2 Industrial Stocks to Build the Portfolio - ASB, NWH

Austal Limited

 

ASB Details
 
FY20 Guidance Upgraded:Austal Limited (ASX: ASB) designs and constructs some of the world’s most advanced commercial and defence vessels, with contracts primarily in the shipbuilding and defence sectors.
 
Update on Key Contracts Awarded:The company recently announced regarding the modification to a previously awarded Littoral Contract Ship (LCS) contract, by the United States Department of Defence. The change provides Austral Limited with a total potential additional value of approximately $62.7 million, with work expected to be completed by June 2021. In May 2020, the company received the largest contract for an Australian vessel construction program in its history, to design and construct six evolved Cape-class Patrol Boats (CCPBs) for the Royal Australian Navy. The contract value was worth $324 million.
 
Shareholder Update:As per another update, Macquarie Group Limited along with its controlled bodies corporate, ceased to be a substantial holder in the company.
 
Improved Guidance for FY20:The company now expects FY20 group revenue to be ~$2 billion as compared to the previous guidance of $1.9 billion. Group EBIT is now expected to be at least $125 million, as compared to $110 million in the previous guidance. The revision in guidance is supported by strong business performance and a limited impact of COVID-19 in April and May. The company also benefitted from the recognition of Research & Development tax credits in the USA after satisfying utilisation and recognition criteria.
 
1HFY20 Highlights: During the half-year ended 31^st December 2019, the company reported revenue amounting to $1.04 billion, up 22% on pcp. EBIT and NPAT for the period stood at $59.9 million and $40.8 million, up 48% and 72%, respectively. The company had a strong cash position at the end of the period, with net cash amounting to $152.4 million.
 

1HFY20 Income Statement (Source: Company Reports)
 
Key Risks:Some of the risks to the company’s business, include impacts to US programs, the availability of US government funding due to budgetary or debt ceiling constraints; changes in customer priorities or their ability to meet contractual requirements, additional costs or schedule revisions. Moreover, the lack of predictability of the impact of COVID-19 is another unique risk to the company’s operations.
 
Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)
 

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation:The stock of the company gave positive returns of 11.34% in the last one month and is currently trading near the average of its 52-week trading range of $2.25 - $4.99. The company has maintained business continuity by ensuring regular payment to suppliers for their goods and services, by working closely with defence customers to accelerate payment terms and support cashflow. Austal Limited possesses a strong balance sheet and a coronavirus-resilient order book to weather the current challenges. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with low double-digit upside (in % terms).Considering the above factors, performance in 1HFY20, improved guidance, minimal impact of COVID-19, and a resilient order book, we recommend a “Speculative Buy” rating on the stock at the current market price of $3.36, up 3.704% on 18th June 2020.


ASB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
 

NRW Holdings Limited

 

NWH Details
 
Strong Cash Conversion in 1HFY20:NRW Holdings Limited (ASX: NWH) is a leading, diversified provider of contract services to the resources and infrastructure sectors in Australia.
 
Recent Update on Gascoyne Resources Limited:The company recently notified about a proposed recapitalisation plan for Gascoyne Resources Limited (ASX: GCY) and its related entities, put forward by FTI Consulting as Voluntary Administrators. The proposal is to be voted at a creditors meeting on 25^th June 2020 and involves an equity raising in the range of $70-$80 million and separate arrangements with key stakeholders for the repayment of pre-appointment debts.
 
Relationship with NRW: At the time of the appointment of Voluntary Administrators, Gascoyne owed $32.7 million to NRW Holdings, on account of a loan provided by the latter. The proposed recapitalisation plan offers the potential for a 100% return of this loan amount.
 
Performance Update: For the 10 months ended April 2020, the company reported record revenue of $1.6 billion and EBITDA of $177 million. The company witnessed significant improvement in net debt, which stood at $115 million as at 30^th April 2020. Given the strong performance, the company paid the interim dividend of 2.5 cents per share on 9^th June 2020. During 1HFY20, the company further expanded its services across the Australian resources, infrastructure and energy sectors through the acquisition of BGC Contracting for $270.1 million. Revenue and EBITDA for the half stood at $808.7 million and $94.6 million, up 55% and 27% on yoy basis, respectively.
 

1HFY20 Results (Source: Company Reports)
 
Outlook: The company seems well placed to cater to increasing opportunities through both its Golding business on the east coast and the significantly enhanced construction business in the west.The business remains on track to achieve the FY20 revenue guidance of $2 billion, as compared to FY19 revenue of ~$1.1 billion.
 
Key Risks: The company’s financial performance is prone to the level of activity in the resources and mining sector, which can be impacted by several factors beyond control. A highly competitive market makes it difficult to predict the certainty of new contracts being awarded.The company also faces the risk of existing contracts being cancelled, reducing the revenue-generating potential. There can be delays in the delivery of projects due to the high level of complexity involved in operations and can impact the company’s cash flow and liquidity. Other risks can be related to the cost of fuel and energy sources, equipment, and personnel, if the company materially underestimates these costs.
 
Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation (Illustrative)
 

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation:The stock of the company gave positive returns of 25.90% in the last one month and is currently trading near the average of its 52-week trading range of $1 - $3.45. During 1HFY20, the company reported a strong cash conversion of 91% of EBITDA through continued management of working capital. Net debt at the end of the period amounted to $286.5 million, on the back of BGC Contracting debt and new equipment finance. The company expects high cashflow conversion to lead to deleveraging over a short period of time. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with low double-digit upside (in % terms).For the purpose, we have taken peers such as Monadelphous Group Ltd (ASX: MND), ALS Ltd (ASX: ALQ), Austin Engineering Ltd (ASX: ANG), etc. Considering the above factors, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.94, up 1.042% on 18th June 2020.

 
NWH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.