Event Core
On 3rd March 2022, the Australian Bureau of Statistics released January 2022 statistics on international trade in goods and services, on global trade and balance of payments basis. The balance on goods and services surplus, seasonally adjusted, advanced by $4,067 million and registered $12,891 million in January 2022. The goods and services exports edged up by 8% and clocked $49,251 million, primarily driven by metal ores and minerals. Goods and services imports slipped by $581 million or 2% and stood at $36,359 million, caused by contraction in the telecommunications equipment and capital goods industry.
Figure 1: Recent Surge in Balance of Goods and Services
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Improved Prospects for Metals and Mining Industry
Surged Exports for Metal Ores and Minerals – In the non-rural goods section, the metal ores and minerals recorded exports of $14,542 million relative to $12,647 million recorded in December 2021, representing a 15% sequential uptick. Consequently, exports in metals (excluding non-monetary gold) jumped by 8% sequentially, post registering $1,233 million in export value relative to $1,142 million in December 2021.
Figure 2: Significant Recovery Witnessed in Metal Ores and Minerals Export
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Prospects for Iron Ore: The total volume of iron ore exports stood at around 220 million tonnes in September 2021, up by 7.7% from weather-affected March 2021. The improvement portrays recovery in production and exports from Western Australia, following the dissipation of significant weather disruptions borne in 2021. Iron ore shipments are expected to rise in December 2021 quarter, owing to the emergence of new replacement mine supplies from major Australian suppliers.
Australian Gold Mine Production: In September 2021 quarter, several gold mines registered a rose in gold output. Production at Newcrest’s Telfer gold mine (WA) surged by 17% YoY to 3.1 tonnes. Production at Northern Star Resources’ Carosue Dam gold mine advanced by 19% YoY to 2.0 tonnes, primarily driven by higher ore grades.
Growing Prospects for Agriculture Industry
International and Retail Trade: In January 2022, imports for consumption goods surged by $77 million or 1%, primarily driven by the food and beverages industry. In January 2022, retail trade edged by 1.8% monthly and 6.4% on a PcP basis. Food retailing edged up by 2.2% and recorded $289.0 million, and online retailing advanced 7.9% to $285.6 million.
Favourable Prospects for Horticulture: As per the Australian Bureau of Agricultural and Resource Economics (ABARES), the value of horticulture production is estimated to clock $12 billion, the second-highest on record. Farmgate prices are expected to be less affected by labor supply challenges over the medium term as international mobility improves and farms benefit from previous investments made towards improving labour productivity.
Key Risks and Challenges
Due to the cut on China’s steel output in September 2021 quarter, iron ore prices slipped substantially, hitting a low of US$85/tonne in mid-November. The Chinese Government announced to diversify its current iron ore supply, including 45% self-sufficiency in steelmaking. The world demand for gold consumption slipped by 7% YoY to 831 tonnes. Due to higher input costs, farm and retail prices are forecasted to remain at elevated levels. Despite the gradual fading of COVID-19 restrictions, workforce shortages challenge supply chain operations.
Figure 3: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook
Iron Ore Export Values: With steady production volumes, the total export value for iron ore is estimated to clock $118 billion in FY22. A total of $175 million was spent on exploring iron ore in September 2021 quarter, 16% higher QoQ.
Improved Potential Demand for Gold Bars and Coins: The global demand for gold bars & coins rose by 19% YoY or 41 tonnes in September 2021. The trend is expected to sustain in the current scenario of geopolitical stress between Ukraine and Russia.
Export Forecasts for Australian Gold: The Australian gold export earnings are estimated to surge from $28.3 billion in FY22 to $28.4 billion in FY23, primarily driven by higher export volumes to 377 tonnes in FY23.
Improved Horticulture Production Prospects: In FY23, horticulture production is estimated to rise by 4% and clock $12.5 billion in value. Despite the projected moderate decline due to a return to average seasonal conditions, this is true.
Horticulture Award New Minimum Wage Guarantee: From 28th April 2022, the Horticulture Award will induce a minimum hourly wage guarantee with a requirement of recording work hours of pieceworkers. The award implications are expected to lure more worker screening by farm employers.
(1) Fortescue Metals Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 59.11 billion, Annual Dividend Yield: 15.46%)
Advancement into Green Energy Projects Enabling Diversification: Fortescue Metals Group Limited (ASX: FMG) operates as an iron ore mining company that owns Chichester Hub and Solomon Hub, located in Pilbara, Western Australia. On 1 March 2022, FMG acquired Williams Advanced Engineering (AWE) at a purchase price of nearly GBP 164 million. In FY21, FMG recorded the highest annual shipments of 182.2 million tonnes, surpassing guidance. Underlying EBITDA stood at US$16.4 billion, up by 96% YoY, with increased EBITDA margins to 73%. Net operating cash flows stood at US$12.6 billion, and free cash flows after US$3.6 billion capex stood at US$9.0 billion.
In H1FY22, the solid operating performance across the supply chain delivered a record shipment of 93.1 million tonnes, 3% over H1FY21. Underlying EBITDA stood at US$4.8 billion at 59% margins. Net profit after tax clocked US$2.8 billion with EPS of US$0.90. Net operating cash flow stood at US$2.1 billion while capex stood at US$1.5 billion, encompassing US$589 million investment in the Pilbara Energy Connect decarbonization project and Bridge group project.
Outlook: FMG continues to advance into a global portfolio of decarbonization technologies and green energy projects. For FY22, the guidance stands at 180 to 185mt of iron ore shipment and capital expenditure of US$3.0 to US$3.4 billion.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
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FMG Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of FMG went down by ~8.435%. The stock made a 52-weeks low and high of $13.900 and $26.580, 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 average, considering potential supply chain constraints and labour supply shortage. For valuation purposes, peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: AKL), OZ Minerals Ltd (ASX: OZL), and others have been considered. Given the increased shipments, diversification into global energy portfolio, upscaling fundamentals, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $19.52, as of 07 March 2022, at 11:03 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
(2) Costa Group Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.28 billion, Annual Dividend Yield: 3.24%)
Growth Capex in Major Projects may Deliver Fundamental outperformance: Costa Holdings Limited (ASX: CGC) is Australia’s leading growers, packers, and marketers of fresh fruit & vegetables. It operates in five core categories: berries, mushrooms, glasshouse tomatoes, citrus, and avocados. In FY21, total revenue stood at $1,220.6 million, up by 4.8% PcP. International sales climbed 30% PcP, and underlying results were affected by a revenue decline in Avocado, offset by improvements in Mushroom, Berry and Tomato segments. EBITDA-S clocked $218.2 million, up by 10.6% PcP and 14% on constant currency basis.
Operating cash flows declined to $114.7 million relative to $137.9 million in FY20, driven by high tax payments of $23.1 million (FY20: $0.3 million). Operating capex stood at $43.2 million, above FY20. Growth capex stood at $84 million, including the commencement of international expansion, completion of Tomato GH4, and Avocado protection via substrate trellis crop program. The robust balance sheet was supported by growth initiatives in line with the funding of various major projects, including $40 million KW Orchards, $35 million 2PH, and $13 million Select Fresh.
Outlook: A rebound from Colignan farm is expected, delivering benefit from a maturing tree age profile. Berry volumes have been higher than the forecasts with a favourable pricing impact. Tomato and Mushroom production are significantly uplifted on a PcP basis.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
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CGC Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CGC went down by ~8.389%. The stock made a 52-weeks low and high of $2.670 and $4.811, 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 some discount compared to its peer's average, considering decreased estimates for Avocado industry production and highly competitive markets. For valuation purposes, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Australian Agricultural Company Ltd (ASX: AAC), and others have been considered. Given the decent developments in company fundamentals, investment in growth projects, higher volumes for Tomato and Mushroom, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $2.725, as of 07 March 2022, at 11:14 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
(3) Regis Resources Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.48 billion, Annual Dividend Yield: 3.56%)
Improving Gold Prospects Encouraging Fundamental Growth: Regis Resources Limited (ASX: RRL) is a gold production company with projects in Western Australia and New South Wales. RRL operates Duketon North operations, Duketon South operations, and Tropicana (30% stake) segments. In FY21, RRL clocked a revenue of $819 million by selling 267,285 ounces of gold at an average price of $2,229/ounce. EBITDA stood at $403 million at the margin of 49%, and NPAT stood at $146 million at the margin of 18%, reflecting business strength. Cash and bulling as of 30 June 2021 stood at $269 million after a fully franked dividend payment of $61 million.
In H1FY22, RRL delivered revenue of $489 million from the sale of 216,651 ounces of gold at an average price of $2,256/ounce. EBITDA for the period stood at $196 million at a 40% margin amid the inclusion of 30% interest in Tropicana. Underlying NPAT stood at $44 million with a statutory NPAT of $26 million. Cash flow from operating activities clocked $136 million. Gold production for the period stood at 210,270 ounces for H1FY22 at an AISC of $1,527/ounce. Cash and bullion as of 31 December 2021 stood at $180 million after consideration of $22 million dividend payment, $31 million in taxes, $33 million in exploration expenditure and $152 million capex.
Outlook: RRL is looking forward to the growth ahead of Tropicana as the operations transition back to its historical run-rate of 450 to 500koz annually. Production guidance for FY22 stood at 420 to 475 koz at an AUSC of $1,425 to $1,500/ounce.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
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RRL Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of RRL went up by ~14.681%. The stock made a 52-weeks low and high of $1.665 and $3.132, 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 premium compared to its peer's average, considering favourable gold prospects. For valuation purposes, peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Given the favourable god prospects, improved production guidance, decent fundamentals, and upside indicated by valuation, we give a 'Hold' rating on the stock at the closing market price of $2.070, up by ~5.343% as of 07 March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic 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 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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