Transurban Group

TCL Details

Completion of Three Major Projects: Transurban Group (ASX: TCL) owns, operates and develops electronic toll roads and intelligent transport systems. The market capitalisation of the company stood at $39.16 billion as on 4^th September 2020. Despite the difficult market conditions, FY20 proved as a significant year of development and delivery for the business, and the company managed to finish three major projects. For FY20, the company reported a fall of 3.4% in proportional toll revenue to $2,492 million. Proportional earnings before interest, tax, depreciation and amortisation (EBITDA) and before significant items for the period amounted to $1,888 million, reflecting a fall of 6.4%. Average daily traffic for the year witnessed a drop of 8.6% across the portfolio. The financial performance for the year was impacted by COVID-19 pandemic.

Proportional Results (Source: Company Reports)

Response to COVID-19: The company undertook necessary action to support its customers, communities and people, which include a grant of $4.7 million in tolling credits to customers impacted by the crisis and an additional targeted social investment of $1.5 million.

What to Expect: The company is capable of pursuing a significant pipeline of opportunities in its existing markets on the back of long-term and proactive management of its balance sheet and organisational capability. The company is scheduled to conduct its 2020 Annual General Meeting on 8^th October 2020.

Key Risks: The company’s business could be impacted by a variety of risks such as unfavourable changes in the market, failure in delivering projects on time and changes in government policies or regulatory interpretations.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: TCL seems well-placed to support economic recovery. For FY20, the company has paid a total distribution of 47.0 cents per stapled security, out of which 2.0 cents is fully franked. For FY21, the company anticipates distribution to be in line with free cash, which stood at $1,476 million in FY20. The company raised $0.8 billion in the form of equity through institutional placement and security purchase plan. The capital strategy of TCL is focused on maintaining strong investment-grade credit metrics, including a strong liquidity position. On the technical analysis front, the stock of the company has a support level of ~A$13.340 and a resistance level of ~A$14.992. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a price of the upside of low double-digit (in percentage terms). Therefore, considering the development and delivery of projects in FY20, the company’s capability to pursue the significant pipeline of opportunities, capital strategy and valuation, we give a “Hold” recommendation on the stock at the current market price of $14.140 per share, down by 1.188% on 4^th September 2020.

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

Downer EDI Limited

DOW Details

Takeover Offer to Spotless Group: Downer EDI Limited (ASX: DOW) provides integrated services in Australia and New Zealand with a market capitalisation of $3.13 billion as on 4^th September 2020. On 20^th August 2020, the company notified the market that its wholly-owned subsidiary, Downer EDI Services Pty Ltd has commenced dispatch of the Takeover Booklet to the shareholders of Spotless Group Holdings Limited (Spotless) with respect to its takeover bid to acquire around 12% of the issued share capital of Spotless not already owned by Downer. In addition, Spotless Group Holdings Limited finds the takeover offer fair and reasonable for Spotless Shareholders not associated with Downer. Under the offer, Downer Services is likely to purchase all of the Spotless Shares for $1.00 cash per Spotless share plus, for every 17.92741 Spotless Shares accepted into the Offer.

Contract from NBN Co Limited: On 31^st August 2020, the company announced that it has been presented a Unified Field Operations (Network) contract by NBN Co Limited having an estimated value of $320 million. This contract is for the maximum tenure of eight years. As per the terms of the contract, the company would provide services that include network restoration, copper rehabilitation, alternate power system activities, network performance and capacity enhancement, urgent field service work and site maintenance in Western Australia, South Australia and the Northern Territory.

A Look at FY20 Results: For FY20, the company reported revenue amounting to $13,417.9 million and Underlying EBITA for the period stood at $416.0 million. During FY20, the company delivered net operating cash flow of $178.8 million with an underlying EBITDA conversion of 39.5%. 

Key Financials (Source: Company Reports)

Key Risks: The company’s business is sensitive to a variety of risks, including the ability to meet customer expectations, reliable and cost-effective assets and services, proper utilization of technology in core service offerings, etc.

Strategic Objectives: The strategic objective of the company revolves around maintaining focus on zero harm, focus on engagement with customers as a cornerstone of the relationship pillar. The company is likely to conduct its 2020 Annual General Meeting on 5^th November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company closed FY20 with strong liquidity, which is likely to assist the company in mitigating any further market volatility. In addition, DOW has no material debt facilities maturing in the 12 months to 30 June 2021. The stock of DOW has corrected 23.91% in the past six months, and as a result, the stock is inclined towards 52-week low level of $2.538, offering decent opportunities for accumulation. On the technical analysis front, the stock of the company has a support level of ~A$3.942 and a resistance level of ~A$4.586. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, considering the recent contract by NBN, strong liquidity position, strategic objectives and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.270 per share, down by 4.26% on 4^th September 2020.

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

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