Event Core
According to the Australian Bureau of Statistics (ABS), the payroll jobs and wages estimate highlights a marginal drop of 0.3% in payroll jobs and 1.7% in total wages between 2 April and 16 April 2022. Payroll jobs primarily slipped due to Easter holidays, which typically witnessed rising school and public holidays.
Uptick by Selected Sectors:
Despite the downturn, the mining sector added a silver lining with a 0.7% uptick in payroll jobs in the fortnight over the prior week. Similarly, the construction sector witnessed an expansion of 0.5%, while rental, hiring and real estate services posted a healthy 3.0% growth in wages compared to last year.
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
In the above chart, the mining sector exhibited above par payroll job addition aided by rising international demand, soaring prices, and healthy exports by Australia. The construction sector was affected by a severe labour crunch but showed a steep recovery in recent periods.
Real Estate Witnessing Uptrend:
Favourable Indicators in Housing Finance: In March 2022, the value of new loan commitments increased by 1.6% for housing and jumped significantly by 23.6% for business construction. On a seasonally adjusted basis, total employment rose to 13.39 million in March 2022, and the underemployment rate slipped to 6.3%.
Key Risks and Challenges
The rapid change in international trade policies will likely continue to impact economic activities in 2022, causing supply chain disruptions and constraining commodity demand. The Australian metals and mining industry is affected by bad weather conditions impacting exploration and transportation activities. Mining value-added dipped by 1.0% in December 2021 quarter and slipped 0.1% on a PcP basis. The recovery in world economic activity continues to be affected by COVID-19 outbreaks and energy shortfalls. Labour and immobility affect the materials industry, causing short-term cash flow constraints and delays in production.
Outlook
Increased Commodity Price Index: The Office of the Chief Economist’s Resources and Energy Commodity Price Index increased by 24% in the March 2022 quarter and stood by 49% on a PcP basis in Australian dollar terms.
Resilient Commodity Export Earnings: Exports are estimated to touch a record of $425 billion in FY22, up from $320 billion in FY21. With volumes assuming a modest upgrade, price changes are forecast to account for most of the move in future earnings.
Increased Gold Consumption: Global gold consumption increased by 9.9% YoY to 4,021 tonnes in 2021. The economic recovery from the pandemic delivered support to gold jewellery demand in 2021, up by 52% YoY to 2,124 tonnes.
Spurt in Capex Spend: Total capex in buildings and structures will reach $79.4 billion in FY22. This was upwardly revised by 1.0% from the previous estimate by the Australian Bureau of Statistics. In FY23, the capex estimates for buildings and structures to record $71.0 billion.
Considering the uptick in payroll jobs and wage expansion in selected industries, we have figured out three stocks on ASX that are set to see momentum.
(1) Goodman Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 36.74 billion, Annual Dividend Yield: 1.52%)
Improving Operational Efficiency and Decent Liquidity Projecting Growth: Goodman Group (ASX: GMG) is engaged in the business of real estate and has operations throughout Australia, New Zealand, Asia, Europe, the UK, North America, and Brazil. In FY21, the total assets under management (AUM) increased by 12% YoY to $57.9 billion. It had incurred $5.8 billion towards revaluation gains across GMG and partnership assets. Operating profit stood at $1.22 billion, up by 15%, with lower gearing at 6.8%.
In H1FY22, total AUM stood at $68.2 billion, with external AUM clocked at $64.1 billion, up by a considerable 32% PcP. Portfolio occupancy remained at elevated levels at 98.4%, and net property income surged by 3.4% PcP. Operating profits for the period stood at $786.2 million, up by 28% PcP with high gearing at 7.2%. Available liquidity stands at $2 billion, excluding equity commitments, cash, and undrawn debt amounting to $17.3 billion in Partnerships.
Outlook: GMG is forecasting a distribution of 30.0 cents/share, considering the lucrative opportunity to deploy retained earnings. Market guidance for FY22 has been upgraded, with operating EPS growth projected to stand at 20%.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs GMG (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GMG went down by ~13.73%. The stock made a 52-weeks low and high of $18.220 and $26.960, 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 peers, considering recovery expectations in the industrial REIT industry. For valuation purpose, peers like Centuria Industrial Reit (ASX: CIP), Arena Reit No 1 (ASX: ARF), Dexus Industria REIT (ASX: DXI), and others have been considered. Considering the decent liquidity position, elevated occupancy rates, decent uptick in operational metrics, current trading levels and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $19.550, down by ~0.610%, as of 16 May 2022.
(2) Monadelphous Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 970.72 million, Annual Dividend Yield: 4.41%)
Increased Demand from Resource Sector Magnifying Fundamentals: Monadelphous Group Limited (ASX: MND) provides maintenance, construction, and industrial services to the energy, infrastructure, and resources sector. In FY21, total revenue stood at $1.95 billion, up by 18% YoY, and net profit after tax stood at $47.1 million, up by 29% YoY. During the period, MND secured $950 million of new extensions and contracts. The demand for MND’s services advanced as the industry recovered from disruptions and delays.
In H1FY22, MND clocked a revenue of $1,065 million, up by 12.3% PcP, clocking a half-yearly Maintenance and Industrial services revenue at $596.1 million, up by 21.3%. EBITDA for the period stood at $60.9 million at a 5.7% margin. Net profit after tax increased by 17.7% and was registered at $30.1 million. MND ended with a cash balance of $175.3 million, representing a strong cash conversion rate of 104% for the six months.
Outlook: Demand for maintenance services increased substantially as the industry entered the recovery phase and worked on a backlog of work delayed and deferred during the COVID-19 pandemic. The resource sector is expected to deliver continued growth prospects, with the Australian iron ore industry remaining buoyant.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs MND (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of MND went down by ~7.58%. The stock made a 52-weeks low and high of $8.680 and $11.920, 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 discount compared to its peers, considering fallback in construction activities. For valuation purpose, peers like Lycopodium Ltd (ASX: LYL), Service Stream Ltd (ASX: SSM), Saunders International Ltd (ASX: SND), and others have been considered. Considering the decent fundamentals, high cash conversion, improved prospects from the resource sector, current trading levels and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $10.240, up by ~0.490%, as of 16 May 2022.
(3) Newcrest Mining Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 21.95 billion, Annual Dividend Yield: 2.67%)
The Completed Acquisition and Expansion in Production Profile may Deliver Fundamental Support: Newcrest Mining Limited (ASX: NCM) is mainly involved in the exploration, mine development, mine operations, and the sale of gold and gold/copper concentrate. On 9 March 2022, NCM announced the completion of the Pretium Resources acquisition, which will immediately increase NCM’s gold production and cash flows. In FY21, NCM recorded an AISC margin of US$876 per ounce, substantially up by 31% YoY. Cumulative free cash flow inclined substantially to US$4,295 million with a receipt of US$92 million from the Fruta del Norte finance facility.
In H1FY22, NCM clocked revenue of US$1,715 million, down by 21% PcP and EBITDA slopped by 35% and was struck at US$740 million. Free cash flows turned adverse to an outflow of US$303 million relative to an inflow of US$439 million. Statutory and underlying profits were clocked at US$298 million, and AISC stood at US$1,194/ounce, delivering an AISC margin of US$502/ounce. NCM approved the Cadia PC1-2, Havieron Stage 1, Red Chris Block Cave, and Lihir Phase 14A pre-feasibility studies.
Outlook: NCM expects the produced commodities to stay strong with additional opportunities to enhance gold and copper production profiles. The acquisition of Pretium Resources is expected to deliver synergy benefits of ~C$15 to C$20 million annually.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs NCM (Source: REFINITIV)
Stock Recommendation: Over the last nine months, the stock of NCM went down by ~2.89%. The stock made a 52-weeks low and high of $20.910 and $20.270, respectively. The stock underperformed the market volatility index. Considering the decent financial performance relative to the current downturn in economic activities, the company can trade at a slight premium compared to its peers. For valuation purposes, peers like Alkane Resources Ltd (ASX: ALK), Perseus Mining Ltd (ASX: PRU), Capricorn Metals Ltd (ASX: CMM), and others have been considered. Given the synergies sought with Pretium Resources, potential expansion of gold & copper profile, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $24.780, up by ~0.813% as of 16 May 2022.
Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
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 for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the Valuation has been achieved and subject to the factors discussed above.
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