Austal Limited

ASB Details

Austal Limited (ASX: ASB) is an Australia-based global shipbuilder, defence prime contractor, and maritime technology partner. It offers services that include designing, constructing, and supporting defence and commercial vessels.

Result Performance (Half-Year Ended 31 December 2020 – H1FY21)

The company’s revenue for the interim period stood at $840.3 million, a decline of 19.1% on the previous corresponding period (pcp), mainly due to higher USD/AUD exchange rate, a decrease in USA throughput, a fall in Australasia commercial shipbuilding following the delivery of three large ferries and some COVID-19 related delays. EBIT growth for the period stood at 17.6% (pcp) to $70.5 million, primarily led by better shipbuilding margins in both the USA and Australasia, some of which are regular, and others were of H1FY21 specific. The increase in EBIT contributed to 28.7% YoY  growth in the NPAT to $52.4 million for the interim period.

Key Data (Source: Company Reports)

Recent Update

As per the company’s announcement of 28 June 2021, Austal USA has delivered its 14th Independence-class Littoral Combat Ship (LCS) to the U.S. Navy, from the company’s shipyard in Mobile, Alabama. Austal USA achieved  significant gains in production efficiency having completed the future USS Savannah (LCS 28)  in just under three years, a full twelve months earlier than previous ships delivered under the same program.

In the previous update of 25 June 2021, the company received formal notification from the Australian Securities and Investment Commission (ASIC) that ASIC has concluded its investigation into potential criminal contraventions of the Corporations Act and had determined that it will not take any criminal action against the Company. The company has also stated that there is a sense of relief that ASIC investigated the matter and they have decided not to pursue criminal charges around ASB’s previous market disclosures. It needs to be noted that the company must deal with the civil action that ASIC has initiated earlier.

On 23 June 2021, the company informed the market that the United States Department of Defense has awarded Austal USA a modification to a previously awarded Littoral Combat Ship (LCS) program contract. The modification provides Austal with a total potential additional value of US$44,384,296 (approx. A$58,742,000).

Outlook

The company, through its announcement of 15 June 2021, advised that it expected its EBIT for FY21 to be in the ambit of $112-$118 million, with reduced revenue of ~$1.55 billion from earlier guidance of $125 million EBIT and revenue of ~$1.65 billion for FY2021. This downward revision was necessitated due to delays experienced on programs and associated costs because of Covid-19 related border closures, travel restrictions, and resourcing challenges along with the requirement to make provision for expected future expenses towards civil penalty proceedings commenced by ASIC in the Federal Court of Australia. Having said that, the company has been awarded a US$235 million undefined contract by the USA Navy and an award of US$44 million contract modification would be driving sales of the company in the upcoming years.

Key Risks

The company is exposed to financial risks that include interest rate risk, foreign currency risk, credit risk, and liquidity risk. Meanwhile, COVID-19 presents both logistical challenges for an integrated network of shipyards and the restricted travel that impacts demand for large vehicle ferries.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The company’s gross margin, EBITDA margin and net margin for H1FY21 stood at 13.9%, 11.0% and 6.2%, better than the H1FY20 result of 10.5%, 8.1% and 3.9%, respectively implying improved operating efficiency.

We have valued the stock using EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a slight discount to EV/Sales Multiple (NTM) (Peer Average) considering lower revenue as well as fall in the cash balance.

Considering the aforesaid facts and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.160 per share, down by 0.461% on July 22, 2021.

Data#3 Limited

DTL Details

Data#3 Limited (ASX: DTL) is engaged in providing Australian IT services and solutions and focuses on aiding its customers to resolve complicated business tasks by applying new and advanced technology solutions.

Result Performance (Half-Year Ended 31 December 2020 – H1FY21)

The company reported total revenues of $856.7 million, which went up by ~19.2% year over year. Revenues for the period included $346.1 million of public cloud-based revenues, which went up a whopping 37.4% from the prior corresponding period. Total gross profit in H1FY21 came in at $89.7 million, up by 1.2% on a year over year basis. Net profit after tax (excluding minority interests) showed an improvement of 7.9% year over year to $9.37 million. The Board of Directors declared an interim fully franked dividend of 5.50 cents per share, an increase of 7.8% year over year, representing a payout ratio of 90.3%.

Key Data (Source: Company Reports)

Recent Update

The company, on 19 July 2021, highlighted that it expects its unaudited consolidated net profit before tax for FY21 to be ~$36.8 million, an increase of 8% on the prior year. The year was impacted by increased product delivery delays in the second half, related to the global computer chip shortage being experienced across the industry. These supply constraints have coincided with the spike in demand for devices traditionally experienced during the fourth quarter, resulting in a larger than usual product backorder at year-end. The result is expected to get published on 19 August 2021.

Outlook

The company remains on track to capture higher growth opportunities in the Australian IT market. The company has a robust business, no debt, strong long-term customer relationships which will help it continue experiencing good growth. It could achieve its FY21 financial objectives on the strong H1FY21 performance and pipeline of objectives in the H2FY21.

Key Risks

Stiff competition in the markets where DTL operates, COVID-19 led disruptions, and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions could add to the woes.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The company’s ROE for H1FY21 stood at 18.7%, better than the industry median of 4.5%, implying that the company generated better returns for its shareholders than its peer group. Its return on invested capital for H1FY21 stood at a decent figure of 12.5%.

We have valued the stock using a Price/Earnings multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a slight discount to Price/Earnings Multiple (NTM) (Peer Average) considering fall in the cash balance, decline in the net assets, stiff competition as well as risks related to the COVID-19.

Considering the aforesaid facts and current trading levels, we give  a “Buy” recommendation on the stock at the current market price of $4.960 per share, down by 3.126% on July 22, 2021.

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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