Will, the Rebound in December Quarter Real GDP, Continue to Augment the Industrials Sector – 3 Stocks to Consider

This report is an updated version of the report published on 7th April 2022 at 5:03 PM (GMT +12)

I. Sector Landscape and Outlook

The government has stated a crown infrastructure investment of $57.3 billion for the 4-four years. It has already recorded $42 billion of infrastructure investment towards roads and rail, schools and hospitals, housing, and energy generation. With slight economic recovery, the demand for petroleum and petrol products increases. Petroleum and petrol products increased by 106% to $474 million, followed by crude oil, which increased by 342% in value, while quantity was up 203% and the average unit value increased 46% in February 2022. Automotive diesel and petrol increased by 22%, and the average unit value increased by 54% in February 2022.

NZ Export and Import Rises to all Top Destinations in February 2022

As per Stats.NZ, annual goods exports increased by $5.8 billion to $64.9 billion and annual goods imports increased by $16.6 billion to $73.3 billion in February 2022 from the previous year. Top export destination in February 2022 comprised of China: up 5.4% to $1.6 billion, Australia: up 22% to $662 million, USA: up 7.4% to $535 million, EU: up 25% to $311 million, and Japan: up 34% to $280 million. Top import destination in February 2022 comprised of China: up 45% to $1.6 billion, EU: up 32% to $868 million, Australia: up 26% to $670 million, USA: up 29% to $463 million, and Japan up 60% to $446 million.

Exhibit 1: Merchandise Trade Values ($ million), Exports and Imports, February Months, 2012–2022

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

NZ Traded $11.4 Billion Of Goods in February 2022

As per Stats.NZ, goods exports increased by 22% to $5.5 billion, while goods imports grew by $1.6 billion (37%) to $5.9 billion, resulting in a monthly trade deficit of $385 million in February 2022 versus February 2019. Major export contributors were Milk powder, butter, and cheese, which increased by 37% to $1.7 billion. Milk powder increased by 30%, and the average unit value increased by 36%. Milk fats, including butter, grew 78%, and the average unit value grew 56%. Cheese increased by 29%, and the average unit value increased by 27%.

Exhibit 2: Overseas Merchandise Trade in February 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

The International Border is Reopening in Five Phases

As per Immigration Department, from 12 April 2022, the border reopens to temporary work and student visa holders who meet the visa requirements set by the government. This includes people currently outside NZ and those who leave and want to return. The department allows up to 5000 international students to study in semester 2—also, Australian citizens and permanent residents arriving from anywhere in the world. From 1 May 2022, the border opens to visa-waiver travellers and existing holders of valid visitor visas.

Index Performance:

The S&P/NZX All Industrials (Sector) Index generated a 1-year return of ~3.20% versus ~-3.30% by the S&P/NZX 50 Index. Therefore, NZX All Industrials Index overperformed NZX50 Index by ~6.5% in 1-year.

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

Source: REFINITIV

Key Risks and Challenges:

The pandemic created boundaries for the industrial sector. A disrupted supply chain challenged the transit of essential goods from origin to destination without compromising the quality and rising cost. Further, the country is experiencing the impacts of climate change (like more frequent severe storm events, flooding, and coastal inundation) on the transport network.

Exhibit 4. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the government, the real GDP reported a sizable recovery in December 2021 quarter from the Delta-impacted September 2021 quarter. Real GDP grew 3.0% following the 3.6% decrease in the September quarter. Therefore, the annual average GDP increased to 5.6%, and the level of GDP to 3.5% above its pre-pandemic level. Manufacturing and construction activity recovered strongly, while business investment augmented. A significant proportion of investment was driven by imports, which was indicated by widening the current account deficit. The economic activity recovered from a substantial proportion of the September quarter's losses that are likely to continue into 2022.

Apart from the sector-specific factors, we have also analysed four NZX-listed companies operating in the same sector. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Mainfreight Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$8.14 billion, Gross Dividend Yield: 1.704%)

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 specialized packaged solutions.

Outlook

In H2FY22, the volume trends have been positive, at times significantly ahead of the last year. The company remains optimistic on current activity levels and expects the growth to continue across the global network for the remainder of FY22 and into the following year.

On 2 February 2022, the company released 43 weeks of trading updates starting 1 April 2021 to 31 December 2021 monthly financial statements, plus weekly financials for January 2022. Total revenue increased by 45% YoY to $4,134.92 million for the said period.

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 relative valuation (on an illustrative basis), and the target price so arrived reflects a rise of low double-digit (in % terms). In addition, a slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering significant market presence across region and YTD growth in revenue.

Considering the facts above and the recent update, we give a “Buy” recommendation on the stock at the current market price of NZ$80.81 per share as of 7^th April 2022 (New Zealand Time: 4:39 PM (GMT +12)).

2) Port of Tauranga Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$4.21 billion, Gross Dividend Yield: 3.162%)

Business Description:

Port of Tauranga Limited (NZX: POT) is New Zealand’s largest port and international freight gateway. The location of the port is central to key export commodity sources.

Outlook

The outlook for H2FY22 is unpredictable due to uncertainties revolving the supply chain disruption, and the full effects of the Omicron outbreak are yet to be seen. Looking at the current performance of H1FY22, full-year earnings are projected to be between $103-$110 million (versus $102.4 million in the 2021 financial year).

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 POT’s diversity of cargoes as well as decent outlook.

Considering the facts above and the recent update, we give a “Buy” recommendation on the stock at the current market price of NZ$6.10 per share as of 7^th April 2022 (New Zealand Time: 11:32 AM (GMT +12)).

3) Napier Port Holdings Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZ$599.88 million, Gross Dividend Yield: 3.472%)

Business Description:

Napier Port Holdings Limited (NZX: NPH) is New Zealand’s fourth-largest port by container volume. It is the main gateway for Hawke’s Bay and lower North Island’s exports.

Outlook

The volume forecast for log exports in FY22 will be in-line with FY2021. The company is eyeing to deliver its strategic capital investments in FY22, including the earlier than contracted completion of 6 Wharf in 2HFY22. It anticipates them to contribute to the group's new financial year. Considering this contribution, the base-case forecast for log volumes, and assuming a continuation of current market conditions, the underlying result from operating activities is expected to increase by ~10% in FY22.

On 20 January 2022, the company released its trade volume data for Q1FY22, which grew by 3.4% YoY for bulk cargo, primarily driven by increased log exports. However, the containerised cargo volume fell by 7.7%, mainly led by less container repositioning activity and continued container shipping schedule disruption.

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 EV/Sales based relative valuation (on an illustrative basis), and the target price reflects a rise of low double-digit (in % terms). A premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the diversity of trades that passes across NPH's wharves and protects the company from container-based supply chain and COVID-19 disruptions.

Considering the facts above and a decent outlook, we give a “Hold” recommendation on the stock at the current market price of NZ$3.00 per share as of 7^th April 2022 (New Zealand Time: 4:39 PM (GMT +12)).

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: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.