How Broader Consumer Staples Sector is Expected to Perform Amidst Challenges – 2 Stocks to Consider

Company Overview:

Foley Wines Limited (NZX: FWL) is an integrated wine company. It is engaged in producing as well as distributing table wines. Comvita Limited (NZX: CVT) is engaged in manufacturing as well as marketing nature health products, apiary ownership and native forest management. 

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

1. Sector Landscape and Outlook

The food and fibre sector remains the engine room of NZ’s economy resulting in robust export revenue of $57.4 Bn for the year ended June 2023. This was a robust result considering the range of challenges which are being navigated by NZ’s farmers, growers, fishers, foresters as well as processors over the last year, including major adverse weather events. A critical focus for MPI was working alongside sector partners as well as rural communities in order to respond to the weather events in North Island, which includes Cyclone Gabrielle.

MPI has supported significant changes to Fisheries Act this year. The Fisheries Amendment Act 2022 became law on 1^st November 2022. Some of the changes consist of clarifying commercial fishing rules, new graduated offences and penalties as well as using on-board cameras more widely. The food and fibre sector’s span remains significant, from paddock, orchard, forest as well as ocean, through to processing, packaging, and transportation system, to the market, and ultimately to consumers globally. The activities cover 52% of New Zealand’s land mass as well as 4 million square kilometres of ocean.

The future outlook for NZ’s food and fibre sector is still positive, and it needs to adapt to impacts of technology, shifting trade dynamics, climate change as well as rapidly changing public attitudes and consumer preferences. 

Exports and Imports

As per Stats.NZ, annual goods exports were valued at $68.7 Bn for the year ended December 2023, reflecting a fall of $3.3 Bn (or 4.5%) from the year ended December 2022. Over the same period, imports stood at $82.3 billion, down by $4.3 Bn (or 5.0%). This led to an annual trade deficit of $13.6 Bn for the year ended December 2023. In the year ended December 2022, there was deficit of $14.6 Bn.

Tropical cyclones Hale and Gabrielle impacted Aotearoa NZ in January and February 2023. The adverse weather as well as resulting flooding led to significant damage and disruption, mainly throughout North Island. The fall in exports for H2 FY 2023 as compared to 2022 were led by unit price falls for most of the main export commodities. Notably, milk powder as well as sheep meat were 2 of the most affected commodities.

Exhibit 1: Monthly export values ($ Bn), July 2023 – December 2023

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

Honey Export and Production Volumes

NZ’s honey exports reached $379 Mn for the year ended 30^th June 2023, reflecting a 17% fall in revenue as compared to 2021/22. The export volumes declined 13% to 9,880 tonnes while average export prices witnessed a fall of 5%. The honey production for 2022/23 season was estimated at 12,000 tonnes, reflecting a decline of 45% from prior year’s harvest. The large decline in production was because of persistently wet weather in the North Island over the summer as well as autumn months impacting nectar collection throughout.

The hotter and drier El Niño weather pattern is expected to prove more favourable overall to the honey production in 2023/24 season. However, because of existing inventories, this is expected to have little impact on the export volumes. Export revenue for honey is expected to bounce back up by 8% to $410 Mn for the year ended 30^th June 2024 due to slight recovery in export volumes as well as higher average price for monofloral mānuka honey.

Exhibit 2: Honey Export Revenue 2019 – 2025 (Year to 30 June, NZD Mn)

Data Source: This work is based on/includes the Ministry for Primary Industries data which are licensed under Crown for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Key Risks and Challenges:

The extreme weather events (such as Cyclones Hale and Gabrielle), dry conditions, higher input costs as well as supply chain issues are some of the challenges which are being faced by broader food and fibre sector.

The main challenge for the broader food and fibre sector is to grow sustainably. This sector depends on long-term usage of natural resources and such resources are under pressure as of now. The climate change is impacting marine environment as well as land productivity, and increased frequency of extreme weather events is leading to significant impacts for overall rural communities.

Exhibit 3. Key Risks in Consumer Staples Sector:

Source: Analysis by Kalkine Group

Outlook:

The food and fibre sector export revenue surpassed the expectations, witnessing a rise of 8% to touch a record high of $57.4 Bn for the year ended 30^th June 2023. Supporting this rise was higher prices for dairy, horticulture, seafood, arable as well as processed food and other products, overshadowing falls in meat and wool and forestry sectors. This was helped by weaker NZD against the USD.

The consumers in critical markets are expected to continue to prioritise high-quality food which is safe and healthy as well as food and fibre products which are produced and packaged sustainably. The shift towards more efficient and environmentally sustainable agricultural practices would be enhancing the NZ's food and fibre sector’s ability to market high-value products and increase the returns.

The funds are expected to be used for deployment towards innovation as well as sustainability throughout the food and fibre sector. The focus would be towards initiatives making positive and lasting difference to the farmers, growers, the primary sector, and rural communities, which includes development of new products as well as services.

Apart from the sector-specific factors, an analysis on three 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) Foley Wines Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 68.3 million)

Business Description:

Foley Wines Limited (NZX: FWL) is an integrated wine company. It is engaged in producing as well as distributing table wines.

Outlook:

FWL has established some robust global partnerships which would certainly help in navigating the company’s way through the headwinds in the global economy. FWL is focused towards having a much improved second 6 months.

FWL has routes to market which would enable the company to sell its brands profitability. It is securing strong new routes to market for the premium portfolio.

Technical Overview:

Technical Commentary

One the daily chart, FWL’s stock prices are forming a downtrend characterized by lower lows and lower highs, indicating a negative bias. Conversely, the momentum oscillator RSI (14-period) is forming multiple bottom divergences near its oversold region in relation to prices, showing a weakening downside momentum. Prices are trading below the 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s nearest round level may serve as a sentimental support. An important support level for the stock is placed at NZD 0.96, while key resistance level is situated at NZD 1.14.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.04 per share, down by 5.45% as on 29^th February 2024.

2) Comvita Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 165.03 Mn, Annual Dividend Yield (TTM)^1:: 3.25%)

Business Description:

Comvita Limited (NZX: CVT) is engaged in manufacturing as well as marketing nature health products, apiary ownership and native forest management.

Outlook:

CVT is focused towards returning to consistent growth after trading conditions normalise. The company’s management is committed to FY 2025 strategic plan to deliver EBITDA of c$50 Mn, subject to the timing of a more stable trading environment.

CVT has advised that credible offshore party has approached the company with highly conditional unsolicited, indicative, non-binding proposal to acquire all of its shares.

Key Risk:

There is no certainty that NBIO would result in any negotiated transaction for the shareholders to then vote on. Therefore, there could be some volatility in the company’s stock price.

Fundamental Valuation

Technical Overview:

Technical Commentary

While experiencing a downtrend, CVT’s stock prices are developing a trading range on the daily chart characterized by lower lows and higher highs, indicating that the sideways period in the stock might continue to persist in the near future. In addition, the momentum oscillator RSI (14-period) is heading southward from the overbought zone, providing further support for the previous observation. Prices are trading above the 21-period and 50-period SMAs, which might function as dynamic support levels for the stock; in contrast, the stock’s most recent may act as a resistance. A significant support level for the stock is positioned at NZD 2.15, while critical resistance level is located at NZD 2.70.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 2.35 per share, down by 1.67% as on 29 February 2024.

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 February 29, 2024. 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

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