In Brief: Gold, Building Products, Online Classifieds & Milk

This story features PERSEUS MINING LIMITED, and other companies. For more info SHARE ANALYSIS: PRU

Discounted gold miners; building products & services with US exposures; online classifieds; and improving conditions for milk producers and Australian farmers.

-Discounted gold miners
-US exposures for building products & services
-Jarden’s favourites among online classifieds businesses
-Improving conditions for Australian farmers

By Mark Woodruff

The opportunity for gold investors

Canaccord Genuity points to the incongruity of recent record highs for both Australian dollar and US dollar gold prices and the ASX Gold Index which is currently around -13% below the 52-week high.

In a similar vein, gold companies under research coverage by the broker are all trading below their respective 52-week highs at an average discount of around -18%.

Taking into account the potential for central bank rate cuts, the US debt pile and geopolitical instability, Canaccord notes both the favourable outlook for gold and the opportunity for gold investors on the ASX. 

In selecting appropriate company exposures, the broker prefers those either in, or entering a free cash flow (FCF) harvest period. In the screening process, favourable mining jurisdictions and reasonable liquidity/market capitalisation were also looked upon favourably.

Coming up trumps were Buy-rated Perseus Mining ((PRU)), Regis Resources ((RRL)) and Ramelius Resources ((RMS)). Bellevue Gold ((BGL)), which is on the cusp of commercial production, is also recommended as a Speculative Buy.

The focus turns to the US for building-related companies

Following the reporting season for the Building Products & Services sector in Australia, Macquarie turns its focus to the US and the prospect of stability in new construction activity and the timing of the repair and remodel (R&R) recovery. 

Judging by US reporting season commentary, the broker remains relatively optimistic as confidence levels seem to be gaining momentum.

The industry backdrop for R&R remains very favourable in the US, suggests the analyst, with aging stock and pre-GFC builds now turning 20 years old. Additionally, there have been positive impacts from borrowers locking-in mortgage rates and more people preferring to age in the family home.

While early days, Citi is starting to see evidence R&R activity in the US has bottomed after examining existing home sales figures in January that show single-family property sales are on the rise. 

It appears last-October was the nadir for existing home sales across the Northeast and South, while the West and Midwest bottomed in November and December, respectively, observes the broker.

An increase in the median price of existing single-family homes and increasing momentum for new listings, along with active inventory of homes-for-sale, suggests to Citi the traditionally busy spring home buying season should present higher turnover and greater R&R activity. 

Pricing is also holding up for value-added products in the face of moderating inflation, observe the analysts. 

Citi notes only a modest improvement is being factored into share prices for James Hardie Industries ((JHX)) and Reliance Worldwide ((RWC)). The industry backdrop in the UK appears to still be a risk and will need to be monitored, acknowledges the broker.

Citi has Buy ratings for both James Hardie and Reliance, while Macquarie also has two Outperform recommendations.

Macquarie likes James Hardie’s exposure to recovering US end-markets. It’s felt volumes are supported by new residential markets, while a cyclical R&R recovery is close at hand. Reliance appeals for its operational efficiency gains, strong execution in a down-cycle, and the successful roll-out of SharkBite Max.

Macquarie also has an Outperform rating for GWA Group ((GWA)) due to its high level of exposure to the R&R market and an attractive dividend yield, while Reece ((REH)) is rated Underperform on valuation and soft A&NZ commentary by management at recent first half results.

Jarden’s favourites from among classified’s businesses

Jarden highlights ongoing strength for yields, well ahead of inflation, across all online classified’s businesses under research coverage.

Seek ((SEK)) remains the broker’s top pick given the market is not currently allowing for management’s $2bn revenue aspiration across A&NZ and Asia. It’s also felt consensus should be looking through near-term uncertainty around listing volumes. 

Ultimately, second half volumes are the key swing factor to Jarden’s FY24 forecasts for REA Group ((REA)), Domain Holdings Australia ((DHG)) and CAR Group ((CAR)), but particularly for Seek as employment is the most volatile classifieds vertical and the margin for error is higher.

The reporting season revealed an improving revenue outlook for both CAR Group and REA Group, and hence, their cost outlook is also higher, while Seek's revenue outlook was lower and consequently costs will be lower as well. The season inflicted no material change to the revenue and cost outlook for Domain.

An advantage of online classifieds businesses is the ability of management to flex costs quickly in line with market conditions, highlights Jarden.

At present valuations, the broker prefers Domain over REA Group and is Underweight on CAR Group as the market has gone from not pricing-in execution in the US to a currently bullish scenario.

Jarden has a Buy rating for Seek, a (one step lower) Overweight rating for Domain Holdings and Underweight recommendations for both REA Group and CAR Group.

Improving conditions for Australian farmers

Australian farmers are experiencing the most significant turnaround in confidence in several years, according to Rabobank, in response to better-than-expected seasonal conditions through summer and the prospect for positive farm margins in 2024.

The latest quarterly Rabobank Rural Confidence Survey shows national farmer confidence has returned to positive territory for the first time since June 2022, with nearly a third of farmers expecting the agricultural economy will improve over the next 12 months, more than double the last survey.

The reason given by 58% of respondents was rising commodity prices, while 40% were increasingly positive about seasonal conditions.

Falls in the red meat markets, higher interest rates and rising input costs have previously caused rural sentiment to “languish in negative territory”, notes Rabobank group executive for Country Banking Australia, Marcel van Doremaele.

“In particular, beef and sheep prices are set to be above the lows we saw last year, and that has driven up the confidence of red meat producers”, notes Van Doremaele.

Concerns around falling commodity prices and rising input costs remain high for Australian grain growers, according to the survey, though there were less grain farmers in the category who believe the Australian economy will worsen.

Confidence among dairy farmers increased as they look ahead to the new season milk price, as “dairy margins are tipped to remain positive thanks to ongoing domestic support for farmgate prices”, explains Mr van Doremaele.

Just past the halfway point of the current dairy season, a separate Q1 Global Dairy Quarterly report by Rabobank points to widespread growth in milk supply across all dairying regions due to favourable seasonal conditions and good farmgate margins.

The bank highlights Australian milk production reached 5.35bn litres in the period July 2023 to January 2024, a rise of 2.5% year-on-year. Rabobank forecasts Australian milk supply will finish the 2023/24 season 2.6% higher on 30 June, with growth in the range of 3-4% expected for the 2024/25 season.

As “milk prices remain elevated, expectations are that new season pricing from July 1 will be margin-supportive”, according to report co-author and Rabobank senior dairy analyst Michael Harvey.

Harvey also points out “Australian household budgets remain strained, driving discretionary spending lower, which is flowing into the food basket”.

Dairy exports have been under pressure in the first six months of the season with volumes -8.5% lower than last year, with significant declines for milk, whole milk powder and butteroil.

While export competitiveness remains, Harvey notes the gap between local and offshore farmgate milk prices has narrowed as milk prices in competitors’ regions increase on the back of improving commodity markets.

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