Is NZ’s Industrials Sector on a Path to Recovery Amidst Economic Uncertainty – 2 Stocks to Consider

Company Overview: Accordant Group Limited (NZX: AGL) is a New Zealand-based recruitment company engaged in the supply of temporary staff, contractor resources, and recruitment of permanent staff. Tourism Holdings Limited (NZX: THL) is NZ’s premier tourism company.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

Sector Landscape and Outlook

As per the ‘Fortnightly Economic Update’ dated 29^th November 2024 released by The Treasury, global markets have been responding to news around the US President-elect Trump’s policy plans and cabinet choices. The easing of monetary policy is providing businesses a sense of optimism. As per November ANZ Business Outlook, business confidence is elevated at +65 and expected price and cost increases ease.

The weak activity has been dampening labour demand. Notably, employment declined for 7^th month in a row as per October Monthly Employment Indicators (MEI). Filled jobs fell 0.1% in the month and 1.5% on a year ago. The labour market would likely continue easing over the coming months off the back of weak activity and businesses showing weakness in actual employment and wage growth. The international trade for October was broadly similar to the previous month. The monthly trade deficit remained ~$1.5 Bn as goods exports and imports increased. Most of the lift in exports was because of dairy and fruit.

International Trade: September 2024 Quarter

As per Stats NZ, total exports of goods and services for the September 2024 quarter amounted to $22.2 Bn, up from $21.5 Bn in the September 2023 quarter. Also, total imports of goods and services for the September 2024 quarter stood at $29.1 Bn, the same as the September 2023 quarter. The total two-way trade for the September 2024 quarter amounted to $51.3 Bn.

Total services exports declined $43 Mn to $6.5 Bn in the September 2024 quarter as compared with the September 2023 quarter. During the September 2024 quarter, travel services rose $172 Mn to $2.8 Bn and other business services increased $120 Mn to $885 Mn as compared to the September 2023 quarter.

Exhibit 1: Goods and Services (Exports and Imports)

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

Building Activity Declined 3.2%

The seasonally adjusted volume of building work in NZ was $7.8 Bn in the September 2024 quarter, down by 3.2% as compared with the June 2024 quarter. The residential building work declined 3.5% to $4.8 Bn and non-residential building work fell 2.8% to $2.9 Bn over the same period. As per the release, quarterly residential building activity reached its lowest level in 4 years, in seasonally adjusted terms. The value of building work put in place amounted to $35 Bn in the year ended September 2024, down by 2.6% from the year ended September 2023. 

In the past 12 months, the capital goods price index recorded a 3.2% rise in non-residential construction prices as well as a 2.9% increase in residential construction prices.

Exhibit 2: Seasonally Adjusted Volume of Building Work Put in Place ($ Bn), September 2023–2024 (Quarters)

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:

As per the recent FEU released by The Treasury, trade uncertainty continues to impact business decisions, in both the US and the rest of the world. Over the short-term, anecdotes point to higher US imports as businesses bring forward import orders, consistent with the experience from the 2018-19 trade war. In Europe, uncertainty pertaining to trade, alongside an escalation of risks in Russia’s war with Ukraine and political uncertainty in France, were witnessed in the weaker business sentiment, which might begin to weigh on business investment from early next year.

Exhibit 3: Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

Overall, the US equites made robust post-election gains, and the dollar index has strengthened, demonstrating that investors expect that the new administration’s policies would be positive for corporate earnings, but likely at the expense of other nations, including Europe and China. As per RBNZ, economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. As inflationary pressures have eased, the MPC has reduced the OCR. Price- and wage-setting behaviour are assumed to adapt to a low-inflation environment over time, which would be further easing the inflationary pressure.

RBNZ also stated that lower interest rates are assumed to increase demand and output. This would help close the output gap and a recovery in labour market conditions over the medium term. Notably, annual CPI inflation is expected to remain within the target band. Economic growth is expected to resume from the December 2024 quarter and increase over 2025, with lower interest rates supporting demand. Key mortgage as well as term deposit rates have declined since the middle of the year, demonstrating actual and expected future OCR cuts.

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) Tourism Holdings Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 437.9 million, Annual Dividend Yield (TTM)¹: 6.63%)

Business Description:

Tourism Holdings Limited (NZX: THL) is NZ’s premier tourism company.

Outlook:

THL announced several changes in the business as part of the targeted cost reduction plan announced at the AGM in October 2024. Aligning with the reduction in demand over 2024, the closure of the Melbourne sub-assembly plant and adjustments in production planning for calendar 2025, THL reduced the number of employees in manufacturing in Australia by ~100 roles.

The company is focused towards growth plans as it targets the $12 Mn NPAT cost saving in FY 2027.

Technical Overview:

THL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

Fundamental Valuation

P/E Based Valuation

Stock Recommendation

Considering the aforementioned factors, a ‘Hold’ rating is given on the stock at the closing market price of NZD 1.99 per share, up by 1.02% as on 19 December 2024.

2) Accordant Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 15.9 million)

Business Description:

Accordant Group Limited (NZX: AGL) is a New Zealand-based recruitment company engaged in the supply of temporary staff, contractor resources, and recruitment of permanent staff.

Outlook:

In common with most businesses, AGL is expecting recovery in business and consumer confidence as monetary policy easing delivers further interest rate reductions. The company’s Board has resolved not to pay a dividend, with a focus towards return to profitability, modest investment as well as reduction in debt where possible. Absolute IT is now appropriately sized for the current reduced demand for tech talent, whilst retaining enough capacity to deliver on pent up demand anticipated to materialise next financial year.

Technical Overview:

AGL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, AGL’s stock prices are forming a trading range characterized by lower highs and higher lows, suggesting that the sideways period in the stock might remain intact in the near term. Moreover, the momentum oscillator RSI (14-period) is hovering around the midpoint, providing further support to the previous observation. 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 0.430, while critical resistance level is located at NZD 0.52.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.470 per share as on 18^th December 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 December 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.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from REFINITIV or Trading View. Typically, REFINITIV or Trading View may reflect stock prices with a delay which could be a lag of 25-30 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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.