How Broader Industrials Sector Plans to Tackle Increased Inflationary Concerns – 2 Stocks to Consider

Overview:

Steel & Tube Holdings Limited (NZX: STU) is one of NZ's leading providers of steel solutions. Skellerup Holdings Limited (NZX: SKL) designs, manufactures as well as sells engineered polymer products and vacuum systems for customers in dairy rubberware, water and related infrastructure, roofing, plumbing, automotive, etc.

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

As per the ‘Fortnightly Economic Update’ released by The Treasury dated 15 March 2024, the partial indicators in goods-producing sectors as well as retail trade reflect flat GDP for the quarter ended December. The building consents for new residential dwellings witnessed a decline of 45.5% since their peak in mid-2022. Consents fell 8.8% for the month in January on the seasonally adjusted basis unwinding gains in October and December to be at their lowest point (aside from April 2020) since the month of January 2018.

The financial markets are focused towards timing of anticipated rate cuts by the critical central banks. Broader equity markets anticipate that the US Federal Reserve would start cutting rates in June. However, the inflation data dampened the expectations, with ECB and other central banks moving soon after.

The house prices remained flat in February as per the Real Estate Institute of New Zealand’s (or REINZ) house price index (or HPI), that averaged just 0.3% monthly growth during the previous 12 months.

Gross Domestic Product: December 2023 Quarter

As per Stats.NZ, in the December 2023 quarter, the GDP witnessed a fall of 0.1 percent as well as GDP per capita declined 0.7% as compared to September 2023 quarter. During the same period, the real gross national disposable income declined 1.4%. All these figures have been adjusted for price inflation. The wholesale trade declined 1.8% as a result of grocery and liquor product wholesaling as well as machinery and equipment wholesaling.

The retail trade and accommodation fell by 0.9% due to furniture, electrical, and hardware retailing, food and beverage services and motor vehicles and parts retailing.

On the other hand, there were certain upward drivers. The rental, hiring, and real estate services rose 1.0% due to owner-occupied property operation as well as rental and hiring services (except real estate).

Exhibit 1: Gross Domestic Product, Quarterly And Annual Growth Rates, Chain-Volume, December 2022–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

International trade: December 2023 Quarter

As per Stats.NZ, the total exports of goods and services for the December 2023 quarter stood at $24.2 Bn, reflecting a fall from $24.6 Bn in the quarter ended December 2022. Notably, total imports of goods and services for the December 2023 quarter amounted to $28.8 Bn, down from $31.6 Bn in the December 2022 quarter. Therefore, the total two-way trade for the December 2023 quarter amounted to $53.0 Bn.

The total services exports increased $1.3 Bn to $7.1 Bn in the December 2023 quarter as compared to December 2022 quarter. In the December 2023 quarter as compared to December 2022 quarter, the travel services rose $1.1 Bn to $3.7 Bn, telecommunication services increased $87 Mn to $526 Mn as well as transportation services increased $72 Mn to $999 Mn.

The total services imports declined $103 Mn to $7.8 Bn in the December 2023 quarter as compared to December 2022 quarter. Notably, travel services increased $350 Mn to $1.8 Bn, transportation services declined $730 Mn to $1.6 Bn as well as telecommunication services rose $76 Mn to $971 Mn.

Exhibit: 2 Trend in Goods Export and Import in October 2022

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

Value of Building Work Put In Place: December 2023 Quarter

As per the announcement by Stats NZ, in the quarter ended December 2023, the seasonally adjusted total building volume declined 0.1% as compared to the September 2023 quarter, with residential falling 2.4%, and non-residential declining 4.6%. The total building value amounted to $9.5 Bn, reflecting a rise of 3.8% as compared to December 2022 quarter.

In the value terms (not adjusted for cost changes or seasonal effects), the actual value of building work stood at $9.5 Bn in the December 2023 quarter, reflecting a rise of 3.8% from the December 2022 quarter. Within this, the residential building work was down 1.3% to $6.1 Bn as well as non-residential work increased 14% to $3.4 Bn.

Key Risks and Challenges:

The uncertainty in the demand outlook, building inflationary pressure, uncertain monetary policies by the global central banks, as well as geopolitical tensions are some of the critical challenges faced by the industrials sector.

The Australian economy closed the year with the modest 0.2% rise in GDP in final quarter as well as calendar year growth of 2.1%. The domestic demand remained flat for the quarter as weakness in household consumption spread to the private sector investment. The business confidence was weak in the latest NAB survey, as mentioned in the recent Fortnightly Economic Update.

Exhibit 3. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

Some of the selected price indexes provided a mixed picture in February. The food price inflation, that accounted for almost a fifth of the CPI, slowed to the lowest annual rate in ~3 years (2.1%) after averaging close to 10% throughout last year. The food prices declined 0.6% in the month because of a 4.6% decline in fruit and vegetable prices. However, petrol prices increased 4.1% in February after falling for 4 consecutive months by 9.8% between the months of September 2023 and January 2024.

The residential construction activity slowed over the recent quarters as well as outlook is for further declines over the upcoming 2 years. However, the rebuild activity which has been arising from North Island weather events would be mitigating extent of short-term weakness. In medium-term, the easing of interest rates as well as tighter housing supply leads to the recovery in residential investment.

The property, plant and equipment (or PPE) assets are expected to increase by $40.6 Bn by 2027/28. The increase is mainly because of additions of $83.0 Bn, which are partly offset by depreciation expenses over the forecast period which total $40.1 Bn.

The largest growth in PPE remains attributable to the buildings, which are expected to increase by $20.8 Bn over the forecast period, mainly because of growth in assets held by the education, health and housing sectors.

Apart from the sector-specific factors, an analysis on two 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) Steel & Tube Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 174.08 Mn, Annual Dividend Yield: 10.68%¹)

Business Description:

Steel & Tube Holdings Limited (NZX: STU) is one of NZ's leading providers of steel solutions.

Outlook:

STU is well positioned to leverage the increase in demand from the private as well as public sectors. Notably, growth is the key focus, through organic expansion and acquisition. The steel is an essential construction material and, in several cases, the only viable solution. There has been underinvestment in NZ’s infrastructure for several years and the company is optimistic about the new coalition Government confirming its long term investment plan.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Technical Commentary

On the daily chart, STU’s stock prices are developing a trading range characterized by lower highs and higher lows, suggesting that the sideways period on the stock might continue to remain in place. Moreover, the momentum oscillator RSI (14-period) is fluctuating around the midpoint, adding more evidence to the previous observation. Prices are oscillating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is located at NZD 0.95, while crucial resistance level is placed at NZD 1.19.

STU Daily Technical Chart, Data Source: REFINITIV

Stock Recommendation

The stock has been valued using P/EPS multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms).

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.040 per share, down 0.95% as of 21 March 2024.

2) Skellerup Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 841.1 million, Annual Dividend Yield: 6.27%¹)

Business Description:

Skellerup Holdings Limited (NZX: SKL) designs, manufactures as well as sells engineered polymer products and vacuum systems for customers in dairy rubberware, water and related infrastructure, roofing, plumbing, automotive, etc.

Outlook:

SKL is expecting that NPAT for FY 2024 would be similar to the prior-year record result as well as it is expecting that some of the H1 headwinds of customers reducing inventory used in dairy and leisure applications would abate. The company has continued focus towards critical products for OEM customers.

The company’s strategy of working closely with customers in order to provide engineered products which assure performance remains the focus to deliver sustainable earnings growth.

Fundamental Valuation

P/E Based Relative Valuation

Technical Overview:

SKL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

While experiencing a downtrend characterized by lower lows and lower highs, SKL’s stock prices are rebounding from a significant support established by the low of 2023, suggesting that the current rally on the stock might continue to persist in the near future. In addition, after forming multiple bottom divergences in relation to prices, the momentum oscillator RSI (14-period) is heading upward from the oversold region, providing more evidence to the previous analysis. Prices are trading below the trend-following indicator 50-period SMA, which might serve as resistance level for the stock; in contrast, the stock’s most recent low may function as a support. A critical support level for the stock is positioned at NZD 3.90, while key resistance level is situated at NZD 4.80.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 4.29 per share, up by 2.14% as on 21 March 2024.

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 March 21, 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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