Event Core

On 17 November 2021, the Australian Bureau of Statistics (ABS) released Wage Price Index (WPI) for the September 2021 quarter. As per the release, WPI surged by 0.6% quarterly and 2.2% PcP. WPI in the public sector jumped 0.5% and in the private sector rose 0.6%. The release spotlight on wage growth frequency, which provides the impact of the COVID-19 pandemic on wage and salary growth patterns.

The broader picture on wage growth

Private sector wage inclines: Private sector wage edged up by 0.6% in September quarter 2021, outpacing pre-pandemic September quarters. This quarter witnessed more employers conducting salary reviews relative to past year observed reviews when COVID-19 impact had a vast influence on business operations. Small and isolated pockets of demand across various industries witnessed a significant incline in salaries and wages to retain and attract experienced staff.

The public sector followed the trajectory of the private sector: Wage growth for the public sector winded by 0.5% and has continued to trace below the private sector growth since September 2020 quarter. Post a period of public sector wage freezes, this quarter assumed a rebound to regularly scheduled hikes.

Figure 1: Wage Growth by Public and Private Sector:

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

Key Drivers for Wage Growth

Individual Arrangements: 25% of all the jobs covered by individual arrangements recorded a wage hike in September 2021 quarter. Many of these arrangements witnessed a substantial shift away from the regular pre-COVID pattern of annual wage hikes. Usually, circa 55-60% of September wage hikes are annual increments, while only 22% of these increments were annual this quarter.

Enterprise Bargaining Agreements: Enterprise agreements in the private sector, state and commonwealth governments were affected by several wage freezes since the pandemic impacted the Australian economy. September 2021 quarter has rebounded to a more regular pattern of wage hikes, with 35% of jobs reporting increments.

Awards: In the past two annual reviews, the Fair Work Commission staggered the time gap of award increments between 2020 and 2021. Annual increments have been a feature of the Modern awards, with interruptions occurring only during significant economic disruptions like the Global Financial Crisis (GFC) and the COVID-19 pandemic.

Figure 2: Contribution to Wage Price Index (WPI) by Method of Setting Pay

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

Key Industries Impacting the WPI Movement:

Professional, scientific, and technical services: Annual change in wages for professional, scientific, and technical services stood at +3.4%, and quarter change stood at +1.3%. The rising superannuation funds under management and its dominant support in the COVID-19 crisis has complemented an uplift in the salary packaging industry, growing leaps and bounds.

Construction Industry: Annual change in wages for the construction industry stood at +2.6%, and quarter change stood at +1.1%. Total private sector dwellings (excluding houses) surged by 18.1% monthly or 47.2% PcP in the September 2021 quarter on a seasonally adjusted basis. On the contrary, the total dwellings approved slipped by 4.3% due to extensive containment measures in place.

Manufacturing Industry: Annual change in wages for the manufacturing industry stood at +2.0%, and quarter change stood at +0.7%. The wage uplift was complemented by a significant rise in new private capital expenditure. For the June 2021 quarter, capex on buildings and structures edged up by 4.6% and capex on equipment, plant and machinery uplifted by 4.3% (on a QoQ basis).

Financial and insurance services: Annual change in wages for finance and insurance services stood at +1.6%, and quarter change stood at +0.5%. As suggested by lending indicators, personal fixed-term loans edged up by 0.4% and loan commitments for business construction lifted by a considerable 13.0%. Financial activities have further synergized with BNPL and other fin-tech platforms, unfolding employment opportunities.

Key Risks and Challenges

Figure 3: Key Drivers V/S Key Constraints

Source: Analysis by Kalkine Group

For October 2021, the unemployment rate surged to 5.2%, and employment slipped to ~12.835 million from ~12.882 million witnessed in September 2021. The employment to population ratio decreased to 61.3% while the participation rate increased. Potential threats to businesses from supply chain disruptions and a downturn in the Chinese economy may intensify unemployment in the short term. Growth in company gross operating profits took a downtrend since the recent peak of the September 2020 quarter. COVID-19 uncertainties persist, and the potential threat of containment measures exists.

Outlook

Employment may gear up as the participation rate for October 2021 increased to 64.7%, up from 64.5% in September 2021. The gradual unlocking and reopening borders may deliver improved dynamics for businesses. Wage hikes shall deliver improved conditions on disposable income and hence give a push to household spending. For June 2021 quarter, household spending widened by 1.1%, and the savings ratio dropped to 9.7%. The gross operating profits of companies (on a seasonally adjusted basis) surged 7.1% in June 2021 quarter despite lower production, suggesting a high capacity to absorb wage increments. Improved wages shall translate to high household endurance to tackle inflation. As a result, the consumer price index (CPI) surged 0.8% QoQ and 3.0% YoY in the September 2021 quarter. Considering the developments in the wage price index, we have figured out four stocks on ASX that are set to see the momentum.

(1) Platinum Asset Management Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$1.66 billion, Annual Dividend Yield: 8.45%)

Significant Developments in Operating Performance: Platinum Asset Management Limited (ASX: PTM) is engaged in asset management, financial planning, and financial advisory services. For FY21, total revenue and other income inclined by 5.9% amid a 10% increase in Funds Under Management, clocking $23.5billion, primarily driven by the investment performance of $5.5 billion. PTM earned performance fee revenue of $4.0 million relative to $9.1 million in FY20. Absolute investment performance towards to value of PTM’s seed investments touched $43.9 million relative to $8.7 million in FY21.

In FY21, PBT inclined by 6.1% and touched $234.2 million. However, the significant gains of PTM’s seed investments were partially offset by a decline in performance and management income. As a result, PTM launched the fixed cash distribution option to enable investors to elect on either receiving fixed annual cash distribution yield (currently at 4%).

Outlook: The ongoing process of vaccination drill is expected to place the economy in expansion territory and hence better investment opportunities. The future outlook for equity markets remains bullish, which shall imply high investment funds.

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

PTM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of PTM went down by ~9.09%. The stock made a 52-weeks’ low and high of $2.770 and $5.140, respectively. 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). Considering the high fund diversification attribute, the company can trade at a slight premium compared to its peer’s average EV/Sales multiple. For valuation, peers like EQT Holdings Ltd (ASX: EQT), ASX Ltd (ASX: ASX), Magellan Financial Group Ltd (ASX: MFG) have been considered. Given the prudent liquidity levels, resilience showcased by funds’ performance, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $2.780, as of 22 November 2021, at 1:16 PM (GMT+10), Sydney, Eastern Australia. 

(2) ­­­Smartgroup Corporation Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.04 billion, Annual Dividend Yield: 6.99%)

Improving Operational Efficiency Built Company’s Endurance: Smartgroup Corporation Limited (ASX: SIQ) is a specialist employee management services provider, which provides salary packaging, fleet management and various other employee management services to organizations across Australia. In FY20, revenue clocked $216.3 million, down by 13% YoY, and NPATA stood at $65.2 million, down by 20% YoY. SIQ strived for steady operational performance during a disrupted environment. The period witnessed 100% extension or renewal of top 20 client contracts. 360,500 of total packages stood in line with December 2019 numbers. 24,900 fleet vehicles stood under management, up by 4% YoY.

In H1FY21, revenues stood at $109.4 million, up by 4% sequentially and down by 2% PcP. NPATA stood at $33.5 million, up by 1% sequentially and by 5% PcP. SIQ’s largest client, the Department of Defence, renewed its contract for five years engagement, inclusive of extensive options. Adjusted after-tax operating cash flows stood at a 107% conversion rate (relative to NPATA), and net debt as of 30 June 2021 corresponded to $4.5 million. Leasing settlement volumes stood up by 2% PcP and 4% sequentially.

Outlook: SIQ targets EBITDA uplift of $15- $20 million from strategic initiatives; ~66% from revenue expansion and the rest from sales and service efficiencies. SIQ estimated $5-$6 million of annual digital investment for the next three years, primarily funded from operating cash flows.

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

SIQ Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of SIQ went down by ~15.42%. The stock made a 52-weeks’ low and high of $5.820 and $9.990, respectively. 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 premium compared to its peer’s average EV/Sales multiple, considering the accelerated investments in digitalization and improved NPAT in H1FY21. For valuation, peers like SML Corporation Ltd (ASX: SOP), Future First Technologies Ltd (ASX: FFT), Kelly Partners Group Holdings Ltd (ASX: KPG) have been considered. Given the improvements in top-line figures, SIQ’s prudent cost-saving measures, rising investment for digital infrastructure, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $7.880, as of 22 November 2021, at 1:18 PM (GMT+10), Sydney, Eastern Australia. 

(3) ­­­Carbon Resolution Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 226.79 million, Annual Dividend Yield: 0%)

Favourable Project Pipelines Feeding Future Growth Prospects: Carbon Revolution Limited (ASX: CBR) manufactures and sells carbon fibre wheels. It is also engaged in R&D activities related to carbon fibre wheel technology. In FY21, CBR reported an 8.6% decline in wheels sales to 12,749 units due to COVID-19 associated challenges affecting the timing of new program launches. Consequently, core revenues declined by 10.3% and stood at $34.9 million.

Adjusted EBITDA declined by 9.2% and stood at a loss of $17.2 million. Gross loss stood at $14.3 million, relative to $11.6 million loss in FY20; significantly driven by additional finishing costs and reduced production volume in H1FY21, partly offset by a recovery in H2FY21. The cash outflow from operating activities declined to $9.3 million, relative to outflow of $30.9 million, representing a 70% YoY improvement, owing to prudent working capital management and improvements in work in progress and raw materials inventory levels.

Outlook: Although yet not profitable, CBR has shown considerable growth in operational efficiency in H2FY21. The company reported reduced COGS in H2FY21, primarily driven by stabilizing sales and production volume. The Mega-line project, completing a $95 million equity raise, holds significant potential to boost manufacturing activities.

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

CBR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of CBR went up by ~5.31%. The stock made a 52-weeks’ low and high of $0.960 and $3.048, respectively. 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 premium compared to its peer’s average EV/Sales multiple, considering improving the project pipeline underway. For valuation, peers like GUD Holdings Ltd (ASX: GUD), ARB Corp Ltd (ASX: ARB), PWR Holdings Ltd (ASX: PWH) have been considered. Considering current trading levels, the launch of Ferrari programs, constructive agreements for detailed engineering and design, and valuation, we give a ‘Speculative Buy’ rating on the stock at the closing price of $1.090, down by ~0.910% as of 22 November 2021. 

(4) ­­­ Deterra Royalties Limited (Recommendation: Hold, Potential Upside: Mid Single-Digit)

(M-cap: A$ 2.16 billion, Annual Dividend Yield: 5.63%)

MAC Delivering High Volume Growth Potential: Deterra Royalties Limited (ASX: DRR) operates in a royalty business model that involves managing and investing a portfolio of royalties across bulk commodities, base metals, and battery metals in Australia. In FY21, DRR clocked revenue of $145.2 million with an NPAT of $94.3 million. Underlying EBITDA stood at $135.5 million at a margin of 96% (post-demerger). During the period, MAC South Flank achieved its first ore; growth potential of 80 million wet metric tonne/annum (Mwmtpa) capacity, bringing together a total MAC capacity of 145 Mwmtpa.

DRR is streamlining capital management and shareholders’ return with low debt levels, scalable corporate structure and 100% NPAT payout. MAC royalty outperformed in a backdrop of the robust incline in iron ore prices. As a result, MAC quarterly receipts have inclined since September 2020 quarter, standing at $253.7 implied sales price/dmt.

Outlook: DRR holds low-risk exposure to a low cost, large iron ore mining complex (MAC), which is set for growing its volumes by almost 2.4x. DRR expects to ramp up production volume to 145 million Mwmtpa in the next three years.

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

DRR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of DRR went down by ~3.78%. The stock made a 52-weeks’ low and high of $3.520 and $5.350, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of mid-single-digit (in percentage terms). Considering a low-risk business model, the company can trade at a slight premium compared to its peer’s average EV/Sales multiple. For valuation, peers like IGO Ltd (ASX: IGO), Arafura Resources Ltd (ASX: ARU), Bellevue Gold Ltd (ASX: BGL) have been considered. Considering high growth potential from MAC, low debt levels, streamlined corporate structure, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $4.120, up by ~0.733% as of 22 November 2021.

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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