Will NZ’s Industrials Sector Be Able to Revive Inflationary Concerns – 2 Stocks to Consider

Company Overview: Steel & Tube Holdings Limited (NZX: STU) is one of NZ’s leading providers of steel solutions, allowing access to the widest range of steel products in the market, through the nationwide network of distribution centres. Move Logistics Group Limited (NZX: MOV) is one of the NZ’s largest private domestic freight as well as logistics platforms, with the nationwide network of branches, depots and warehouses.

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 1 December 2023 released by The Treasury, The Reserve Bank kept the policy rate on hold and warned that the settings would be restrictive for the longer period of time because inflation remained outside of the targeted band. There has been a slowdown in certain key interest rate-sensitive sectors, which includes the retail spending. The central banks are on high alert for the upside inflation surprises amidst the tight labour markets as well as solid wage growth.

However, the lower consumer spending in the United States as well as economic contraction in Canada reflect that rate cuts would start in some economies next year. The recent data stated that building consents which were issued for new residential dwellings witnessed a rise of 8.7% in October month, after the declines of -4.6% in September, -6.9% in August and -5.6% in July. However, this is only the 3^rd time that consents increased this year. Notably, even on the seasonally adjusted basis, the building consents data could be volatile.

Despite the overall downward trend in the new residential dwelling consents, the 8.7% rise during the month of October was mirrored in the jump in business sentiment in the construction sector in the month of November.

Overseas Merchandise Trade- October 2023

As per Stats NZ, in October 2023, goods exports declined by $552 Mn (or 9.3%) to $5.4 Bn as well as goods imports fell $1.2 Bn (or 14%) to $7.1 Bn as compared to October 2022. Therefore, the monthly trade balance was the deficit of $1.7 Bn. Coming to the exports, milk powder, butter, and cheese declined $199 Mn (or 11%) to $1.7 Bn and other dairy-based products, which includes infant formula and casein, also declined. Infant formula is included in the preparations of milk, cereals, flour as well as starch, which increased $35 Mn (or 17%)to $240 Mn. Notably, meat and edible offal declined $50 Mn (or 8.5%) to $534 Mn.

Coming to the imports, mechanical machinery and equipment declined by $132 Mn (or 11%) to $1.0 Bn and electrical machinery and equipment fell by $131 Mn (or 17%) to $652 Mn. Notably, vehicles, parts, and accessories declined by $130 Mn (or 11%) to $1.1 Bn.

Exhibit 1: Goods Imports and Exports -  October 2023 Month Versus October 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 Top Monthly fall in Exports- October 2023

With respect to China, total exports witnessed a fall of $308 Mn (or 19%) and the largest falls were milk powder, butter, and cheese, reflecting a fall of $162 Mn and meat and edible offal, which was down $72 Mn in October 2023 as compared to October 2022. During the same period, with respect to Australia, total exports witnessed a fall of $128 Mn (or 15%) and the largest falls were witnessed in iron and steel, and articles, which were down by $19 Mn as well as vehicles, parts, and accessories, which declined $14 Mn.

With respect to USA, total exports witnessed a rise of $2.9 Mn (or 0.5%) and the largest rises were iron and steel, and articles, which rose by $26 Mn, milk powder, butter, and cheese increased by $23 Mn and meat and edible offal were up by $18 Mn. 

Exhibit: 2 Goods Exports- 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 ~-0.08% versus ~0.92% by the  S&P/NZX 50 Index. Therefore, NZX All Industrials Index outperformed the S&P/NZX 50 Index

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

Key Risks and Challenges:

The retail trade seems to be another sector of the broader NZ economy which could be sensitive to the changes in interest rates. Retail sales volumes were flat for the quarter ended September even though there has been record high annual net migration for the September year of ~118,800.

The spending was lower throughout several discretionary spending categories which includes furniture, floor coverings, and housewares, electrical goods, and department stores. The OECD is expecting global GDP growth to slow from 2.9% this year to 2.7% in 2024, before it increases to 3.0% in 2025 as the real income growth witnesses recovery as well as central banks ease the interest rates.

Exhibit 4. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the report by The Treasury, the business confidence touched the highest level since March 2015 in  the month of November as per ANZ Business Outlook. Notably, business confidence rose 7.4 points to 30.8 as well as the residential construction sector reached the first non-negative reading in 2 years up from -12.5 in October to 0.0 in November. The business confidence throughout the broader construction sector reached the 7-year high of 32.6.

The trade deficit narrowed further in October to $900 Mn on the seasonally adjusted basis, almost half the $1.7 Bn deficit in the month of October 2022. The annual trade deficit narrowed from $15.4 Bn in September, to $14.8 Bn in the year ended October. Much of this improvement was because of lower imports implying slower economic activity amid slowdown in the domestic demand.

The Australian housing market lagged the NZ market in that it is only now starting to slow down as house price inflation in most of the major state’s capitals continued this year even though there have been multiple interest rate increases by the RBA.

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) Steel & Tube Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 174.08 million, Annual Dividend Yield (TTM)¹: 10.68%)

Business Description:

Steel & Tube Holdings Limited (NZX: STU) is one of NZ’s leading providers of steel solutions, allowing access to the widest range of steel products in the market, through the nationwide network of distribution centres.

Outlook:

STU’s strategic goals revolve around clear growth strategy, which is in place. It is focusing towards building on the robust foundations in order to strengthen the core as well as growth in high value products, services and sectors. Its record operating cash flows are reflecting steady revenues as well as inventory disciplines.

It has the balance sheet strength with headroom for growth investment as well as clear forward strategy with potential for growth and expansion.

Technical Overview:

Technical Commentary

On the daily chart, STU’s stock prices are undergoing a correction characterized by lower highs and lower lows, indicating for a negative bias. In contrast, the stock is currently trading near its previous trough and forming multiple bottom divergences compared to the momentum oscillator RSI (14-period), anticipating for a potential minor rally. Prices are trading below both the trend-following 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast the stock’s previous trough may act as a support. An important support level for the stock is situated at NZD 0.93, while significant resistance level is placed at NZD 1.21.

Fundamental Valuation

EV/Sales Based Relative Valuation

Stock Recommendation

Considering the aforementioned factors, a ‘Buy’ rating is given on the stock at the closing market price of NZD 1.04 per share, up by 1.96% as of 7^th December 2023.

2) Move Logistics Group Limited (Recommendation: Speculatuive Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 72.7 million)

Business Description:

Move Logistics Group Limited (NZX: MOV) is one of the NZ’s largest private domestic freight as well as logistics platforms, with the nationwide network of branches, depots and warehouses.

Outlook:

The company stated that deployments towards future growth includes new trans-Tasman shipping service, fleet upgrade as well as technology. Its focus remained towards embedding change, improving productivity, driving revenue and delivering customer service excellence. The company is having a robust balance sheet which would be supporting it through the broader economic cycle.

Technical Overview:

Technical Commentary

While experiencing a downtrend, MOV’s stock prices are trading near the lower boundary of a descending wedge pattern on the daily chart, anticipating for a potential rally heading to the upper edge of the pattern. Additionally, after forming multiple bottom divergences in relation to prices, the momentum oscillator RSI (14-period) is rebounding from its oversold region, further supporting for the mentioned recommendation. Prices are trading below both the trend-following 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. A significant support level for the stock is positioned at NZD 0.50, while critical resistance level is located at NZD 0.66.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.570 per share, up by 3.64% as on 7^th December 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 December 7, 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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