Company Overview: Ava Risk Group Limited (ASX: AVA) is engaged in the provision of risk management services and technologies and provides its services to a diverse client base from different sectors. It provides its offering to commercial, industrial, military and government clients. It makes use of leading technology divisions – Future Fibre Technologies (FFT) and BQT Solutions (BQT). Its product offering includes intrusion detection for perimeters, pipelines and data networks, biometric and card access control, etc., to name a few. It also provides international valuable logistics services, which is operated under Ava Global DMCC.

AVA Details

Decent YTD Performance Aided by Growth in Services Division: Ava Risk Group Limited (ASX: AVA) provides risk management services and technologies to a diverse client base. The market capitalisation of the company as on 04 June 2021, stood at ~$103.90 million. Despite the impact of COVID-19 pandemic, the company has delivered resilient results for the nine months to 31 March 2021 where it reported a ~16.6% YoY revenue growth in Technology division and ~82.4% YoY revenue growth in Services division. It has been able to adapt itself to the changing circumstances and manage cost effectively while delivering innovative solutions. Group EBITDA margin expanded ~1,000 bps YoY to 27% in YTD FY21 vs 17% on the pcp.

AVA has posted decent performance in the Services Division, reflecting the scalable nature of its operations. It is optimistic about its FY22 prospects and have a decent pipeline of growth opportunities, and is well-positioned to take advantage of the expected uptick in demand for its products and services going forward.

In Q3FY21, the company has reported a revenue of $13.4 million, reflecting an increase of 8.8% on the previous corresponding period. The Group Revenue increased by 48.2% to $48.5 million during the nine months to 31 March 2021. The growth has been aided by the decent performance from the Services Division, as AVA was able to capture a greater share of the existing client spend. The gross margins increased to ~52% from ~49% during the nine-month period due to improved margin performance in the Services Division, which also includes $7.8 million in licence fees from the Indian Ministry of Defence (IMoD) project. EBITDA also improved to $13.1 million, compared to $7.6 million on the previous corresponding period, on a nine-month YTD basis. It ended the period with a decent cash position of $11.7 million as of 31 March 2021, with no debt on the balance sheet.

Liquidity Trend (Source: Analysis by Kalkine Group)

Segment Performance in Q3FY21: The Technology Division, which comprises – Future Fibre Technologies (FFT) and BQT Solutions (BQT), was impacted by the COVID-19 pandemic and witnessed delays in the ordering, delivery and commissioning of products to certain customers. However, this business unit was able to build a decent sale pipeline for technology products. The segment had a backlog of $3.2 million as of 31 March 2021, which included $2.6 million in regards to the IMoD contract. It expects to realise this revenue in FY22.

However, during the quarter, the Services Division witnessed resilient performance, despite the impact of the pandemic on the air freight sector. It expanded its suite of service offerings and responded to the pandemic by providing a range of innovative cargo and charter aircraft solutions and ensured the delivery of currency, precious metals and other valuable goods to its clients.  On the back of these activities, the revenue increased by 61.6% to $10.1 million in Q3FY21 when compared to the pcp. This segment continues to build on its performance and position in the international valuable logistics sector.

Q3FY21 Services Division Financial Performance (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 42.70% of the total shareholding, while the top 4 constitute the maximum holding. Cronin (David Lachlan) and Valwren Pty. Ltd. are holding a maximum stake in the company at 13.52% and 6.35%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During H1FY21 period, the company reported impressive margin performance and delivered a gross margin of 58.1%, compared to 48.9% in the previous corresponding period. There was also a significant improvement in the net margin performance to 30.8%, from a level of 4.6% in H1FY20. ROE stood at 37.1% during the same period under consideration. There was also considerable improvement in the liquidity of the company, with the current ratio at 3.81x in H1FY21.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: As witnessed in the quarterly update, the company is exposed to the impacts of macro-economic events such as the ongoing COVID-19 pandemic. The technology division has been impacted as a result of the travel restrictions and imposed lockdowns, which caused a delay in several key projects. It is also exposed to interest rate risk in regards to the amount of cash and equivalents held on its balance sheet.

Outlook: AVA has forecasted the Group Revenue of $60-$64 million in FY21. It also expects EBITDA to be between $13-$15 million during the same period. Along with the IMoD contract, it anticipates a total order of $6 million in projects to be deferred to FY22, creating a robust pipeline in the process. It has continued to receive interest in Aura IQ, which is a new conveyer health monitoring solution. Moreover, it expects to sign multi-year maintenance agreements that will provide recurring revenue comfort to the company. It will also look to leverage BQT’s key distributor partners in the US and Europe and drive sales in the process.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company believes that new client wins and higher contracted customer spends might drive the Services Division revenues in FY22. As per ASX, the stock of AVA is trading below its average 52-weeks’ levels of $0.145-$0.785. The stock of AVA gave a positive return of ~1.20% in the past one month and a positive return of ~10.52% in the past one week. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount to its peer median EV/Sales (NTM trading multiple), considering the impact of the COVID-19 pandemic on the company’s operations and delay in key strategic projects. For this purpose, we have taken peers such as Catapult Group International Ltd (ASX: CAT), Smart Parking Ltd (ASX: SPZ), Senetas Corp Ltd (ASX: SEN), to name a few. Considering the expected upside in valuation and current trading levels, robust performance in the nine months to March 2021 quarter, resilient results in the Services Division, positive long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.420, down by 2.326% as on June 04, 2021.

AVA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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