Will the Global Market Recovery Support NZ’s Consumer Discretionary Sector: 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. Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough. 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

Stats NZ released changes in the value of electronic card transactions, wherein the spending in the retail industries witnessed a fall of 0.8% (or $55 Mn) in September 2023 as compared to August 2023. During the same period, spending in the core retail industries fell 0.2% (or $13 Mn). The non-retail (excluding services) category witnessed  a fall of $20 Mn (or 1.0%) from August 2023. This category consists of medical as well as other health care, travel and tour arrangement, postal and courier delivery, and other non-retail industries. The services category fell $0.6 Mn (or 0.2%. This includes repair and maintenance, and personal care, funeral, and other personal services.

The total value of electronic card spending, including the 2 non-retail categories (services and other non-retail), witnessed a fall from August 2023, down $6.7 Mn (or 0.1%). The spending in the hospitality industry rose 1.4% (or $16 Mn) between September 2022 and September 2023. In actual terms, cardholders made 160 Mn transactions throughout all the industries in September 2023, with an average value of $55 per transaction. The total amount which was spent using electronic cards amounted to $8.8 Bn.

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

Exports to China Declined

As per Stats NZ, the total value of goods exported to China in the year ended September 2023 stood at $19.3 Bn. Notably, annual exports to China have been declining since May 2023. For the year ended September 2023, China received 27% of the total value of NZ’s total goods exports (or $70.4 billion). By comparison, in the year ended September 2013, China received 18% (or $8.3 Bn) of NZ’s total goods export values (or $46.0 billion).

Over the previous decade, the exports to China have been steadily increasing, with the flat period during the COVID-19 pandemic. However, in the recent months, this has started to shift. Out of NZ’s top 15 export commodities for the year ended September 2023, China was the country’s top trading partner for seven of those commodities.

Annual Wage Cost Inflation Stood at 4.3%

As per Stats NZ, wage cost inflation, which gets measured by the labour cost index (or LCI), stood at 4.3% in the year ended September 2023 quarter, which was unchanged from the previous quarter. The annual rise to the LCI was because of an increase to public sector salary as well as wages. This was influenced by the collective agreements for teachers, nurses as well as the NZ Defence Force over the previous year.

The salary and wage rates for the public sector witnessed a rise of 5.4% annually, which was the highest rate since the series started in the December 1992 quarter. This compares to the 4.2% in the year to the June 2023 quarter.

The average ordinary time hourly earnings, which is measured by the Quarterly Employment Survey (or QES), rose 6.7% to reach $40.40 in the year to the September 2023 quarter.

Exhibit 2: Public sector, education, and health indexes for all salary and wage rates (For Mentioned Quarters)

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 increased competition from the domestic as well as international tech- e-commerce companies, launch of brands and stores. The physical risks like susceptibility of the stores as well as other key locations to rising sea levels and flooding, along with transitional risks pose several challenges and opportunities to the overall financial stability of the consumer discretionary companies, potentially affecting the financial markets in the future.

Broader consumer discretionary sector in NZ might also be impacted by the increasing geopolitical risks as well as increased inflationary pressures.

Exhibit 3. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

Globally, the core inflation is still elevated as well as the central banks are anticipated to keep monetary policy tight for some time. The global economy’s adjustment to the increased interest rates was relatively benign so far, the full impact is expected to be witnessed and there are numerous tail risk scenarios. The NZ housing market witnessed some stabilisation after the decline in prices as well as activity since late 2021. Over the past few months, there has been a modest rise in house prices throughout most of the regions, because of robust net immigration, though high interest rates are suppressing the buyers’ borrowing capacity.

The mortgage borrowers are able to adapt to increased repayments by reducing the discretionary spending as well as have been supported by the robust household income growth. Some borrowers are able to reduce the impact of increased interest rates by extending the pending term of their loan, in case ahead of original repayment schedule.

However, if the inflation declines moving forward, it would positively impact the consumer sentiments and would also increase the disposable income. As the result, this could lead to increased discretionary spending moving forward.

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 792.2 million, Annual Dividend Yield (TTM)¹: 3.5%)

Business Description:

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

Outlook:

The company’s total sales for the third quarter ended 30 September 2023 rose to $340.9 Mn. This was up $18.8 Mn (or 5.8%) over the equivalent period of the previous year. Notably, the Hawaii trading solidified around the new highs witnessed during the previous year and the new stores opened in 2022 produced robust trading results.

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 zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~37.2326 level. However, the prices are trading below the trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 3.25, while the key resistance level is placed at NZD 4.0.

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 3.590 per share, up by 0.84% as on 9 November 2023.

2) Marlborough Wine Estates Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 45.1 million)

Business Description:

Marlborough Wine Estates Group Limited (NZX: MWE) owns as well as operates vineyards in Awatere Valley, Marlborough.

Outlook:

The company made considerable progress over the past year, despite the wider economic challenges as well as inflationary cost increases throughout the business. Pleasingly, the global supply chain disruption witnessed in the previous 2 years reduced. The company is positive about the future for its brands. Notably, the NZ wine is highly sought after globally as well as the long-term demand and supply equations are favourable.

Technical Overview:

Technical Commentary:

On the daily chart, MWE prices are trading above the falling trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~12.5841 level. However, the prices are trading below the trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 0.131, while the key resistance level is placed at NZD 0.185.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.152 per share, down by 0.65% as on 9^th November 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 date for all price data, currency, technical indicators, support, and resistance levels is November 9, 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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