Is NZ’s Consumer Staples Sector Well-placed Amidst Falling Inflation - 2 Stocks to Consider

Company Overview:

Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough. 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

As per Situation and Outlook for Primary Industries (June 2024), the food and fibre sector performed significantly well over the previous few years. As per the release by Stats NZ, food prices in New Zealand rose by 0.6% in the 12 months ended July 2024, following the 0.3% decline in the 12 months to June 2024. The rise in food prices was partly because of increased prices for restaurant meals and ready-to-eat food, that rose 3.7% in the 12 months ended July 2024.

Despite the annual rise in overall food prices, the prices declined for fruit and vegetables (down 8.5%), and meat, poultry, and fish (1.1%). Notably, the cheaper prices for kumara, lettuce, and potatoes drove the decline in fruit and vegetable prices. The petrol prices declined 0.5%, while diesel prices witnessed a fall of 0.2% in July 2024.

The Government announced a further $26 Mn investment in AgriZero^NZ, contributing $13 Mn to match the industry’s investment and taking the total investment in this JV to $191 Mn over its first 4 years.

Exhibit 1: Food Prices, Annual Percentage Change, Jan 2024–July 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

Arable Export Revenue

The arable export revenue is anticipated to rise 12% to $310 Mn for the year ended 30 June 2024 with increased returns in all export categories led by vegetable seeds. Notably, the seasonable conditions were mostly favourable through 2023/24, ending with the good harvest. Total tonnage for cereal crops rose 3% on last year because of 4% rise in overall yields from the similar number of hectares as last year. However, the domestic grain prices have declined over the last year, and demand for grain has been subdued.

The export revenue for the first 9 months of the year ended 30 June 2024 was 36% ahead of the same period in 2022/23. Notably, higher returns were witnessed across all the export categories with clover seed rising 69%, ryegrass seed up 41%, vegetable seed increasing 28%, and other grains and seeds up by 32%.

Exhibit 2: Arable Export Revenue (NZ$ Mn) (Year to 31 March 2024)

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

Retail Activity Declines by 1.2%

Recently, Stats NZ reported that the total volume of retail sales in NZ declined 1.2% in the June 2024 quarter, after adjusting for the price inflation and seasonal effects. As per the release, 11 of the 15 retail industries witnessed lower sales volumes in the June 2024 quarter as compared to the March 2024 quarter. The largest contributors to the decline in retail activity were electrical and electronic goods retailing (down by 6%), motor vehicle and parts retailing (down 2.7%), food and beverage services (down by 1.9%) and clothing, footwear, and personal accessories (down by 4.1%).

Key Risks and Challenges:

The broader consumer staples sector is exposed to risks such as labour shortages, global economic slowdown, etc. Also, geopolitical tensions might also result in supply chain disruptions. 

The slower global growth, especially in NZ’s key export market, China, as well as correction in commodity prices could impact the broader food and fibre sector. Also, higher input costs might also reduce the 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), for year to 30 June 2025, food and fibre export revenue is forecast to rebound 6% to $58.1 Bn. The robust gains in dairy and horticulture export revenue are expected to support this increase. Forestry is expected to witness recovery from supply side disruptions as well as meat and wool export revenue might increase as prices recover. Also, most of the other sectors might increase.

The focus would be on strengthening research and development of new tools and technologies which would assist farmers as well as growers in lowering on-farm emissions. Apart from driving the development of tools, investments are being made to ensure that the high-quality, sustainably produced food and fibre products could command the premium from global markets.

In addition, the honey sector has been showing some signs of recovery. Its export revenue is anticipated to grow by 11% to $420 Mn in the year ended 30 June 2024 driven by increased export prices and volumes of monofloral mānuka honey.

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 ) Marlborough Wine Estates Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 23.7 million)

Business Description:

Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough.

Outlook:

The MWE team is focused towards building a robust branded wine business, expanding its international distribution network as well as enhancing the profitability in the coming years. The OTU brand is being well received in domestic and global markets. The reduced yield in the 2024 vintage offers additional growth opportunities in key export markets for NZ wine, as NZ maintains robust presence and momentum with sales to consumers in most critical international markets increasing YoY.

Technical Overview:

MWE Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, MWE’s stock prices are undergoing a downtrend characterized by lower lows and lower highs, indicating a negative bias. Moreover, the momentum oscillator RSI (14-period) is heading southward, providing further support to the previous observation. Prices are trading below the trend-following indicators 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s next round level may act as a support. A significant support level for the stock is positioned at NZD 0.070, while critical resistance level is located at NZD 0.097

Stock Recommendation

MWE was last covered on August 12, 2024. Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.08 per share as on 29^th August 2024

2 ) PGG Wrightson Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 152.4 Mn, Annual Dividend Yield¹: 6.88%)

Business Description:

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

Outlook:

PGW recorded operating cash flows during the year of $57.7 Mn, which was $32.2 Mn higher than the prior year. The critical drivers of the increased operating cashflows were a reduced GO-STOCK balance from that recorded in June 2023 together with lower income tax payments. The renewed and extended the syndicated bank facilities during the year through to 2026. These facilities offer extended term and working capital limits as well as allow for growth in the GO-STOCK book.

Technical Overview:

Technical Commentary

On the daily chart, PGW’s stock prices are forming a trading range, characterized by lower 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 trading near the midpoint, adding more evidence to the mentioned recommendation. Prices are fluctuating 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 1.81, while critical resistance level is located at NZD 2.30.

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 2.020 per share, up by 1.00% as on 29^th August 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 August 29, 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.