Are These 3 stocks in Buy Zone - PDN, API, PNV

Stocks’ Details

Paladin Energy Ltd

Update on consent for Kayelekera Sale:Paladin Energy Ltd (ASX: PDN) is engaged in the development and operation of uranium mines in Africa, together with the global exploration and evaluation activities in Africa and Canada. As on 13^th December 2019, the market capitalisation of the company stood at $172.37 million. The company updated the market status of the sale of its 85% interest in Paladin (Africa) Ltd, wherein it has to meet the obligation of further tax reporting information, corporate social responsibility and environmental assurances and responses to labour related queries in order to facilitate Government consent.

Strong Balance Sheet with Cash of $40 Million: For the quarter ended 30 September 2019, the company reported a strong balance sheet with cash and cash equivalents of US$40.1million. The company also raised A$30.2 million from the issue of 262,814,641 ordinary shares. During FY 2019, Paladin Energy Ltd continued to demonstrate progress on cost reduction as corporate costs went down to US$4.5 million from US$10.6 million. During the year, net loss after tax stood at US$42.9 million in FY 2019 from a profit of $343.4 million in FY 2018. This was mainly due to one-off gain on the extinguishment of debt in 2018 of US$483,721,000, which resulted from the effectuation of the Deed of Company Arrangement.


Financial Performance (Source: Company Reports)

Stock Recommendation: The company expects the demand growth to exceed the supply capability in the upcoming years. Also, Sale of 85% interest in Paladin (Africa) Ltd will reduce ongoing care and maintenance costs of approximately US$5 million per annum, associated with the Kayelekera Mine. As per ASX, the stock of PDN is trading close to its 52-week low of $0.077. Gross margin improved on YoY basis and stood at 21.1% in FY19. Thus, considering the decent outlook, trading levels and improvement in margin, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.090, up by 5.882% on December 13, 2019.

Australian Pharmaceutical Industries Limited

Rise in Basic Earnings with a High Pay-out Ratio: Australian Pharmaceutical Industries Limited (ASX: API) is a wholesaler distributor of pharmaceutical and allied products and retail support services to pharmacists. As at 13^th December 2019, the market capitalisation of the company stood at $633.06 million. The company, in-line with the decent operational performance, has recently declared a fully franked final dividend of 4 cents per share, bringing a total dividend to 7.75 cents per share, up from 7.5 cents per share in 2018. This provides a dividend pay-out ratio of 70%, reflecting basic earnings per share of 11.2 cents for the 2019 year, up from 9.8 cents in 2018.
Substantial Rise in Net Profits: During the FY19, the group recorded a net profit after tax of $56.6 million, up by 17.4% from $48.2 million in 2018. Total revenue stood at $4 billion in FY 2019, up 4.1% on prior year. This was primarily driven by Pharmacy Distribution revenue of $2.8 billion and inclusion of the first full year of Clear Skincare revenue of $45.6 million. During FY 2019, earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) of $123.1 million, up 11.3% on the prior year.


Revenue Growth (Source: Company Reports)

Expectations for New Growth Opportunities: The company remains focused on leveraging its organisational, strategic and physical assets across Australia and New Zealand to drive continued value growth for its shareholders. API expects to have growth opportunities from new clinics, new offerings, customers in existing clinics and broadening distribution of the product range and also expect growth from the launch of new products.

Valuation Methodology: Price to Cash Flow Multiple Approach

Price/Cash Flow Multiple (Source: Thomson Reuters) *NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: As per ASX, the stock is trading close to its 52-week low level of $1.250, proffering a decent opportunity for accumulation. In the time span of 4 years from FY15 to FY19, the company witnessed a CAGR of 3.78% in revenue and a CAGR of 3.39% in gross profit. Net margin and Return on Equity showed a slight improvement in FY 2019 over the past year and stood at 1.4% and 10.7%, up from 1.2% and 9%, respectively. This indicates that the company is efficiently managing its costs and is delivering decent returns to its shareholders.

Considering the trading levels, decent CAGR in revenue and gross profit, improvement in margins and modest outlook, we have valued the company using one relative valuation, i.e., Price to Cash Flow multiple and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Hence, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.290, up by 0.389% on December 13, 2019.

PolyNovo Limited

BTM CE Mark Approval: PolyNovo Limited (ASX: PNV) develops and commercialises innovative medical devices using its NovoSorb technology in the treatment of burns, surgical wounds and negative pressure wound therapy. As on 13^th December 2019, the market capitalisation of the company stood at $1.15 billion. The company has recently announced that NovoSorb BTM has been granted a certificate of conformance (CE Mark) approval for sale throughout UK/Ireland and the European Union.

Substantial Rise in Revenue:During the year, PolyNovo Limited reporteda total revenue of $14.377 million, an increase of 110.53% from $6.829 million in FY18. This resulted a fall in the loss for the period to decrease to $3.18 million from $5.97 million in FY18. In the time span from FY15 to FY19, the company witnessed a CAGR of 214.41% in revenue.


Financial Performance (Source: Company Reports)

Breakeven in FY20: The company expects a significant expansion of sales of BTM in the US, Australia and New Zealand. The company is increasing its manufacturing capacity of hernia production and is well advanced in its Hernia repair device development and anticipate US market entry in early FY21. PNV also expects to break even in FY20, however, cash flows will continue to be reinvested to drive growth.

Stock Recommendation: As per ASX, the stock of PNV gave a return of 189.17% on a YTD basis but a negative return of 21.49% in the last one month. During the year, gross margin of the company stood at 90.5%, higher than the industry median of 70.8% and current ratio stood at 9.64x as compared to the industry median of 2.47x. In terms of valuation, the stock is trading at EV/Sales multiple of 58.8x, higher than the industry median (Biotechnology and Medical Research) of 24.4x on TTM basis. Thus, considering the volatility in returns, and stretched valuations, we have a watch stance on the stock at the current market price of $1.940 per share, up by 11.816% on December 13, 2019, owing to the approval for sale throughout UK/Ireland and the European Union.


Comparative Price Chart (Source: Thomson Reuters)

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