Event Core
On 22 March 2022, the Australian Bureau of Statistics released data on monthly household spending indicator for January 2022, suggesting a 4.3% PcP uptick in household spending, clocking an index of 105.6 points. Household spending was primarily supported by an 11.3% increase in recreation & culture, a 9.7% jump in food and a 9.6% advancement in clothing & footwear spending. Western Australia, Victoria, and Tasmania witnessed the highest surge in household spending.
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Update on Retail Trade
Key Statistics on Retail Turnover: Australian retail turnover advanced by 1.8% in January 2022, seasonally adjusted, as per the Australian Bureau of Statistics Data. The January result follows a fall of 4.4% in December 2021, after a consecutive surge of 7.3% in November 2021 and 4.9% in October 2021. The emergence of the Omicron variant and increasing COVID-19 cases, combined with an absence of containment measures, resulted in different consumer behaviors.
Online Retailing: Total online retailing sales stood at $3.89 billion in January 2022, in seasonally adjusted terms. Online sales advanced 7.9% or by $285.6 million, the first surge since the end of containment measures in October 2021. Food online sales stood at $1.06 billion, and non-food online sales stood at $2.83 billion in seasonally adjusted terms.
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Risks and Challenges
Comparative to January 2020 (pre-pandemic estimates), the total household spending in January 2022 decreased by 0.6% at the current price. Recent disruption in the global supply chain may vastly affect the retail and wholesale trade business in traditional and online retail platforms. The limited availability of skilled and unskilled labour will challenge Australia’s consumer market. Significant challenges for retailers include integration process & physical automation across the supply chain and comprehending actual channel cost & SKU profitability.
Analysis by Kalkine Group
Outlook
Favourable Economic Indicators: In December 2021 quarter, the Australian economy expanded by 3.4%, with real net national disposable income increasing by 1.7%. The household saving ratio decreased dramatically from 19.8% to 13.6%.
Increased Domestic Final Demand: The final domestic demand contributed 2.9 ppts to the GDP growth, and household final consumption expenditure contributed 3.2 ppts, as restrictions on businesses and households are lifted.
Food Retailing Emerges: Food retailing witnessed the most significant sales uptick in January 2022, clocking a 2.2% surge, the most effective monthly rise since July 2021, with sales sustaining elevated levels.
Improved Household Spending: As Australia phases out of the COVID-19 impact, household spending is taking pace with an increase in seven of the nine spending categories in January 2022 relative to January 2021.
Increased Investment Inflow: In the December 2021 quarter, the new private capital expenditure for retail and wholesale trade advanced by +8.5% and +9.0% PcP, respectively. Capex in transport, postal and warehousing moved substantially by 13.5% PcP.
Considering the uptick in household spending covering the broad spectrum of industries, we have figured out three stocks on ASX that are set to see the momentum.
(1) Blackmores Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.44 billion, Annual Dividend Yield: 1.41%)
Improving Gross Margins Warranting Operational Efficiency: Blackmores Limited (ASX: BKL) manufactures and supplies vitamin, herbal, mineral supplements and natural skin and hair treatment products in Australia and New Zealand. In FY21, BKL clocked a revenue of $575.9 million, up by 1.3% PcP. Gross profit stood at $301.0 million, up by 4.6% PcP, with gross profit margin up by 1.6ppts to 52.3%. Group EBIT stood at $45.8 million, up by 82.5% on PcP.
In H1FY22, BKL revenue stood at $346.0 million, up by 14.3% PcP or 14.9% uptick on a constant currency basis. The company continued to execute its strategic game plan of cost-out and efficiency savings. Gross profit stood at $187.6 million, up by 19.4% PcP, with gross profit margin extended by 2.3ppts to 54.2%. As of 31 December 2021, group net cash stood at $89.4 million with strong operating cash flow conversion.
Outlook: Total A&P investments are expected to range between $10 million and $15 million higher in H2FY22. Investments in supply chain capabilities have strengthened BKL and underpinned the ability to meet customer demand.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BKL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BKL went down by ~2.642%. The stock made a 52-weeks low and high of $63.170 and $103.970, respectively. The stock outperformed 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 significant exposure to the Chinese market and financial susceptibility to forex movements. For valuation purposes, peers like McPherson’s Ltd (ASX: MCP), BWX Ltd (ASX: BWX), Biome Australia Ltd (ASX: BIO), and others have been considered. Given the improving operational efficiency, expanding top-line, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $73.320, down by ~1.439%, as of 28 March 2022.
(2) Temple & Webster Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 819.07 million, Annual Dividend Yield: 0.00%)
Rising Active Customers Warranting Improved Market Share: Temple & Webster Group Limited (ASX: TPW) is engaged in the online retailing of furniture and homewares. In FY21, revenue advanced by 85% YoY to $326.3 million, driven by robust growth in new and repeat customers and average order values. EBITDA advanced by 141% YoY to $20.5 million during the period, and cash flow stood in positive territory. Trade and commercial division increased by 110% YoY, and active customers increased by 62% YoY to 778k.
In H1FY22, revenue stood at $235.4 million, up by 46% relative to H1FY21 and 218% relative to H1FY20. The robust supply chain diversity (private label and drop shop) has enabled consistent trading performance across the COVID affected period. Revenue per active customer advanced by 10% for the sixth consecutive quarter. Active customers grew by 34% and totalled 906k. EBITDA stands ahead of the 2-4% target range at 5.1%.
Outlook: H2FY22 has commenced vigorously with PcP revenue growth of 26% for 1 January 2022 to 6 February 2022. TPW remains confident of its strategy with the next generation shoppers. The company continues to reinvest operating leverage in building strategic moats across the core business.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs TPW (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of TPW went down by ~5.974%. The stock made a 52-weeks low and high of $5.840 and $15.000, respectively. The stock outperformed 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 high inventory/supplier management requirements and supply chain constraints. For valuation purposes, peers like Mydeal.Com Au Ltd (ASX: MYD), Mad Paws Holdings Ltd (ASX: MPA), Step One Clothing Ltd (ASX: STP), and others have been considered. Given the rise in active customers, decent bottom-line, strong revenue growth, current trading levels, and upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $6.610, down by ~2.795%, as of 28 March 2022.
(3) SG Fleet Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 854.96 million, Annual Dividend Yield: 5.48%)
Stable Performance Across Geographies and Business Segments: SG Fleet Group Limited (ASX: SGF) provides vehicle leasing and fleet management services covering Australia, New Zealand, and the UK. SGF witnessed a 15% uplift in total net revenue to $198.2 million in FY21 over the prior year. Its underlying NPAT showcased a growth of 41.8% to $51.6 million.
In H1FY22, net revenue stood at $153.8 million, up by 58.0% PcP, including a $41.6 million contribution from LeasePlan. SGF reported NPAT of $21.6 million, up by 16.6% PcP and underlying NPAT surged by 54.3% PcP. The NPAT included $8.1 million and $9.0 million four-month contributions from LeasePlan Australia and New Zealand businesses (recently acquired), respectively. The company continued to deliver strong momentum across all channels.
Outlook: SGF has continued to improve cost efficiencies by automation & digitalization, prospects for credit system replacement and potential securitization term-out. The company is betting on expanding higher value-add products & services, investment in new capabilities, growth in EV-related services, and expansion of mobility services.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs SGF (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SGF went down by ~3.846%. The stock made a 52-weeks low and high of $2.210 and $3.290, respectively. The stock outperformed the market volatility index. The company can trade at a slight discount compared to its peers, considering global supply chain constraints and better working capital management requirements. For valuation purposes, peers like HRL Holdings Ltd (ASX: HRL), Mader Group Ltd (ASX: MAD), Ai-Media Technologies Ltd (ASX: AIM), and others have been considered. Considering the improvement in cost efficiencies, favourable jump in fundamentals, high contribution from strategic acquisitions, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $2.500, as of 28 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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