Event Core

On 4 January 2022, the Reserve Bank of Australia released preliminary estimates for the December 2021 index of commodity prices. The index edged up by 1.5% on a monthly average basis, following a revised 6.7% surge in November 2021. The rural and non-rural indices expanded in the month, while the base metal index recovered after a drop in the prior month. In Australian dollar terms, the index advanced by 3.3% for December 2021.

Figure 1: Index of Commodity Prices in Australian Dollar Terms on Monthly Basis:

Source: Based on Reserve Bank of Australia Data, Analysis by Kalkine Group

Materials Industry to Expand with Improving Price Index

Materials’ Export Price Index: For September 2021 quarter, the export price index of non-ferrous metals increased by 17.1% due to surged manufacturing demand as containment restrictions eased and economic activities improve. Metalliferous ores and metal scrap slipped by 12.8% due to shredded iron ore demand from Chinese markets. The import price index for iron and steel expanded by 18.7% attributed to the global construction boom, supply shortages, and supply chain constraints.

Total Expenditure on Mineral Exploration: Expenditure in mineral exploration increased by 4.5% to $925.9 million in the September 2021 quarter. Existing deposits surged by 5.8% to $636.3 million and new deposits advanced by 11.5% to $346.1 million. Other minerals registered the largest incline of 37.8% to $91.1 million. Iron ore recorded the second-largest increase of 15.8% to $174.6 million.

Figure 2: Expenditure on Mineral Exploration on Quarterly Basis (in A$Mn):

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Movement in Energy and Resources Industry

Price Index Movements: Over the past year, the commodity price index expanded by 25.7% in SDR terms, primarily driven by increased LNG, thermal coal, and cooking oil prices. Analyzing the spot price prices of the bulk commodities, the commodity price index expanded by 4.2% in SDR terms, 24.6% higher relative to the past year.

Export Price Index Contributors: An increase of 6.2% in the export price index in the September 2021 quarter was led by coal, coke & briquettes surged which had rallied by 48.1%, driven by improved international demand for thermal and coking coals. Gas, natural, and manufactured prices advanced by 39.5%, riding on the increased count of oil-linked contracts. Petroleum, petroleum products, and related materials increased by 12.0%, supported by robust global oil demand and global supply chain constraints.

Figure 3: Export Price Index by Classification:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Updates on Food and Beverages Industry

Key Business Indicators: Based on hours worked basis, the market sector multifactor productivity (MFP) increased by 0.2% (YoY) in FY21. The market sector's gross value added (GVA) rebounded from a downturn in the previous year, clocking 0.6% growth. MFP growth for agriculture, forestry, and fishing was the highest recorded at 21.7% growth and retail trade MFP growth stood at 2.4%.

Almost 70% of Agricultural Exports: Exports to Asia, one of the eight most important export markets, surged by 62% and registered $33 billion over the last 20 years to FY20. China remains Australia’s largest export market for agricultural, fisheries, and forestry products, exporting $16 billion export value in FY20.

Key Risks and Challenges

China’s manufacturing PMI has continued a downside trend, clocking 51.1. The recent contraction in the Chinese manufacturing industry, specifically steel manufacturing, may pose short-term earning shredding for the Australian materials industry. On a seasonally adjusted scape, meters drilled have slipped by 1.9% to 3,388.3 meters in September 2021 quarter. The slippage was majorly attributed to the recent countrywide shortfall of labor supply witnessed. The infrastructure investment activities may enter a cool-down period, considering the potential resurgence of containment restrictions and high volatility in metal prices. Mining MFP slipped by 3.3%, embarking upon the first MFP downturn since FY13. The greatest fall was witnessed in the coal mining subdivision amidst weak coal demand on a global scale. The global freight supply chain has adapted to changing trade dynamics in the wake of COVID-19, as bulk freight vessels and shipping containers have turned scarer on many routes.

Figure 4: Key Drivers v/s Key Constraints

Source: Analysis by Kalkine Group

Outlook

Resource and Energy Exports: Australia’s resource and energy exports are estimated to clock $349 billion in FY22, substantially up from $310 billion registered in FY21.

Resilient Dwelling and Infrastructure Spending: The recent global construction boom and infrastructure investment shall culminate to string global demand for non-ferrous metals and steel for a few upcoming quarters.

Improving Thermal Coal Prices: The thermal coal process has surged substantially in China, as critical shortages emerge. Seabourn thermal coal prices have advanced to their highest levels for over a decade.

The rise in Agricultural Production: The gross value of agricultural production is forecasted to register a record of $78 billion in FY22. This represents a $5.4 billion upward revision due to improved domestic conditions, downgrades for key international competitors driving prices higher, and improving logistics.

Agricultural Export Values to Incline: The agricultural export value is estimated to surge by 27% to surpass $61 billion in FY22. Higher prices and increased export volumes are estimated for almost all major export commodities.

Considering the uphill movement in the index of commodity prices, we have figured out four stocks on ASX that are set to see the momentum.

(1) ­­­Newcrest Mining Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 19.65 billion, Annual Dividend Yield: 3.10%)

Favorable Gold and Copper Production to Generate Free Cash Flow: Newcrest Mining Limited (ASX: NCM) is mainly involved in the exploration, mine development, mine operations, and the sale of gold and gold/copper concentrate. In FY21, NCM recorded an AISC margin of US$876 per ounce, substantially up by 31% YoY. Free cash flow inclined substantially to US$4,295 million with receipt of US$92 million from Fruta del Norte finance facility. Net cash position for the period stood at US$176 million as of 30 June 2021, including a reduction of almost US$3.9 billion in net debt since June 2014.

In Q1FY22, NCM clocked gold production of 396k ounces and copper production stood at 25k tonnes. The AISC for the period was clocked at US$1,270 per ounce. AISC margin dropped to US$406 per ounce from the FY21 figure. On 20 December 2021, NCM reported an exploration update on Paterson Province Farm-In projects. The update highlights included complete funding of Wilki Farm-In Project 2021 by NCM as part of its US$60 million farm-in.

Outlook: For FY22, NCM seeks to clock gold production of 1,800k to 2,000k ounces and copper production of 125k to 130k tonnes. The AISC guidance expenditure includes additional management costs in the COVID-19 context and is looking at circa US$35 million to US$45 million.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

NCM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of NCM went up by ~2.083%. The stock made a 52-weeks low and high of $21.850 and $29.270, 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 discount compared to its peers, considering fluctuations in commodity prices and uncertainty surrounding the impact of COVID-19 uncertainties. For valuation purposes, peers like Alkane Resources Ltd (ASX: ALK), Iluka Resources Ltd (ASX: ILU), Fortescue Metals Group Ltd (ASX: FMG), and others have been considered. Considering NCM’s improved free cash flow position, expected benefits from the proposed acquisition of Pretium Resources, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $24.000, as of 10 January 2022, at 12:25 PM (GMT+10), Sydney, Eastern Australia. 

(2) ­­­Washington H Soul Pattinson & Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 10.87 billion, Annual Dividend Yield: 2.06%)

Improved and Diverse Portfolio Performance Holding Growth Opportunities: ­­­Washington H Soul Pattinson & Company Limited (ASX: SOL) is an Australian-based investment company, driving revenue through stakes in coal mining, gold, and copper mining, refining operations, and consulting services. In FY21, SOL registered $273 million in statutory NPAT, an uptick of 71% PcP. Primary bottom-line drivers were significant growth in building products and favorable land revaluations which increased Brickworks’ contribution by almost 95%. Commendable improvements in Round Oak, up by $103 million, and strong recovery in the coal process increased New Hope’s profit contribution by almost 45% PcP.

SOL’s net asset value was primarily driven by a 48.5% surge in Brickwork’s portfolio, 21.5% increase in New Hope Corporation, partially offset by a 22.5% downshift in the telecommunication portfolio. SOL’s portfolio value surged by 12% PcP to $5.8 billion, on the other hand, net cash from investments plunged 29% PcP to $180 million. Despite the shortfall in TPG value, net asset value clocked 12% growth. Resilient FY21 cash generation from portfolio enabled a higher return to investors, primarily driven by a 6% incline in cash generation on a PcP basis.

Outlook: The merger with Milton Corporation is estimated to increase the large-cap portfolio by over $3.5 billion. SOL targets higher long-term shareholders’ returns via building capital growth and steady improvements in dividend payout.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

SOL Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of SOL went down by ~5.681%. The stock made a 52-weeks low and high of $26.610 and $40.800, 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 discount compared to its peers, considering fluctuations in coal supply, changes in macroeconomic factors, etc. For valuation purposes, peers like Santos Ltd (ASX: STO), Woodside Petroleum Ltd (ASX: WPL), Beach Energy Ltd (ASX: BPT), and others have been considered. Given the diversification benefits, potential merger synergies, improved net asset value, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $29.910, as of 10 January 2022, at 12:06 PM (GMT+10), Sydney, Eastern Australia.

(3) ­­­Tassal Group Limited (Recommendation: Hold, Potential Upside: High Single-Digit)

(M-cap: A$ 726.26 million, Annual Dividend Yield: 4.11%)

Favorable Outlook on Prawn and Salmon to Clock High Production Levels: Tassal Group Limited (ASX: TGR) is engaged in farming Atlantic salmon and tiger prawns and the processing and marketing of salmon, prawns, and other seafood. During FY21, revenue clocked $594.04 million, up by 5.6% YoY. The top-line was primarily supported by salmon domestic retail sales and increased prawn contribution. Statutory EBITDA for the period was down by 17.7% to $119.8 million, resulting from global and domestic pricing pressures, coupled with increased export supply chain costs. Operating EBITDA was up by 0.6% to $139.4 million, owing to reductions in the cost of efficiencies and growth in salmon and prawns to $0.33 per kg and $1.43 per kg, respectively.

Reported net debt increased by 60.7% and stood at $317.8 million with a leverage uptick to 2.5x from 1.6x in the previous year. Gearing increased to 40.9% from 25.0% in the prior comparable period. Undrawn debt facilities stood at $118.6 million out of the total available facility of $467.0 million. Cash and cash equivalents for the period clocked to $30.6 million. Considering the recent financial position, TGR holds substantial headroom availability in cash and undrawn debt facility with a focus on maintaining appropriate financial access and minimization of refinancing risk.

Outlook: Salmon production is expected to clock 41,000 hog tonnes in FY23 with salmon replacement and upgrade capex of approximately $50 million/annum. Prawn production remains on track to clock ~5,000 tonnes in FY22 as sales volume is supported by the Coles contract.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

TGR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of TGR went up by ~0.590%. The stock made a 52-weeks low and high of $3.160 and $3.970, 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 high single-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering bottom-line variability and high drawn facility. 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. Considering the cost-efficient strategies, improved cash flow scenario, and valuation, we give a 'Hold' rating on the stock at the closing market price of $3.410, up by ~0.294% as of 10 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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