Is NZ’s Industrials Sector Well-placed for Long-term Growth – 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. Metro Performance Glass Limited (NZX: MPG) produces the range of customised glass products which are predominantly utilised in residential and non-residential construction applications like windows, doors, internal partitions, etc.

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 the ‘Fortnightly Economic Update’ dated 2^nd August 2024 released by The Treasury, the labour market has likely eased through the quarter ended June with weak economic activity. As per the release, the global growth remained broadly steady over Q2 FY 2024, with stronger growth in the US offsetting weaker growth in China, while euro area activity continued to recover from the period of stagnation. However, there are signs that global demand is waning rapidly.

The easing of labour market in the June quarter was because of restrictive interest rates required to dampen inflation weaken economic activity. The business surveys reflect that finding labour as well as utilising capacity are becoming easier, mainly in manufacturing and construction. At the same time as labour demand has fallen, the migration inflows have led to the rise in labour supply.

The residential housing sector has showed further weakness. As per the release, ~33,600 residential consents were issued for the year ended June, 33.4% lower than the peak for the year ended May 2022. The consumers are downbeat regarding the current situation and they are cautious. Notably, Reserve Bank credit card data for June witnessed a decline in spending of 0.7% in the month, and the July ANZ-Roy Morgan Consumer Confidence survey saw perceptions remain deeply negative.

Overseas merchandise trade: June 2024

As per Stats NZ, in June 2024, goods exports declined by $7.4 Mn (or 0.1%) to $6.2 billion and goods imports fell by $821 Mn (or 13%) to $5.5 billion as compared to June 2023. Therefore, the monthly trade balance was a surplus of $699 Mn. Coming to the exports, milk powder, butter, and cheese declined $172 Mn (or 10%) to $1.5 billion. However, other dairy-based products, which includes infant formula and casein and caseinates, rose in this period.

Notably, the infant formula is included in preparations of milk, cereals, flour, and starch, that rose $94 Mn (or 57%) to $258 Mn. Offsetting the decline in exports was a rise in fruit, which rose $95 Mn (or 18%) to $610 Mn. This was led by kiwifruit, that increased $73 Mn (or 21%) to $423 Mn.

Exhibit 1: Merchandise Trade Values ($ Bn), exports and imports, June months, 2021–2024

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

Building Consents Issued: June 2024

In June 2024, the seasonally adjusted number of new dwellings consented witnessed a fall of 14%, after falling 1.9% in May 2024. For the year ended June 2024, the actual number of new dwellings consented stood at 33,627, reflecting a fall of 24% from the year ended June 2023. The annual value of non- residential building work consented amounted to $9.1 Bn, down 9.6% from the year ended June 2023.

In June 2024, there were 2,178 new dwellings consented, comprising 1,122 standalone houses, 896 townhouses, flats, and units, 85 retirement village units, and 75 apartments. Notably, the seasonally adjusted number of new stand-alone houses consented declined 4.6%, after falling 3.9% in May 2024.

In the year to June 2024, non-residential building consents totalled $9.1 Bn, down by 9.6% from the year ended June 2023.

Exhibit: 2 New Dwellings Consented, Monthly, January 2024–June 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

Key Risks and Challenges:

The global growth remained below trend throughout advanced economies. The growth in China was softer than anticipated, because of the depressed property market as well as weak consumer demand. While the US growth has been firm, there are indicators which are showing emerging weakness. However, the recent volatility in global asset markets implies nervousness about US economic prospects, geopolitical risks, and the outlook for international trade policy.

RBNZ stated that, alongside restrictive monetary policy, an earlier or larger impact of tighter fiscal policy might be limiting the domestic demand. 

Exhibit 3. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

The global growth was broadly steady over Q2 FY 2024, with stronger growth in the US offsetting the weaker growth in China, while euro area activity recovered from the period of stagnation. Notably, a similar pace of global expansion is anticipated  over H2 of the year, but weaker global manufacturing indicators and falling commodity prices are raising tensions related to the slowdown in demand.

The policy support for growth in China picked up after the slowdown in domestic demand evident during the quarter ended June. Alongside monetary policy rate cuts, the authorities moved to deliver support for equipment upgrades for corporates as well as consumers. Notably, the policy measures would be helping the government achieve its 5% growth target for 2024. However, commentators argue that additional support would be needed to ensure success.

RBNZ stated that economic growth is below trend as well as inflation is declining throughout advanced economies.  Some of the central banks have started to reduce policy interest rates. Notably, the imported inflation into NZ has declined to be more consistent with the pre-pandemic levels. 

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) Accordant Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 24.08 million, Annual Dividend Yield (TTM)¹: 5.87%)

Business Description:

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

Outlook:

Madison is seeking growth through the strategic focus on mid-senior specialist, management as well as leadership roles at levels below the tiers currently serviced by Hobson Leavy and JacksonStone & Partners. The decision to impair AWF’s goodwill by $4.5 Mn reflects the prudent approach to the uncertainty of NZ’s rate of growth as well as its impact on sector over medium term.

While there is currently restraint in hiring, NZ would be resuming its growth and the company’s breadth of revenue streams places it to deliver upon pent up demand as well as long-term talent needs.

Technical Overview:

AGL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

While experiencing a downtrend, AGL’s stock prices broke above a downward slope trendline, indicating a positive bias in the near term. Currently, the stock is approaching a significant resistance at previous peak, anticipating for a minor correction. Moreover, the momentum oscillator RSI (14-period) is forming a top divergence in relation to prices, providing further support to the previous observation. Prices are trading above the trend-following indicators 21-period and the 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s previous high may serve as a support level. A significant support level for the stock is positioned at NZD 0.600, while critical resistance level is located at NZD 0.800.

Stock Recommendation

AGL was last covered on August 1, 2024. Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.710 per share as on 15^th August 2024.

2) Metro Performance Glass Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 16.4 million)

Business Description:

Metro Performance Glass Limited (NZX: MPG) produces the range of customised glass products which are predominantly utilised in residential and non-residential construction applications.

Outlook:

The board remains committed to building new strategy, empowering the people as well as actively managing the debt and capital requirements. The new board undertook a thorough review of the operations and has developed a plan to meaningfully transform business and reset the performance, particularly in NZ. AGG has continued to steadily improve performance in Australia, notwithstanding the market headwinds.

Technical Overview:

MPG Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, MPG’s stock prices are experiencing a downtrend characterized by lower lows and lower highs, indicating a negative bias. Recently, though undergoing a minor rally, the stock has reversed after approaching the short-term downward trendline established since August 2023, indicating that the downtrend might resume soon. Moreover, the momentum oscillator RSI (14-period) is heading southward, adding more evidence to the mentioned observation. Prices are trading above the trend-following indicator 50-period SMA, which might function as dynamic support levels for the stock; in contrast, the stock’s previous peak may act as a resistance level. A significant support level for the stock is placed at NZD 0.080, while critical resistance level is located at NZD 0.103.

Stock Recommendation

MPG was last covered on July 29, 2024. Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.089 per share, down by 4.30% as on 15^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 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 August 15, 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.