name a few. Considering the improving top-line and resilient financial position and valuation, we give a 'Hold' rating on the stock at the current market price of $6.190, down by 1.590% as of 26 July 2021.
(4) Deterra Royalties Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.52 billion, Annual Dividend Yield: 0.00%)
Riding on a Low-Risk Exposure and Operationally Efficient Mining Complex: Deterra Royalties Limited (ASX: DRR) owns royalty over iron ore production in specific tenements of BHP Group Limited’s (BHP) Mining Area C (MAC) province in Western Australia. In November 2020, DRR was demerged from Iluka Resources. In H1FY21, DRR registered total revenue of $53.9 million and NPAT of $33.3 million. MAC’s royalty payments inclined to $48.4 million in H1FY21 relative to $44.0 million in H1FY20, accompanied by improved sales prices (implied) from $129/dmt to $156/dmt. Underlying EBITDA stood at $47.8 million while combining $24.4 million from Iluka and $23.4 million from Deterra Royalties.
In Q3FY21, Iron ore royalties from MAC stood at $36.3 million, up by 49.0% on the back of increased sales volume and robust iron ore prices. BHP’s reported production from MAC inclined by 12.5% and stood at 15.3 mwmt, and sales volume inclined by 7.7% and stood at 13.8 mdmt.
Outlook: On May 2021, DRR announced production commencement at South Flank Mine with a capacity of 80 mtpa, which is expected to inflate royalty revenue in FY21. MAC royalties are forecasted to improve exponentially with 2.4x growth expectations in volume. A long-term growth strategy involves portfolio diversification into royalty business amidst earnings growth.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs DRR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of DRR went up by ~8.000%. The stock made a 52-weeks’ low and high of $3.850 and $5.350, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering the commencement of production at South Flank, a double-edged growth in iron ore prices & volumes, and a scalable cost structure. We have taken peers like Galaxy Resources Ltd (ASX: GXY), Syrah Resources Ltd (ASX: SYR), Pilbara Minerals Ltd (ASX: PLS), to name a few. Considering the commencement of South Flank production, favorable growth prospects, portfolio diversification strategies, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $4.860, up by ~1.673% as on 26 July 2021.
Comparative Price Chart (Source: REFINITIV)
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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