Event Core

On 2 June 2022, the Australian Bureau of Statistics (ABS) released data on international trade in goods and services, international trade basis, and balance of payments. Good and services exports advanced by $479 million or 1.0% to $50.38 billion, driven by travel and other mineral fuels exports. Goods and services imports slipped by $278 million or 0.7% to $39.88 billion, driven by a decline in imports of non-industrial transport equipment and processed industrial supplies.

Trends in Select Industries

Impact on Building Materials: The total engineering construction work has advanced by 4.8% PcP to $23.55 billion in March 2022 quarter, and total construction edged up by 1.4% PcP to $53.66 billion. As per the Department of Industry, Science, Energy and Resources, Construction is expected to seek solid growth over the outlook period. The expansion will be spurred by substantial infrastructure investment pledged across key nations in the past two years.

Favourable Retail Trade Prospects: Import of consumption goods slipped by 1.1% to $10.48 billion. In April 2022, retail trade advanced by 0.9% MoM and 9.6% PcP to clock a total turnover of $33.92 billion. Key drivers for the favourable trade industries were Cafes, restaurants & takeaway food services, clothing, footwear, & personal accessory retailing, and food retailing, registering gains of 3.3%, 3.1%, and 1.9%, respectively.

Favourable Scope for Travel Industry: In services exports, travel has expanded considerably to $2.10 billion, up by 26.8% MoM. In March 2022, Australia witnessed a monthly increase of 103,370 trips in 374,630 arrivals and an increase of 158,980 trips in 335,240 departures. For visitor arrivals to Australia, 161,720 short-term trips were registered, a surge of 153,410 relative to the corresponding month of the previous year.

Key Risks and Challenges

In March 2022, the value of construction work done for buildings and residential slipped by 1.3% and 0.9% on a sequential basis. The seasonally adjusted dwellings approved dipped by 32.4% sequentially in April 2022. The recent hike in interest rates may considerably impact loan commitments for residential & commercial estate and business loans. Additionally, the household savings ratio may take an upswing, considering the surge in interest rates, affecting final domestic demand. In March 2022, three leading visitor source countries were the UK, New Zealand, and India, a considerably small basket of countries for the travel industry to rely on.

Outlook

Improved Terms of Trade: In March 2022 quarter, the terms of trade advanced by 5.9%, with export edged up by 9.6% and import prices jumped by 3.5%. Additionally, strong demand for Australia’s agricultural and mining commodities has contributed to the rise in exports.

Improved Household Spending: Household spending advanced by 1.5% in March 2022 quarter, and spending on discretionary goods and services was enhanced by 4.3%, primarily supported by transport services (+60.0%).

Increased Capex in Buildings and Structures: The total private new capital expenditure on buildings and structures increased by 7.1% in March 2022 quarter. The ABS estimate for capex in buildings and structures stands at $77.1 billion for FY22 and $78.8 billion for FY23.

Increased Gross Value Added by Retail Trade: For March 2022 quarter, the retail and wholesale trade rose 4.8% and 2.3%, respectively, in industry gross value-added. The availability of online platforms and other technology-driven parameters significantly support these industries.

Travel Statistics Following an Upswing: Considering the fade out of containment measures amid COVID-19, the travel industry took a joyous ride, with short-term arrivals of overseas visitors increasing by 80,980 to 161,720 in March 2022.

Considering the improved international trade in select industries, we have figures out three stocks on ASX that are set to see momentum.

(1) ­­­CSR Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 2.20 billion, Annual Dividend Yield: 6.93%)

Resurgence in Commercial Construction may Deliver Top-Line Support: CSR Limited (ASX: CSR) is a leading building products company in Australia and New Zealand. In FY22, CSR registered NPAT (before significant items) at $193 million, up by 20% PcP. Statutory NPAT stood at $271 million, including substantial items reflected by recognising $86 million in carrying forward capital tax losses. Trading revenue increased by 9% to $2.3 billion.

Building Products’ EBIT recorded $228 million, up by 24%, representing substantial housing activities, substantiated by improved factory performance, higher volumes, and operational execution. Property EBIT stood at $47 million, down from $54 million recorded in FY21, which involves the next stage of Horsley Park and the 4.6-hectare land sale at Badgerys Creek. Aluminium EBIT increased from $23 million in FY21 to $40 million, reflecting increased aluminium prices, partly offset by increased production costs.

Outlook: Building Products segment is well-positioned to witness continued growth, with a comprehensive strategy to amplify performance from robust brands portfolio and customer solutions. The group earnings are well assisted by contracted transactions in Property over the next three years with surged hedge position in Aluminium.

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

A-VIX vs CSR (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of CSR went down by ~23.52%. The stock made a 52-weeks low and high of $4.460 and $6.400, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering favourable building product prospects and robust brand portfolio. For valuation purpose, peers like Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), Boral Ltd (ASX: BLD), and others have been considered. Given the decent potential in construction activities, improving capital expenditure in the industry, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $4.520, down by ~0.440% as of 06 June 2022.

(2) ­­­Jumbo Interactive Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 955.80 million, Annual Dividend Yield: 2.65%)

Attractive Financial Position and High Margin Business Model to Deliver Decent Returns: Jumbo Interactive Limited (ASX: JIN) is engaged in selling lottery tickets through the Internet and mobile devices. On 02 June 2022, JIN confirmed the acquisition of Stride Management Inc., following the satisfaction of all terms of the Share Purchase Agreement. In FY21, JIN clocked solid double-digit growth with Total Transaction Value (TTV) up by 37% to $487.0 million, revenue advanced by 17% to $83.3 million, and underlying EBITDA climbed up by 13% to $48.9 million.

In H1FY22, JIN reported a surge in TTV of 41% to $327.9 million and revenue inclined by 29% to $52.8 million. The bottom line inclined with underlying EBITDA increased by 18% to $28.3 million and underlying NPAT inclined by 18% to $16.5 million. There were 23 Powerball/Oz Lotto jackpots, surpassing $15 million. JIN licences its Powered by Jumbo (PBJ) software platform to charity and government globally. SaaS-delivered EBITDA of $14.8 million, reflecting an EBITDA margin of 68.8%.

Outlook: JIN successfully secured a new senior debt facility of $50 million for up to five years alongside an initial tranche of $30 million to be used for the M&A activity of StarVale, with a further $20 million expended for future growth.

Valuation Methodology: EV/EBITDA Value Multiple Based Relative Valuation (Illustrative)

A-VIX vs JIN (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of JIN went down by ~7.60%. The stock made a 52-week low and high of $14.340 and $19.940, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Considering a high margin business model, the company can trade at a slight premium compared to its peer’s average. For valuation purposes, peers like Crown Resorts Ltd (ASX: CWN), Betmakers Technology Group Ltd (ASX: BET), Helloworld Travel Ltd (ASX: HLO), and others have been considered. Considering the favourable financial position for capital management, fruitful acquisitions, broad revenue streams, PBJ licencing, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $15.680, up by ~2.954% as of 06 June 2022.

(3) ­­­Flight Centre Travel Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 4.13 billion, Annual Dividend Yield: 0.00%)

Improving Resilience with Corporate Contract Wins: Flight Centre Travel Group Limited (ASX: FLT) is an Australia-based travel company, including corporate and leisure sectors. In FY21, the company clocked an operating revenue of $396 million relative to $1,897 million in FY20. This is primarily attributed to the COVID-19 travel restrictions. The company encouraged some cost reduction strategies, reflected in an overall decline in expenses. Underlying losses before tax stood at $507 million.

In H1FY22, the company embarked upon a total revenue of $316 million relative to $159 million in H1FY21 (Reinstated). Underlying EBITDA stood at a loss of $184 million. The group’s Total Transaction Value (TTV) enlarged by $1.73 billion to $3.263 billion in 1HFY22. The sales recovery was witnessed immediately after the August – September delta waves.

Outlook: FLT targets a return to monthly profitability in leisure and corporate during FY22. The company is well placed in recovery mode amid a robust pipeline of corporate account wins to improve recovery in the Americas & EMEA.

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

A-VIX vs FLT (Source: REFINITIV)

Stock Recommendation: Over the last six months, the stock of FLT went up by ~19.14%. The stock made a 52-weeks low and high of $13.670 and $25.280, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s average, considering the curbs on travel & other activities being removed and its strong global presence. For valuation, peers like Webjet Ltd (ASX: WEB), Helloworld Travel Ltd (ASX: HLO), Corporate Travel Management Ltd (ASX: CTD), and others have been considered. Given the strong liquidity position, reopening of borders, strategic objectives in place, enlarged TTV, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $20.540, down by ~0.724% as of 06 June 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: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the valuation achieved and subject to the factors discussed above.

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