How NZ’s Consumer Discretionary Sector Will Manage Increased Inflationary Concerns– 2 Stocks to Consider

Company Overview:

Foley Wines Limited (NZX: FWL) is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions. 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. 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 October 2023. For the October 2023 month, the spending in retail industries witnessed a fall of 0.7% (or $44 Mn) as compared to September 2023. The spending in core retail industries witnessed a fall of 0.7% (or $43 Mn). Coming to the retail spending category movements, spending  on fuel witnessed a rise of $2.5 Mn (or 0.4%) as well as on motor vehicles (excluding fuel) the spending rose by $1.5 Mn (or 0.7%). The spending on apparel fell by $7.1 Mn (or 2.1%) and on consumables it was down by $7.8 Mn (or 0.3%).

The non-retail (excluding services) category witnessed a rise of $4.7 Mn (or 0.2%) from September 2023. This category consists of medical and other health care, travel and tour arrangement, postal and courier delivery as well as other non-retail industries. The total value of electronic card spending, which includes 2 non-retail categories (services and other non-retail) fell from September 2023, down by $23 Mn (or 0.3%). The spending in the hospitality industry fell by 2.3% (or $30 Mn) between October 2022 and October 2023. In the actual terms, cardholders made 165 million transactions throughout all the industries in October 2023, with an average value of $55 per transaction. The total amount spent utilising electronic cards stood at $9.1 Bn.

Exhibit 1: Percentage Change In Seasonally Adjusted Card Transaction Values By Industry, September 2023–October 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

Food Prices Rose 6.0% Annually

As per Stats.NZ, the food prices in NZ witnessed a rise of 6.0% as compared to the previous year but are cheaper in November 2023 compared to October 2023. The significant contribution to the annual change was grocery food, which was primarily supported by increased prices for fresh eggs, lollies as well as peanuts. In the month of November 2023, the annual increase was because of price increases throughout the 5 broad food categories measured by Stats NZ.

For the 12 months to November 2023, grocery food prices witnessed a rise of 7.0%, restaurant meals and ready-to-eat food prices rose 7.5%, fruit and vegetable prices increased 4.8% as well as non-alcoholic beverage prices witnessed a rise of 5.8%.

However, food prices declined 0.2% in November 2023 as compared to October 2023.

Exhibit 2: Food Price Index Annual Percentage Change (Jan 2023- Nov 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

Key Risks and Challenges:

The demand for the consumer discretionary sector is exposed to the risks related to higher labour costs as well as inflationary concerns. The global inflationary pressures, mainly with respect to higher ingredient and wage costs could impact the profit margins of the companies operating in the sector. The continued input cost increases in NZ could also impact the broader consumer discretionary sector. Apart from these challenges, decline in the purchasing power of consumers could potentially hurt the growth prospects of the sector. 

Additionally, the labour market pressures could result in adverse staff shortages.

Exhibit 4. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

As per MPI, the horticulture export revenue is expected to decline 1% to $7.0 Bn for the year ended 30 June 2024. While this decline was mainly because of lower volumes of wine and vegetables, the export prices are expected to be supported by robust global demand as well as constrained global supply. The wine and cherry exports are all expected to increase on the previous year, with overall horticulture export revenue expected to build back to the record forecast of $8.2 Bn in the year ended 30 June 2025.

The wine export prices are expected to rise 8% for the year ended 30^th June 2024 which indicates that underlying consumer demand remained robust as well as provides some confidence that export volumes would be recovering in early 2024. Over the longer timeframe, wine prices are growing strongly over the past 3 years after the decade of stagnant prices. In turn, these increased export prices are flowing through to grape prices as well as vineyard returns. The consumer discretionary sector is expected to be supported by lower inflation, higher disposable income, reduced interest rates as well as improvement in the consumer confidence. 

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) Foley Wines Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 76.9 Mn)

Business Description:

Foley Wines Limited (NZX: FWL) is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions.

Outlook:

The company’s long term strategic priorities revolve around realising the premiumisation strategy as well as leveraging the power of portfolio. Also, managing the costs prudently and seeking out new high-quality routes to market are some of the company’s immediate priorities. The company has been in the good shape as well as it continues to focus towards robust growth and deployment for the future.

Technical Overview:

Daily Price Chart

Technical Commentary:

While experiencing a downtrend, FWL’s stock prices are establishing a descending wedge pattern, suggesting that the stock’s downside momentum is halting. Additionally, the momentum oscillator RSI (14-period) is trading near its oversold region, adding more evidence for the mentioned recommendation. Prices are trading below both trend-following indicators 21-day and 50-day SMAs, which might serve as dynamic resistance levels for the stock; in contrast, the pattern’s lower boundary may act as a dynamic support. A significant support level for the stock is placed at NZD 1.07, while critical resistance level is located at NZD 1.31.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.17 per share as on 13^th December 2023.

2) Delegat Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 655.3 million, Annual Dividend Yield: 4.29% (TTM¹))

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:

DGL is expecting to achieve global sales of 3,614,000 cases for the year ended June 2024. This was 1.7% down as compared to the last year as well as 5.5% below its previous guidance. Its guidance range on Operating Net Profit after Tax is between $57 Mn - $61 Mn for the year ending June 2024. DGL is committed to increased profitability in key markets via price increases in order to offset the cost inflation.

Fundamental Valuation:

Price/EPS Based Valuation

Technical Overview:

Technical Commentary:

On the daily chart, DGL’s stock prices are forming a symmetrical triangle pattern, suggesting that the sideways period in the stock might continue to persist in the near future. Additionally, the momentum oscillator RSI (14-period) is hovering near the midpoint, providing further support for the above observation. Prices are fluctuating between its previous peak and trough, which might serve as resistance and support levels for the stock, respectively. An important support level for the stock is placed at NZD 5.90, while key resistance level is located at NZD 7.20.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 6.48 per share, down by 1.52% as on 14^th December 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.

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

Kalkine New Zealand Limited is a Financial Advice Provider (“FAP”) and is authorised by a Class 1 Financial Advice Provider Licence issued by Financial Markets Authority (“FMA”) to provide financial advice. Kalkine provides only general financial advice through its research reports following a person becoming a member. The reports contain buy/sell/hold and other recommendations in relation to equity financial products. The recommendations and opinions [on this website] / [in this report] do not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions. If you act on the advice in the research reports, you may have to pay fees, expenses or other amounts (but not to Kalkine).  Further information about the complaints and dispute resolution process, as well as information about Kalkine’s duties are available on Kalkine’s website.  Please read our Financial Advice Provider (FAP) disclosure statement and Complaints Handling Guide, which are available on the website.