How Consumer Staples Sector Will Tackle Current Inflationary Environment – 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. Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough. 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 Ministry for Primary Industries (MPI) annual report for FY 2023, New Zealand currently has 14 FTAs (or free trade agreements) in force as well as some yet to be finalised or ratified. These agreements benefit farmers and growers directly in the form of reducing or eliminating tariffs and then simplifying the process related to exports. For the year ending 30 June 2023, total export earnings from NZ food and fibre sector exports to FTA partners witnessed a rise to NZ$39.5 Bn, reflecting a rise of 7.1% as compared to the export earnings in 2021/22. MPI supports producers in accessing new markets. This is one of the main factors which enable producers to increase their returns sustainably.

The F&B sector feeds the people and tens of millions of consumers internationally. The wider food chain employs 1 in every 5 New Zealanders – and up to 2 in every 5 in the regions. The sector is the primary economic driver, with exports figure of $45.6 Bn in 2023. On 28^th August 2023, the Cabinet approved the final version of the Food and Beverage Industry Transformation Plan. The focus of the plan is towards supporting food and beverage innovation, and is the result of extensive research, sector engagement as well as public consultation. It would be helping to further build and strengthen the innovation infrastructure, where a lot of the value from the F&B sector is added beyond the farmgate.

Trend in Goods Imports and Exports (October 2023)

As per Stats.NZ, in October 2023, goods exports witnessed a fall of $552 Mn (or 9.3%) to $5.4 Bn and goods imports declined $1.2 Bn (or 14%) to $7.1 Bn as compared to October 2022. As the result, the monthly trade balance was the deficit of $1.7 Bn. The milk powder, butter, and cheese declined $199 Mn (or 11%) to $1.7 Bn and other dairy-based products including infant formula and casein also witnessed a fall. The infant formula is included in the preparations of milk, cereals, flour, and starch, which increased $35 Mn (or 17%) to $240 Mn. Notably, meat and edible offal fell $50 Mn (or 8.5%) to $534 Mn.

Coming to imports, mechanical machinery and equipment declined $132 Mn (or 11%) to $1.0 Bn and turbojets and associated parts declined $69 Mn (or 31%). The electrical machinery and equipment declined $131 Mn (or 17%) to $652 Mn and vehicles, parts, and accessories fell $130 Mn (or 11%) to $1.1 Bn.

Exhibit 1: Merchandise trade values ($ Bn), exports and imports, October 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

Initiatives To Support Winery Industry

The New Zealand-United Kingdom Free Trade Agreement (NZ-UK FTA) was entered into force on 31 May 2023. NZ goods exports to the UK are expected to increase by more than 50% at the full implementation, which is expected to support NZ’s real GDP by between $700 Mn - $1 Bn by 2040. Over time, the UK would be eliminating all the tariffs on NZ exports, with 99.5% of current goods trade to the UK duty free. Notably, at least $25 Mn of wine tariffs per annum as well as $6.3 Mn of honey tariffs per annum were removed immediately.

The poor season in Hawke’s Bay and Gisborne Tairāwhiti punctuated by the Cyclone Gabrielle led to the loss of ~15,000 tonnes of production, plus ~300–350 hectares is required to be completely replanted over upcoming few years. The damage in these areas is indeed significant. However, in the context of the whole NZ wine industry, Hawke’s Bay and Gisborne Tairāwhiti collectively make up for ~15 percent of planted area and 11% of production.

Wine is the profitable land-use option, with high yields for the 2022 vintage leading to decent on-farm profitability in the previous year. However, working expenses rose by 6% in 2021 and 9% in 2022,  and the higher labour expenses was the key driver.

Exhibit 2: Top Wine Export Markets

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. Globally, the weaker commodity prices, COVID-19 disruptions, subdued demand and increased  input cost inflation might impact the profitability of the companies operating in the broader consumer staples sector.

The 2022/23 year was one of two halves for the key export products, as prices reached record highs before weakening because consumers and businesses constrained spending due to increased commodity prices and debt servicing costs.

Exhibit 3. Key Risks in Consumer Staples Sector:

Source: Analysis by Kalkine Group

Outlook:

Over the long term, strengthening demand as well as weakening supply are expected to increase the prices of food and fibre commodities. The demand is expected to be supported by higher growth of the global economy driven mainly by the emerging economies. On the other hand, global supply might get constrained by the climate change as well as the increased frequency of extreme weather events, tough regulatory pressures, demographic shifts and rising input costs. The high prices provide the opportunity for firms in the food and fibre sector to further deploy in certain field which could enhance sustainability and productivity.

The inflation in several economies reached multi-decade highs last year because of pent-up demand after the COVID-19 lockdowns, supply disruptions, etc. The reduction in inflation was mainly because of the sharp reversal in energy and food prices. The core inflation, which excludes the volatile energy and food components, is high in several countries. China’s economy is expected to witness recovery. Since China happens to be the major importer of New Zealand food and fibre sector exports, the reopening as well as growth of its economy might generate positive spillover effects, mainly for the sectors with stronger trade links with China.

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 77.5 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’s long-term strategic priorities are same which include continuing to realise the premiumisation strategy, leveraging the power of the portfolio as well as maintaining strong and long-term relationships. The company’s immediate priority includes the US market. The focus is also towards managing costs prudently as well as seeking out new high-quality routes to market. It is also focusing towards managing the costs prudently.

Technical Overview:

Technical Commentary

While experiencing a downtrend, FWL’s stock prices are fluctuating between a descending wedge pattern on the daily chart established since the early of 2021, signalling for a positive trend. Moreover, the momentum oscillator RSI (14-period) is trading deep in its oversold region, anticipating for a potential minor rally. Prices are trading below its previous peak, which might serve as a resistance level for the stock; in contrast, the pattern’s lower boundary may act as a dynamic support. A significant support level for the stock is positioned at NZD 1.07, while critical resistance level is located at NZD 1.35.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.180 per share as on 22nd November 2023.

2) Marlborough Wine Estates Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 45.13 Mn)

Business Description:

Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough.

Outlook:

The company is focused towards building on the platform which has been created in recent years. The OTU brand generated robust consumer appeal in the short period of time. MWE’s growth priorities in FY 2024 include growth of premium branded wine, expansion of market share, identifying opportunities to enhance growth via acquisition, etc.

Technical Overview:

Technical Commentary

On the daily chart, MWE’s stock prices are fluctuating near the lower boundary of a trading range established since July 2022, anticipating for a potential minor rally. Additionally, the momentum oscillator RSI (14-period) is trading deep in its oversold region, adding more evidence to the above observations. Prices are trading below both the trend-following 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s most recent low might act as a support. An important support level for the stock is placed at NZD 0.142, while crucial resistance level is situated at NZD 0.169.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.152 per share, up by 0.66% as on 23 November 2023.

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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