Company Overview: Euroz Hartleys Group Limited (ASX: EZL) provides stockbroking, investment, financial advisory, and funds management services to private, institutional, and corporate clients. The company has transformed itself from a stockbroking business into a leading Western Australian financial advisory firm, supported by organic growth and successful acquisitions. The company started trading on ASX in August 1971.

EZL Details

EZL Rides on Robust Balance Sheet & Diversified Revenue Streams: EZL remains focused on growing and diversifying revenue streams, underpinned by a decent outlook for Western Australian Economy, supported by strong demand across the business, consumer, and government sectors. With its increased business scale, the company seems well placed to capitalise on the buoyant Western Australian economy and commodities outlook.

Spotlight on 1HFY22 Results: EZL has recently released financial results for the year ended 31 December 2021.

• Capital Raising Program: The company’s robust equity capital market (“ECM”) raisings and brokerage revenues, are positively driving EZL’s underlying cashflow and profitability. Over 43 consecutive half-year periods, including December 2021, the company has paid $271 million in dividends.
• Rise in Revenues & FUM: The company's revenues for the year grew by 18.7% YoY in 1HFY22, and its total FUM grew to $3.7 billion, which was 19.4% higher than the previous year. Notably, the company was positively impacted by larger scale, which offered material synergies and an augmented platform for organic and acquisition growth prospects.
• Profitability: NPAT for 1HFY22 stood at $22.9 million, down 8.8% year over year, mainly due to a rise in staff costs, and higher operating expenditures. The Group’s underlying cash profit for 1HFY22 came in at $9.4 million.
• Liquidity Position: With a cash & cash equivalent of ~$78.5 million and $42.4 million of lease liabilities in its balance sheet as at 31 December 2021, the company seems well placed for growth.

Financial Summary (Source: Analysis by Kalkine Group)

Schemes of Arrangement: On 24 December 2021, EZL updated the market regarding, the proposed Schemes of Arrangement (“Schemes”) with WAM Capital Limited, Westow Investment Company Limited (“Westoz”) and Ozgrowth Limited (“Ozgrowth”). EZL has invested ~$65 million into these listed investment companies since its inception. It currently owns 26.25% of Westoz and 40.58% of Ozgrowth.

Key Metrics: Gross margin for 1HFY22 stood at 95.2%, up from 90.3% in 1HFY21. EBITDA margin for 1HFY22 stood at 22.8%, up from 22.5% reported in 1HFY21. Current Ratio for 1HFY22 stood at 2.02x, higher than industry median figure 1.40x.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 33.98% of the total shareholding, while the top four constitute the maximum holding. Hughes (Jay Evan Dale) and McKenzie (Andrew Neil) are holding a maximum stake in the company at 6.97% and 6.73%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend Track Record:

The company has a decent track record of rewarding shareholders through dividends. Supported by decent profitability and cash generation, EZL has paid an interim dividend of 2.5 cents per share for 1HFY22 fully franked, consistent with the prior corresponding period. Over 43 consecutive half-year periods, including December 2021, the company has paid $271 million in dividends. At the CMP of $1.49, the company’s annual dividend yield stood at ~10.88%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks: The company is exposed to the risk of adverse economic conditions triggered by the COVID-19 pandemic. Additionally, continuation of the pandemic and its adverse economic repercussions could substantially hurt its businesses as well as results and financial condition. Since the company is mainly focused on resource, energy and industrial companies, and fluctuations in the commodity prices continue may pose a risk to the company.

Outlook: The company remains on track to gain from a rebounding Western Australian economy and robust commodity prices. EZL has bolstered its balance sheet from continued profitability and an uplift in the value of its many investments, taking total cash and investments to $180.2 million. This, in turn, supports its activities, give it’s a competitive advantage and provides confidence to their large client base.

Stock Recommendation: Over the three months, the stock has been corrected by 14.6% and is currently trading lower than the average 52-week price level band of $1.4 and $2. On a TTM basis, the stock is trading at an EV/Sales multiple of 2.1x, lower than the industry average (Financials) of 7.9x, thus seems undervalued. Considering the company’s increased scale of business, positive Western Australian economy, valuation on TTM basis, capital raising program, technical levels mentioned below, current trading level and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $1.49, as on 3 March 2022, 12:30 PM (GMT+10), Sydney, Eastern Australia). Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Technical Note: EZL's prices recently started to move upward from a crucial support zone, indicating the possibility of an upside movement hereon. On the daily chart, the leading indicator RSI (14-period) is recovering from lower levels and currently trading around mid-point. However, the trend-following indicator 21-period SMA and 50-period SMA are above the CMP and may act as the resistance levels for the stock. Now an important support level for the stock is placed at $1.35, while resistance is at $1.66 level.

Note: The purple color line in the chart shows RSI (14-period).

EZL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.

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