How Will NZ’s Consumer Staples Sector Revive Amidst Uncertainties - 2 Stocks to Consider

Company Overview:

Foley Wines Limited (NZX: FWL) is an integrated wine company producing table wines with the marketing and sales of premium wines in New Zealand and various export markets. PGG Wrightson Limited (NZX: PGW) is an agricultural services business operating throughout New Zealand.

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

In October 2024, goods exports witnessed a rise of $400 Mn (or 7.5%) to $5.8 Bn and goods imports increased $211 Mn (or 3.0%) to $7.3 Bn as compared to October 2023. The monthly trade balance was a deficit of $1.5 Bn. With respect to exports, the milk powder, butter, and cheese increased $261 Mn (or 16%) to $1.9 Bn. The infant formula is included in preparations of milk, cereals, flour, and starch, which increased $28 Mn (or 12%) to $267 Mn.

Fruit increased $142 Mn (or 314%) to $188 Mn in the October 2024 month as compared with the October 2023 month. This was led by kiwifruit, which increased $133 Mn to $146 million. Country-wise, with respect to China, the total exports were up $113 million (or 8.4%). Notably, the largest rises were milk powder, butter, and cheese, up $189 Mn, petroleum and products (up $30 Mn) and fruit (up $20 Mn). With respect to Imports, aircraft and parts led the rise. Aircraft and parts increased $313 Mn (644 percent) to $362 Mn.

Exhibit 1: Merchandise trade values ($ Bn), Exports and Imports, October Months

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

Retail Trade Survey: September 2024 Quarter

For the September 2024 quarter, total volume of seasonally adjusted retail sales stood at $24 Bn, down 0.1% as compared with the June 2024 quarter. The total value of seasonally adjusted retail sales was $30 billion, down by 0.7%. The total value of actual retail sales amounted to $28 Bn, down 2.8% ($829 million) as compared with the September 2023 quarter. Ten of the 15 industries had lower seasonally adjusted sales volumes in the September 2024 quarter as compared with the June 2024 quarter.

By industry, the motor vehicle and parts retailing witnessed an increase of 4.3% and electrical and electronic goods retailing rose 4.6%. However, supermarket and grocery stores witnessed a fall of 1.3%.

Exhibit 2: Total Retail Trade Sales ($ Bn), Volumes, December 2023 – September 2024 Quarters

Data Source: This work is based on/includes MPI’s data which are licensed for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Open Ocean Salmon Farm

As per Situation and Outlook for Primary Industries (June 2024), NZ’s first open ocean salmon farm, Blue Endeavour, received its final consent authorisation in February this year. Notably, there is strong interest from industry to continue to expand into the open ocean. Investment would be needed right across the production chain in wharves and ports, boats, hatcheries, and processing facilities as well as the actual ocean farms.

By enabling the open ocean salmon farming, NZ would be on track to the Government’s goal of doubling export revenue while meeting the global demand for the low-carbon, nutritious, sustainable, and premium product.

Key Risks and Challenges:

The broader consumer staples sector is exposed to risks such as labour shortages, global economic slowdown, higher inflation, etc. Also, increased borrowing costs might also act as a hurdle for the companies operating in the consumer staples sector. The challenging global macroeconomic landscape and lower global demand might also weigh over the broader sector moving forward. Domestically, farm input costs are forecasted to remain elevated in 2024/25, squeezing producer profitability.

Exhibit 3. Key Risks in Consumer Staples Sector:

Source: Analysis by Kalkine Group

Outlook:

As per Situation and Outlook for Primary Industries (June 2024), the strong consumer demand for New Zealand wine within markets is expected to support growth in export revenue for the year ended 30 June 2025. Once retailers' inventories return to pre-COVID-19 levels, export demand is anticipated to pick up. Beyond 2025, the demand for Sauvignon Blanc, which represents close to 90% of New Zealand’s wine export volume, is expected to remain strong as consumer preferences continue to shift from red wine to white wine.

Also, the NZ-EU FTA is expected to support NZ wine as the agreement is estimated to save the industry $5.5 million in annual tariff savings. In recent years, imported wine outpaced the New Zealand wine in the domestic market. In the year ended 30^th June 2022, imported wine made 54% of the domestic wine market. Also, the favourable weather and improved market access, such as the NZ-EU FTA for exports to Europe, is expected to support growth of fresh vegetable exports.

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 47.3 Mn)

Business Description:

Foley Wines Limited (NZX: FWL) is an integrated wine company producing table wines with the marketing and sales of premium wines in New Zealand and various export markets.

Outlook:

The company is focused towards selling its brand through its established channels. FWL completed a major upgrade of the Vavasour winery refrigeration, plus continued its replanting of underperforming vineyards. Its key focus areas for 2024/25 include managing capex prudently, continued focus towards seeking out and cementing new opportunities, building momentum with The Runholder brand home, etc.

Technical Overview:

FWL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, FWL's stock prices are forming a downtrend characterized by lower lows and lower highs, indicating a negative bias. Currently, while undergoing a rally, the stock is approaching a significant resistance established in May 2024, suggesting that the mentioned downtrend might resume soon. Prices are trading 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 0.65, while crucial resistance level is placed at NZD 0.82.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.720 per share, up by 2.86% as on 28^th November 2024.

2) PGG Wrightson Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 128.32 Mn)

Business Description:

PGG Wrightson Limited (NZX: PGW) is an agricultural services business operating throughout New Zealand.

Outlook:

PGW believes that confidence has been returning to the dairy sector and this confidence is seeing increased enquiry and activity in the company’s Real Estate business for dairy and dairy support properties, in particular. The Beef prices are strong with export demand supporting a positive outlook. Currently, PGW is expecting an Operating EBITDA for the year ended 30 June 2025 of ~$51 Mn.

Technical Overview:

Technical Commentary

On the daily chart, PGW's stock prices are undergoing a downtrend characterized by lower highs and lower lows, suggesting a negative bias. Moreover, the momentum oscillator RSI (14-period) is trading below the midpoint, adding more evidence to the mentioned recommendation. Prices are trading between its previous peak and trough, which might serve as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 1.54, while critical resistance level is located at NZD 1.92.

PGW Daily Technical Chart, Data Source: REFINITIV

Fundamental Valuation

P/E Based Relative Valuation

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.70 per share, down by 1.16% as on 28^th November 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 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 28, 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.