I. Sector Landscape and Outlook
Australia is the world’s largest exporter of iron ore and coal, second largest exporter of aluminium ores, unwrought lead and zinc ores, and third-largest exporter of copper ores by value as per the United Nations Comtrade database (for 2018).
The freight and logistics sector enables trade and transport of goods forming integral part of the economic growth. The sector accounted for about 4.0% of gross value added in Sep’20 quarter (based on chain-volume measure). Being the largest exporter, Australia is well connected to the world economy with shipping and air movements that transport bulk commodities and general cargo. Its major ports, airports, and intermodal terminals make up the freight nodes linked by road, rail, air, and coastal shipping. About 75% of non-bulk domestic freight is currently carried through road transport.
Commodity trade has remained stable since the onset of the pandemic. While some reductions in commodity trades were observed during the initial period and trading levels of many commodities have returned subsequently to pre-COVID-19 levels. Population growth, changing demographics, expected future domestic and overseas economic growth and oil prices are among the key factors that will influence Australian freight growth.
Freight Performance Update:
Airfreight transportation was affected by the closure of borders and mobility restrictions resulting in limited flight operations. As per data by the Bureau of Infrastructure, Transport and Regional Economics, international and domestic air freight volumes decreased by 11.6% to ~1.21 million tonnes in the year ending June 2020 as compared to last year. Domestic freight volumes posted a decline of ~9.8% to ~213.2k tonnes. Perth, Adelaide, and Sydney witnessed the largest decline in freight activity.
Figure 1. Air Freight Transportation Was Worst Affected by Boarder Closures:
Source: Data from Bureau of Infrastructure, Transport and Regional Economics, Chart Created by Kalkine Group
Road freight transportation is resilient to the pandemic with kilometres travelled by heavy vehicles estimated to be above pre-COVID levels. The retail sector which had served essential products to Australians during in-home restrictions, is highly relied upon road freight services with food and live animals and beverages comprised of ~13% of total tonnage volume. Total bulk and non-bulk freight moved about 224.15 billion kilometres for the full-year ending June 2020, up by 2.4% over last year.
Figure 2. Road Freight Transportation is Resilient to COVID-19:
Source: Data from Bureau of Infrastructure, Transport and Regional Economics, Chart Created by Kalkine Group
Australian rail freight serves several major export commodities such as iron ore, coal, cereal grains, etc. To meet the increased demand, The Australian Rail Track Corporation expanded its national rail network by ~13%. Extra rail freight services ran across the Sydney network to cater increased demand for essential supplies and exports.
Domestic shipping volumes experienced a slight drop in the first half of 2020. Shipping voyage numbers fell by 7% from Feb’20 to June’20 as compared to the similar period of last year. Despite the modest decrease, cargo volumes have been relatively stable, implying the domestic shipping remained the effective mode of transport during the pandemic. International shipping volumes were impacted during the initial period but subsequently recovered.
Free Trade Agreements:
Australia is working towards opening-up the economy for new exports and investment opportunities. The government has a goal of increasing the nation’s two-way trades with free trade agreement partners to ~90% of total trade by 2022. Australia currently has about 15 free trade agreements in-force with more than 20 partners. It recently signed The Regional Comprehensive Economic Partnership (RCEP) with 14 other Indo-Pacific countries. RCEP is the world’s largest free trade agreement. The partnership facilitates the involvement of Australian businesses in regional value chains and more seamless trade and investment between businesses in partnering countries. Australia is currently negotiating trade ties with the largest trading partner, Europe. This will open-up a market for Australian goods and services of close to 450 million people and a GDP of US $15.5 trillion.
Top Trading Partners:
Asian countries dominate the nation’s two-way trade flows. China remained the largest two-way trade partner for three consecutive years. Exports to China stood at ~$167.7 billion in 2019-20, up by 9.3% over the prior year. Off late, exports of resource commodities to China specifically iron ore have shown an increasing trend. Australia increasingly relied upon China for the import of telecommunications equipment, laptops, washing machines, and dryers. This electronic equipment saw increased offtake recently aided by work-from-home and home-based schooling requirements.
Imports from China increased by 2.4% to ~$83.5 billion in 2019-20. Since the commencement of the China-Australia free trade agreement in December 2015, there were a marked increase in exports of other commodities like meat, pharmaceutical products, and beverages. Asian countries to deliver nearly two-thirds of global growth by 2030 as per the data by the Department of Foreign Affairs and Trade. Australia is well positioned to benefit from it. The United States piped 2nd position. It is worth to mention the United States was the largest foreign investor in Australia. Japan’s position has been changed to 3rd from last year’s ranking of 2nd.
Figure 3. China Continue to Dominate the Top Trading Destination:
Source: Data from the Department of Foreign Affairs and Trade, Chart Created by Kalkine Group
Trade Update:
Australia, being the export nation, reported a positive trade surplus in the past four years. It had posted a surplus balance of trade to the extent of $77.4 billion in 2019-20, an increase of 58% from last year. Trade activities were severally impacted by the pandemic with ports and border closures affecting shipments of coal, iron ore, and copper. Import ban from China and lower offtake by Japan and South Korea affected coal exports. Iron ore exports benefited from favourable pricing and supply shortages at global markets. Copper demand improved backed by strong demand from China. Plant shutdowns and mine closure by domestic copper producers affected the volumes but recovered subsequently.
Figure 4. Exports Improved by 1%, while Imports Declined by 58% in 2019-20:
Source: Data from the Department of Foreign Affairs and Trade, Chart Created by Kalkine Group
Exports by Categories:
Australia is the largest exporter of Iron Ore constituted ~32% of overall exports in 2019-20. Growing volumes backed by new mines in Western Australia, and strong prices coupled with a low Australian dollar attributed to a surge in export values (+32% over the prior year). Coal constituted ~17% of total exports in 2019-20. Weak demand following COVID affected coal exports which had declined by ~22% over last year. The Australian premium Hard Coking Coal prices (HCC) receded on the back of supply-side disruptions. Natural gas is the third largest product with a share of 15% in total exports. Exports deteriorated by ~4% as Australian LNG prices have fallen to record lows owing to a sharp drop in both contract and spot prices. Australia ramped-up the LNG capacity in 2019 reaching 88 million tonnes. Investments in new capacity subsequently affected by weakening oil prices. Education services become the fourth export category accounted for 12%, followed by gold with an 8% share in overall exports in 2019-20.
Index Performance:
The ASX 200 Transportation Index generated returns of ~+111.64% in last 10 years vis-à-vis ASX 200 Index returns of +41.15%. Rapid industrialization, increased spending on road infrastructure by the government and expanding borders with trading partners spurred the sector growth.
Figure 5: ASX 200 Transportation Index outperformed ASX 200 Index by 70.49% over the last decade
Source: Refinitiv (Thomson Reuters) as on the close of 14 January 2021
Key Risks and Challenges:
Road transport experienced traffic congestion, particularly in Sydney and Melbourne. Increased infrastructure spending by the government on road projects will overcome the bottleneck. Trade volumes are largely dependent on the retail, mining, and manufacturing sector. Household spending is influenced by the unemployment rate, wage hikes, and inflation. The retail sector post threat to the economy during the pandemic as household spends were directed towards essentials. Renewed virus outbreaks will likely impact the retail demand for transportation.
Mining activities posted a mixed trend during the pandemic. Transportation and trading volumes were impacted by production shutdowns, a ban on import restrictions by China, geopolitical tension with Japan and South Korea, and international prices of bulk commodities and base metals. Rural commodity trading was influenced by seasonal variations and climate change.
Figure 6. Key Risks Affecting Trade Volumes and Movement of Goods:
Source: Chart Created by Kalkine Group
Outlook:
Shifts in consumer patterns towards online shopping lifted the sector with increased shipments during the pandemic. Retailers to continue to invest in various omni-channel initiatives such as ‘Buy Now Pay Later’, ‘Buy Online Pick-up In-Store’, etc. to drive the sector growth. Increased adaption by millennials to increase the penetration of online retailing.
To cater to the increased demand for parcel services, Australia Post has established 16 new posts and recommissioned parcel processing facilities. It also chartered additional freighter flights. Further to boost the freight and logistics sector, the Australian government has announced an investment of $110 billion over 10 years starting from 2020-21 in various transport infrastructure projects under Infrastructure Investment Program. It had committed ~$4.6 billion through the Roads of Strategic Importance initiative to improve better road connectivity between agricultural regions and ports, airports, and other transport hubs. The government also committed ~$5 billion towards the construction of a road link to Melbourne airport in partnership with the Victorian government. Similarly, the opening of Sydney Airport in 2026 to enable the efficient movement of passengers and freight.
II. Investment theme and stocks under discussion (ASB, ALX, BXB, QUB)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Cash Flow’ method.
1. ASX: ASB (Austal Ltd.)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$927.65 Million)
Austal Limited operates as a defense contractor. The company develops and supplies vessel platforms such as the littoral combat ship and joint high-speed vessel to defense force and installs and maintains military communications, radar, command, and control systems.
Valuation
Our illustrative valuation model suggest that stock has a potential upside of 21.1% on 14 January 2021. For the said purposes, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), Quickstep Holdings Ltd. (ASX: QHL), PTB Group Ltd. (ASX: PTB). The stock delivered annualized yield of 3.10%.
2. ASX: ALX (Atlas Arteria Group)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$5.91 Billion)
Atlas Arteria Limted operates as an infrastructure developer and operator. The company constructs highways, roads, bridges, and tunnels. Atlas Arteria also collects toll. Atlas Arteria serves clients worldwide.
Valuation
Our illustrative valuation model suggest that stock has a potential upside of 25.9% on 14 January 2021. For the said purposes, we have taken peers such as Transurban Group (ASX: TCL), Qube Holdings Ltd. (ASX: QUB), Downer EDI Ltd. (ASX: DOW). The stock delivered annualized yield of 4.21%.
3. ASX: BXB (Brambles Ltd.)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$15.49 Billion)
Brambles Limited is a global support services group which provides pallet and plastic container pooling services and information management service.
Valuation
Our illustrative valuation model suggest that stock has a potential upside of 17.1% on 14 January 2021. For the said purposes, we have taken peers such as Aurizon Holdings Ltd (ASX: AZJ), Transurban Group (ASX: TCL), Pro-Pac Packaging Ltd. (ASX: PPG). The stock delivered annualized yield of 2.45%.
4. ASX: QUB (Qube Holdings Ltd.)
(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$5.61 Billion)
Qube Holdings Limited provides logistics services for clients in import and export cargo supply chains in Australia.
Valuation
Our illustrative valuation model suggest that stock has a potential upside of 16.3% on 14 January 2021. For the said purposes, we have taken peers such as Sydney Airport Holdings Pty Ltd. (ASX: SYD), Transurban Group (ASX: TCL), Atlas Arteria Group (ASX: ALX). The stock delivered annualized yield of 1.76%.
Note: All the recommendations and the calculations are based on the closing price of 14 January 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
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