Will Broader Industrials Sector Be Able to Tackle Macro-economic Challenges – 2 Stocks to Consider

Company Overview: Air New Zealand Limited (NZX: AIR) is engaged in the transportation of passengers as well as cargo on integrated network of scheduled airline services to, from and within NZ. Napier Port Holdings Limited (NZX: NPH) offers the range of container, bulk cargo and cruise vessel services. 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 22 September 2023 released by The Treasury, economic growth rebounded in the quarter ended June, increasing 0.9% in the quarter as well as showing some resilience to higher interest rates, past falls in house prices and intense cost-of-living pressures. The latest projections from the Organisation of Economic Cooperation and Development (OECD) reflect that global growth is anticipated to be below average as tighter monetary policy restrains growth. Notably, the global inflation would be lower in 2024 but remain above central bank targets in most of the economies.

The broad-based rise in services activity supported the June’s expansion, aided by primary production as well as processing. The construction activity was slightly lower, while retail and wholesale trade also witnessed falls. Coming to the expenditure on GDP, growth was little stronger, increasing 1.3% in the quarter, although this measure is more volatile than the headline (production) measure. Looking through the components, the real household spending supported much of the surprise, increasing 0.4% led by higher spending on durable goods, mainly vehicles. Business investment grew strongly, increasing 2.5% in the quarter to be 8.6% higher as compared to the year ago, mainly reflecting higher construction activity as well as purchases of new aeroplanes.

Overseas Merchandise Trade- August 2023

In the month of August 2023, goods exports witnessed a decline of $296 Mn (or 5.6%) to $5.0 Bn as well as goods imports declined $639 Mn (or 8.1%) to $7.3 Bn as compared to the month of August 2022. Therefore, the monthly trade balance was the deficit of $2.3 Bn.

Coming to the exports, meat and edible offal declined $105 Mn (or 15%) to $621 Mn as well as milk powder, butter, and cheese (the largest export commodity group) declined $39 Mn (or 3.8%) to $984 Mn.

With respect to imports, petroleum and products declined $169 Mn (or 16%) to $879 Mn. The vehicles, parts, and accessories increased $130 Mn (or 12%) to $1.2 Bn. The rise was led by motor vehicles up $203 Mn (or 37%) to $748 Mn.

Exhibit 1: Goods Imports and Exports -  August 2023 Month Versus August 2022 Month

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

China Led the Decline In Imports for August 2023

As mentioned earlier, goods imports declined $639 Mn (or 8.1%) in August 2023 (to $7.3 billion) compared with August 2022. China declined $363 Mn (or 19%) and the largest fall was mechanical machinery and equipment, which was down $71 Mn. Iron and steel and articles declined $49 Mn and the largest rise was automotive diesel, up $47 Mn.

Australia declined $92 Mn (or 9.7%) and the largest fall was other chemical products, which was down $52 Mn. Notably, USA fell $36 Mn (or 5.4%). EU increased $120 Mn (or 12%) and the largest rise was vehicles, parts and accessories, up $89 Mn. Also, mechanical machinery and equipment increased $35 Mn.

Exhibit: 2 Goods Imports- Destinations

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

Index Performance:

The S&P/NZX All Industrials (Sector) Index generated a YTD return of ~-1.00% versus ~-4.17% by the S&P/NZX All Index. Therefore, NZX All Industrials Index outperformed S&P/NZX All Index by ~3.17%.

Exhibit 3: S&P/NZX All Industrials (Sector) vs S&P/NZX50 Index

Key Risks and Challenges:

Overall, the economy seems to have quickly shrugged off the effects of weather-related disruption in the quarter ended March as well as performed more strongly than expected. Nonetheless, economic growth has slowed as GDP was just 0.3% higher than in September 2022. There are still expectations of high interest rates, soft commodity prices and easing government consumption spending which would keep growth below average for some time.

The OECD is anticipating that headline inflation in the G20 economies would be slowing from 6.0% in 2023 to 4.8% in 2024, broadly in line with previous expectations. However, the OECD warned that the renewed spike in energy prices could disrupt progress in reducing the inflation.

Exhibit 4. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

In China, monthly activity data for August reflected the pick-up in consumer spending as well as industrial output. However, the property sector remained the drag. The pick-up was because of broadening range of government policy easing measures in past month. The ECB increased its 3 key policy rates 25bps, which took the main refinancing rate to 4.5%, a level ECB is considering high enough to return inflation to its 2% target.

ECB would now be focusing towards ensuring that policy is sufficiently restrictive for as long as needed to meet 2% target. The ECB’s updated forecasts reflect that inflation is slowing to an average of 3.2% in 2024 as well as 2.1% in 2025.

The Australian labour market seems to be cooling, albeit gradually. August’s labour force survey reflected that employment increased 0.5% in the month of August after last month’s flat outturn. The unemployment rate remained steady at 3.7%, alongside the record high participation rate of 67.0% as well as immigration-fuelled working-age population growth of 2.8%. The signs of labour market cooling were reflected in increased underemployment, at 6.6% as well as underutilisation at 10.2%. The RBA’s August forecasts reflected unemployment increasing to 3.9% by the end of the year as well as to 4.4% by the end of 2024, just below the expected peak of 4.5% in 2025.

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 ) Air New Zealand Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 2.45 billion, Annual Dividend Yield (TTM)¹: 11.41%)

Business Description:

Air New Zealand Limited (NZX: AIR) is engaged in the transportation of passengers as well as cargo on integrated network of scheduled airline services to, from and within NZ.

Outlook:

The airline noted that FY 2023 was particularly unique with robust customer demand, constrained market capacity as well as lower fuel prices in H2. AIR is expecting that 2024 financial year would be more reflective of the future financial performance. The company is focused towards maintaining financial resilience and flexibility and its target liquidity range is $1.2 Bn - $1.5 Bn.

Technical Overview:

Technical Commentary

On the daily chart, AIR prices are sustaining above the falling trendline support level and taking support from the trendline. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~43.2481 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 0.67 while the key resistance level is placed at NZD 0.82.

Fundamental Valuation

Price/EPS Based Relative Valuation

Stock Recommendation

Considering the aforementioned factors, a ‘Buy’ rating is given on the stock at the closing market price of NZD 0.730 per share, down by 0.68% as of 28^th September 2023.

2 ) Napier Port Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 459.9 million, Annual Dividend Yield (TTM)¹: 3.87%)

Business Description:

Napier Port Holdings Limited (NZX: NPH) offers the range of container, bulk cargo and cruise vessel services.

Outlook:

NPH stated that regional infrastructure rebuilding is well underway, supported by the ongoing financial commitment as well as prioritisation by government. The robust forward bookings for the upcoming cruise season reflect that it could be NPH’s busiest on record. Notably, the interest from shipping lines remained high, which is the measure of confidence in the company’s long-term volume growth potential.

Technical Overview:

Technical Commentary

On the daily chart, NPH prices are trading near the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~48.2887 level. Further, the prices are trading above the trend-following indicators 21-period SMA, which may act as a support zone. An important support level for the stock is placed at NZD 2.10 while the key resistance level is placed at NZD 2.60.

Fundamental Valuation

EV/Sales Based Relative Valuation

Stock Recommendation

Considering the aforementioned factors, a ‘Buy’ is given on the stock at the closing market price of NZD 2.300 per share, down by 1.71% as on 28^th September 2023.

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 September 28, 2023. 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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