Event Core
Infrastructure Australia has drafted some practical steps to mitigate infrastructure-related threats, such as droughts, bushfires, global pandemics, floods and cyber-attacks. The draft recommends an all-hazards approach towards resilience planning, which aims to strengthen infrastructure assets and networks. The value of favourable alterations for mitigating natural disaster costs is enormous, as, by 2050, the cost of natural disasters in Australia is estimated to clock $39 billion/year, currently $18 billion/year.
Potentially Intensified Natural Hazards in Australia
CISRO’s Key Note on Climate Change: Commonwealth Scientific and Industrial Research Organisation (CISRO) suggests that Australia’s climate change is driving changes in extreme and average weather and posing a significant impact on Australia’s ecosystems, health, water resources, infrastructure and economy.
Australia’s Warming Trend: Figure 1 illustrates a clear ongoing trend in warming. Since 1910, Australia has warmed by circa 1.4 degrees. In 2019, Australia touched the hottest year on record at +1.52 degrees of mean temperature anomaly. In 2020, the anomaly dropped to 1.15 degrees, mainly in consequence of containment measures.
Figure 1: Australia’s Mean Temperature:
Source: Based on Bureau of Meteorology Data, Analysis by Kalkine Group
Persistence of Drying Trend: A drying trend is witnessed in the Southwest particularly in Winter months. Across the past two decades, the southern half of Australia experienced below-average rainfall. In 2019, the nation recorded the least rainfall in the past 70 years of history, which may signal potential natural hazards down the line.
Figure 2: Australia’s Annual Rainfall Trend:
Source: Based on Bureau of Meteorology Data, Analysis by Kalkine Group
Natural Disasters are Extensive and has Long-term Impact
Compounding Impact of Disasters:
Estimated Cost of Natural Disasters: By late 2017, Deloitte Access Economics estimated the $18.2 billion/year cost of natural disasters in Australia for the preceding decade, considering tangible and intangible assets. Insurance losses signify broader direct and indirect costs incurred from these events. In 2020, total catastrophe claims stood at $7.2 billion, with a total claims count of 388,000.
Figure 3 – 2020 Catastrophe Claims:
Source: Based on Insurance Council of Australia Data, Analysis by Kalkine Group
Bushfires Challenges: In 2019 – 2020 illustrated a significant challenge for communities, businesses, individuals and governments in reconstructing houses and infrastructure facilities. As per the NSW state government, the bushfire aftermath resulted in 24 damaged local government bridges, 39 destroyed government bridges, repair work of 880kms of state roads, replacement of 30kms of guardrail and 2,000 signs, and an estimated restoration cost of $77 million for rail corridors.
Government Measures in Infrastructure Support and Disaster Relief
National Partnership Agreements: Over the last decade, Australian state and territory governments initiated a series of national partnership agreements that included significant funding commitments to promote disaster resilience and mitigate associated risks. In the 2020 national partnership agreement, the governments committed funding of $261 million over five years.
Investment Towards Improving Resilience of Critical Infrastructure to Natural Disasters: In light of power outages during the 2019 – 2020 bushfire season, the Australian government invested $37.1 million to enhance telecommunications’ resilience.
Government’s Industry-wide Support and Waste Management Plan: In the Agriculture, Water and Environment space, the government is facilitating a $234 million package to warrant the sustainability of the Murray-Darling Basin for a certain future. Further, the government has embarked upon its National Waste Policy Action Plan with $35 million support to uplift waste management across regional and remote communities.
Rebuilding Fund in Bushfire Aftermath: The government committed a $2 billion funding for the National Bushfire Recovery Fund to rebuild communities, livelihoods, local economic projects, and wildlife post the bushfire aftermath. Additionally, the government paid $252.3 million under the Disaster Recovery Allowance and Government Disaster Recovery Payment.
Government Commitment to National Aerial Firefighting Centre (NAFC): The Australian government committed to facilitating $15 million/year during 2018 – 2021, with total funding equaling $44.79 million over the three years. For the 2019 – 2020 bushfire season, the government-supported NAFC with additional $11 million aid in December 2019 and $20 million aid in January 2020.
Key Risks and Challenges
The lack of awareness of critical infrastructure assets may not deliver informed decisions from state and territory governments. Increased number of disasters and low resilience levels incur high insurance costs for infrastructure assets. Driven by Australia’s changing climatic conditions, many types of natural hazards have become more frequent. The interdependence between essential services, such as affordable food, energy, water, transport network, telecommunications, and financial services, is high; failure in one element may exhibit system-wide consequences. As regional and city centres expand to accommodate growing populations, the infrastructure and building need to support future communities will be vulnerable and exposed to natural disasters.
Figure 4: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
Government focus on greater awareness of the highly uncertain and potential long-term indirect and direct disaster impacts on all industries. New datasets and information regarding all disaster risk components are collated to deliver a more comprehensive understanding of natural hazard risks. Business donations deliver great support for disaster relief measures; for instance, a $70 million donation was reported in 2019 – 2020. Under the Disaster Recovery Funding Arrangements (DRFA), the state and territory governments have identified circa $5.6 billion eligible expenditures. The better knowledge and technological capabilities have delivered better analysis and integration with predictions of natural disasters. Considering the infrastructure-related disaster and relief package, we have figured out four stocks on ASX that are set to see the momentum.
(1) BHP Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 130.81 billion, Annual Dividend Yield: 9.10%)
Increased Global Demand and Price of Metals and Fuels Drive Fundamentals: For FY21, revenues inclined by 42% and stood at US$60.82 billion. Underlying EBITDA increased by 69% YoY and stood at US$37.4 billion at underlying EBITDA margin of 64%. Improved cost-efficiency was delivered by improved price and volume mix of iron ore, copper and petroleum production. Net operating cash flow stood at US$27.2 billion, while excess cash was reported at US$17.6 billion. Net debt has declined significantly to US$ 4.1 billion in FY21, relative to US$12.0 billion in FY20.
Key Strategic Business Updates (as announced on 17 August 2021): BHP aims to invest in the Jansen Stage 1 potash project to tap Potash market due to its large size, differentiated demand drivers from current portfolio and transition towards inducement pricing. BHP has entered into a merger agreement between Woodside and BHP’s petroleum business to develop a global top 10 independent energy company.
Outlook: BHP assumes high expectations from Jansen Stage 1 investment which shall bring high diversification to current portfolio. For FY22, BHP estimates 249-259Mt of iron ore production with capital and exploration expenditure of US$2.1 billion. Copper production is estimated to clock 1,590-1,760kt in copper production with capital and exploration expenditure of US$2.9 billion.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BHP (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BHP went down by ~13.283%. The stock made a 52-weeks' low and high of $33.730 and $54.550, 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). However, the company might trade at a slight discount compared to its peers’ average, considering underperformance relative to investor expectations. For the purpose of valuation, few peers such as BlueScope Steel Ltd (ASX: BSL), Newcrest Mining Ltd (ASX: NCM), Fortescue Metals Group Ltd (ASX: FMG) have been considered. Considering the potential growth in potash market, consistently upward trending metal prices, high infrastructure activities, and valuation, we give a 'Buy' rating on the stock at the market price of $44.250 as of 23 August 2021, 02:09 PM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 9.10%.
(2) Aurelia Metals Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 413.63 million, Annual Dividend Yield: 3.03%)
Significant Investment Returns and Production Levels Driving Cash Flows: Aurelia Metals Limited (ASX: AMI) is engaged in base metals and gold mining and exploration. For FY20, AMI reported $331.8 million in revenue relative to $295.0 million PcP while EBITDA margins slipped from 35% in FY19 to 31% in FY20. Revenue surge was considerably driven by the $53.7 million net sales price impact of gold. In addition, NPAT declined to $29.4 million from $36.0 million PcP due to increased operating costs of $34.6 million from mining and processing activities.
In H1FY21, gold production stood at 45.9 koz at an AISC of $1,035/oz. Sales revenue inclined by 26% PcP and stood at $207.7 million, and EBITDA improved by 44% PcP and stood at $72.3 million. Underlying NPAT inclined by 164% PcP and stood at $41.1 million due to $20.5 million in gold revenue and $22.0 million in by-product revenue at low operating costs. Operating mine cash flow stood at $95.3 million, up by 57% PcP in consequence of combined investments in exploration & growth and 28% lower sustaining capital PcP.
Outlook: As reported on 1 July 2021, Kairos delivered additional high grades adding volumes to the revenue stream for FY21. AMI has also extended the mineralization of gold at Dargues with new drilling results, which focused on extensional and infill drilling on the eastern portion of the Main Lode. As a result, FY22 guidance for gold production remains at 112- 123 koz with $1,500 – 1,700/oz in AISC.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs AMI (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of AMI went down by ~31.250%. The stock made a 52-weeks' low and high of $0.315 and $0.544, 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). Moreover, the company might trade at a slight premium compared to its peers’ median, considering favorable price factors in commodity markets. For the purpose of valuation, few peers such as Resolute Mining Ltd (ASX: RSG), BlueScope Steel Ltd (ASX: BSL), Sandfire Resources Ltd (ASX: SFR) have been considered. Considering the favorable top-line & bottom-line performance, expansion strategies, prudent liquidity position, and valuation, we give a 'Buy' rating on the stock at the market price of $0.325 as of 23 August 2021, 12:34 PM (GMT+10), Sydney, Eastern Australia. The stock had generated an annualized dividend yield of 3.03%.
(3) Vmoto Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 93.30 million, Annual Dividend Yield: 0.00%)
Secured Orders and Improved Cost Synergies Drives Profitability: Vmoto Limited (ASX: VMT) is engaged in manufacturing and global distribution of electric two-wheeler vehicles (EV). For FY20, total revenue increased to $61 million, up by 34% YoY and NPAT increased to $3.7 million, up by 174% YoY. Cash flows from operating activities clocked $4 million, up 139% YoY. All attributed to improved domestic and international demand, 4,300 units order secured with Go Sharing and 5,904 units with Greenmo Group, and JV partnership with Super Soco had unfold cost synergies.
On the balance sheet front, VMT is debt free as at 31 December 2020, and has secured Nanjing Facility – to be used against debt security, if required. VMT stands at a working capital surplus of $20.64 million as at 31 December 2020 relative to $9.40 million in the previous year. The company holds a cash balance of ~$15.00 million as at 31 December 2020, up from ~$6.65 million as at 31 December 2019.
Outlook: VMT continues to build strong B2C and B2B distribution network globally. The launch of 3 new B2C models in February 2021 and planning of a new B2B two-wheel electric vehicle delivery in upcoming months are focused on the tapping broader markets. As announced on 15 June 2021, VMT signed a marketing and sponsorship agreement to supply scooters and promote its brands at a motorcycle racing event – FIM ENEL MotoE World Cup for 2021 – 2023 seasons.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs VMT (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of VMT went down by ~9.460%. The stock made a 52-weeks' low and high of $0.325 and $0.670, 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). Moreover, the company might trade at some premium compared to its peers’ average, considering potential edge in promotion activities. For the purpose of valuation, few peers such as GUD Holdings Ltd (ASX: GUD), Camplify Holdings Ltd (ASX:CHL), Apollo Tourism & Leisure Ltd (ASX: ATL) have been considered. Considering the increased demand for EVs, strong contract build-up, expansion in product range, and valuation, we give a 'Speculative Buy' rating on the stock at the market price of $0.330 as of 23 August 2021, 12:17 PM (GMT+10), Sydney, Eastern Australia.
(4) Atlas Arteria (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 6.01 billion, Annual Dividend Yield: 3.83%)
Rebound in Top-line as Traffic Approaches Pre-COVID Levels: Atlas Arteria (ASX: ALX) is engaged in operating and developing toll roads. The company’s asset portfolio includes APRR toll (France), ADELAC (France), Dulles Greenway (USA), and Warnow Tunnel (Germany). In FY20, the company reported $95.3 million in toll revenue, a decline of 37% YoY as a result of COVID-19 movement restrictions. In line with top-line erosion, NPAT declined by 61% and stood at $69.6 million. Amidst containment measures, the EBITDA margin assumed a modest decline to 71.4% from 74.4% PcP. The balance sheet position remained flexible with EUR9.2 billion in total debt with Net Debt/EBITDA of 4.5x stood lower than the covenant restriction of 7.0x.
For Q2FY21, weighted average traffic was recorded 68.5% higher, and weighted average toll revenue was recorded 57.3% higher from Q2FY20 levels. ADELAC and APRR assumed a strong performance from heavy vehicle traffic that approached pre-COVID levels during the period.
Outlook: APRR and ADELAC are into ongoing dialogues with French State for improvements in road development projects and completion of RCEA arrangements underway in FY21. ALX is focused on building sustainable cash flows and enhancing its value proposition.
Valuation Methodology: Price/Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs ALX (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of ALX corrected by ~0.477%. The stock made a 52-weeks' low and high of $5.390 and $6.980, respectively. The stock outperformed the market volatility index. The stock has been valued using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, the company might trade at a slight premium compared to its peers’ average, considering pre-COVID normalcy in traffic levels. For the purpose of valuation, few peers such as Lindsay Australia Ltd (ASX: LAU), Qube Holdings Ltd (ASX: QUB), Dalrymple Bay Infrastructure Ltd (ASX: DBI) have been considered. Considering the improving top-line and resilient financial position and valuation, we give a 'Hold' rating on the stock at the current market price of $6.260, down by ~0.160% as of 23 August 2021. The stock had generated an annualized dividend yield of 3.83%.
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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