Company Overview: IDT Australia Limited (ASX: IDT) is engaged in the supply of products, research, and development in the pharmaceutical space, including medicinal cannabis. The company specialises in high energy manufacture of Active Pharmaceutical Ingredients (API) and Finished Dose Forms (FDF), clinical packaging, microbiological and analytical testing. The company has a 40-year history of developing more than 60 marketed drugs.

IDT Details

IDT Rides on Decent Operational and Financial Fundamentals: During the year ended 30 June 2021, the company remained on track and posted decent operating performance with both top and bottom-line increasing year over year. The company booked its first operating profit since 2009. Despite multiple Victorian lockdowns, the company’s manufacturing operations and laboratories remained fully operational, which assists the company in delivering products in the pharmaceutical space, including medicinal cannabis.

Key Findings from FY21 Results:

• Rise in Revenues: In FY21, the company’s revenue soared 19.5% on pcp and came in at $16.9 million. The reported revenues include $0.9 million of JobKeeper receipts.
• Increase in EBITDA & NPAT: EBITDA stood at $2.72 million, representing a rise of ~244.9% year over year. NPAT came in at $2.1 million, compared to a loss of $1.92 million in FY20, depicting a rise of ~209.6% on pcp. Owing to a higher revenue base and stronger controls in procurement and manufacturing, the company reported its first operating profit since 2009.
• Rise in Earnings Per Share: The company reported EPS of 0.9 cents  as compared to a loss of 0.8 cents reported in FY20.
• Vaccine Initiatives: The company assisted the Australian Government with certain COVID-19 response activities to enhance Australia’s production capability for a COVID-19 vaccine. In this regard, IDT worked with the Victorian Government and Monash Institute of Pharmaceutical Sciences (MIPS) to provide cGMP manufacture services to continue the progress of Australia’s first locally established mRNA COVID-19 vaccine candidate.
• Medicinal Cannabis Manufacturing Plan: IDT remains on track to make further progress on its Medicinal Cannabis Manufacturing Plan. In doing so, it has developed its own proprietary medicinal cannabis API, which is now commercially available. In June 2021, IDT entered into a strategic alliance with Clever Leaves Holding Inc. to create two varieties of bulk medicinal cannabis flowers. The company expects to expand its range of proprietary medicinal cannabis products in the Australian market post the successful completion of stability trials.

Ongoing investment in product innovation to capitalise on new market opportunities were key growth drivers. The below picture depicts a continuous growth trajectory in IDT’ top-line since FY19.

Revenues Highlight; Analysis by Kalkine Group

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

• Cash & Debt Position: The company exited FY21 with a cash balance of $6.9 million, up from $6.86 million at the end of 30 June 2020. The cash balance was backed by an unused facility of $2.5 million with the National Australia Bank Ltd, due for renewal in July 2022. Total borrowings amounted to ~$766k at the end of the period.
• Rise in Operating Cash Inflow: During FY21, the company generated an operating cash inflow amounting to $370k compared to an operating cash outflow of ~$1.91 million reported in the year-ago period.

Key Metrics: For FY21, the company reported an EBITDA margin of 16.2%, higher than the 5.6% reported in FY20. In FY21, the company recorded gross margins of 88.9% compared to the industry median figure of 67.5%. Debt-to-equity ratio for the period stood at ~0.03x.

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 52.86% of the total shareholdings, while the top 4 constitute the maximum holding. One Managed Investment Funds Ltd. and Sandon Capital Pty Ltd held the maximum number of shares with a percentage holding of 11.67%, and 11.16%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis:

• The company is exposed to a complex regulatory landscape in the cannabis business. Also, cannabis companies are exposed to the risks of cyber theft and hacking. 
• The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• The company is exposed to forex headwinds and stiff rivalry from competitors developing similar product lines and services.
• The company has declared or distributed no dividends to its members, which might hurt the sentiments of the shareholders.

Outlook: The cash reserves and debt facility are expected to aid the company in implementing its growth strategies and projects and to extend production and manufacturing capabilities. Going forward, the company remains focused on re-establishing sterile manufacturing, assist the Australian Government with certain COVID-19 vaccines and other therapeutics, and expand the base contract development and manufacturing business. During FY21, IDT made progress to advance its Medicinal Cannabis Manufacturing Plan. Notably, its extraction and purification activities have the capability to produce a range of cGMP medicinal resins and refined APIs.

Stock Recommendation: Currently, the stock is trading above the average of its 52-week high and low levels of $0.755 and $0.15, respectively. On a TTM basis, the stock of IDT is trading at an EV/Sales multiple of 9.2x lower than the industry median (Healthcare) of 14.2x, thus seems under-valued. Considering the increase in cash balance and cash flow, higher revenue base, increase in profits, 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 $0.66, down by ~5.036% as on 1 September 2021. 

Technical Commentary:

On the daily chart, IDT price broke out the trend line resistance at AUD 0.565 level on August 23, 2021. After the breakout, prices are sustaining above the trend line. The leading indicator RSI (14-Period) is trading at ~63.27 levels, indicating a positive momentum. An important support level for the stock, is placed at AUD 0.54, while the key resistance level is placed at AUD 0.79.

IDT 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.