Capital Goods and Energy Sector Riding on Industrial Activities and Global Demand

This report is an updated version of the report published on the 28^th July 2022 at 3:55 PM GMT.

Rising Capital Expenditure in Select Industries

Energy Commodities to Witness Favourable Volume and Price Metrics

Trend in Capital Goods Justified by Mining and Construction Activities

Index Performance

Key Risks and Challenges

Outlook

Investment theme and stocks under discussion (SOL, EHL):

After understanding the sector, let us now look at two companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Earnings’ multiple method.

1. ASX: SOL (Washington H. Soul Pattinson and Company Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: AUD 9.10bn)

SOL is an investment company which operates a diversified portfolio of investments across a range of industries and asset classes, including telecommunications, mining, building products and other investing activities.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 17.38% as of 28 July 2022. Moreover, the stock might trade at a slight discount to its peers, considering the volatility in the market and rising interest rates, etc. For valuation, peers such as Whitehaven Coal Ltd (ASX: WHC), Yancoal Australia Ltd (ASX: YAL), Peninsula Energy Ltd (ASX: PEN), and others have been considered. Considering the expected upside in valuation, rising earnings, optimistic outlook, and current trading levels, a ‘Buy’ recommendation is given on the stock at the current market price of AUD 25.240, as of 28 July 2022, 11:55 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered annualized dividends of 2.56%. On the technical front, the stock has an immediate support level of AUD 22.50 and resistance levels of AUD 27.20 and AUD 29.20.  

2. ASX: EHL (Emeco Holdings Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: AUD 368.66mn)

EHL provides open-cut and underground mining equipment, maintenance and project support solutions and services.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 22.82% as of 28 July 2022. Moreover, the stock might trade at a slight discount to its peers, considering the macroeconomic uncertainties and other material business risks, etc. For valuation, peers such as NRW Holdings Ltd (ASX: NWH), Acrow Formwork and Construction Services Ltd (ASX: ACF), and Stealth Global Holdings Ltd (ASX: SGI) have been considered. Considering the expected upside in valuation, spurt in demand for equipments and services, rising business momentum, optimistic outlook, and current trading levels, a ‘Speculative Buy’ recommendation is given on the stock at the current market price of AUD 0.707, as of 28 July 2022, 11:55 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered annualized dividends of 3.35%. On the technical front, the stock has an immediate support level of AUD 0.64 and resistance levels of AUD 0.80 and AUD 0.90.

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 not a reliable indicator of future performance. 

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is July 28, 2022. 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. 

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 authorised to provide general advice only. The information on this website does 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.