Company Overview: Ava Risk Group Limited (ASX: AVA) provides security technology products and is also engaged in the provision of security access control products. It has business in the international valuable logistics division which is operated under Ava Global DMCC. Its range of product solutions include - Future Fibre Technologies (FFT) for intrusion detection for perimeters, pipelines and data networks; BQT Solutions (BQT) for biometric and card access control; as well as international logistics and storage of high-value assets under the AVA Global business vertical.
AVA Details
Key Contract Wins & Margin Performance Driving Revenues: Ava Risk Group Limited (ASX: AVA) is involved in the business of risk management services and technologies. The market capitalisation of the company as on 16 April 2021, stood at ~$114.77 million. As per the recent news, the company has announced that its Aura Ai sensing solution has been selected for deployment to upgrade security at certain important rail facilities in South America. The contract has been valued at over $1.84 million, under which multiple Aura Ai-2 systems will be integrated with the clients’ video management software and CCTV systems.
During H1FY21, the company reported decent financial performance with an increase of ~72% in revenues to ~$35.16 million, compared to the previous corresponding period. The revenue growth has been aided by decent performance in the Services Division. Perimeter Security and Access Control also made an additional contribution of $5.47 million to sales with revenue inflow from the Indian Ministry of Defence Contract (MoD) as well as from the Australian Department of Defence. The orders backlog stood at $3.4 million as of 31 December 2020. There has been improvement in the gross margin of the company owing to a higher margin in the International Valuable Logistics (Services) segment and aided by an improved margin in the Technology division. The net profit increased to ~$11.028 million in H1FY21, compared to a profit of $0.942 million in H1FY20. It ended the period with a cash position of $13.398 million as of 31 December 2020, with no external borrowings on the balance sheet.
H1FY21 Financial Performance (Source: Company Reports)
Decent Growth Complemented by Service and Technology Division: The service division contributed revenue of ~$18.4 million in H1FY21 and an EBITDA of $3.8 million. This segment provides fully insured, door-to-door services through a network of highly experienced service providers. Its unique partnership model enables it to provide service in over 100 countries. There has been a revenue contribution of ~$16.6 million from the Technology Division in H1FY21, and an EBIDTA of $8.2 million. It offers highly reliable and intelligent intrusion detection solutions for the protection of critical sites and infrastructures. The segment finds its applications in the Transport, Government, Military, Oil & Gas and Utility sectors. The company’s new Aura Ai platform makes use of advanced optical designs and algorithms, extending its reach to related adjacent markets.
Business Segments (Source: Company Reports)
Award of Multi-Base Air Force Contract: AVA has announced that its Aura Ai sensing product has been able to complete Site Acceptance Testing at a major airbase located within a large Asian country. It has been further selected to be deployed for a 15-site program in order to upgrade security at certain air force bases. It has received initial purchase orders of over $0.7 million for the next four sites, where deployment was supposed to be during Q3FY21.
Top 10 Shareholders: The top 10 shareholders together form around 42.41% of the total shareholding, while the top 4 constitute the maximum holding. Pandon Holdings Pte Ltd. and Valwren Pty. Ltd. are holding a maximum stake in the company at 13.23% and 6.35%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: AVA reported a significant increase in the gross margin to 58.1% in H1FY21, compared to a margin of 48.9% in the previous corresponding period. There was also an improvement in the net margin to 30.8% from 4.6% during the same period under consideration. ROE of the company stood at 37.1% during H1FY21. The current ratio also improved to 3.81x and cash cycle decreased to 31.6 days.
Growth and Margin Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The important risks arising from the company’s financial instruments are currency risk, credit risk, and liquidity risk. It is exposed to interest rate risk with regards to the cash and equivalents held on its balance sheet. It is also prone to foreign currency risks, with its line of business being inclined to operations and revenue opportunities across several governments and countries. The Group serves major corporations and Governments and as such there may be a delay in the receipt of its revenue which might inflate the receivables in the process.
Outlook: The company seems to be well funded to leverage on any growth opportunities with $13.4 million as cash at bank during the end of the first half of FY21. The improved gross margins from the service division augur well for the company with further scope for achieving scale in operations. Moreover, it has witnessed increased traction for its Aura IQ product and expects to further drive revenues through it. The increasing global security concerns have given rise to a demand for security solutions, and AVA seems to be well-positioned to address the concerns of the industry with its quality services and highly rated technological products.
Valuation Methodology: Price to Sales Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Stock Recommendation: On January 2021 the company has announced a special dividend of 2 cents per share, paid on 11 March 2021. As per ASX, the stock of AVA is trading slightly above its average 52-weeks’ levels of $0.110-$0.785 The stock of AVA gave a positive return of ~16.40% in the past six months and a negative return of ~11.81% in the past one month. On a technical analysis front, the stock of AVA has a support level of ~$0.439 and a resistance level of ~$0.551. We have valued the stock using 1-year forward Price to Sales market multiple (considering premium of 1x from the three years’ average considering the improved financial performance and expected improvement in the efficiency of operations) to FY22E consensus sales of $68.5 million and have arrived at an indicative target price of lower double-digit upside (in % terms). Considering the expected upside in valuation, impressive financial performance in H1FY21, improvement in the margin performance from the service division, key contract wins, decent cash position and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.485, up by 2.105% as on April 16, 2021.
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AVA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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