Will Consumer Discretionary Sector Be Able to Support Broader New Zealand Economy– 2 Stocks to Consider

Company Overview:

Restaurant Brands New Zealand Ltd (NZX: RBD) is the corporate franchisee which specialises in managing multi-site branded food retail chains. Foley Wines Limited (NZX: FWL) is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions. 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 Stats.NZ, electronic card transactions spending in the retail industries witnessed a rise of 0.7% (or $46 Mn) and spending in the core retail industries rose by 0.6% (or $37 Mn) for the August 2023 month (compared with July 2023). The non-retail (excluding services) category rose by $23 Mn (or 1.1%) as compared to July 2023. This category consists of medical and other health care, travel and tour arrangement, postal and courier delivery as well as other non-retail industries. The services category witnessed a rise of $12 Mn (or 3.5%). This category consists of repair and maintenance, and personal care, funeral, and other personal services.

The total value of electronic card spending, which includes the 2 non-retail categories (services and other non-retail), rose as compared to July 2023, up $82 Mn (or 0.9%). The spending in the hospitality industry rose 5.1% (or $59 Mn) between August 2022 and August 2023. In actual terms, cardholders made 164 Mn transactions throughout all the industries in August 2023, with average value of $55 per transaction. The total amount spent through using electronic cards amounted to $9.0 Bn.

According to Stats NZ, in the June 2023 quarter as compared to the March 2023 quarter, GDP witnessed a rise of 0.9% as well as expenditure on GDP increased 1.3%. Notably, goods producing industries witnessed a rise of 0.7% and GDP per capita rose 0.2%.

Category-wise Spending (Electronic Card Transactions)

Talking about the category, electronic card transactions spending in fuel witnessed a rise of $69 Mn (or 13.5%) as well as in apparel it was up by $8.4 Mn (or 2.5%). Notably, the spending in motor vehicles (excluding fuel) category was up $4.5 Mn (or 2.2%) and in consumables it was down $3.1 Mn (or 0.1%).

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

New Zealand Economy Rose in Quarter Ended June 2023

As per Stats.NZ, economic activity witnessed a rise of 0.9% in the quarter ended June 2023 as measured by the gross domestic product. This follows the flat (0.0%) March 2023 quarter. GDP witnessed a rise of 3.2% over the year ended June 2023 as compared to the year ended June 2022. The expenditure on GDP witnessed a rise of 1.3% in the quarter ended June 2023, after the 0.2% decline in the quarte ended March 2023. Expenditure on GDP increased 3.3% over the year ended June 2023 as compared to the year ended June 2022.

Notably, the business services rose by 2.1% as the result of computer system design and related services as well as employment and other administrative services. Public administration, safety, and defence rose by 2.8% driven by public order, safety, and regulatory services.

Exhibit 2: Gross Domestic Product, Quarterly and Annual Growth Rates, Chain-Volume, March 2017–June 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

Key Risks and Challenges:

The consumer discretionary market is exposed to higher competition from the domestic as well as international tech- e-commerce companies, launch of brands and stores. The companies which are operating in the broader consumer discretionary sector might be impacted because of disruptions in the supply chain, higher labour shortages, global macro-economic challenges, risks related to COVID-19 pandemic, etc. The companies might witness disruptions across their operations.

Broader inflationary pressures could impact the profit margins of such consumer discretionary companies. Another risk which broader consumer discretionary sector faces is decline in the disposable income of the consumers.

Exhibit 3. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

The wine export revenue is influenced by the massive harvest as well as resilient pricing. For the upcoming season, the export revenue is expected to decline 2% to $2.45 Bn mainly because of lower production as well as export volumes. Some production was lost as a result of Cyclone Gabrielle and yields in Marlborough fell back towards long-run averages.

The prices are being helped by robust consumer demand as well as the inflationary environment in some of the critical destination markets. There was also the marginal shift away from lower-priced bulk exports and towards bottling in NZ prior to export.

The US is the leading export market with robust growth YoY. This market is now accounting for ~36% of wine exports as well as $868 Mn in the year ended March 2023, and the US market alone could exceed $1 Bn in the time span of next few years. Also, the export revenue from the other top markets – the UK, Australia, the EU and Canada – has witnessed a rise. This was supported by the large 2022 vintage as well as reasonable consumer demand amidst tough economic conditions.

Looking ahead to the year ended 30^th June 2024, food and fibre sector export revenue is expected to remain flat at $56.2 Bn, with strengthening export revenue in dairy, forestry, horticulture as well as seafood sectors offsetting weakening export revenue in meat and wool and processed food and other products sectors.

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: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 540.2 million, Annual Dividend Yield (TTM)¹: 5.13%)

Business Description:

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

Outlook:

Despite the near-term global inflationary challenges, the Board as well as Management are confident about the robust measures in place in order to deliver against guidance in H2 and rebuild performance to help the long-term roadmap to growth. The focus of the company is towards robust sales volumes, customer loyalty as well as maintenance of competitive market, while carefully managing cost pressures and margin performance.

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Technical Commentary:

On the daily chart, RBD 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 ~42.1602 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 3.85 while the key resistance level is placed at NZD 5.00.

Stock Recommendation

The stock has been valued using P/E multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to P/E Multiple (NTM) (Peer Average) considering the decent outlook.

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 4.33 per share, up by 1.41% as on 5 October 2023.  

2) Foley Wines Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 80.19 million, Annual Dividend Yield: 4.56%)

Business Description:

Foley Wines Limited (NZX: FWL) is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions.

Outlook:

FWL completed the major capital expenditure programmes which would lead to the ability to process more wine with the Grove Mill winery capacity increased to 4,000 tonnes, significant deployment towards vineyard productivity and capacity and the completion of The Runholder in Martinborough. The company is in good shape and continues its robust growth and investment for the future.

Technical Overview:

Technical Commentary:

On the daily chart, FWL prices are trading near the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~44.3450 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 1.06 while the key resistance level is placed at NZD 1.45.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.22 per share as on 4 October 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 not a reliable indicator of future performance.

Note 2: 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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