Company Overview: COSOL Limited (ASX: COS) is engaged in delivering exclusive digital solutions and is one of the biggest Hitachi Ellipse enterprise software operated service givers in North America & Asia Pacific. The company has maintained relationships and competencies with industry-leading solution providers such as SAP, Microsoft, and IBM, Accenture, to name a few. In January 2020, COSOL was listed on the ASX, with its global headquarters and COSOL Asia Pacific in Brisbane, Australia.  COSOL North America is located in Denver, USA.

COS Details

COS Rides on Decent Operational and Financial Fundamentals: During the six months ended 31 December 2020, the company remained on track and posted robust operating performance with both top and bottom-line increasing year over year. The strong results fortify the company’s position as a global leader in delivering innovative proprietary digital solutions to asset-intensive industries.

Key Findings from 1HFY21 Results:

• Rise in Revenues: In 1HFY21, the company’s revenue soared ~45% on pcp and came in at $15.66 million. The reported revenues also exceeded the management guided range of $15.25- $15.50 million. COSOL Australia organic revenue saw an increase of 22%, higher than the management guided range of 20%.
• Increase in EBIT & NPAT: EBIT stood at $2.56 million, representing a rise of 32% year over year. COSOL Australia EBIT witnessed a rise of 28%, outperforming the management guided range of 25% on pcp. Statutory NPAT came in at $1.85 million, depicting a rise of ~35% on pcp.
• Enhancing Shareholder’s Value: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent net cash position, strong liquidity, improved cash flow in 1HFY21, COS declared a fully franked interim dividend of 0.5 cents per share.
• Acquisition Synergies: The company completed the acquisition of AddOns Inc. on 1 September 2020, with an addition of $3 million in revenues & $544k in EBIT. With this acquisition, COS now stands to be one of the leading HAPG Enterprise Software service providers worldwide. The buyout of AddOns also offers a platform for potential acquisitions in North America to COS.
• Expansion of Proprietary Digital IP portfolio: During the period, COS expanded its proprietary digital IP portfolio by offering RPConnect® solutions that provided a secure and resilient platform as a data control centre. The expansion of proprietary solutions aided COS to offer solutions that led to major client wins such as CleanCo, Department of Defence, OK Tedi Mining, and Urban Utilities.  
• Product Launch: The company unveiled OneCOSOL brand in March 2021, a centralised solution & business expansion function aiding cross-sell or upsell throughout various geographies.

Ongoing investment in product innovation to capitalise on new market opportunities were key growth drivers. In addition, the company has an established global strategic sales team to determination large scale deal outcomes throughout various territories. The below picture depicts a continuous growth trajectory in COS’ top-line since 1HFY19.

Revenues Highlight; Analysis by Kalkine Group

Key Developments:

• Strategic Partnership: On 22 July 2021, COS expanded its strategic alliance deal with Hitachi ABB Power Grids. The partnership will fortify COSOL’s position as the largest Ellipse professional services provider needed by Hitachi ABB Power Grids' customers in Australia, New Zealand region.
• Contract Wins: Recently, COS’ wholly-owned subsidiaries, COSOL Australia and AddOns Inc, won new contracts with Transgrid, Ioneer and Anglo American on the back of its RP Connect and Copernicus digital solutions. The contract win strengthens COSOL’s longstanding position as the global leader in Hitachi Ellipse applications and management. The combined revenue from the contract is expected to be $2.2 million in FY21. 

Balance Sheet and Liquidity Position: A healthy balance sheet will help COS attain its long-term objectives, enhance its shareholder’s value, and pursue further strategic acquisitions.

• Cash & Debt Position: The company exited 1HFY21 with a cash balance of $9.3 million, up from $6.77 million at the end of 30 June 2020. Net debt amounted to ~$960k at the end of the period.
• Rise in Operating Cash Inflow: During 1HFY21, the company generated an operating cash inflow amounting to $4.75 million compared to an operating cash outflow of ~$504k reported in the year-ago period.

Key Metrics: For 1HFY21, the company reported an EBITDA margin of 25.3%, higher than 25.1% reported in 2HFY20. In 1HFY21, the company recorded gross margins of 36.7% compared to the 2HFY20 figure of 33.4%. The debt-to-equity ratio for the period stood at 0.16x. 

Profitability Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 66.34% of the total shareholdings, while the top 4 constitutes the maximum holding. Both Lewis (Geoffrey James) and Johnston (Stephen Edward Oliver) held the maximum number of shares with a percentage holding of 18.40%, each, followed by Skeggs (Bradley Ronald) holding 6.81%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Loss of Key clients: The company’s financial performance might get impacted by caution in buying behaviour. Thus, retaining robust and long-term client relationships is a challenging task.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Integration Risk: COS is acquiring many companies, which results in some integration risk.
• The company is also exposed to forex headwinds.

Outlook:

• The company remains focused on concluding FY21 on a strong note. The acquisition of AddOns Inc. will aid the company to expand its offerings to existing clients and budding clients in numerous geographies.
• The company remains positive to perform sturdily in the 2HFY21, given its robust product pipeline to win new client work, the continuous investment to develop its proprietary digital IP platform, and the prospective consolidation and integration of future synergistic businesses.
• The company remains on track to enhance shareholder’s value by paying fully franked dividends in FY21, with an expected pay-out ratio of 50% of NPAT.
• For 2HFY21, the company remains confident to build and expand more comprehensive product offerings to strengthen its market position. In 2HFY21, it expects top-line growth of 23-25% above 1HFY21.

Stock Recommendation: The stock of the company has been corrected by ~10.14% in the past three months. Currently, the stock is trading below the average of its 52-week high and low levels of $0.93 and $0.53, respectively. On a TTM basis, the stock of COS is trading at an EV/Sales multiple of 2.7x lower than the industry median (Professional & Commercial Services) of 3.1x, thus seems undervalued. Considering the increase in cash balance and cashflows, higher revenue base, increase in profits, acquisition synergies, robust product pipeline, positive outlook, technical levels mentioned in the below para, current trading levels, valuation on TTM basis, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.615, down by ~0.807% as on August 6, 2021.

Technical Commentary:

COSOL prices are trading in a primary upward trend. Prices broke the downward sloping trend line by upside in March 2021, and since then, prices are sustaining above the downward sloping breakout line. Prices have recently shoot up from the supporting levels further indicating reversal signs in the stock. RSI (14-period) is hovering at ~60 level monthly and ~46 on a daily chart that indicates prices are getting upside momentum. Immediate support levels are $0.54 and $0.50, while immediate resistance levels are $0.75 and $0.81.

COS Daily Technical Chart, Data Source: REFINITIV 

Note: The purple color line in the chart depicts RSI (14-period) while the yellow color line represents the trend line.

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

Note 2: 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. 

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.