Pact Group Holdings Limited

PGH Details
 
Proposed Sale of Contract Manufacturing Segment: Pact Group Holdings Ltd (ASX: PGH) is a manufacturer of rigid plastics packaging, metals packaging and related products. On 21 January 2020, the company announced the initiation of the sale of its Contract Manufacturing division. For this purpose, the company appointed Citigroup to assist in the sale procedure. Contract Manufacturing reported sales of $372 million and EBITDA of $25 million in FY19. The company reported that the business performance during the first four months of FY20 have been in-line with the expectations.

FY19 Business Highlights for the Period ended 30 June 2019: PGH reported its full-year results, wherein the company reported top-line at $1,834.1 million, up 9.6% on y-o-y basis, primarily on the back of  acquisition of the Asian packaging operations undertaken during the second half of FY18. NPAT came in at $77.3 million, down 18.3% from FY18, due to delays in recovering higher raw material costs and Australian energy costs coupled with lower volumes across few sectors. During the period, the company reported long-term contract win with a major retailer in the USA which is likely to expand reuse services in FY20. The company changed its operating model to improve its focus on product portfolio performance.


FY19 Income Statement Highlights (Source: Company Reports)

Guidance: As per the FY20 guidance, the company expects Cash spend of $20 million to $30 million and incremental EBITDA benefits of ~$10 million. The Management also highlighted that the business is likely to seek plant closures and offshoring opportunities in FY20, leveraging the import model already established.

Stock Recommendation: The stock of PGH is trading at $2.920 with a market capitalization of ~$963.18 million. The stock is quoting below the average of its 52-week trading range of $2.080 to $4.100. The stock has generated mixed returns of 7.54% and -3.21% in the last three months and six months, respectively. The company is focusing on the expansion of crate pooling services in Australia followed by the expansion of re-use services across the offshore markets.  The stock is available at an Enterprise Value to Sales of 0.9x on its trailing twelve months (TTM) basis as compared to the industry average (Containers & Packaging) of 1.3x. Considering the current price movement and trading levels, proposed sale contract manufacturing division, and business prospects, we recommend a ‘Hold’ rating on the stock at the current market price of $2.920, up 4.286% as on 24 January 2020.

 
PGH Daily Technical Chart (Source: Thomson Reuters)
 

Orocobre Limited

ORE Details
 
Two New Contract Win from Chinese Cathode Manufacturers: Orocobre Limited (ASX: ORE) is engaged in the exploration and production of Lithium/Potash resources across Argentina. On 20 January 2020, the company announced that it has signed two contracts for the supply of battery grade lithium carbonate to the top tier Chinese cathode manufacturers namely B&M Science and Technology and XTC New Energy Materials.

Q1FY20 Operational Update for the Period ended 30 June 2019: ORE announced its quarterly updates, wherein the company reported total production of 3,093 tonnes, up 35% on pcp. The company reported average price received at US$7,111/tonne, down by 52% on pcp terms. Cost of sale stood at US$4,885/tonne during the first quarter of FY20.


Q1FY20 Operational Highlights (Source: Company Reports)

Guidance: As per the latest guidance by the Management, the business expects indicative weighted average price of lithium carbonate sales to be approximately US$5,400/tonne for the December quarter 2019, based upon the planned shipping schedule. The company expects soft market conditions. Notably, the business is emphasizing on the current pricing to ensure retention of market share.

Valuation Methodology: Price to Book Based valuation

Price to Book based Valuation (Source: Thomson Reuters)

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

Stock Recommendation: The stock of ORE is trading at $3.540 with a market cap of ~$939.9 million. The stock is quoting at the upper band of its 52-week trading range of $2.180 to $4.040. The stock has generated stellar returns of 60.79% and 28.52% in the last three months and six months, respectively. As per the Management, the lithium chemical prices are trading below the incentive pricing for green-fields projects while the business expects price recovery in the medium-term. Considering the current price movement and trading levels, win of two contracts and encouraging business prospects, we have valued the stock using one relative valuation method, i.e., Price to Book Value multiple. We have considered peers like Westgold Resources Ltd (ASX: WGX), Resolute Mining Ltd (ASX: RSG), Sandfire Resources NL (ASX: SFR), etc., and arrived at a target price of higher single-digit upside (in percentage terms). Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $3.540, down 1.393% as on 24 January 2020. 

 
ORE Daily Technical Chart (Source: Thomson Reuters)

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