How Export Revenue Will Support NZ’s Broader Consumer Staples Sector – 2 Stocks to Consider

Company Overview:

Scales Corporation Limited (NZX: SCL) is the diversified agribusiness portfolio. It comprises 3 operating divisions: Horticulture, Storage & Logistics and Food Ingredients. 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

As per the Ministry for Primary Industries (or MPI), the food and fibre sector continues to be the engine room of NZ’s economy resulting in record export revenue of $57.4 Bn in the year ended June 2023. This result was impressive considering several challenges navigated by the farmers, growers, fishers, foresters as well as processors over the last year, which includes major adverse weather events. An important focus for MPI was working together with the sector partners and rural communities in order to respond to the weather events in the North Island, including Cyclone Gabrielle. NZ’s food and fibre sector depends on being able to export the products to the world. Through utilising extensive networks as well as international market presence, it is important to maintain and improve access for NZ’s products so the nation could increase the value of its food and fibre exports.

MPI finances the research and innovation projects which could position the food and fibre sector for robust future growth and environmental sustainability. Considering the budget of ~$40 Mn a year, the Sustainable Food and Fibre Futures (or SFF Futures) fund helps in problem solving and innovation.

The focus towards trade as well as export growth remained the major cornerstone in government's economic recovery plan, with the securing of new FTAs like the UK & EU, as well as an upgrade to the China FTA. These are resulting in more and more export opportunities and more value being derived. Since 2017, food and fibre exports have jumped $19.2 Bn, reflecting a rise of 50%.

China Led The Monthly Decline in Exports

As per Stats.NZ, in August 2023, goods exports witnessed a decline of $296 Mn (or 5.6%) to $5.0 Bn as well as goods imports witnessed a fall of $639 Mn (or 8.1%) to $7.3 Bn as compared to August 2022. The monthly trade balance was the deficit of $2.3 Bn. With respect to exports, meat and edible offal declined $105 Mn (or 15%) to $621 Mn and milk powder, butter, and cheese (the largest export commodity group) declined $39 Mn (or 3.8%) to $984 Mn.

The exports of logs, wood, and wood articles declined by $79 Mn (or 17%) to $386 Mn. The largest contribution was rough wood (treated and untreated logs), falling by $54 Mn (or 18%) to $253 Mn.

Coming to NZ’s top export partners, China declined $262 Mn (or 18%) and Australia fell $71 Mn (or 9.0%). Notably, USA rose $62 Mn (or 9.6%). The largest rise was witnessed in frozen beef, up by $51 Mn. Also, milk powder, butter, and cheese increased $41 Mn.

Exhibit 1: Merchandise trade values ($ Bn), Exports and Imports, August months, 2017–2023

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

Dairy Export Revenue Grew 18% YoY

NZ Government has always supported its farmers, growers, fishers as well as foresters to achieve success – deploying significantly towards supporting the sector in order to lift the sustainability credentials for the maintenance of competitive edge. Most of the sectors are performing strongly, driving robust export revenue growth.

NZ’s dairy export revenue reached the record $26 Bn, which reflects the rise of 18% as compared to the previous year. NZ’s horticulture, seafood, and arable sectors are reflecting robust performance, with growth on the prior year of $254 Mn (or 4%), $178 Mn (or 9%) and $21 Mn (or 8%), respectively.

Exhibit 2: Trend in Dairy Export Revenue 2024F – 2027F (Year to 30 June, NZ$ million)

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:

More extreme as well as frequent climate-related events are having impacts throughout the world, including in food and fibre production systems. In order to combat climate change, NZ is committed towards reducing the methane emissions and achieving net zero for other greenhouse gases by 2050.

The world economy is facing challenges, which is exacerbated by the policy measures to contain inflation, financial sector turbulence, the war in Ukraine, as well as several other geopolitical tensions. Such factors contributed in increased input costs and supply chain challenges and complicated exporters’ ability to access the markets. Notably, the global food consumption patterns are changing, because of demographic, social as well as economic trends.

Exhibit 3. Key Risks in Consumer Staples Sector:

Outlook:

The recent decline in commodity prices as well as increased farm expenses will affect the farmers in the coming year. Inflation peaked and on-farm expenses such as fertiliser have dropped significantly. Notably, the farming is cyclical and NZ is committed to working with the sector and to represent the work overseas. In order to help NZ’s food and fibre product exporters, MPI tries to open new market access opportunities, decrease unnecessary costs as well as maintain the access to existing markets. As NZ’s competent authority, it maintains trusted relationships with regulators in the key markets and play an important role in NZ’s trade negotiation teams.

The food and beverage sector feeds tens of millions of consumers globally. The wider food chain is responsible for employing 1 in every 5 New Zealanders – and up to 2 in every 5 in the regions. Notably, the sector is the primary economic driver, with exports of $45.5 Bn in 2023. On 28^th August 2023, the cabinet approved the final version of the Food and Beverage Industry Transformation Plan. The plan focuses towards helping food and beverage innovation, and is the result of extensive research, sector engagement as well as public consultation.

The plan targets to help the small and medium food and beverage enterprises (SMEs) to innovate, grow, and realise the global market opportunities. It would help to further build and strengthen the innovation infrastructure, where lot of the value from F&B sector is added beyond the farmgate. The focus would be ensuring that Aotearoa continues to be the world-class producer of primary produce.

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 ) Scales Corporation Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 450.7 million, Annual Dividend Yield (TTM)¹: 4.19%)

Business Description:

Scales Corporation Limited (NZX: SCL) is the diversified agribusiness portfolio. It comprises 3 operating divisions: Horticulture, Storage & Logistics and Food Ingredients.

Outlook:

In H1 FY 2023, SCL delivered the resilient result and it was a difficult period for the Horticulture division. SCL benefited from the continued growth in the Global Proteins division together with solid results from logistics. For FY 2023, the company is expecting underlying net profit attributable to shareholders of between $14.0 Mn - $19.0 Mn. The company is exploring several opportunities to grow the Global Proteins division.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Technical Commentary:

On the daily chart, SCL prices are trading above the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~54.9259 level. Further, the prices are trading above trend-following indicator 21-period SMA, which may act as a support level. An important support level for the stock is placed at NZD 2.70 while the key resistance level is placed at NZD 3.80.

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 ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 3.15 per share, down by 1.56% as on 19 October 2023.

2) Sanford Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 368.4 Mn, Annual Dividend Yield (TTM)¹: 5.64%)

Business Description:

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

Outlook:

SAN released the Q3 FY 2023 (for the three months ended June 2023) update. The robust prices in Wildcatch, Salmon as well as Mussels witnessed in the earlier months of the year were maintained, but volumes were impacted by the lower squid and ling catch and reduced mussel volume caused by adverse climatic and water conditions.

Relative Valuation

P/E Based Relative Valuation

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Technical Commentary:

On the daily chart, SAN prices are trading above the falling trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~45.3476 level. However, the prices are trading below trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 3.65 while the key resistance level is placed at NZD 4.40.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 3.940 per share, down by 0.25% as on 19 October 2023.

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 October 19, 2023. 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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