How Will NZ’s Industrials Sector Revive Amidst Macro-economic Challenges - 2 Stocks to Consider

Company Overview: Napier Port Holdings Limited (NZX: NPH) provides range of container, bulk cargo and cruise vessel services. Mainfreight Limited (NZX: MFT) is the global logistics provider. Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

I. Sector Landscape and Outlook 

As per fortnightly economic update (18 August 2023) released by The Treasury, net immigration has been supporting the broader housing market, but spending remained subdued. There was some growth which was witnessed in the advanced economies, but challenges are still mounting in China. The economic activity has been slowing, broadly as was expected in the Budget Update. Notably, indicators of activity in July reflect to the sluggish start to the Q3 and household spending remained under pressure because of higher mortgage interest rates as well as high inflation, and lesser commodity prices impacting the rural sector. Net migration inflows are still offering support, mainly in the housing market, as prices of existing homes are now increasing, and rental prices have spiked.

On the positive side, NZ tourism witnessed some sort of steady recovery, as Stats NZ data showed that monthly visitor arrivals as the percentage of 2019 rose to 84% in the month of June 2023 as compared to the average of ~72% in the months of April and May. The increase in visitor numbers was supported by rise in Australian holidaymakers as well as the return of Chinese tourists.

Trends in Exports and Imports- July 2023

As per Stats.NZ, in July 2023, goods exports declined by $890 Mn (or 14%) to $5.5 Bn as well as goods imports declined by $1.2 Bn (or 16%) to $6.6 Bn as compared to July 2022. Notably, the monthly trade balance was the deficit of $1.1 Bn. Talking about the exports, milk powder, butter, and cheese (the largest export commodity group) declined $350 Mn (or 19%) to $1.5 Bn. Meat and edible offal exports declined $194 Mn (or 21%) to $712 Mn.

Coming to the imports, petroleum and products was the leading contributor to the decline in imports in the month of July 2023. Notably, chemical product imports declined by $147 Mn (or 66%) to $75 Mn, led by the diagnostic as well as laboratory reagents, down $129 Mn (or 90%).

Exhibit 1: Trends in Exports and Imports- July 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 Goods Trading Partners With New Zealand

With respect to China, total exports were down $407 Mn (or 24%). Notably, the largest rises were: casein and caseinates, up by $25 Mn as well as miscellaneous edible preparations, up by $13 Mn. The largest falls were: meat and edible offal, down by $176 Mn, preparations of milk, cereals, flour, and starch, down by $96 Mn and milk powder, butter, and cheese, down by $64 Mn.

Coming to Australia, total exports increased by $59 Mn (or 8.9%) and the largest rises were: milk powder, butter, and cheese, up by $26 Mn, vehicles, parts, and accessories, up $21 Mn as well as mechanical machinery and equipment, up by $12 Mn.

Regarding USA, the total exports rose by $105 Mn (or 16%). The largest increases were: meat and edible offal, up by $73 Mn, milk powder, butter, and cheese, increase of $49 Mn and mechanical machinery and equipment, up by $24 million.

Exhibit 2 Trend in Goods Export and Import in June 2022

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

Index Performance:

The S&P/NZX All Industrials (Sector) Index generated the YTD return of ~1.25% versus ~0.25% by the S&P/NZX 50 Index. Therefore, NZX All Industrials Index overperformed NZX50 Index by ~1% on YTD basis.

Exhibit 3: S&P/NZX All Industrials (Sector) vs S&P/NZX50 Index

Source: REFINITIV

Key Risks and Challenges:

The rise in labour costs, higher domestic competition as well as the changes in regulatory environment are some of the critical considerations which NZ companies witness in China as well as contribute to their cautious optimism. In the case of macro-economic uncertainty, broader NZ industrials sector might witness the impacts of major disruption in the freight as well as supply chain system. These consist of congestion at ports, loss in capacity as well as reliability of air and shipping services, problems in securing shipping containers, etc. All of these factors might lead to a very difficult operating environment, delays in deliveries as well as higher costs to businesses and consumers.

Exhibit 4. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

NZ’s freight as well as supply chain system plays the critical role in enabling NZ economy and improving the standard of living. New Zealand Government’s management of the bilateral relationship is appreciated by NZ business present in China. The continuation of the NZ Government’s efforts in this area are favoured by the NZ business.  The timely and relevant upgrade to the China-NZ FTA and the ratification of RCEP are well-accepted  by the NZ business and have the direct positive impact on trade.

Russia made an announcement that it would be suspending some provisions in the double tax agreements with 38 “unfriendly countries” including NZ, effective from 8 August 2023. The suspended treaty articles are related to allocating tax rights, placing maximum withholding tax rates and establishing non-discriminatory treatment.

The Government worked with BlackRock to launch the $2 billion fund with the target of making NZ as one of the first countries in the world to touch 100% renewable electricity.

New Zealand red meat exports witnessed a fall of 12% year-on-year in value in June 2023. The sheep meat exports fell to most major markets – likely implying tough conditions in major economies – while beef exports remained solid. Notably, the Meat Industry is witnessing the benefits of New Zealand-United Kingdom Free Trade Agreement for beef exports with tariff savings of ~$650,000 in June 2023.

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) Napier Port Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 455.9 million, Annual Dividend Yield (TTM)¹: 3.9%)

Business Description:

Napier Port Holdings Limited (NZX: NPH) provides the range of container, bulk cargo and cruise vessel services.

Outlook:

NPH is expecting underlying result from operating activities for the year ended 30 September 2023 of between $34.5 Mn - $36.5 Mn. This guidance excludes the insurance recoveries (of which $3.5 Mn has been recognised to date). Over the 9-month period, the company invested $11 Mn in capital assets, including mobile plant, planned site maintenance as well as post-cyclone restorative dredging.

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

Technical Overview:

Technical Commentary:

On the daily chart, NPH prices are trading near the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~37.304 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 2.00 while the key resistance level is placed at NZD 2.70

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

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 2.280 per share, down by 0.87% as of 24 August 2023.

2) Mainfreight Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 6.62 billion, Annual Dividend Yield: 3.63%)

Business Description:

Mainfreight Limited (NZX: MFT) is the global logistics provider.

Outlook:

During the past year, the company witnessed extraordinary levels of freight volume, mainly during the first 6 months, a reflection of the difficult as well as over-heated logistics market. The company took opportunities which were presented and have grown a bigger and better business, including the expansion of its network and infrastructure investment towards better and larger facilities. MFT has a disciplined approach to capital investment, with $676 Mn being deployed through until the end of 2025.

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

Technical Overview:

Technical Commentary:

On the daily chart, MFT prices are hovering above the falling trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~29.837 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 61.00 while the key resistance level is placed at NZD 73.00.

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

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 65.790 per share, down by 1.08% as on 24 August 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 August 24, 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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