With daily cases dropping since September 2020, the Australian Government has begun easing the restrictions. It had earlier chartered the 3-step plan to reopen the country by December 2020. Victoria, once peaked with daily cases, achieved significant easing restrictions recently.
Revenues to Grow by December 2020: As per the latest Government statistics, 24% of businesses in Australia reported an increase in revenue in November 2020 as compared to 16% in October 2020. The increase is significant compared to earlier periods. The data also showed 25% of businesses are expecting higher revenues in December 2020. This correlates to the step 3 plan announced by the Government to attain COVID normal state by Christmas 2020 with free domestic movement and quarantine-free international travel to low-risk regions. The data mentioned that accommodation and food services industry to show significant revenue growth in December following electricity, gas, water and waste services, and retail trade sector.
Figures 1. Proportion of Businesses Showing Change in Revenues, July to November 2020
Data Source: Australian Bureau of Statistics
Figure 2. Factors that Drove Improvement in Business Sentiments
Data Source: Australian Bureau of Statistics, Chart Prepared by Kalkine Group
Retail Sector: Declining daily cases and improving business sentiments favourably impacted retail sales. Easing restrictions and opening of retail stores in Victoria benefited sales across industries. Retail sales turnover improved by 1.6% in October 2020 over preceding month and +7.3% over last year comparable period. Sales at cafes, restaurants and takeaway food services contributed to the rise, following clothing, footwear, and personal accessories category, and department stores.
Online sales remained elevated as mobility restrictions reduced in-store shopping. Online sales accounted for 10.6% of total Australia retail sales in September 2020 as against 6.6% last year. Retailers deployed various omni-channel initiatives in segments like apparels and footwear to drive growth.
Figure 3. Retail Sales Turnover Growth
Source: Australian Bureau of Statistics, Chart Prepared by Kalkine Group
Waste Recycling Sector: The pandemic had mixed impact on the waste recycling sector. The sector saw increased traction from clinical and hospital waste partly offsetting the decline in industrial waste. Volumes of residential waste although increased but mostly sent to landfill. In FY2019, the sector generated about 75.8 million tonnes of solid waste, a two-fold increase from the preceding two years. In FY20-21 budget, the Australian Government proposed to invest $249.6 million in waste recycling industry. It had planned to set-up Recycling Modernisation Fund that will generate $600 million of investment in Australia’s recycling capacity. In addition, the National Waste Policy Action Plan will be formed with investment of $59.6 million to eliminate waste exports, improving waste data and halving food waste by 2030.
Spend on Capital Expenditure: As business sentiments improve, companies are optimistic about their capital expenditure plans. As per the data release, about 22% of businesses have capex plans for the next three months. Of this, a handful of businesses are expecting to spend the same or more. Large companies are expected to spend more capex than medium and small companies. Companies in retail sector are expected to spend more capex over the next three months strongly benefiting from the improvement in disposable household income.
Figure 4. Proportion of businesses with Planned Capex over the Next Three Months
Source: Australian Bureau of Statistics
Increase in IT Spend: The online sales grew massively with mobility restrictions forcing companies to invest in technology delivering seamless e-commerce experience. Companies were reporting increased online sales penetration above pre-COVID levels. Retail companies are increasingly expanding omni-channel fulfilment capabilities like BODFS (Buy Online, Delivery From Store), BOPIS (Buy Online, Pick-up In Store), BORIS (Buy Online Return In Store) and BOSS (Buy Online, Ship to Store).
Figure 5. Capex Spend by Category:
Source: Australian Bureau of Statistics
Key Risks: The pandemic altered the consumption pattern. The household consumption, an indicator of consumer spends, deteriorated sharply in June quarter by 12.7% over last year. Although employment improved, wage hikes declined with hourly pay rates touching low in June 2020. Consumers were reluctant to spend on discretionary products during COVID-19 and preferred to save more and spend only on essentials. This may hurt retail sales in the near-term, but we believe as the economy continues to open, consumer confidence will improve. We also believe the Government’s announcement to extend the JobSeeker program until March 2021 will help revival in consumption and drive growth for businesses.
The recent data from ABS showed that accommodation and food services industry, electricity, gas, water and waste services, and retail trade are expected to report growth in revenues in December 2020. Furthermore, large companies are expecting an increase in capex spend on IT/ technology. Considering these expectations, let us have a look at few stocks that are most likely to benefit from improved economic conditions, going forward.
(1) FINEOS Corporation Holdings Plc (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.18 Billion, Annual Dividend Yield: 0%)
Increase in FY20 Revenues: FINEOS Corporation Holdings Plc (ASX: FCL) provides cloud-based software and services to life and healthcare insurance carriers. During FY20, FINEOS won 9 new contracts including 8 in North America and 1 in Australia. The company is geographically diversified with clients in the US, Canada, Australia, and New Zealand and is rapidly expanding its businesses in the North America region. Acquisition of Limelight increased the penetration in the US market with deep portfolio from quotations to claims management. Overall revenues grew by ~40% in FY20 to EUR 87.8 million. EBITDA margin improved from 14.6% in FY19 to 15.9% despite an increase in headcount costs and R&D expenses. The company reported a strong opening quarter for FY21, with cash receipts rising by 18.1% to EUR 30.1 million. During the quarter, the company completed the acquisition of Limelight Health for US$75 million.
Outlook: The management intends to grow its high margin cloud-based SaaS products which accounted for 64% of revenue in FY20. It is currently migrating legacy core systems to cloud-based systems through continued R&D in FINEOS admin suite (offering complete product suite) as against claims suite. Its acquisition of Limelight business helps to deepen the penetration in underwriting portfolio and access to blue-chip clients in the US market. Excluding Limelight, the management is targeting revenue growth of 20% in FY21 with 30% growth in subscriptions.
We believe FINEOS is well-positioned to benefit from the increased spend on capex by large companies on IT/ technology given the sizeable nature of business, strong clientele base and leadership position in life insurance carriers. The company is rightly progressing in cloud-based software services with increased R&D spend.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs FCL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has corrected by 15.10% in the last one month. As on 30th September 2020, the company had a cash balance of EUR 34.9 million. The company also reported an increase of 19% in headcount as on that date, as compared to the headcount on 30th June 2020. Owing to the performance in FY20, the stock price peaked in August 2020 against the market index movements. Currently, the stock is moving in line with the market volatility index, with high-margin products and growing R&D to drive growth in the long run. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.00, up 1.781% on 23rd November 2020.
(2) Cooper Energy Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 561.19 Million, Annual Dividend Yield: 0%)
Increase in 1Q21 Production: Cooper Energy Limited (ASX: COE) is an upstream oil and gas exploration and production company. During the three months ended 30th September 2020, the company reported sales revenue amounting to $24 million, as compared to the previous quarter revenue of $24.1 million. Gas revenue increased by 1% to $21.8 million and gas sales volume increased by 11% during the quarter. In comparison to pcp, gas revenue increased by 27%. Revenue from oil went down by 15% on the prior quarter. Production for the quarter stood at 0.67 MMboe, up 10% on the previous quarter and 72% YTD. During FY20, the company’s sales revenue increased by 3% and operating cash flow increased by 134%, on pcp.
Outlook: The Otway Phase 3 Development Project is currently in the Concept Select phase which is expected to be completed in the first half of FY21 for a Final Investment Decision (FID) in the September quarter 2021. Site works at the Athena Gas Plant Project commenced in late October 2020 with first gas still expected in the September quarter 2021. Subsequent to the end of the quarter Cooper Energy Limited and APA announced commitment to works to reconfigure the Orbost Gas Processing Plant, which has a budgeted total gross cost of $19 million.
The commencement of term gas supply from Sole, deferred in FY20, is expected to drive substantial growth in production, revenue and cash generation in FY21. The company is also planning for a resumption of offshore drilling on new gas projects in FY23. Since the company has a strong gas segment, it seems to be a beneficiary of the latest ABS announcement predicting an increase in December 2020 gas revenues.
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
A-VIX vs COE (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has corrected by 14.63% in the last six months. The company has delivered decent growth in revenues over the past 5 years, with decent improvement in gas revenues in FY20 and 1Q21. After a drop in price due to fluctuations in commodity price and demand, the stock is now performing well as compared to the market index. The business in intact with the recovery in demand for gas driving revenues. Going forward, gas is expected to drive substantial growth in production and revenues, hence, driving the stock returns. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation, key risks, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.350, up 1.449% on 23rd November 2020.
(3) Cleanaway Waste Management Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 4.83 Billion, Annual Dividend Yield: 1.74%)
Growth in FY20 EBITDA and NPAT: Cleanaway Waste Management Limited (ASX: CWY) is a provider of waste management services and resource recovery. In FY20, the company reported net revenue amounting to $2,100 million, down 0.4% on pcp. EBITDA for the year increased by 11.7% and stood at $515.7 million. EBIT increased by 6.6% and stood at $256.6 million. NPAT for FY20 amounted to $150.3 million, representing an increase of 7% on the previous year. The results reflected decent organic growth and full year benefit of the synergies from the Toxfree acquisition, which translated to 8.7% earnings per share growth to 7.5 cents per share.
Outlook: The company’s Q1FY21 EBITDA was in line with FY20 full year run rate, with further improved conditions in September. The company expects FY21 full year EBITDA to be moderately higher than FY20, subject to recovery in economic conditions in 2HFY21. Each of the company’s business segments seems to be performing well despite the challenges posed by the pandemic.
Being a key player in the waste management industry in Australia, CWY is set to benefit from improved business sentiments for December 2020. According to the ABS, waste services companies are expected to report an increase of 36% in revenue for December.
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
A-VIX vs CWY (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has given positive returns of 27.42% in the last six months. During FY20, the company witnessed an increase of 4.3% in cash flow from operations and a cash conversion ratio of 108.2%. Cash on hand increased from $56.2 million in FY19 to $79.8 million in FY20. As market volatility stabilised, the stock of the company has shown remarkable movements. Currently, the stock is trading on the high side of its 52-weeks low-high range but is expected to witness growth on the back of acquisition synergies and a growing market for waste management services. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.360, up 0.425% on 23rd November 2020.
(4) Kogan.com Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 1.84 Billion, Annual Dividend Yield: 1.20%)
Significant Growth in YTDFY21 Sales: Kogan.com Limited (ASX: KGN) is engaged in the management of a portfolio of retail and services businesses, including Kogan Retail, Kogan Insurance, Kogan Travel, etc. In FY20, the company reported gross sales of $768.9 million, up 39.3% on the previous year. The company’s YoY growth in exclusive brands revenue accelerated in the second half of FY20, up 34.1% on 2HFY19. Gross margin and EBITDA margin for FY20 improved on FY19 and stood at 25.4% and 9.3%, respectively. For YTDFY21 (July 2020 – October 2020), unaudited gross sales went up by 99.8% on pcp.
Outlook: Going forward, the company aims to launch new products and grow across new verticals, benefit from acquisition and growth in exclusive brands and third-party brands, and further increase its active customer base.
The retail sector continued to have its ups and downs during the pandemic but maintained resilience through online presence. Kogan, being a provider of a diverse set of offerings, continued to witness demand for its products. As conditions improve further, the company may witness an improvement in sales and number of customers in the months ahead. In December 2020, retail trade revenues are expected to rise by 32%, according to the data released by ABS.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs KGN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company has given positive returns of 81.89% in the last six months but corrected by 29.55% in the last one month. At the end of FY20, the company had a strong balance sheet with cash amounting to $146.7 million and an undrawn debt facility of $30 million. Being a provider of essential goods, KGN has witnessed resilience in its stock price despite COVID-19 challenges. As depicted in the chart above, the price has performed decently relative to the market index and is backed by a growing customer base, new products and verticals, and growth in exclusive brands. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $17.300, down 1.143% on 23rd November 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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