How Broader Retail and Consumer Staples Sector in NZ Plans to Unveil Growth Opportunities – 2 Stocks to Consider

Company Overview:

Delegat Group Limited (NZX: DGL) is a New Zealand-based wine company. Restaurant Brands New Zealand Ltd (NZX: RBD) is a corporate franchisee that specialises in managing multi-site branded food retail chains. 

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

Stats NZ released data regarding electronic card transactions for the month of January 2024. The spending in the retail industries witnessed a rise of 1.7% (or $114 Mn) for Jan 2024 as compared to December 2023. During the same period, spending in core retail industries rose by 1.9% (or $109 Mn). Coming to the retail spending category, durables rose by $28 Mn (or 1.8%), apparel was up by $10 Mn (or 3.1%), consumables increased $9.3 Mn (or 0.4%) as well as fuel rose by $9.1 Mn (or 1.6%). The non-retail (excluding services) category rose $60 Mn (or 2.7%) as compared to December 2023. The category consists of medical and other health care, travel and tour arrangement, postal and courier delivery, and other non-retail industries.

The total value of electronic card spending, which includes 2 non-retail categories (services and other non-retail), rose from December 2023, up by $187 Mn (or 2.0%). In actual terms, cardholders made 165 Mn transactions throughout all the industries in January 2024, equating to an average value of $56 per transaction. The total amount spent through electronic cards stood at $9.2 Bn.

Exhibit 1: Percentage change in seasonally adjusted card transactions values by industry, December 2023–January 2024

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

Overseas Merchandise Trade: January 2024

As per Stats.NZ, in January 2024, goods exports witnessed a fall of $375 Mn (or 7.1%) to $4.9 Bn as well as goods imports declined $1.5 Bn (or 20%) to $5.9 Bn as compared to January 2023. The monthly trade balance was the deficit of $976 Mn. Coming to the exports, crude oil declined $77 Mn (or 69%) to $34 Mn and milk powder, butter, and cheese witnessed a fall of $68 Mn (or 3.6%) to $1.8 Bn.

With regards to China, the total exports were down $42 Mn (or 2.8%). The largest rises were witnessed in milk powder, butter, and cheese, reflecting a rise of $59 Mn. Notably, logs, wood, and wood articles increased $40 Mn and crude oil rose $22 Mn. Coming to Australia, the total exports declined $112 Mn (or 17%). The largest falls were witnessed in crude oil, down by $77 Mn and iron and steel, and articles, which were down by $10 Mn.

Exhibit 2: Goods Imports and Exports (Jan 2024 Month vs Jan 2023 Month)

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 broader consumer discretionary sector is exposed to the risks associated to increased labour costs as well as inflationary concerns. NZ has not been immune to the global events. For example, conflicts are causing challenges, like pushing up input costs for the growers and farmers. However, the pace of such cost increases has been slowing.

The pandemic as well as conflicts overseas resulted in numerous challenges for the producers, which includes rising inflation and costs of living, impacting consumer demand, and causing slowdown in China. Notably, several North Island producers were impacted by adverse weather events, with many of the producers in cyclone-impacted regions still recovering.

Exhibit 3. Key Risks in Consumer Staples Sector:

Source: Analysis by Kalkine Group

Outlook:

The horticulture export revenue is expected to fall 1% to $7.0 Bn for the year ended 30^th June 2024. While the decline was mainly because of decreased volumes of wine as well as vegetables, export prices are expected to be helped by robust global demand and constrained global supply.

The recovery in yields in 2024 is expected to offset decreased volumes for some crops mainly resulting from tail end of weather-affected 2023 harvests. The increased yields is expected to witness a lift in kiwifruit revenue, and while wine exports were affected by decreased demand as a result of rebalancing of wholesale inventories, robust consumer demand should help prices.

The climatic conditions for pollination as well as fruit set in spring 2023 (for 2024 crop) was mostly favourable with good fruit set reported. In Hawke’s Bay and Gisborne Tairāwhiti, the growers and sector experts were cautious regarding how flood-impacted trees would be performing into summer and what crop loads could be carried through to harvest. The average export price for NZ apples and pears for the year ended 31 December 2024 is anticipated to be similar to previous year. Influencing factors consist of an increasing proportion of premium apple varieties in export mix, competitive shipping rates as well as weaker NZD as compared to 2023 export season.

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) Delegat Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 622.9 Mn, Annual Dividend Yield: 4.51%)

Business Description:

Delegat Group Limited (NZX: DGL) is a New Zealand-based wine company.

Outlook:

DGL has maintained the FY 2024 Operating Profit guidance of between $57 Mn - $61 Mn. It has deployed $44 Mn in NZ vineyard developments and winery expansion in 6-month period to give future earnings growth. DGL is planning to continue investing in vineyards and wineries in H2 of FY 2024.

With distribution channels as well as its viticulture and winemaking assets already giving robust foundations for growth, it has focused its deployment towards consumer marketing in order to drive awareness and affinity.

Fundamental Valuation:

P/E Based Relative Valuation

Technical Overview:

Daily Price Chart

DGL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary:

While undergoing a downtrend, DGL’s stock prices are fluctuating between a downward slope channel, suggesting that downside momentum in the stock has been halting. Moreover, after forming a bottom divergence in relation to prices, the momentum oscillator RSI (14-period) is trading near the midpoint, adding further evidence for the mentioned recommendation. Prices are trading 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 positioned at NZD 5.6, while critical resistance level is located at NZD 6.80.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 6.160 per share as on 7^th March 2024.

2) Restaurant Brands New Zealand Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 392.9 million, Gross Dividend Yield: 7.215%)

Business Description:

Restaurant Brands New Zealand Ltd (NZX: RBD) is a corporate franchisee that specialises in managing multi-site branded food retail chains.

Outlook:

The inflation pressures eased in most of the regions in the H2 FY 2023. The sales were robust, with growth delivered throughout all 4 operating regions in NZ dollars. The implementation of a strategic programme of price increases along with cost control measures to relieve margin pressures remained successful with margin gains in H2 FY 2023. The company’s pricing strategy has been balancing need to mitigate inflation while protecting sales volume as well as brand health.

The Group is well positioned to deliver on the strategy to provide continued long-term shareholder value.

Fundamental Valuation:

Price/EPS Based Valuation

Technical Overview:

RBD Daily Technical Chart, Data Source: REFINITIV

Technical Commentary:

On the daily chart, RBD’s stock prices are experiencing a downtrend, characterized by lower highs and lower lows, indicating a negative bias. In contrast, the momentum oscillator RSI (14-period) is trading oversold region, anticipating for a minor rally. Prices are trading below its previous low, which might serve as a resistance level for the stock; conversely, the stock’s next round level may act as a sentimental support. A significant support level for the stock is positioned at NZD 2.9, while critical resistance level is located at NZD 3.40.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 3.15 per share, up by 2.27% as on 7^th March 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 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

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