The re-opening of the economy resumed activity with the unemployment rate improving at 6.4% in January 2020 month and household spending rose a 60-year high at 7.9% in the September 2020 quarter. The economic recovery is well underway and has been stronger than was earlier expected as mentioned by the Governor of The Reserve Bank of Australia. The government’s expanded tax incentives for corporates and aggressive monetary policy easing served as a cornerstone for business expansion. As capacity utilization improved to the long-run average and lingering around the pre-COVID levels, businesses expressed optimistic views and are willing to invest in capex, as shown in the NAB Business Survey report. 

In the latest release by The Australian Bureau of Statistics, private new capital expenditure showed an increase of 3.0% to reach $29.39 billion in December 2020 quarter over the preceding quarter. Capex in buildings and structures improved by 0.7%, while equipment, plant and machinery surged by 5.7%. Favourable sentiments and revival in consumption led businesses to pursue capex plans after being paused for about five quarterly periods starting from September 2019. By sectors, mining capex fell 1.4%, while non-mining rose 4.9% in December 2020 quarter (on a QoQ basis).

Figure 1. New Capex Spend Posted An Increase After Series of Declines:

Source: Data from The Australian Bureau of Statistics, Chart Created by Kalkine Group

Easing of restrictions and lifting of border closures saw an increase in visitor arrivals to Australia by 16.5% in December 2020 over the preceding month, according to The Australian Bureau of Statistics. Further, Australian residents stranded at various places are returning with an increase in short-term trips by 10%. This had boosted the accommodation and food services industry with capex spend grew by 32.6% to $737.0 million in December 2020 quarter as compared to the preceding quarter.

Digitization and e-commerce purchases revolutionizes the retail sector during the pandemic with a surge in freight volumes. Freight transportation was able to connect even the very remote places in Australia, which had shown a strong increase in online shopping. Capex spend by the transportation sector increased by 18.8% to $2.78 billion in December 2020 quarter (on a QoQ basis).

The housing market showed revival with an increase of 22.8% in housing dwellings approval in December 2020 over pcp. Australians showed increasing interest in detached single-family apartments. Further, engineering construction gradually picked-up benefited from the government’s austerity $110 billion investment plan over the next ten years. Capex spends by the construction sector grew by 14.9% to reach $1.57 billion in December 2020 quarter (on a QoQ basis).

The pandemic has changed the payment industry with contactless and card-based payments. Debit cards, Buy-Now-Pay-Later and payment processing firms, and other business support providers posted an increase of 15.0% in capex spend to $398.0 million in December 2020 quarter (on a QoQ basis).

Figure 2. Accommodation and Food Services, and Transportation Showed Significant Growth:

Source: Data from The Australian Bureau of Statistics, Chart Created by Kalkine Group

In a separate report, Australia showed traction in the economic activity. According to the NAB Business Survey, Australian businesses have started the year in optimistic manner as Covid-19 scenario eased with positive employment conditions. Business Confidence Index moved above average in January 2021. Capacity utilization edged up in January 2021 and reached pre-COVID levels as demand picked-up. The survey also mentioned that firms are willing to invest in capex. Business Conditions Index although fell in January 2021 but remained above the average and back to November 2020 levels. More firms are reporting higher employment over the month but the pace of expansion moderated a bit. Businesses in NSW, VIC, and WA expressed strong confidence.

Figure 3. Business Confidence Index Showing Recovery:

Source: Data from National Australia Bank (NAB), Chart Created by Kalkine Group

Australian firms have signalled expansion driven by a rebound in global demand spurred exports of manufactured goods. The index of industrial production showed an uptick on a QoQ basis to reach 100.3 points in September 2020 quarter (vs. 100.0 in June 2020) as per the data by The Australian Bureau of Statistics.

Key Risks: Capex spend by Australian businesses is yet to reach pre-COVID levels. The official data showed that private capital expenditure is lower than December 2019 quarter by 7.5%. The mining sector which makes-up more than half of exports, showed a decline in capex spends by 1.4% in December 2020 quarter. The virus outbreak halted mining and refining operations. As supply recovers in Brazil and China reduces stimulus, iron prices are expected to fall, affecting capex built-up by miners, according to the Department of Industry, Science, Energy and Resources. Finances for LPG projects remain difficult as LNG price are linked to crude oil and LNG prices are expected to decline. Roll-back of Australia’s tax incentives and various other government stimulus measures may affect household spending and may slow down private sector expansion.

Source: Analysis by Kalkine Group

Outlook:

The Morrison government’s $27 billion investment incentives allow businesses with turnover up to $5 billion to completely write-off purchases for the next two years. This helps numerous companies to continue their capital expenditure programs. Several ASX-listed companies have increased their capex guidance for this financial year to $110-115 million. Commonwealth Bank and Westpac Banking Corporation expect capital spending could rise in the coming financial year by 10-15%. In a survey by The Australian Bureau of Statistics, a handful of companies have planned capex over the next three months and a majority expressed that capex spend would be higher than usual. Demand conditions, uncertainty towards COVID-19 restrictions, and access to funds are the top factors to influence the capex plans.  In the recent announcement, the Reserve Bank of Australia decided to continue its quantitative easing program until September 2021, pumping an additional $100 billion into the economy. This will boost the demand, auguring private sector expansion and accelerate job creation. The official cash rate is expected to remain just above zero through at least 2022. NAB is expecting GDP to rebound by 2.9% in Q4 2020 aided by a surge in household spending and recovery of the services sector. The economy is expected to fully recover in mid-2021. Considering the development in capex spend, we have figured out 4 stocks on ASX that are set to see the momentum from the development.

(1) Atlas Arteria (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 5.26 Billion, Annual Dividend Yield: 4.68%)

The Pandemic Impacted Traffic Volumes: Atlas Arteria (ASX: ALX) operates as an infrastructure developer and operator. The company constructs highways, roads, bridges, and tunnels. Teleworking and distance-based learning saw a 22.8% decline in average traffic across the portfolio. There was a ~19.3% drop in average toll revenues in FY20. E-commerce and logistics provided some relief with revenues from heavy vehicles accounted for 39% in FY20 as compared to 34% in pcp. Roadworks around the Warrow Tunnel continued to support traffic. APRR and ADELAC businesses experienced sharp recovery post-lifting of the lockdown in Q4 FY20. EBITDA margin plunged to 35.7% in FY20 (vs. 42.6% in FY19) on account of decline in toll revenues and decrease in variable costs partly provided an offset. Capex projects are progressing on-track although some delay due to the pandemic. Construction of  RCEA project began in 2020-mid and is expected to be completed in 2.5 years with costs of ~EUR 600 million. ALX refinanced the Eiffarie debt facility to the tune of EUR 1.07 billion to defer amortization until June 2023. It had repaid EUR 350 million corporate debt. This resulted in an improvement in the debt-to-equity ratio at 0.43x as of December 2020 (vs. 0.66x in pcp). Further, ALX received proceeds of $420 million via equity fundraising and also launched buyback of US retail security holders. It had closed the FY20 fiscal year with a cash balance of $193.7 million.

Outlook: ALX to focus on sustainable cash flows by lengthening the average concession terms and create long-term value. It is evaluating other free-flow tolling opportunities on the APRR network. The company will finalise SCC rates for Dulles Greenway. ALX has initiated a restructuring plan at its subsidiary, Warnow Tunnel. The company plans to raise EUR 115 million debt and a cash injection of EUR 42 million which are to be utilised to repay the debt of EUR 142 million. The program is expected to close by March 2021.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Price/Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs ALX (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted negative 3-month and 6-month returns of ~9.88% and ~10.15%, respectively. It is currently trading slightly below the average of 52-week high price of $8.630 and 52-week low price of $3.510. The stock underperformed the market volatility index given the weak toll revenues and traffic volumes on the back of lockdown restrictions. But off-late, it had started to show recovery. We have valued the stock using the Price/Cash Flow multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a discount as compared to its peer median (NTM Trading multiple) as cash flows are tied-up to toll collection which are influenced by freight rates and trade volumes. Its business provides inadequate diversification and the company may take time to realise cash flows from new projects considering the long gestation period and project cycles. For this purpose, we have taken peers such as Transurban Group (ASX: TCL), Boom Logistics Ltd. (ASX: BOL), Aurizon Holdings Ltd. (ASX: AZJ), to name a few. Considering the project pipeline, funding flexibility, adequate liquidity, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.840, up by 5.225% on 1^st March 2021.  

(2) United Malt Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.10 Billion, Annual Dividend Yield: 0%)

Change in Product Mix and Lower Volumes Affected Revenues: United Malt Group Limited (ASX: UMG) operates as a commercial malt company. The company offers malt, hops, yeast, adjuncts, and related products to craft brewers and distillers. The government lockdown restrictions curtailed on-premise consumption of alcohol which had affected revenues in FY20. But a surge in off-premise consumption provided some support. Customer ordering pattern has changed while ordering frequency had increased. UMG witnessed greater demand for base malts. EBITDA margin plunged to 11.5% in FY20 (vs. 13.1% in pcp) partly supported by direct cost savings and government wage support schemes. UMG focused on packaging and supply chain which also pushed operating costs. It had invested in GBP 51 million in Scottish malting facilities and expansion at the Arbroath facility. The North American warehouse built-out has been completed with the Chicago warehouse operational. Total capex surged to $59.6 million in FY20 (vs. $47.7 million in pcp). It had de-stocked inventories, following the pandemic, resulting in lower inventories. The gearing ratio improved to 1.7x as of September 2020 as against 3.3x as of March 2020, driven by lower working capital requirements. The company expects the gearing ratio to be within the target range of 2.0x to 2.5x in H1 FY21.

In the latest update, UMG to close its Grantham facility in March 2021 and consolidate production into its Witham and Arbroath facilities. This will provide greater asset utilization and lower production costs per tonne.

Outlook: UMG entered into a distribution agreement to expand penetration into the Mexican market. Its Scottish expansion will increase production capacity by 79,000 tonnes by end of CY2021. In the light of restrictions on public gatherings, concerts, and sports events, UMG expects subdued volumes in its on-premise sales. It continues to monitor product mix with a higher level of base malt usage. Its FY21 operating costs are likely to increase on account of insurance costs. UMG is expecting positive cash flows in FY21. 

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs UMG (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted negative 3-month and 6-month returns of ~18.78% and ~8.42%, respectively. It is currently trading below the average of 52-week high price of $5.240 and 52-week low price of $3.540. The stock underperformed the market volatility index due to shift in consumption pattern following closure of avenues and stores impacting sales. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median EV/Sales multiple (NTM Trading multiple) as the company’s Scottish plant expansion will significantly increase production capacity by 79,000 tonnes by the end of 2021. For this purpose, we have taken peers such as Freedom Foods Group Ltd. (ASX: FNP), Elders Ltd. (ASX: ELD), Wingara AG Ltd. (ASX: WNR), to name a few. Considering the expansion plans, better alignment of product mix, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.590, down by 1.644% on 1^st March 2021. 

(3) Laybuy Group Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double Digit)

(M-cap: A$ 242.50 Million, Annual Dividend Yield: 0%)

Increased Marchant Tie-ups and Adoption of BNPL Drove Growth: Laybuy Group Holdings Limited (ASX: LBY) provides a technology-driven payment platform both online and in-store via a dashboard. It serves customers in the United Kingdom, New Zealand, and Australia. LBY experienced a surge in revenues from repeat customers, particularly in NZ and a higher purchase frequency in FY20. Australia and UK are likely to show an increase in net transaction margins. LBY continues to report negative EBITDA due to higher merchant expenses and marketing spend. It had incurred sizeable impairment from customers due to which the company reported operating loss in FY20.

In the H1FY21 update, LBY reported a 48% increase in active merchants and group income grew by 151% over pcp to reach NZD 13.3 million. Net transaction margin improved to 1.7% (of GMV) in H1 FY21, up from 0.8% in pcp. Gross Merchant Value (GMV) accelerated in the UK through large and small merchant wins and increased customer adoption to Buy-Now-Pay-Later. Repeat customers continue to grow in Australia (share of 70% in H1 FY21 vs. 66% in pcp). The company continues to show EBITDA loss of NZD 8.1 million in H1 FY21 (vs. a loss of NZD 4.5 million in pcp), driven by share-based payments to merchants and sponsorship payments towards marketing. The company recently listed on ASX and realised proceeds of NZD 43.4 million from IPO. It had closed the H1 FY21 with a cash balance of NZD 31.8 million. The company utilized the IPO proceeds to pair-down debt with Kiwibank and UK loans. It had ~NZD 203.8 million available under liquidity facilities. 

Outlook:  In the Q3 trading update, LBY reported GMV of NZD 182 million as against NZD 127 million in Q2 FY21. Its net transaction margin dropped to 1.3% (vs. 2.8% in pcp). LBY expects to continue to invest in a number of merchant programs. And its ‘Tap to Pay’ product and Gift Card store launch is expected to boost topline growth in Q4 FY21. LBY added 230 active merchants and 23,000 active customers in January 2021 month. The company will continue to test-launch the US market with a progressive launch expected during FY21.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs LBY (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted negative 1-month and 3-month returns of ~5.94% and ~2.18%, respectively. It is currently trading below to the average of 52-week high price of $2.300 and 52-week low price of $1.230. The stock underperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms).  We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as the company’s topline growth accelerated driven by merchant wins and increased customer adoption to Buy-Now-Pay-Later. Its ‘Tap to Pay’ product and Gift Card store launch to further boost the revenues in Q4 FY21. For this purpose, we have taken peers such as Link Administration Holdings Ltd. (ASX: LNK), Megaport Ltd. (ASX: MP1), Appen Ltd. (ASX: APX), to name a few. Considering the robust revenue growth through active merchant additions, adequate liquidity, valuation and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.345, down by 1.825% on 01 March 2021.

(4) Coles Group Limited (Recommendation: Hold, Potential Upside: Low Double Digit)

(M-cap: A$ 21.36 Billion, Annual Dividend Yield: 3.94%)

Surge in Online Sales to Offset the Revenue Loss: Coles Group Limited (ASX: COL) owns and operates a chain of supermarkets and department stores. The company provides apparel, liquor, office supplies, groceries, and household products to customers in Australia and New Zealand. COL experienced 10% growth in its own brands with ~1,850 products launched during the year. It had doubled online capacity through the rapid rollout of contactless and Click and Connect modes. The company experienced double-digit growth in meat exports to Asia.  Through streamlining efforts, COL realised ~$250 million in cost savings. EBIT contribution by supermarkets surged 10.7% in FY20 over pcp.

During H1 FY21, COL realised e-commerce B2C sales growth of 61% over pcp. It had opened three e-commerce dark stores for liquor supporting e-commerce offtake. Supermarket sales density increased by 7.7% on YoY basis to $18,101 per sqm. It is on-track to realize cost savings of $250 million in FY21. The company reported group-wide EBIT growth of 12.1% in H1 FY21. Omni-channel spends increased by 2.1x. Partnership with Ocado widened the product range and increased inventory networking. Operating cash flow increased to $2,157 million in H1 FY21. Net capex surged to $509 million (from $142 million in pcp) led by the opening of 11 new supermarkets and 20 liquor stores. It had closed the Jan 2021 half-year period with a net cash balance of $38 million as compared to net debt of $362 million as of June 2020. Liquidity was supported by undrawn lines of credit to the tune of $2.4 billion. It had issued $150 million five-year senior floating rate notes. Leverage ratio improved to 2.9x during H1 FY21 as compared to 3.0x in pcp. 

Outlook: COL is expecting FY21 supermarket sales to be moderated. Capex for the full year is likely to be $1.1 billion, with sizeable investments in e-commerce and operational efficiencies. It had plans to renew 65 stores and to open 15-20 new stores in FY21. 

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs COL (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted negative 3-month and 6-month returns of ~13.21% and ~12.58%, respectively. It is currently slightly below to the average of 52-week high price of $19.260 and 52-week low price of $14.010. The stock underperformed over the market volatility index as the lockdown restrictions impacted store revenues. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms).  We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) as the company continue to invest in B2C e-commerce sales and supply-chain with omni-channel spend increased by 2.1x. For this purpose, we have taken peers such as United Malt Group Ltd. (ASX: UMG), Bega Cheese Ltd. (ASX: BGA), Woolworths Group Ltd. (ASX: WOW), to name a few. Considering the product expansion in ‘Own Brand’ category, ample liquidity, significant investment in online and omni-channel initiatives, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $15.50, up by 1.108% on 1^st March 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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Disclaimer  

 

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