Is NZ’s Consumer Discretionary Sector Well-Placed Amidst Economic Uncertainty - 2 Stocks to Consider

Company Overview:

Delegat Group Limited (NZX: DGL) is a New Zealand-based wine company. Michael Hill International Limited (NZX: MHJ) is an Australia-based jewellery retailer.

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 stated that monthly food prices witnessed a fall of 0.9% in October 2024 as compared with September 2024. The largest contributor to the fall was vegetables, falling by 7.2% This was partly offset by the rise in fruit prices, up by 0.6%. Over the last 2 years, vegetable prices declined 14.2%, while fruit prices increased by 8.0%. In October, veggies were cheaper as a result of falling prices for tomatoes, cucumber, and capsicum, while apples, oranges, and bananas pushed up fruit prices.

Overall, fruit and vegetable prices declined by 4.1% in October 2024. Notably, the food prices rose by 1.2% during the 12 months ended October 2024, maintaining the same increase as the 12 months to September 2024. As per the release, the higher prices for restaurant meals and ready-to-eat food as well as grocery food drove the annual rise in food prices, up 3.4% and 2.5%, respectively. The price increase in restaurant meals and ready-to-eat food was because of higher prices for lunch/brunch, takeaway coffees, and takeaway meals.

Exhibit 1: Fruit and Vegetable Prices, Index Number, June 2024–October 2024

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

Electronic Card Transactions: October 2024

Stats NZ released data about electronic card transactions (October 2024). In October 2024 month, the spending in the retail industries rose 0.6% (or $39 Mn) and spending in the core retail industries witnessed a rise of 0.6% (or $35 Mn). By the retail spending category, hospitality witnessed a rise of $24 Mn (or 2.0%), durables rose by $1.2 Mn (or 0.1%), apparel (up 0.2%) and motor vehicles (excluding fuel), was down by $1.8 Mn (or 0.9%).

The non-retail (excluding services) category declined by $12 Mn (or 0.5%) from September 2024. This category includes 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, including the 2 non-retail categories (services and other non-retail), rose from September 2024, up $32 Mn (or 0.4%).

Exhibit 2: Percentage Change In Seasonally Adjusted Card Transaction Values By Industry, September 2024–October 2024

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

Labour Market Statistics

In the September 2024 quarter, unemployment rate stood at 4.8% as compared to 4.6% in the June 2024 quarter, while underutilisation rate was 11.6% as compared with 11.8%. Notably, employment rate stood at 67.8%, down from 68.4% in the June 2024 quarter. In the year to the September 2024 quarter, all the salary and wage rates (including overtime) rose 3.8% and average weekly earnings (including overtime) for full-time equivalent employees (FTEs) rose to $1,621.

For men, the unemployment rate was 4.7% as compared with 4.6% in the last quarter (revised). The seasonally adjusted number of unemployed people stood at 148,000.

Key Risks and Challenges:

The consumer discretionary sector is exposed to risks like increased labour shortages, inflationary concerns, supply-chain disruptions, etc. As per Situation and Outlook for Primary Industries (SOPI) (June 2024), NZ dairy farmers have witnessed significant inflationary pressures. The recent challenges experienced by dairy farmers resulted in the cautious approach towards borrowing funds for capital expenses. Some farmers have been restructuring existing loans to interest-only payments.

The Consumer discretionary industry is cyclical in nature. Therefore, fluctuating interest rates might pose a greater risk to the broader sector. 

Exhibit 3. Key Risks in Consumer Discretionary Sector:

Source: Analysis by Kalkine Group

Outlook:

As per Situation and Outlook for Primary Industries (SOPI) (June 2024), after more than 2 decades of impressive growth – averaging ~6% a year – the emerging markets of the Group of 20 (G20) are making up for ~30% of global economic activity and ~25% of global trade. At the same time, these economies have become integrated into global value chains. Several large emerging market economies have been performing strongly, and sometimes they are benefiting from a reconfiguration of global supply chains and rising trade tensions between China and the US.

Notably, these countries continue to have increased influence on the global economy, and they would be playing a larger role in supporting global growth in years to come. As per the recent SOPI, despite productivity at the farm level looking good in NZ overall, the continuous improvements to productivity and sustainability would be required in order to increase the comparative and competitive advantage of food and fibre producers and future proof NZ’s farming systems.

Moving forward, the agritech is expected to be a critical driver of productivity growth and an enabler of long-term sustainability in NZ’s primary industries.

Apart from the sector-specific factors, an analysis on three 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)  Delegat Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 487.4 million, Annual Dividend Yield: 5.76%¹)

Business Description:

Delegat Group Limited (NZX: DGL) is a NZ-based wine company. It invests in wineries and vineyards in the prime grape growing regions of New Zealand and Australia.

Outlook:

DGL stated that Oyster Bay possesses a significant share of the NZ premium wine category throughout its major markets, and it continues to gain market share. Also, it continues to win in the US market, gaining further distribution as well as expanding the Pinot Grigio sales. DGL’s FY 2025 priorities include increasing investment in consumer marketing and shopper marketing to drive increased rate of sale, driving ongoing growth of Pinot Gris/Grigio, Chardonnay and Pinot Noir, among others.

Technical Overview:

DGL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, DGL’s stock prices are reserving fluctuating between the two boundaries of a downward slope channel, anticipating a negative bias. Moreover, the stock recently penetrated its previous trough, providing more support to the previous analysis. Prices are trading between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 4.45, while critical resistance level is located at NZD 5.30.

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 4.82 per share, up by 0.42% as on 14 November 2024.

2) Michael Hill International Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 238.5 Mn, Annual Dividend Yield: 3.03%¹)

Business Description:

Michael Hill International Limited (NZX: MHJ) is an Australia-based jewellery retailer.

Outlook:

As MHJ prepares for the all-important Christmas trading period, the company witnessed positive momentum in the first 14 weeks. For the first 14-week of FY 2025, the group sales were up 4.3% on LY, and its same store sales rose 4.0%, as a result of particularly strong performance from Australian and Canadian segments. MHJ is focused towards inventory management, capital and operational cost control, along with optimisation of store rostering.

Technical Overview:

MHJ Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, MHJ’s stock prices are developing a trading range, characterized by identical highs and higher lows, suggesting that the sideways period in the stock might continue to persist in the near future. Moreover, the momentum oscillator RSI (14-period) is hovering around its midpoint, adding further evidence to the mentioned recommendation. Prices are trading between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 0.570, while critical resistance level is located at NZD 0.700.

Fundamental Valuation

P/E Based Relative Valuation

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.62 per share as on 14^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 14, 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.