ASX manufacturing stocks set to benefit from multi-billion-dollar cash splash

After months of anticipation, ASX manufacturing stocks and their investors are seeing concrete steps being taken to boost the domestic industry.

In the early 1960s, manufacturing was 30 per cent of Australia’s GDP, but it now accounts for just 5.7 per cent.

This steep decline is due to Australia’s increased dependence on overseas supply chains, which have been put under extreme pressure during the COVID-19 pandemic.

The disruption of international trade and COVID-19 restrictions offshore was a big cost, but the pandemic has also triggered broader economic and political arguments about Australia bringing manufacturing home.

In the federal budget earlier this week, the Morrison government unveiled a formal manufacturing strategy. It will invest $1.5bn across six priority sectors:

Resources technology and critical minerals processing,
Food and beverage,
Medical products,
Recycling and clean energy, defence and
Space

Ben Lazzaro, chief executive of the Australia Made campaign said it was encouraging to see the renewed government support for Australian manufacturers.

“It’s anticipated that such a significant investment will yield benefits beyond just the six priority sectors, as there is great potential for the initiative to create positive impacts throughout entire manufacturing supply chains,” he said.

Health companies to benefit

Su Zhang from Star Combo Pharma (ASX:S66), a manufacturer of premium health and natural beauty products such as vitamins, said the billion-dollar cash injection showed that the federal government was “recognising the manufacturing sector in Australia is fundamental for recovery of the economy into a post-COVID world”.

“And for us the timing of the funding is crucial to the overall manufacturing sector,” she said.

According to Zhang, funding the sector now is critical because of the increased consumer shift to preventative health, a segment that is now witnessing rapid growth.

“What we’ve seen through the pandemic is preventative health is at the forefront of consumer minds,” she said.

“So we’ve seen quite strong demand in that segment.”

Other vitamin and wellness product exporters include large cap Blackmores (ASX:BKL) as well as smaller caps RooLife (ASX:RLG), AFT Pharmaceuticals (ASX:AFP) and BWX (ASX:BWX).

Defence & space tech stocks

For several weeks prior to the budget the government had flagged an investment in defence capabilities above and beyond any general manufacturing program.

In addition to being one of the six priority sectors, it has also been earmarked to receive $575bn in funding to the sector over the next decade.

Several ASX stocks have benefited from a flood of government and private sector orders in recent months.

Examples of defence tech stocks include military equipment makers Codan (ASX:CDA) and Orbital UAV (ASX:OEC), both of which have locked in orders with big names in recent months.

Others include additive manufacturers Amaero Ltd (ASX:3DA) and Titomic (ASX:TTT).

Stuart Douglas, a director at Amaero told Stockhead he felt Australia was already well positioned in this space but nonetheless welcomed this week’s news.

“We punch very much above our weight on a global scale,” he said.

“Support from the government is encouraged to continue to assist those organisations that are proving capable of turning these great research projects into revenue producing and market leading technology companies.”

Food & beverage stocks

Food and beverage stocks aren’t traditionally considered ASX manufacturing stocks.

But it is a sector already successful both at home and abroad and showing Australia can be more than just a “services” economy.

Stocks such as Tassal (ASX:TGR), A2 Milk (ASX:A2M) and now acquired Bellamys (ASX:BAL) all became multi-baggers off the back of export success.

Nipping at their heels are dozens of food & beverage small caps seeking to become the next big export giant.

Many of these stocks, particularly in the infant formula sector, continued to see solid demand and were often allowed to keep operating during restrictions as essential businesses.

While many companies have relied heavily on China, the trade relationship has deteriorated in recent months.

Some are consequently hedging their bets and seeking other markets in Asia and elsewhere.

The most successful stock in the sector is wine selling platform Digital Wine Ventures (ASX:DW8) which is up over 800 per cent in three months due to heavy global demand.

The biggest food winners include Maggie Beer Holdings (ASX:MBH), which is up 197 per cent, and New Zealand Coastal Seafoods (ASX:NZS), which is up 246 per cent.

The challenge for ASX manufacturing stocks

Of course, as optimistic as things appear, it will take more than government funding to boost the sector.

Talking more generally about ASX manufacturing stocks, Star Combo’s Zhang told Stockhead Australia shouldn’t just manufacture to be self-sufficient.

Rather the country should aim to be a global manufacturing player supplying world-leading products.

“In the past Australian vitamins have done well across Asia, there’s a recognition of premium quality associated with Australian vitamins across Asia,” she said.

“I think for us to really take the next big step as a whole is that Australian manufacturing needs to go on a globalised stage.

“They need to come across stronger, better and our premium quality needs to stand firm when we’re competing with the US and European markets.”

Zhang said that required heightened knowledge and education.

“So I think that would be an ongoing communication as we work to make a bigger offer – better turnaround times, more innovative products, more quality products. I think that would be the next big move that we would see.

“Because around the world when they think of Australian manufacturing the connotation is its a small segment and usually we’re not leading the way in terms of having innovative products.”