Are the Conditions in Consumer Discretionary Sector Improving – 2 Stocks to Consider

Company Overview: Briscoe Group Limited (NZX: BGP) is a New Zealand-based non-trading holding company. The segments include homeware and sporting goods. Delegat Group Limited (NZX: DGL) is a New Zealand based wine company. Its segments include Delegat Limited, Delegat Australia Pty Ltd, Delegat Europe Limited, Delegat USA, Inc. and Other Segments. Kalkine’s Sector Report covers the Investment Highlights, Key Financial Metrics, Risks, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

1. Sector Landscape and Outlook

As per the Ministry for Primary Industries (MPI), the food and fibre industry of NZ is considered a power and top export earner. Its revenue is expected to hit new heights this year, reaching a record of NZD 56.2 Bn in the year to 30 June 2023, up ~6% on a pcp basis. However, multiple challenges were faced by rural communities following Cyclone Gabrielle and Cyclone Hale. The government provided NZD 74 Mn for grants and NZD 4 Mn to help rural communities with immediate recovery needs such as aerial surveys, mental well-being, recovery advice, fencing support, logistics and transport, and NZD 172 Mn was committed to help silt clean-up in affected regions.

The food and fibre sector accounted for 81.8% of NZ’s merchandise exports in the year to 31 March 2023. Primary industry export growth exceeded that of non-primary industries for eight of the past ten years and contributed ~10.7% of the GDP for the period ending March 2021. Dairy export revenue is anticipated to hike ~14% and reach a record high of NZD 25.1bn in the year to 30 June 2023, while on the contrary, Meat and wool export revenue is expected to decline ~3% to NZD 11.9bn.

Horticulture Export Revenue Trend

As per MPI, with the easing of supply chain issues, Horticulture export revenue for the year ended 30 June 2023 is expected to grow ~2% to NZD 6.92 Bn and for 2024, a further upside to NZD 7.35 Bn. It is mainly driven by the large wine vintage 2022 offsetting lower production and exports of kiwifruit, apples, avocados, and vegetables.

Wine export revenue is forecasted to rise 29% to NZD 2.5bn for the period ending 30 June 2023, mainly due to record harvest and resulting export volumes. Besides, the prices are also forecasted to hike by 5% during the year. However, export revenue is predicted to drop 2% to NZD 2.45bn for the coming season as the production volumes fall from this season’s record highs.

For the Kiwifruit, export revenue for the year ending 31 March 2023 fell 3% to NZD 2.6bn and lower yields and challenges in fruit quality affected the volume reaching the market. Yields for the 2023/24 season are expected to be 15% lower than the previous year (2022/23). However, keeping the longer-term growth of the industry in mind, NZ is assuming the return of yields to long-term averages, with a correspondingly large increase in revenue from 2024/25 and beyond.

Exhibit 1: Trend in Wine & Kiwifruit Export Revenue 2019–27Forecast (F) (Year to 30 June, NZ)

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Changes in Retail Trade Sales Perpetually  

As per Stats.NZ, the total volume of actual retail sales fell 4.1% in the March 2023 quarter compared to the March 2022 quarter. This was majorly because of decline in hardware and vehicle retailing volumes by almost ~13% and motor vehicles and parts by 7.5%. On the contrary, food and beverage services and accommodation were up 14% and 19%, respectively. 

However, post seasonal adjustments and price effects, total retail sales volumes fell 1.4% in the March 2023 quarter compared to the December 2022 quarter. 

Exhibit 2: Seasonally Adjusted Total Retail Trade Sales, (March 2021–March 2023 quarters)

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Key Risks and Challenges:

The consumer discretionary market is exposed to high competition from domestic and international tech- e-commerce companies, new brands and stores. These factors could create significant pressure on margins. Notably, the broader consumer discretionary sector is exposed to supply chain costs, labour shortages, higher hourly rates, and general economic cost pressures.

As the world gradually evolved from the COVID-19 pandemic, many challenges were faced by the rural communities in NZ following Cyclone Gabrielle and Cyclone Hale. These factors could impact the businesses and margins of the companies and can mishandle the demand and supply for the products. Short-term effects on prices, choice, and availability of discretionary items are some of the risks. Moreover, dry conditions in the South Island, high input costs and supply chain issues added to the challenges.

At a global level, various challenges are faced, like a weaker global economy due to high inflation levels. As a result, this caused an increase in the cost of living in many countries, destabilization of the global economy driven by Russia’s conflict with Ukraine and a COVID-19-influenced slowdown in economic growth and manufacturing activity in China and subdued demand and high input cost inflation are affecting profitability.

Exhibit 3. Key Risks in Consumer Discretionary Sector:

Source: Analysis by Kalkine Group

Outlook:

To combat inflation, the Federal Reserve (US) has raised benchmark interest rates since March 2022. Moreover, the Reserve Bank of New Zealand (RBNZ) has been consistently lifting its official cash rate, from a record low of 0.25% in October 2021 to 5.50% in May 2023. According to OECD projections, interest rates in advanced economies are expected to reach their highest point in 2023; like in the US, it is expected to peak at 5.25-5.50%.

The International Monetary Fund (or IMF) latest forecasts anticipate global growth to reach 2.8% in 2023 before slightly increasing to 3.0% in 2024. The economic slowdown is concentrated in the advanced economies, mainly in the eurozone and the UK. In contrast to the advanced economies, emerging economies are expected to experience a growth rate surge.

The New Zealand-United Kingdom Free Trade Agreement (NZ-UK FTA) was entered into force on 31 May 2023. The agreement delivers New Zealand preferential access to the UK’s NZD 3 trillion consumer market for the first time since the UK entered the EU 50 years ago. NZ’s goods exports to the UK are estimated to rise by over ~50% at full implementation, consequently boosting New Zealand’s real GDP by between NZD 700mn-1bn by 2040.

NZD slightly strengthened and reached a high of USD 0.65 in January 2023 and then stabilized at around USD 0.62 by the end of April 2023. Despite the strengthening of the NZD, the average NZD against the USD rate for 2022/23 is 9% lower than in 2021/22. As a result, the weaker currency has provided a boost to export revenues and aided in offsetting the impact of falling food commodity prices and contributed to the inflationary pressures by increasing the cost of imported goods. Looking out to 2027, NZ is also expecting to see the sector’s steady growth to continue, with the export revenue projected to reach a new high of NZD 62bn.

Apart from the sector-specific factors, an analysis of 2 NZX-listed companies is provided. This report covers their insights, outlook, performance, and potential as expected to be delivered in the near to medium term.

1 ) Briscoe Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 931.16 million, Annual Dividend Yield (TTM)¹: 9.259%)

Business Description:

Briscoe Group Limited (NZX: BGP) is a New Zealand-based non-trading holding company. The segments include homeware and sporting goods.

Outlook:

The group is focused towards the Gross margin. BGP expects this year (FY24) to show that the group can protect around half of the 633 basis points gained during the two years ended January 2021 and January 2022. Its unaudited sales for the first trading quarter ended 30 April 2023 (91 days) were NZD 181.2mn, a ~2.82% upside vs. NZD 176.2mn on a pcp basis. Being highly sensitive to ongoing uncertainty in relation to deteriorating economic conditions, customer sentiment, cost pressures, higher interest rates and political uncertainty, BGP continues to introduce an expanded range of new products online (D2C) to benefit the group’s profitability.

Fundamental Valuation:

P/E Multiple Based Relative Valuation

Technical Overview:

Daily Price Chart

Technical Commentary

On the daily chart, BGP prices are trading above the falling trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~38.036 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 3.60 while the key resistance level is placed at NZD 4.50.

Stock Recommendation

Considering the FY23 outlook, the aforementioned factors, and undervaluation as indicated by the relative valuation, a ‘Buy’ is given on the stock at the closing market price of NZD 4.180, down by ~0.48%, as of 22 June 2023.

2 ) Delegat Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 879.833 million), Annual Dividend Yield (TTM)¹: 3.211%)

Business Description:

Delegat Group Limited (NZX: DGL) is a New Zealand based wine company. Its segments include Delegat Limited, Delegat Australia Pty Ltd, Delegat Europe Limited, Delegat USA, Inc. and Other Segments.

Outlook:

In DGL’s recent update, the company concluded the 2023 harvest with excellent quality in all the regions. The Group’s 2023 harvest is 45,340 tonnes, up ~1% on a pcp basis of the harvest of 44,861 tonnes. The Group has appropriate inventories to achieve future sales growth in line with the operating profit guidance of NZD 59mn to NZD 62mn. The company is working towards achieving a global case sales growth to 3,649,000 cases in FY23 (~9% upside on pcp). During the year, the Group has invested in vineyard developments and winery expansion (including NZD 39.9 million purchase of the previously leased Dashwood vineyard in Marlborough) to provide for future earnings growth.

Fundamental Valuation:

P/E Multiple Based Relative Valuation

Technical Overview:

Daily Price Chart

Note: Purple color line reflects Relative Strength Index (14-Period)

Technical Commentary

On the daily chart, DGL prices are sustained above the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~27.590 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 7.80 while the key resistance level is placed at NZD 9.50.

Stock Recommendation

Considering the facts above and undervaluation as indicated by the relative valuation, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 8.700 per share, up by ~0.58%, as of 22 June 2023.

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: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is June 22, 2023. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is a Financial Advice Provider (“FAP”) and is authorised by a Class 1 Financial Advice Provider Licence issued by Financial Markets Authority (“FMA”) to provide financial advice. Kalkine provides only general financial advice through its research reports following a person becoming a member. The reports contain buy/sell/hold and other recommendations in relation to equity financial products. The recommendations and opinions [on this website] / [in this report] do not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions. If you act on the advice in the research reports, you may have to pay fees, expenses or other amounts (but not to Kalkine).  Further information about the complaints and dispute resolution process, as well as information about Kalkine’s duties are available on Kalkine’s website.  Please read our Financial Advice Provider (FAP) disclosure statement and Complaints Handling Guide, which are available on the website.