Will Increased Migration Support Broader NZ’s Industrials Sector – 2 Stocks to Consider

Company Overview: Fletcher Building Limited (NZX: FBU) is a leading provider of building products and solutions, operating some 25 businesses through New Zealand, Australia and the South Pacific. Accordant Group Limited (NZX: AGL) is a New Zealand-based recruitment company which is engaged in the supply of temporary staff, contractor resources as well as recruitment of permanent staff.

Kalkine’s Sector Report covers the Investment Highlights, 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 February 2024 released by The Treasury, NZ inflation has continued to follow global trends with significant decline led by tradables inflation. However, the domestic-related pricing pressures are still present. Monetary policy has been having dampening effect on the aggregate demand and lower inflation outturn along with elevated expectations is unlikely to convince RBNZ to alter the policy stance.

In the latest global update, the IMF expects continues declines in inflation as well as slow growth as increasing the prospects of the soft landing. As per the FEU,  IMF’s recent forecasts reflected global growth of 3.1% in 2024, similar to the levels of 2023, and 3.2% in 2025. The inflation forecasts were revised down, mainly for advanced economies, where inflation is now anticipated to average 2.6% in 2024.

In recent months, there are signs that tourism has been supporting the retail sector as well as overall economic activity. Last month showed that card spending in hospitality in December touched 21-year peak of $1.4 Bn, up 3.3% as compared to the December 2022 despite waning consumer demand in some of the other sectors.

Building Consents Issued: December 2023

As per Stats NZ, in December 2023, the seasonally adjusted number of new dwellings consented witnessed a rise of 3.7%, after declining 11% in November 2023. For the year ended December 2023, the actual number of new dwellings consented stood at 37,239, reflecting a fall of 25% from the year ended December 2022. The annual value of non-residential building work consented was $9.4 Bn, down by 1.0% from the year ended December 2022.

In December 2023, there were 2,487 new dwellings consented, which were comprised of 1,128 townhouses, flats, and units, 1,095 stand-alone houses, 161 apartments as well as 103 retirement village units.

For the year ended December 2023, the non-residential building consents stood at $9.4 Bn, down by 1.0% from the year ended December 2022. This series could be influenced by the price changes – non-residential construction prices (as measured by the capital goods price index) rose by 6.5% in the year ended September 2023.

Exhibit 1: New Dwellings Consented, Monthly, January 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

Overseas Merchandise Trade: December 2023

Stats NZ has released overseas merchandise trade for December 2023. In December 2023, goods exports witnessed a fall of $568 Mn (or 8.7%) to $5.9 Bn and goods imports declined $896 Mn (or 13%) to $6.3 Bn. The monthly trade balance was the deficit of $323 Mn.

Talking about the exports, milk powder, butter, and cheese declined $520 Mn (or 23%) to $1.79 Bn, with other dairy-based products including infant formula and casein falling. With regards to China, the total exports declined $295 Mn (or 16%). The largest increases were logs, wood, and wood articles, which were up by $16 Mn and fish, crustaceans, and molluscs rose by $15 Mn. The largest falls were witnessed in milk powder, butter, and cheese, which were down by $209 Mn and live animals, falling $37 Mn.

Exhibit 2: Merchandise Trade Values ($ Bn), Exports And Imports, December Months, 2018–2023

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 geopolitical tensions as well as disruptions to global supply chains are some of the key risks to further progress in lowering inflation. As per the recent FEU, the world trade growth is expected to be ~3.5% in 2023 and 2024, below the historical average of 4.9%, due to rising trade barriers which would be weighing on growth.

The geopolitical tensions, primarily in the Middle East, could lead to renewed commodity as well as supply disruptions. In the medium-term, the IMF is expecting increased public debt and borrowing costs as the biggest challenges in front of many economies.

The elections could be the major economic influence in 2024, as the US, the UK and European Union have scheduled elections this year. In Asia, Indonesia, India as well as South Korea would be holding the general elections. In the US, the former President Trump’s victory in New Hampshire primary increased prospects of the rematch with President Biden. Notably, the analysts have started to assess prospects for general election. However, it is early for any sort of major market impacts.

Exhibit 3. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the report by The Treasury, the annual merchandise trade deficit narrowed for 7^th consecutive month in December, down to $13.6 Bn. Even though this was slightly less than November ($13.9 billion), the trend is expected to continue after $17.1 Bn peak touched in May 2023. The improvement was mainly because of the 4.5% decline in seasonally adjusted import values, as consumer goods imports declined to their lowest level in 6 months.

Over the recent months, there have been signs that tourism is supporting retail sector and overall economic activity. Last month revealed that card spending in hospitality in December reached 21-year peak of $1.4 Bn, up by 3.3% as compared to December 2022. This was witnessed despite waning consumer demand in several other sectors. Further, QSBO credited tourism as well as net migration in large part for propping up the retail sector in December quarter results. With tensions regarding the hard landing easing, consumer confidence appears to be improving. The Conference Board's index of consumer confidence increased to 114.8 in January because of increased optimism regarding expectations and current situation.

The improved confidence is also witnessed in housing market, as house prices continued to climb in November as per FHFA and Case-Shiller indexes, rising 6.6% and 5.4% from the year ago, respectively.

The IMF mentioned that risks regarding growth as well as inflation diminished and become more balanced. On the positive side, the inflation is expected to slow more quickly than expected.

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) Fletcher Building Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 2.62 Billion, Annual Dividend Yield (TTM)¹: 14.1%)

Business Description:

Fletcher Building Limited (NZX: FBU) is a leading provider of building products and solutions, operating some 25 businesses through New Zealand, Australia and the South Pacific.

Outlook:

For the remainder of the year, FBU is expecting FY 2024 Group EBIT before significant items of between $540 Mn - $640 Mn, with the mid-point assuming the continuation of current market conditions for the balance of FY 2024.

In the more challenging trading environment, New Zealand materials and distribution divisions performed solidly. The gross margins remained robust at 29.3% (H1 FY 2023: 30.3%), with the YoY reduction mainly because of the shift in revenue mix towards lower-margin commercial as well as infrastructure sectors.

Fundamental Valuation

Technical Overview:

FBU Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, FBU’s stock prices broke below a significant support established since March 2023 coupled with a break-away gap, indicating a negative bias. In addition, the momentum oscillator RSI (14-period) is heading southward, providing further support for the previous observation. Prices are trading below the gap’s zone, which might function as a resistance level for the stock; in contrast, the low of 2020 may serve as a support. A significant support level for the stock is situated at NZD 3.00, while critical resistance level is placed at NZD 3.70.

Stock Recommendation

Considering the aforementioned factors, a ‘Buy’ rating is given on the stock at the closing market price of NZD 3.35 per share, down by 7.20% as on 15^th February 2024.

2) Accordant Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 32.1 million, Annual Dividend Yield (TTM)¹: 8.77%)

Business Description:

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

Outlook:

AGL has stated that proposed changes to immigration settings focused towards addressing the shortage of tech talent is encouraging. The executive search firm Hobson Leavy has been tracking to expectations. The dividend was at the more cautious end of the Board’s policy range as well as reflected the prudent approach amidst economic fluctuations and higher interest rate environment.

In H1 FY 2024, the blue-collar recruiter AWF increased revenue by 3% and witnessed close to 200% rise in the number of employees trained and deployed in civil and infrastructure works.

Technical Overview:

Technical Commentary

While experiencing a downtrend, AGL’s stock prices are undergoing a downtrend characterized by lower peaks and lower troughs, indicating a negative bias. Moreover, the momentum oscillator RSI (14-period) is heading southward from the midpoint, adding further evidence for the mentioned recommendation. 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 stock’s most recent low may act as a support. An important support level for the stock is placed at NZD 0.85, while key resistance level is situated at NZD 1.10.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ is given on the stock at the closing market price of NZD 0.950 per share, down by 1.04% as on 15^th February 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 February 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.

Disclaimer

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