Will the Acceleration in Trade Value Augment Industrials Sector – 3 Stocks to Consider

I. Sector Landscape and Outlook

As per the ‘Fortnightly Economic Update’ released by The Treasury, the Business conditions grew by 3 index points to +25, primarily due to increasing trading, whilst confidence fell 5pts to +5, marginally below average. Demand for labour is high, but there are tentative signs that elevated inflationary pressures from inputs to final product prices are starting to ease. Labour costs grew by 3.1% on a QoQ basis, down from a peak of 4.6% in July 2022, while purchase and final prices also showed signs of easing from recent highs. In contrast, consumer sentiment decreased by 0.9% to 83.7 pts in the latest Westpac-Melbourne Institute survey, at a lower level consistent with major economic disruption.

China Leads Monthly Export and Import in September 2022

As per Stats.NZ, the monthly export to China from NZ grew by $401 million (up 31%) to $1.7 billion in September 2022, mainly driven by rises in milk powder, butter, and cheese, an increase of $137 million (36%), and logs, wood, and wood articles, and increase of $85 million (38%). Meanwhile, imports from China to NZ grew by $313 million (up 20%) to $1.9 billion in September 2022, primarily driven by rises in vehicles, parts and accessories, an increase of $134 million (144%), and electrical machinery and equipment, and increase of $42 million (15%).

Exhibit 1: Top Export and Import Partners in September 2022 over September 2021

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

Higher Export Growth than Import Growth in September 2022

As per Stats.NZ, goods exports increased by 37% to $6.0 billion, and goods imports grew by 16% to $7.6 billion, resulting in a monthly trade deficit of $1.6 billion in September 2022 versus September 2021. Meanwhile, the annual trade deficit was $11.9 billion in September 2022 as annual goods exports stood at $70.4 billion, up $8.7 billion from the previous year, and yearly goods imports stood at $82.4 billion, up $16.8 billion from the prior year.

Exhibit 2 Trend in Goods Export and Import in September 2022

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

Most Border Exceptions Have Closed in NZ

As per Immigration.NZ, the border for student and visitor visa applicants, is opened on 1 August 2022. In addition, the maritime boundary is also open, a crucial step in NZ's plan to reconnect with the rest of the world. Visitors must meet NZ's health border settings, be fully vaccinated, and complete an NZ Traveller Declaration. As per the August 2022 monthly traffic update by 'Auckland International Airport Limited (NZX: AIA)', Auckland Airport's total passengers were 67% of the pre-COVID equivalent in the financial year to 30 June 2019. The international passengers (excl. transits) were 54% of the pre-COVID equivalent in August 2018, with transit and domestic passengers at 46% and 84%, respectively.

Exhibit 3 Trend in Passenger Arrivals and Departures

Data Source: This work is based on/includes Customs NZ data which are licensed by Customs 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 2-year return of ~10.04% versus ~-9.40% by the S&P/NZX 50 Index. Therefore, NZX All Industrials Index overperformed NZX50 Index by ~19.44% in 2-year.

Exhibit 4: S&P/NZX All Industrials (Sector) vs S&P/NZX50 Index

Source: REFINITIV

Key Risks and Challenges:

Globally, the Russo-Ukrainian war, elevated inflation and sluggish growth in China indicate a challenging environment. The IMF's latest forecasts caution that risks to the outlook remain unusually large and indicate a downside. The Reserve Bank of New Zealand increased the Official Cash Rate by 50 basis points to 3.50% at its October 2022 Monetary Policy Review. Further, persistent nervousness among businesses driven by lacklustre demand for products and services keeps expansion plans away from the company's regular growth strategies.

Exhibit 5. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

The NZ government plans to infuse $61.9 billion through infrastructure investment over the next five years. It is expected to provide much-needed liquidity into the system and minimize NZ's infrastructure deficit by investing in projects like Auckland Light Rail, water infrastructure, and rolling stock for rail. Further, the Free Trade Agreement (FTA) accelerating pace is forecasted to unlock access to the UK and other markets and boost New Zealand's recovery. Meanwhile, net outflows decreased to 11,000 in the 12 months ended August 2022, lower from 12,200 in the year ended July 2022 and peaked at 16,000 in February 2022. Visitor arrivals have also increased following the relaxation of border restrictions, with nearly 1.3 million arrivals in the year ended August 2022, up from 405,000 in February 2022.

Apart from the sector-specific factors, an analysis on three 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: NZD2.59 billion)

Business Description:

Air New Zealand Limited (NZX: AIR) operates a global network that provides air passenger and cargo transport services to, from, and within New Zealand.

Outlook

The company expects a rebound in sales for the initial three months of FY23 and anticipates that the operation will be ~70% of FY19 capacity. Amid similar capacity and an average jet fuel price of ~USD130/bbl, the company expects earnings before taxation and other significant items for 1H'FY to be in the ambit of $200-$275 million. In 2022 the company flew over 7.7 million customers, operated 123,614 flights, and carried 108,000 tonnes of cargo internationally, including ~44,000 tonnes of NZ exports, and ~7,000 tonnes flown on the domestic network.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales 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 EV/Sales Multiple (NTM) (Peer Average), considering the decent outlook for FY23 and revival in domestic demand.

Considering the aforementioned factors, a ‘Buy’ recommendation has been assigned on the stock at the closing market price of NZD0.77 per share, up 1.32% as of 27 October 2022.

2) Move Logistics Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD132.68 million)

Business Description:

Move Logistics Group Limited (NZX: MOV) is among the leading domestic freight and logistics players in New Zealand. It is engaged in providing freight transporting and warehousing services. It also coordinates offshore freight movements through international alliances.

Outlook

The company plans to focus on the Freight reset programme, market growth in targeted customer segments and evolution of MOVE’s multi-modal offer, mainly in coastal and trans-Tasman shipping. Further, the company is well positioned with a focused strategy, practical balance sheet, experienced team and strategically planned growth targets. On 20 October 2022, the company provided trading update for 1Q’FY23 and guidance for FY23. For FY23, it is forecasting an underlying EBITDA from continuing operations to be an improvement on previous year’s $54.3 million.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

Considering the aforementioned factors, a ‘Speculative Buy’ recommendation has been assigned on the stock at the closing market price of NZD1.14 per share, up 1.79% as of 27 October 2022.

3) Mainfreight Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD7.65 billion, Annual Dividend Yield (TTM)¹: 2.66%)

Business Description:

Mainfreight Limited (NZX: MFT) is a complete end-to-end supply chain logistic solution provider across Asia, Europe, Australia, New Zealand, and The Americas. It offers a wide range of services and specialised packaged solutions.

Outlook

The company will further invest capital in land and buildings (NZD450 million over the next two years) and in newly leased facilities to drive growth. Further, it believes the quantum of profit improvement of FY22 would not reoccur in the short term, and it expects to return to its normal levels of revenue and profit growth.

On 21 October 2022, the company released an estimate for 1H’FY23, which will be released on 10 November 2022. For the 26 weeks, it forecasts revenue to be $3.01 billion and profit before tax to be $301.7 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales 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 EV/Sales Multiple (NTM) (Peer Average), considering its record financial result in FY22, the quality of its facilities and the strength of its network (being closer to its customers), and further investments in facilities.

Considering the aforementioned factors, a ‘Hold’ recommendation has been assigned on the stock at the closing market price of NZD76.00 per share, up 2.49% as of 27 October 2022.

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 October 27, 2022. 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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