Is the Consumer Spending Picking Up Amid the Expected Rate Cuts – 2 Stocks to Consider

Company Overview:

Restaurant Brands New Zealand Ltd (NZX: RBD) is a corporate franchisee that specializes in managing multi-site branded food retail chains. Foley Wines Limited (NZX: FWL) is an integrated wine company, that produces, markets, and sells wines in New Zealand.

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

1. Sector Landscape and Outlook

As per Stats.NZ, electronic card spending in the retail industries witnessed a decline of 2.0% (or $132 Mn) in the month of December 2023 as compared to November 2023. Notably, the spending in the core retail industries decreased by 2% ($119 Mn). For the retail spending category, durables were down $ 33 Mn (2%), fuel was down $19 Mn (3.4%), and apparel was down $10 Mn (2.9%), in the month of December 2023. The non-retail (excluding services) category rose by $24 Mn (or 1.1%) as compared to November 2023, this category consists of medical and other health care, travel and tour arrangements, postal and courier delivery, and other non-retail industries. The services category was down by $6.3 Mn (or 1.8%). This category consists of repair and maintenance, personal care, funeral, and other personal services.

The total value of electronic card spending, including the 2 non-retail categories (services and other non-retail) decreased from November 2023, down $53 Mn (0.6%). In actual terms, the cardholders made 182 Mn transactions throughout all the industries in December 2023, with an average value of $58 per transaction. Notably, the total amount spent using electronic cards amounted to $10.6 Bn.

CPI rose in the December 2023 Quarter

As per Stats.NZ, the total CPI rose 0.7% in the December quarter after adjusting for the seasonal effects. The Housing and household utilities rose 0.8%, where rent went up by 1.1%, construction by 0.7%, and household energy up 1.9%.

Food fell by 1.2%, where fruits and vegetables fell by 6.4% and miscellaneous goods and services rose by 1.5%, under which the insurance went up by 3.3%.

Exhibit 1: Percentage change in seasonally adjusted card transaction values by industry, November 2023– December 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           

Positive Momentum in Retail Sales in the September 2023 Quarter

As per Stats.NZ, total volume of seasonally adjusted retail sales amounted to $25 Bn. Over the same time period, the total value of seasonally adjusted retail sales stood at $31 Bn, up 1.5% (or $449 Mn) as well as 14 of the 16 regions witnessed higher seasonally adjusted sales values. Also, the total value of actual retail sales was $29 billion, up 1.1% ($320 million) compared with the September 2022 quarter.

The total actual value of stock as of 30 September 2023 amounted to $9.6 Bn, reflecting a rise of 1.4% (or $130 Mn) as compared with 30 September 2022.

Exhibit 2: Trend in Total Retail Trade Sales ($bn)

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 consumer discretionary sector has faced investor skepticism during the year as it is most exposed to economic fluctuations and maintaining sustainability of earnings remains a challenge. The sector is exposed to demand risks, supply chain issues, labor shortages, and rising input costs.

Inflationary pressures compress the sector's margin, rising interest rates and cutbacks in consumer spending after recessionary periods tend to negatively affect companies.

Exhibit 3. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the Ministry for Primary Industries, the Meat and wool export revenue is forecast to decline 5 percent to $11.6 billion in the year to 30 June 2024 due to subdued discretionary spending resulting from the continued high cost of living and higher global sheep meat export volumes putting downward pressure on prices. Wider economic challenges in China, which are expected to continue affecting consumer and business confidence and ensuing demand over the next two years, are also contributing to this decline.

Wine Export volumes have slowed more than expected over the past six months. While it appears that overseas consumer demand is holding up against lower economic growth, wholesalers are slowing purchases.

To combat inflation, central banks across the world have increased key interest rates. This has made it more expensive to borrow money and resulted in a decline in consumer spending and business investment. As a result of the rise in central bank policy rates, inflation has been easing. IMF expects global headline inflation to fall from 8.7 percent in 2022 to 6.8 percent in 2023 and 5.2 percent in 2024.

In 2024, sector-level performance will likely continue to be driven by macroeconomic crosscurrents. Lower inflation and a pause or end to the Fed's rate-hike cycle could benefit the sector, as consumers might be more likely to purchase big-ticket items such as automobiles or houses. A better scenario for the sector stands where consumer confidence and the labor markets remain strong.

Apart from the sector-specific factors, an analysis on two 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) Restaurant Brands New Zealand Ltd (Recommendation: Hold, Potential Upside: Mid Double-Digit) (M-Cap: NZD 501.83 million, Annual Dividend Yield (TTM)¹: 4.1%)

Business Description:

Restaurant Brands New Zealand Ltd (NZX: RBD) is a corporate franchisee which specializes in managing multi-site branded food retail chains.

Outlook:

The Group continues to monitor the trading and economic environment closely as volatility continues across its key markets. The Group continues to predict a full-year NPAT of $12 to $16 million. The business has continued to implement a strategic programme of price increases across all markets to relieve margin pressures while balancing brand health and the financial pressures faced by our customers.

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

Technical Overview:

Daily Price Chart

Data Source: REFINITIV

Technical Commentary:

On the daily chart, RBD’s stock prices are forming a symmetrical triangle pattern during a downtrend, indicating that the sideways period in the stock might continue to persist in the near future. Moreover, the momentum oscillator RSI (14-period) is oscillating between the levels of 40 and 60, adding further evidence for the mentioned recommendation. Prices are fluctuating 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 3.50, while critical resistance level is located at NZD 5.40.

Stock Recommendation

Considering the facts above, a ‘Hold’ recommendation on the stock has been provided at the closing market price of 4.06 per share, up by 1.50% as on 25 January 2024.

2) Foley Wines Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 77.34 million)

Business Description:

Foley Wines Limited (NZX: FWL) is an integrated wine company, that produces, markets, and sells wines in New Zealand.

Outlook:

The Group is facing cost increases which may become difficult to pass on to the customers. The UK has introduced new taxes on wine which increases the price to the end consumer which will soften demand. Notwithstanding these headwinds, the Company continues to build high-quality wines and seek out new quality markets for the portfolio. The Company also completed major capital expenditure programmes that will lead to the ability to process more wine with the Grove Mill winery capacity increased to 4,000 tonnes.

Technical Overview:

Daily Price Chart

Data Source: REFINITIV

Technical Commentary:

While experiencing a downtrend, FWL’s stock prices are developing a descending wedge pattern on the daily chart, suggesting that the downside momentum in the stock has been halting. In addition, the momentum oscillator RSI (14-period) is hovering near the oversold region, providing further support for the previous observation. Prices are trading below both the trend-following indicators 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the pattern’s lower boundary may act as a dynamic support. An important support level for the stock is situated at NZD 1.04, while crucial resistance level is placed at NZD 1.25.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.13 per share, down by 3.42% on 25 January 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 January 25, 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.

Disclaimer

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