The Australian International Trade stands to benefit from increasing Asia’s stake in Global GDP. International Merchandise Trade delivered a record-breaking $13.3 billion surplus in May 2021, with exports increased to ~$39.21 billion (up by 11%) and imports increased to ~$25.89 billion. Exports were predominantly driven by iron ore, coal and meat products. Subsequently, petroleum exports surged by a whopping 129%. Australia’s export finance assistance has served as a cornerstone for SME exporters' cash flows.
Figure 1: Surplus Build-up in the Nation’s Current Account:
Source: Australian Bureau of Statistics, Analysis by Kalkine Group
For May 2021, metalliferous ores sought a dominant surge in goods export by 15%, an increase of ~$2.51 billion, wherein iron ore turned primary driver with an export increase of 18%. Iron ore price surged by a unit value hike of 9%, coupled with a 9% spike in quantity. In 2020, Australia accounted for 53% of global iron ore exports; parallelly top 3 importers were China ($93.3 billion), Japan ($6.6 billion) and South Korea ($6.5 billion).
Iron ore prices kinked upwards from US$115/tonne at the beginning of Dec 2020 and ended with US$140/tonne – the highest level since 2011. Price hikes are primarily attributed to a disruption in the supply chain of Brazilian ore, which posed a competitive advantage for Australia to fulfil global demand, and high demand from China’s steel industry. In May 2021, the government announced a $20.1 million investment in global resource strategy to strengthen exports and improve access to key export markets.
Figure 2: Surge in Metalliferous Ores and Metal Scrap Exports:
Source: Office of the Chief Economist, Analysis by Kalkine Group
According to the Australian Bureau of Statistics, exports of non-monetary gold sought a moderate uptick of 2% in May 2021 and stood at $1.81 billion. Amidst COVID-19 turmoil in 2020, world consumption for gold got knocked down by 14% to 3,760-tonne levels. Jewellery consumption in India and China declined sharply by 35% and 42% in 2020, respectively. As economies are phasing out from containment measures, gold exports have almost resurged to pre-COVID levels.
Counterbalancing the decline in jewellery consumption in 2020, industrial and official sectors' gold-backed exchange-traded funds (ETF) portfolio surged by 120% YoY and stood at 877 tonnes (US$48 billion). Moreover, global gold imports rose by 8.3% YoY in 2020, valued at circa US$298 billion. Coupled with COVID-19 phase-out and favourable market sentiments, global jewellery demand is estimated to incline by 25% in 2021, equating to 1,764 tonnes.
Figure 3: Gold Exports Approaching Consistency with Global Phase-out from COVID-19:
Source: Office of the Chief Economist, Analysis by Kalkine Group
In May 2021, meat exports increased by 18% MoM and stood at ~$1.32 million, primarily led by beef and lamb demand. Meat to China increased by 57% MoM ($57 million). On a similar pattern, dairy products and eggs exports export inclined to $280 million relative to $257 million the previous month, manifesting an upward trend post-January 2021. An investment of $72.7 million in the Agri-Business Expansion Initiative program aims to diversify Australia’s export markets.
The total exports value of livestock is expected to improve by 11% in FY22, primarily driven by the forecasted 14% increase in Beef and Veal exports. With global recovery, dairy export prices are steadily trailing upwards. Coupled with improved seasonal conditions, adequate pasture growth, and low grain, hay & water prices, dairy products are expected to contribute 17% of exports in FY21.
Figure 4: Monthly Exports in Meat and Dairy Products (including Eggs) Trailing Upwards:
Source: Australian Bureau of Statistics, Analysis by Kalkine Group
In May 2021, export value for cereals surged by 180% (up by $887 million) on a PcP basis while observing a modest MoM decline of $47 million in Japan. The gross value of crop production is forecasted to reach a second-highest record level of $35.5 billion in FY21. Australian crops' export value is forecasted to exhibit a modest increase to $25.6 billion, primarily driven by favourable cotton exports. At the same time, partially offset by lower wine, pulse and cereal exports. In the second half of FY21, surged Chinese demand for oilseeds and grains, coupled with global production concerns, implied a sharp surge in crop prices.
Figure 5: Opportunities and Challenges in Australia’s Trade Surplus:
Source: Analysis by Kalkine Group
Key Risks and Challenges
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 unfavourable impact on global iron ore prices. Jewellery customer's shopping preferences for traditional retail over online platforms pose a threat to global jewellery markets due to changing customer behaviour post-COVID-19. The recovery of China’s pork production and outbreaks of African swine fever has relaxed import demand and global meat prices, affecting the Livestock industry. Prices are estimated to fall for major Australian crops in FY22 due to excessive supply over demand, causing a disequilibrium.
Outlook
Australia’s iron ore export volumes are estimated to rise from 900 million tonnes in FY21 to 1.1 billion tonnes by FY26. Consequently, price expectations remain strong to underpin peak export value of $136 billion in FY21. Amidst containment measures in 2020, China and Russia’s gold mining production declined by 4.7% and 28%, respectively, while Australia’s gold production remained unaffected and increased by 0.6%. Furthermore, global gold production estimates for 2022 assume a 5.5% uptick in 2021 and a 3.0% uptick in 2022. For FY22, livestock production and export value are expected to rise by 4% to $32.2 billion and 11% to $24 billion, Australia’s farmgate milk price is expected to surge by 2.4% and stands at 50.7 cents per litre. For FY21, the export value of wheat, barley and oilseeds is estimated to increase by 60%, 63% and 54% YoY, respectively.
Considering the improvement in Australia’s exports and trade surplus, we have figured out 3 stocks on ASX that are set to see the momentum.
(1) Northern Star Resources Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 11.76 billion, Annual Dividend Yield: 2.86%)
Favourable Exploration Operations and Spot Gold Prices Driving Cash Flows: Northern Star Resources Limited (ASX: NST) is involved in the gold production business in Australia with tier-1 projects located in low sovereign risk regions of Australia and North America. In FY20, post-investment of $206 million in growth and exploration capex, underlying FCF stood at $423 million. NPAT increased by 69% YoY to $291 million in support of 102% and 67% YoY uptick in ore and mineral reserves, respectively. Operating mine cash flow improved by 54% and stood at $901.6 million.
In H1FY21, Free Cash Flow increased by 94% PcP and stood at $226 million. In favour of favourable operations, NST's tier-1 asset base incorporates strong growth in Pogo contribution from North America, KCMG's sustainable contribution from net mine cash flow, partially offset by Kalgoorlie operations' decline in net mine cash flow. Pogo’s EBITDA margin increased to 47% in H1FY21 from 8% H1FY20, post completion of mining transition. EBITDA of the company increased from 44% in H1FY20 to 46% in H1FY21, including Pogo and KCGM in the company’s asset base. Statutory NPAT inclined to $185 million in H1FY21 from $120 in H1FY20, significantly attributed to a $284 million increase (34%) in revenue on a PcP basis.
Outlook: Contribution from the Kalgoorlie project is expected to uplift in H2FY21. Cost-effective measures and operational improvements are expected to push progress levels in KCGM. FY21 capital expenditure plan for $57 million growth capex and $51 million exploration investment remains firm. FY21 production guidance for Australian operations and Pogo Operations remains to be 760 – 840 koz at $1,440 - 1,540/oz AISC and 180 – 220 koz production at $1,200 – 1,400/oz AISC.
Valuation Methodology: Price/Earnings Multiple Based Relative Valuation (Illustrative)
A-VIX vs NST (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of NST went down by ~12.150%. The stock made a 52-weeks’ low and high of $8.990 and $17.030, respectively. The stock underperformed 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 a 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 amplified operational efficiency and high free cash flow generation capacity. We have taken peers like OZ Minerals Ltd (ASX: OZL), Newcrest Mining Ltd (ASX: NCM), Regis Resources Ltd (ASX: RRL), to name a few. Considering the improved AISC matrices, favourable production guidance and sustainable capital expenditure, the current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $10.050, down by ~0.594% as of 28 June 2021.
(2) Deterra Royalties Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.37 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 ~7.876%. The stock made a 52-weeks’ low and high of $3.850 and $5.350, respectively. The stock overperformed 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 a modest upside 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 Bellevue Gold Ltd (ASX: BGL), Pilbara Minerals Ltd (ASX: PLS), Chalice Mining Ltd (ASX: CHN), to name a few. Considering the current technical levels, the commencement of South Flank production, favourable growth prospects, portfolio diversification strategies, and valuation, we give a 'Hold' rating on the stock at the current market price of $4.520, up by ~0.444% as of 28 June 2021.
(3) Graincorp Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.20 billion, Annual Dividend Yield: 2.90%)
Favourable Weather Conditions and Robust Supply Chain Margins Substantiate Top-line Growth: Graincorp Limited (ASX: GNC) is primarily involved in logistics business (agribusiness) in the grains and oils supply chain and secondarily involved processing business of crushing, manufacturing, and distributing of edible oils. In FY20, agribusiness and processing segment revenue inclined from ~$3.29 billion in FY19 to $3.42 billion, and from ~$541 million in FY19 to $621 million, respectively. Consequently, underlying EBITDA recovered from a loss of $107 million in FY19 to a profit of $108 million, primarily driven by $146 million EBITDA incline from agribusiness, followed by non-repeat of international trading losses and favourable operating initiatives, and $24 million inclines in processing business followed by robust crush volumes.
In H1FY21, grain receivals increased to 14.5 from 3.8 on a PcP basis amidst favourable weather conditions, and subsequently, agribusiness revenues sour to $2.56 billion from $1.97 billion in H1FY21. Total grain handled increased from 12.5 mmt in H1FY20 to 30.4 mmt. EBITDA improved from $105 million in H1FY20 to $140 million, significantly attributed to increased ECA tonnes handled and operating initiatives, partially offset by increased CPC net payments.
Outlook: FY21 guidance for underlying EBITDA increased from $230-$270 million to $255-$285 million, underpinned by robust international demand for Australian grains and oilseeds and operating initiatives. Consistent with supply chain disruptions, export volumes are expected to reduce. Guidance for underlying NPAT stands at $80-$105 million.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs GNC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GNC went up by ~2.994%. The stock made a 52-weeks’ low and high of $3.440 and $5.590, respectively. The stock overperformed 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 a modest upside of low double-digit (in percentage terms). However, we believe that the company can trade at some discount compared to its peer's average, considering global supply chain disruptions and reduced expectations for export volumes. We have taken peers like Woolworths Group Ltd (ASX: WOW), Elders Ltd (ASX: ELD), Ridley Corporation Ltd (ASX: RIC), to name a few. Considering the current technical levels, improved guidance for EBITDA, increased receivals & total grains handled, sound fundamentals, the surge in international demand, and valuation, we give a 'Hold' rating on the stock at the current market price of $5.160, down by ~2.088% as on 28 June 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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