How Will Industrials Sector Tackle Broader Economic Challenges – 2 Stocks to Consider

Company Overview:

Metro Performance Glass Limited (NZX: MPG) produces the range of customised glass products which are predominantly utilised in residential as well as non-residential construction applications such as windows, doors, etc. Just Life Group Limited (NZX: JLG) is a NZ-based company engaged in providing products as well as services focused on the healthy living and healthy homes market sectors. 

Kalkine’s Sector Report covers the Investment Highlights, 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 ‘Fortnightly Economic Update’ dated 15 December 2023 released by The Treasury, weak activity as well as robust population growth led to the further decline in GDP per capita. The housing market activity was dependent on the opposing forces of increased interest rates as well as net migration. Post the migration led pick up early in 2023, the house prices inflation stalled over the recent months. The Real Estate Institute of New Zealand (or REINZ) house price index rose by ~0.2% in November on the seasonally adjusted basis (i.e., up by 0.8% on actual basis), after witnessing small declines over the previous 2 months. Similarly, house sales witnessed a rise of 0.4% in the month and the median days to sell increased on seasonally adjusted basis from 40 to 43 in November. This was still well down on 54 days in month of February this year.

The November updates of sentiment surveys in the manufacturing as well as services sectors reflect ongoing contraction. Even though the US witnessed improvements in the consumer confidence in the University of Michigan Survey of Consumers that increased 13% in December unwinding the falls of previous 4 months, the domestic production seems to be less optimistic. China seems to be middling between expansion as well as contraction.

Building Consents Issued: November 2023

As per Stats NZ, in November 2023, the seasonally adjusted number of new dwellings consented declined 11% post increasing 8.5% in October 2023. In the year ended November 2023, the actual number of new dwellings consented stood at 38,209, reflecting a fall of 24% from the year ended November 2022 and the annual value of non-residential building work consented stood at $9.6 Bn, reflecting a rise of 2.0% from the year ended November 2022.

In November 2023, there were ~2,958 new dwellings consented, which comprises 1,462 stand-alone houses, 1,255 townhouses, flats, and units, 123 apartments as well as 118 retirement village units.

Exhibit 1: New Dwellings Consented, Monthly, November 2022 to November 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

GDP Witnesses a Fall in September Quarter

NZ’s gross domestic product (or GDP) declined by 0.3% in the quarter ended September 2023, after the revised 0.5% rise in the June 2023 quarter as per Stats NZ. All the goods-producing industries witnessed a decline during the quarter, and this was led by the fall in manufacturing. The decline in manufacturing was because of petroleum, chemical, plastic and rubber manufacturing as well as food and beverage manufacturing.

The transport, postal as well as warehousing industry witnessed a fall. This was mainly because of fall in freight logistics, with fewer goods being exported in the September quarter. Despite overall decline in GDP, 8 of 11 service industries witnessed a rise in the quarter. The strongest increases were witnessed in the healthcare and social assistance, and rental, hiring as well as real estate services. The transport equipment investment witnessed similar falls, resulting to the decline in investment expenditure.

Exhibit 2: GDP, Quarterly And Annual Growth Rates, Chain-Volume, Sept 2022 – Sept 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 global GDP has been weakening in response to the increased interest rates. Except US, there are several advanced countries which are witnessing levelling out in the GDP growth because increased interest rates are impacting the real activity, with some, including NZ contracting in the quarter ended September.

The Australian GDP was weaker than the expectations, up by 0.2% in the quarter ended September. The Reserve Bank of Australia (or RBA) held the cash rate at 4.35% in the last meeting of the year.

While avoiding the contraction in the overall economy, the components of Australian GDP reflect the slowing economy with September quarter growth because of temporary effects instead of underlying strength. The weakness in household consumption got offset by growth in public sector spending, business investment as well as build-up in the inventories. Notably, the GDP growth over the previous few quarters reflect general slowdown, as and when increases in cash rate flow through the broader economy.

Exhibit 3. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the report by The Treasury, the growth in net migration has been easing, but the population growth was supporting the housing market as well as consumer confidence has increased. Earlier, the markets were supported by the US Fed hinting future cuts, and similar less hawkish tones from the Australia along with the EU. This was coincided with subdued GDP data from the Australia, reduced demand in China for the imports and shared pessimism regarding the major economies anticipating ongoing contractions within goods and services sectors.

The robust net migration for the year ended September (125,200 people) masks underlying weakness in the real economy.

The anticipations of house price growth appear to have positive impact on the consumer sentiment on expected future conditions. While ANZ-Roy Morgan consumer confidence survey reflected some sort of improvement in overall index as well as sentiments regarding consumers’ current conditions, the index measuring sentiment regarding the consumers’ future conditions stayed above 100 for 2^nd consecutive month.

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) Just Life Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 26.3 million, Annual Dividend Yield (TTM)¹: 6.3%)

Business Description:

Just Life Group Limited (NZX: JLG) is a NZ-based company engaged in providing products as well as services focused on the healthy living and healthy homes market sectors

Outlook:

In March 2024, JLG would be launching Herbal ignite range at the largest natural products show in the world in LA. Before that, the company would be selling the product on Amazon USA.

The company is expecting that there is a niche in that market. However, there could be some impact on the H2 results, but JLG is expecting that potential is high and it is worth making an investment in this market.

Technical Overview:

Technical Commentary

While undergoing a downtrend characterized by lower highs and lower lows, JLG’s stock prices are forming a descending wedge pattern, suggesting that downside momentum in the stock has been weakening. Moreover, the momentum oscillator RSI (14-period) is forming multiple bottom divergences in its oversold region, adding further evidence for the mentioned recommendation. 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 may act as a support. A significant support level for the stock is positioned at NZD 0.245, while critical resistance level is located at NZD 0.299.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.265 per share, up by 1.92% as on 18^th January 2024.

2) Metro Performance Glass Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 25.3 million)

Business Description:

Metro Performance Glass Limited (NZX: MPG) produces the range of customised glass products which are predominantly utilised in residential as well as non-residential construction applications such as windows, doors, etc.

Outlook:

With the current market volatility, it is difficult to forecast NZ earnings for the balance of the year. However, MPG is expecting that the NZ business would continue to be operating cash positive. For the 12 months ended 31 March 2024, the management forecasts are for AGG to witness revenue, EBITDA and EBIT of ~AUD 79.0 million, AUD 11.5 million, AUD 7.5 million, respectively.

Technical Overview:

Technical Commentary

On the daily chart, MPG’s stock prices are forming a trading range characterized by lower highs and identical lows, indicating that the sideways period in the stock might continue to persist in the near future. In addition, the momentum oscillator RSI (14-period) is trading near the midpoint, providing further support for the previous observation. Prices are oscillating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is situated at NZD 0.123, while crucial resistance level is placed at NZD 0.155.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ is given on the stock at the closing market price of NZD 0.137 per share as on 18^th January 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 neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is January 18, 2024. 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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