How NZ’s Industrials Sector Will Be Impacted Amidst Higher Inflation- 2 Stocks to Consider

Company Overview:

Move Logistics Group Limited (NZX: MOV) is the New Zealand-based company, which is engaged in the logistics sector. Steel & Tube Holdings Limited (NZX: STU) is one of NZ's leading providers of steel solutions. 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 fortnightly economic update (20 October 2023) released by The Treasury, inflation eased in accordance with pre-election update with some signs of domestic pressures easing in the field of discretionary spending. This was reflected in the lower card spending on durables in the retail sector. The record net migration as well as rising house prices could have provided more support to spending than otherwise. The tragic return of conflict to the Middle East added to the fears that the global economy would be faltering in its recovery from the effects of the pandemic as well as the war in Europe.

The IMF’s latest global growth forecasts, which was prepared prior to the outbreak of violence in the Middle East, cautioned investors about the risks that more geopolitical shocks that cause price volatility could further hamper the global economy which was already limping along. More positively, the US growth reflected resilience as well as momentum in China picked up. Notably, the annual consumer price inflation slowed from 6.0% in the June 2023 quarter to 5.6% in the September quarter. This was in-line with the pre-election update forecasts as well as below the Reserve Bank’s forecast of 6.0%.

The total non-farm payroll employment increased 336,000 in September, which was well above expectations, as well as the largest rise since January. The unemployment rate remained steady at 3.8% and annual growth in hourly wages eased to 4.2%.

Trends in Exports and Imports- September 2023

As per Stats.NZ, in September 2023, goods exports declined by $1.0 Bn (or 18%) to $4.9 Bn as well as goods imports fell $1.2 Bn (or 15%) to $7.2 Bn. The monthly trade balance was deficit of $2.3 Bn. Milk powder, butter, and cheese declined $459 Mn (or 31%) to $1.04 Bn and other dairy-based products including infant formula and casein also declined.

Talking about its top export partners, with respect to China, total exports witnessed a fall of $332 Mn (or 20%). The largest rise was fruit, which was up $53 Mn and the largest falls were milk powder, butter, and cheese, which were down $160 Mn as well as meat and edible offal, down by $84 Mn. When it comes to Australia, total exports declined $26 Mn (or 3.3%). The largest rise was petroleum and products, which was up $72 Mn.

Exhibit 1: Trends in Exports and Imports- September 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

Top Monthly Import Movements by Country

With respect to China, total imports declined $333 Mn (or 17%) in September 2023 as compared to September 2022. Notably, the largest rises were petroleum and products, which was up $52 Mn as well as aircraft and parts, up $38 Mn. The largest falls were vehicles, parts, and accessories, down by  $81 Mn as well as mechanical machinery and equipment, down by $69 Mn. Talking about EU, total imports declined $16 Mn (or 1.5%). The largest rise was vehicles, parts, and accessories, up by $145 Mn and the largest falls were pharmaceutical products, down by $73 Mn and plastic and plastic articles, which was down by $12 Mn.

With respect to Australia, total imports were down $199 Mn (or 21%).

Exhibit: 2 Trend in Goods Import (September 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 rise in labour costs as well as higher domestic competition are some of the critical considerations which NZ companies witness in China which have earlier contribute to their cautious optimism. The broader NZ industrials sector could witness the impacts of major disruption in the freight as well as supply chain system. The industrials sector is also exposed to geopolitical risks. These risks have intensified in the form of conflict in Israel and Gaza. The immediate response was an increase in demand for safe-haven assets, which includes US bonds as well as the rebound in oil prices from a significant decline which was witnessed earlier.

The electronic card spending was down throughout most of the categories in September as compared to August on the seasonally adjusted basis. While spending on apparel witnessed a decline of 2.8%, the fall in total retail spending (-0.8%) was because of 1.2% fall in durables which constituted the quarter of retail spending (73% of the total card spending).

Exhibit 3. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

In the US, stronger-than-anticipated employment, activity as well as CPI inflation reports reinforced the risk that further monetary policy tightening would be needed to return inflation to the target. However, numerous members of the bank’s decision-making board mentioned that the risk is being mitigated by increased bond yields. The retail sales and industrial production reports for September bettered market anticipations, with increases of ~0.7% and ~0.3%, respectively.

Earlier, minutes from the Reserve Bank of Australia’s (or RBA) October policy meeting mentioned that the policy makers had little tolerance for the slower decline in inflation than anticipated. Subsequently, Governor Bullock highlighted numerous reasons why it would be difficult to get inflation down, including wage pressure from the tight labour market.

China’s economy witnessed faster growth than anticipated of 4.9% on an annual basis, which signals that the momentum is recovering. On the quarterly basis, the economy expanded 1.3% after 0.5% in the June quarter (revised from 0.8%), that took growth for the first 9 months of the year to 5.2%. In other CPI reports this month, Canada’s annual headline CPI inflation rate eased to 3.8% in the month of September as well as core inflation increased just 0.1% in the month. Moreover, in the UK, inflation remained steady at 6.7%.

Apart from the sector-specific factors, an analysis on 2 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) Move Logistics Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 79.12 Mn)

Business Description:

Move Logistics Group Limited (NZX: MOV) is the New Zealand-based company, which is engaged in the logistics sector.

Outlook:

MOV’s management and board are focusing towards adding value to its customers to increase revenue, improvement in the margin as well as strengthening each division. The freight improvement programme is in progress and some softening in Contract Logistics is expected in response to the broader economic conditions. The businesses are looking for strong alternative in the market; a provider who is focused towards NZ customers, with the breadth of product and service capability, and who could move quickly to deliver the solution which is tailored to their needs. MOV is well positioned to meet the expectations.

The company is committed towards delivering exceptional value to its customers.

Technical Overview:

Technical Commentary:

While experiencing a downtrend, MOV’s stock prices are forming a descending falling wedge pattern on the daily chart, indicating a positive bias. Moreover, the momentum oscillator RSI (14-period) is establishing multiple bottom divergences in relation to prices, anticipating a potential minor rally to the pattern’s upper boundary. Prices are trading below the trend-following indicator 21-period SMA, which might serve as a dynamic resistance level for the stock; in contrast, the low in 2020 might act as a support. An important support level for the stock is situated at NZD 0.57, while a critical resistance level is located at NZD 0.71.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.620 per share, up by 1.64% as on 2 November 2023.

2) Steel & Tube Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 175.19 Mn, Annual Dividend Yield (TTM)¹: 10.58%)

Business Description:

Steel & Tube Holdings Limited (NZX: STU) is one of NZ's leading providers of steel solutions.

Outlook:

STU is having balance sheet strength with headroom for further growth investment as well as deployments towards technology and analytics are operational efficiency, business insights and customer service. With respect to FY 2024, the company is having healthy pipeline of infrastructure as well as commercial projects in place and manufacturing remained steady. Notably, the business growth is expected to continue via organic expansion and M&A.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Technical Commentary:

On the daily chart, STU’s stock prices are establishing a short-term downtrend characterized by lower highs and higher lows, signalling a negative bias. In addition, the momentum oscillator RSI (14-period) is moving south from the midpoint, adding further evidence for the mentioned recommendation. Prices are trading below the trend-following indicator 21-period SMA, which might serve as a dynamic resistance level for the stock; in contrast, the low established in May 2023 might act as a support. An important support level for the stock is situated at NZD 0.91, while a critical resistance level is located at NZD 1.30.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.05 per share, down by 2.78% as on 2 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 date for all price data, currency, technical indicators, support, and resistance levels is November 2, 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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