HRL Holdings Limited

HRL Details

H1FY22 Financial Performance: HRL Holdings Limited (ASX: HRL) is mainly involved in providing sampling, data management services, and laboratory testing across Australia and New Zealand. The company’s customers operate in the food, environmental, occupational hygiene, and construction industries.

• Resilient Sales Growth: Sales revenue surged by 10% PcP due to robust environmental and product origin testing growth, partially offset by a plunge in traditional laboratory dairy and honey markets. Environmental and asbestos testing advanced by 15% despite New Zealand lockdowns.
• Disrupted Bottom-Line: Underlying EBITDA slipped by 45% and underlying NPAT shrunk by 97%. The declined profitability levels were owed to softer dairy and honey volumes, containment measures in New Zealand, high mobilization costs for major Geotech projects.
• Business Expansion Prospects: HRL is seeking to invest in technical operating capabilities to harness future volume growth. Headcounts surged by 16% relative to June 2021 levels. Material capex investment stood at $3.4 million for software development, equipment, and joint ventures.
• Financial Position: Closing cash balance for H1FY22 stood at $0.852 million (H1FY21: $3.747 million), attributed mainly to unfavourable CAIQTest profits, increased working capital investment due to prepaid insurances and high inventory levels, and strategically spent on laboratory equipment. Net debt stood at $3.5 million with a debt service coverage of 2.1x and debt to EBITDA ratio of 0.9x.

Source: Company Report, Analysis by Kalkine Group

Key Risks and Challenges

• Disrupted Honey Market: The honey market has faced significant challenges, for instance, oversupply and curtailed demand from overseas customers.
• Excess Inventory in Dairy: Dairy beta-casein customers registered excess inventories amid COVID-19 containment measures extending a demand and supply gap, coupled with a decline in daigou channels.

Outlook

HRL is expected to make considerable investments in laboratory equipment, joint ventures, and software development. For FY22, capex investments stand at a $4.5 million estimate. The company is striving for robust revenue growth in FY22. The reinvestment in Octfolio software products is expected to trade at breakeven levels.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average, and investment risks.

Stock Recommendation: The stock of HRL gave a negative return of ~29.286% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.086 - $0.145. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company might trade at some premium to its peers’ average, considering favourable capex strategy and top-line growth prospects. For valuation, few peers like Namoi Cotton Ltd (ASX: NAM), Mader Group Ltd (ASX: MAD), Ai-Media Technologies Ltd (ASX: AIM) and others have been considered. Given the robust capex planning, favourable upside sought in revenues, reinvestment in Octfolio software products, profitable prospects of CAIQTest Pacific, current trading levels, upside illustrated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $0.099, up by ~7.608%, as of 08 February 2022.

HRL Daily Technical Chart, Data Source: REFINITIV

BSA Limited

BSA Details

Recent Business Update: BSA Limited (ASX BSA) operates in the technical services contracting industry and caters to communications, utility infrastructure, and property solutions. On 08 February 2022, BSA announced an on-market buy-back to enhance capital efficiency, enhance shareholders’ returns, and maintain balance sheet flexibility.

FY21 Financial Performance

• Top-Line Update: In FY21, revenue slipped by 13.2% YoY and clocked $422.5 million due to stabilising nbn volumes after FY20 activations peaked and COVID-19 Impact. The annuity-style revenues constituted 84% (FY20: 81%).
• Bottom-Line Update: Underlying EBITDA stood at $23.1 million, down by 31.7% PcP due to restructuring costs in optimizing the delivery model. Reported EBITDA margin slipped by 1.0 ppts to 3.7%. Reported NPAT stood at $1.5 million, vastly affected by significant items.
• Cash Flow Position: Operating cash flow conversion rate (Operating Cash Flow before Interest and Tax (OCFBIT)/EBITDA) stood at 77% and net cash depleted by $20.8 million, including catalyst ONE acquisition ATO deferrals and significant items.

FY21 Financial Snapshot; Analysis by Kalkine Group

Key Risks and Challenges

Due to high mobility challenges, the labour shortage has affected workforce availability, affecting day-to-day business operations and construction delays. The high cost of legal compliances, delivery model moderation, and M&A expenses may deteriorate cash position.

Outlook

BSA holds a solid financial position, coupled with securing and mobilizing the Core communications & utility infrastructure (CUI) contract base in FY21. A healthy pipeline of projects across communications & utility infrastructure and Advanced property solutions (APS) shall deliver significant top-line support in FY22.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of BSA gave a negative return of ~34.848% in the past year. The stock is currently trading below the average of 52-weeks’ low of $0.205 and 52-weeks’ high of $0.335. The stock has been valued using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company might trade at some discount to its peers’ EV/EBITDA multiple averages, considering shutdowns and halt in operations and construction, labour market constraints, and potential hiccup expected in H1FY22. For valuation, few peers like HRL Holdings Ltd (ASX: HRL), Mader Group Ltd (ASX: MAD), Ai-Media Technologies Ltd (ASX: AIM) and others have been considered. Given the optimistic targets for FY22, market share gain via Foxtel, decreased financial leverage, the trend of decent dividend payout, current trading level, upside indicated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $0.215, up by ~4.878% as of 08 February 2022.

BSA Daily Technical Chart, Data Source: REFINITIV

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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