The Tale of Two Consumer Staples on ASX- Treasury Wine Estates and Synlait Milk

January 28, 2020 09:53 PM AEDT | By Hina Chowdhary
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Essential products inclusive of food, beverage and household goods, to name a few, form the consumer staples sector. Regardless of their financial situation and budget, it is difficult for consumers to put these off their need list. Having said this, these products are always in demand, irrespective of the economy’s situation or the cost of these products.

Interestingly, alcohol and tobacco also form part of this group!

Breaking Down Consumer Staples

Consumer staples are believed to comprise over half of a nation’s gross national product (GNP). These products are:

  • Non-cyclical in nature with year-round demand
  • Impervious to business cycles
  • Also called the consumer defensive sector
  • These household necessities can be regarded as opposite to consumer discretionary
  • Examples include- food and staples retailing, household and personal products and beverage and tobacco

Consumer Staples Sector- Casting an Investing Eye

The S&P/ASX 200 Consumer Staples Index (XSJ) of the Australian Securities Exchange (ASX) includes producers and distributors of food, beverages and tobacco. Besides these, the index comprises of manufacturers of personal products and non-durable household goods. Food & drug retailing companies, hypermarkets and consumer supercenters are also part of this group.

Of the 11 sectors on the ASX, the consumer staples sector comprises a total of approximately 6%.

Few renowned examples of consumer staple companies listed on the ASX are

After the close of trading on the ASX on 28 January 2020, the S&P/ASX 200 Consumer Staples Sector did not particularly build on investor sentiment positively. The index settled in red, at 13,427.2, down by 0.62% or 82.7 basis points, relative to its last close.

However, regardless of the one-day underperformance, one should note that a critical element that consumers consider when tapping investing options is business stability. This element is instrumental with consumer staple companies as their products are always in demand. This consequently leads to sales and earnings growth, resulting in business stability, even in recessionary periods.

Stability is one reason that the consumer staples sector is likely to offer investors an excellent way to protect their total portfolio risk. Moreover, renowned brands are part of this sector, a safe haven in recessionary times, which gives investors’ confidence.

Further, consumer staple stocks are known to pay dividends, higher than those generated in other sectors, driven by their slow but stable nature. They have been one of the favourites when it comes to an investor’s portfolio diversification.

Given this backdrop, let us look at two ASX-listed consumer staples stocks - Treasury Wine Estates Limited (ASX: TWE) and Synlait Milk Limited (ASX:SM1)

Is Treasury Wine Estate Outperforming Amid Wine’s Losing Sparkle?

One of the world's largest wine companies, Treasury Wine Estates Limited caters to 4 regions - ANZ, Americas, Europe and Asia. With its wines sold in over 70 countries across the world, TWE is famous for winemaking, brand marketing and meeting evolving consumer interests across the globe.

In recent times, analysts and wine industry experts have considered TWE brand wines as wines that perform relatively better as compared to peers, especially in terms of brand awareness.

Foremost, let us understand the stance of the wine business-

The Global Alcoholic Beverages Market is predicted to grow at a CAGR of over 5% during the forecast period of 2018 to 2025. According to ASX-listed Digital Wine Ventures (ASX:DW8), the global beverage market is likely to reach USD 423.59 billion by 2023, with a CAGR of approximately 6%.

There is a significant market opportunity in the business, and wine consumption has been significantly growing across all regions.

TWE, specifically, has been growing its earnings strongly over the last few years, catalysed by strong demand for its wines in China and its premiumisation strategy. Even though Australian brands have been suffering, TWE has been a saviour. Moreover, TWE expects a reported EBITS growth of approximately 5% to 10% in F20. The Company seems relatively well-positioned with continued top-line growth, operational efficiency and premiumisation in place.

While Managing Director and Chief Executive Officer Michael Clarke will retire in the first quarter of fiscal 2021, the recent additions of Toni Korsanos to the Board as an independent Non-Executive Director and member of the Audit and Risk Committee, and Ben Dollard as President of the TWE’s operations in the Americas is expected to be a boon for the Company.

On 28 January 2020, TWE quoted $16.680, and the stock has generated YTD returns of 9.33% and 4.61% in the last six months.

Synlait Increases Forecast Milk Price on the Back of Higher than Expected Commodity Prices

New Zealand-based Synlait Milk Limited combines expert farming with state-of-the-art processing to produce a range of nutritional milk products for its global customers.

Recently, the Company updated its forecast base milk price for the 2019/2020 season from the previously notified $7.00 kgMS to the current $7.25 kgMS. This was driven by the Company’s viewpoint that global dairy prices are likely to remain near their current levels for the rest of the milk season.

On the back of better than expected commodity prices by 2019 end, Synlait CEO Leon Clement justified the increase in SM1’s forecast milk price. He also believes that supply and demand for milk will continue to be evenly matched, at least in the medium term.

SM1 will announce its half-year results for the six months ending 31 January on 19 March 2020. It will make its next milk price announcement in late May 2020.

For the 12 months ended 31 July 2019, SM1’s revenue exceeded $1 billion for the first time, increasing 17% to $1,024.3 million. The Net profit increased by 10% (compared to the prior corresponding period) to $82.2 million.

Looking at previous milk prices, for the 12 months ended 31 July 2019, SM1’s average milk price was $6.58 per kgMS for the 2018/2019 season.

On 28 January 2020, SM1 quoted $8.510, and the stock has generated a negative YTD return of 0.23%, and 6.72% in the last six months.

With significant market predictions and revisions appearing in the consumer staples segment just in the first month of the new decade, it will be interesting to watch events unfold themselves in this sector. Moreover, investors are likely to remain faithful to these stocks, given the nature of stability even in times of a downturn.

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