Orocobre Limited

Robust Performance in 1HFY19: Orocobre Limited (ASX: ORE) is a mining company, engaged in the production & exploration of minerals with focus on developing Lithium/Potash resources in Argentina. The company’s operations involve Olaroz Lithium Facility and the Borax Argentina S.A. With a vision to be a world class supplier of lithium chemicals, the company enjoys cost leadership, along with built-in-quality and process innovation. 
 
The company, in its latest presentation, has updated that it has achieved highest production in the March quarter despite rainfall exceeding same period in 2017 / 2018 and lower evaporation rates.
 

Proportionally Consolidated Income Statement (Source: Company Reports)

The Group reported a net profit from continuing operations after tax of US$24 million in 1HFY19 as compared to US$8.2 million in the prior corresponding period. The Group’s net profit included its share of net gains of joint venture amount to US$24.8 million. The cash balance of the company at 31 December 2018 stood at US$284 million with net cash of US$207.7 million.

The company produced 3,075 tonnes during the March quarter of FY19, which was up by 10% for Olaroz joint venture, on the previous corresponding period following pond preparation and a strategy of managing brine quality. The revenue during the quarter stood at US$33.4million on sales of 3,530 tonnes.

Orocobre corporate cash balance at 31 March 2019 stood at US$265.7 million, and Orocobre Group net cash came in at US$192.9 million. The US$18.3 million cash reduction from the prior quarter was on account of a US$15 million shareholders loan made to the SDJ joint venture to fund Olaroz expansion activities, and other factors including corporate costs, payments to other group entities, Cauchari JV expenditure, funding to Borax and forex losses.

Company guidance: The company expects full-year production in FY19 will be approximately the same as that achieved in FY18 for the Olaroz Lithium Facility. The production forecast for the company is within a range of 35,000 - 40,000 tonnes for FY19 and capital expenditure forecast of ~US$ 1-2 million for FY19 for Borax Argentina. Meanwhile, the stock has generated a positive YTD return of 5.68% and managed to stay above the support level of $2.98.

Robust half-year results with a healthy balance sheet along with strong cash-flows generated from operations have supported the overall growth for the company. Further, with record growth in the production in March quarter, a reduction in project debt with an average interest as low as ~4.5% place Orocobre in a strong position for future growth. Hence, considering the above factors, we maintain our “Buy” recommendation on the stock at the current market price of $3.320 (down 0.896% on 27 May 2019). 
 

Reliance Worldwide Corporation Limited

Strong Revenue Growth in 1HFY19: Reliance Worldwide Corporation Limited (ASX: RWC) is into the business of water delivery, control, and optimization systems. Its products include plumbing products with many push-to-connect brass (PTC) fittings, PEX pipes and engineered plumbing support systems. RWC exhibited strong financial performance in 1H FY19and has guided for an optimistic outlook underpinned by John Guest Acquisition.

As per the trading update provided by the company, each of RWC’s operating segments is being affected by market-specific factors which are negatively impacting performance and results with the progress of 2HFY19. The EBITDA guidance for FY19 is in the range of $260 million-$270 million. As per the previous guidance, the FY2019 EBITDA was assumed to be in the range of $280 million to $290 million.

1HFY19 Financial Highlights (Source: Company Reports)

The net sales for RWC were up by 50% to A$544.2 million in 1HFY19 as compared to A$362.6 Mn in 1HFY18, primarily backed by robust revenue performance across all 3 segments of Americas (+21%), Asia Pacific (+7%), and EMEA (+425%, included John Guest sales acquisition). The adjusted EBITDA for RWC was up by 65% to A$130.8 million in 1HFY19 as compared to A$79.3 million in 1HFY18, with the margins benefiting from John Guest business and increased scale and efficiency in operations.

The gross margin, however, was negatively impacted by processing higher cost copper (which is expected to be substantially reversed in the second half of FY19) and one-off raw material quality issues and new equipment start-up challenges.

Expected Synergies from John Guest Acquisition: The company expects top-line growth to be continued in all regions, including the current expansion in the core business as well as growth in the new products. Moreover, the company is continuing to focus on margin and overhead cost control along with the realisation of synergies from the John Guest acquisition. The management expects realised synergies to be achieved at $20 million p.a. on a run rate basis (excluding one-off integration costs) by the end of FY2019. The annual synergy realisation is expected to exceed $30 million on a run rate basis by the end of FY2020.
 
Stock Recommendation: Along with robust performance in 1H FY19 as compared to the prior corresponding period, RWC was able to derive several operational synergies on the back of John Guest acquisition. Continued strong sales growth in Americas, healthy balance sheet with a pro-forma leverage ratio at 1.71x, sound cash flow generations from operations, acquisition synergies along with optimistic outlook augur well for the future growth of the company. Hence, considering the aforesaid facts and current trading level, we give a “Buy” recommendation on the stock at the current market price of $3.910 (up 2.356% on 27 May 2019).  

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