How Broader NZ Consumer Staples Sector Plans to Recover from Uncertain Economic Environment: 2 Stocks to Consider

Company Overview:

Delegat Group Limited (NZX: DGL) is the NZ-based wine company. Sanford Limited (NZX: SAN) is New Zealand's largest and oldest seafood company and the only fully integrated seafood business.

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 Ministry for Primary Industries (or MPI) has released the December 2023 edition of Situation and Outlook for Primary Industries (or SOPI). NZ’s food and fibre sector has been underpinning the broader New Zealand’s economy. As per the latest edition of SOPI, forecasted export revenue is expected to reach $54.3 Bn for the year ended 30 June 2024. Even though this year’s forecast dip follows the robust export revenue of $57.4 Bn for the year ended 30^th June 2023, it was the strong result and testament about the hard work of farmers, growers, fishers, etc.

NZ’s economy has not been immune to the global events. For example, conflicts has been causing challenges, which are pushing up input costs for the growers as well as farmers. However, on the positive side, the pace of such cost increases is beginning to slow. The factors including strengthening kiwifruit prices as well as rebound in the seafood exports in previous couple of years are offering further promise. Therefore, overall mid to long-term outlook for NZ’s food and fibre sector exports has been looking robust. Since 2012/13, NZ’s food and fibre sector export revenue has witnessed a growth of 75% to the record $57.4 Bn for the year ended 30^th June 2023. After witnessing the years of consistent growth, NZ is expecting export revenue to temporarily dip for the year ended 30 June 2024. However, the exports are expected to return to record $57.7 Bn for the year ended 30 June 2025.

Trend in Goods Imports and Exports (November 2023)

As per Stats NZ, in November 2023, goods exports witnessed a fall of $337 Mn (or 5.3%) to $6.0 Bn goods and imports declined $1.3 Bn (or 15%) to $7.2 Bn as compared to November 2022. The monthly trade balance was the deficit of $1.2 Bn. Talking about the exports, China has led the top monthly fall as total exports fell $183 Mn (or 9.7%). The largest rise was witnessed in logs, wood, and wood articles, which were up by $49 Mn. The largest falls were witnessed in live animals, down by $62 million as well as milk powder, butter, and cheese, which were down by $56 Mn.

With respect to imports, vehicles, parts, and accessories declined $352 Mn (or 31%) to $798 Mn. The passenger motor car imports declined $183 Mn (or 25%) to $534 Mn, driven by the EV imports (which were down by $124 Mn or 56%). The goods vehicle imports declined $93 Mn (or 50%) to $94 Mn.

Exhibit 1: Merchandise trade values ($ Bn), exports and imports, November months, 2014–2023

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

Trends in Winery Export Revenue

As per MPI, the export revenue from the high-quality horticulture products is anticipated to decrease 1% to $7.0 Bn for the year ended 30^th June 2024. Wine as well as cherry exports are all expected to rise on the prior year, and overall horticulture export revenue is expected to build back to the record forecast of $8.2 Bn for the year ended 30^th June 2025. While the decline is primarily because of reduced volumes of the wine as well as vegetables, the export prices are anticipated to be helped by robust global demand and constrained global supply.

The recovering yields in 2024 are anticipated to offset reduced volumes for some crops mainly resulting from the tail end of weather-affected 2023 harvests. The wine export revenue is expected to decline 5% to $2.3 Bn for the year ended 30^th June 2024. On the other hand, the wine export prices are expected to rise 8% for the year ended 30 June 2024. This reflects that underlying consumer demand is robust strong and it provides some confidence that export volumes would be recovering in early 2024.

Exhibit 2: Wine Production and Trade 2019–24 (Year to 30 June)

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:

Recently, the broader food and fibre sector managed to navigate several global events. The pandemic as well as conflicts overseas led to significant challenges for the NZ’s producers, which includes raising inflation and costs of living, impacting the consumer demand, and resulting in the slowdown in China. With respect to seafood, the companies might witness increased input costs which could be a challenge for the fishers as well as seafood farming businesses.

The slowdown in the broader Chinese economy, repercussions about the rise in financial sector turbulence as well as the conflicts in Ukraine and Gaza, and geoeconomic tensions are some of the factors which could the broader consumer staples sector in NZ.

Exhibit 3. Key Risks in Consumer Staples Sector:

Source: Analysis by Kalkine Group

Outlook:

The forestry export revenue is expected to decline 9% to $5.8 Bn for the year ended 30^th June 2024. This updated forecast implies weakened log prices as well as less favourable 2023/24 outlook for pulp and paper. The seafood export revenue is expected to rise 8% to reach $2.3 Bn for the year ended 30^th June 2024.

The export prices are expected to remain at elevated levels because of the robust demand as well as tight supply. The export volumes are expected to rebound from the particularly bad year for seafood production supported by better production conditions for aquaculture because of El Niño and increased workforce availability. Notably, arable export revenue is expected to rise 7% to $290 Mn for the year ended 30^th June 2024 as a result of increased prices for vegetable seed as well as increased volumes of clover seed.

The food and fibre sector export revenue surpassed expectations, rising 8% to touch $57.4 Bn for the year ended 30^th June 2023. Notably, supporting this rise was the lift in prices for dairy, horticulture, seafood, arable as well as processed food and other products. These have overshadowed the declines in meat and wool and forestry sectors. The result was helped by the weaker NZD against the USD.

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) Delegat Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 683.6 Mn, Annual Dividend Yield (TTM)¹: 4.11%)

Business Description:

Delegat Group Limited (NZX: DGL) is the NZ-based wine company. It has deployed in wineries as well as vineyards in the prime grape growing regions of NZ and Australia.

Outlook:

The group is expecting to achieve global sales of 3,614,000 cases for the year ended June 2024. This was 1.7% down YoY as well as 5.5% below the previous guidance. Considering that the supply chains are stabilising, distributors as well as retailers have reduced inventory holdings leading to lower replenishment orders for the year to date.

The company’s operating NPAT is expecting in the range of $57 Mn - $61 Mn for the year ending June 2024.

Technical Overview:

Technical Commentary

While undergoing a downtrend characterized by lower highs and lower lows, DGL’s stock prices are rebounding from the low of 2020, suggesting that downside momentum in the stock has been weakening. Moreover, the momentum oscillator RSI (14-period) is trading near the midpoint, adding further evidence for the mentioned recommendation. Prices are trading below the trend-following 50-period SMA, which might function as dynamic resistance level for the stock. In contrast, the stock’s most recent low may act as a support. A significant support level for the stock is positioned at NZD 6.10, while critical resistance level is located at NZD 7.70.

Fundamental Valuation

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 6.76 per share, down by 0.59% as on 11^th January 2024.  

2) Sanford Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 376.8 Mn, Annual Dividend Yield (TTM)¹: 4.14%))

Business Description:

Sanford Limited (NZX: SAN) is New Zealand's largest and oldest seafood company and the only fully integrated seafood business.

Outlook:

The new government indicated its support for enterprises as well as industries which support growth. SAN is expecting that this would witness higher support for the NZ aquaculture industry and initiatives which would be enabling proven companies to further grow and generate wealth.

With respect to the 2024 financial year, the company is expecting continuing robust markets as well as pricing for the premium species, mainly scampi, mussels and salmon.

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Technical Commentary

On the daily chart, SAN’s stock prices are forming a trading range characterized by identical highs and lows, 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 fluctuating between the levels of 40 and 60, providing further support for the previous observation. Prices are oscillating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. A significant support level for the stock is situated at NZD 3.50, while crucial resistance level is placed at NZD 4.90.

Stock Recommendation

The stock has been valued using P/E 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 ‘Hold’ recommendation on the stock has been provided at the closing market price of NZD 4.03 per share, down by 1.71% as on 11^th January 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 January 11, 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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