Stocks’ Details

BINGO Industries Limited

BINGO Industries Limited (ASX: BIN) provides recycling and waste management services. The market capitalisation of the company stood at ~$1.41 Bn as on 25^th August 2020. Despite a challenging market, the company reported a solid result during FY20. The company experienced a growth of 21.0% in underlying revenue to $486.7 million, which indicates a shift to volume strategy adopted in NSW from 2H FY20 and waste mix. The company reported underlying EBITDA amounting to $152.1 million with an increase of 40.8%. BIN witnessed a robust rise of 196% in statutory NPAT to $66 million. In addition, the company realised significant synergies from the DADI acquisition, which has resulted in the strengthening of the EBITDA margin and operating free cash flow. The company has resolved to pay a final dividend amounting to 1.5 cents per share on 8^th October 2020. This took the total dividend for FY20 to 3.70 cents, which was in-line with FY19.

During FY20, the company undertook the pro-active COVID-19 mitigation strategy, which was focused on protecting the health and safety of people, the continuity of its service as well as the preservation of cash flow.

Key Financials (Source: Company Reports)

Outlook: During FY21, the company expects a fall of around 20% in non-residential commencements as a result of the impacts of COVID-19. The company will continue to focus on maximising revenue via protecting volumes and managing expenses, mainly labour costs.

Key Risks: The company’s business activities are exposed to market risk, which arises from the fluctuation in fair value or future cash flows of the financial instrument due to changes in market prices. These include foreign currency risk and interest rate risk. In addition, the business is also sensitive to liquidity and credit risk.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow 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 has maintained a healthy balance sheet with strong capital management and cash conversion of 106.9%. BIN is well-placed for growth over the medium-term because of structural, regulatory and market tailwinds. On the technical analysis front, the stock of the company has a support level of ~$2.266 and a resistance level at ~$2.710. We have valued the stock using the Price to Cash Flow multiple based illustrative relative valuation method and have arrived at a target price of high single-digit-upside (in percentage terms). For the purpose, we have taken peers like Cleanaway Waste Management Ltd (ASX: CWY), IPH Ltd (ASX: IPH), Qube Holdings Ltd (ASX: QUB), etc. Hence, considering the solid FY20 results despite softer market conditions,  focus on maximising revenues, and a healthy balance sheet with strong capital management, we give a “Hold” recommendation on the stock at the current market price of $2.440 per share, up by 13.488% on 25^th August 2020 owing to the release of FY20 results.

Emeco Holdings Limited

Completion of Institutional Entitlement Offer: Emeco Holdings Limited (ASX: EHL) is engaged in selling, renting, and maintaining heavy earthmoving equipment to customers in the mining industry in Australia and overseas. The market capitalisation of the company stood at $381.45 Mn as on 25^th August 2020. Recently, the company has completed its institutional entitlement offer and raised a total of around $111 million via the issue of approximately 131 million new shares at $0.85 per share. In addition, the company is seeking to raise further $38 million through a retail entitlement offer, which will open on 31^st August 2020. The company would utilise the net proceeds from the entitlement offer for the repayment of 2022 Secured Notes.

Equity Raising Timetable (Source: Company Reports)

Decent Growth in Earnings: During FY20, the company reported significant operating growth with operating EBITDA amounting to $246.1 million, reflecting a rise of 15% on FY19. Operating NPAT for the period amounted to $87.5 million, indicating an increase of 39% on FY19. The company added that continued increase in average operating utilisation to 64.4%, continued tight cost control, the contribution from growth assets purchased in FY19 and four months contribution from recently acquired Pit N Portal, a specialist underground equipment and services business, has supported earnings growth in FY20.

Future Focus: During FY21, the company would continue to diversify its commodity and customer mix, increase its service levels, and win long term projects, which are likely to provide a platform for growth in FY22. The goal of the company revolves around becoming a low cost, high-quality provider of mining equipment.

Key Risks: The company’s financial performance could be impacted by the demand for earthmoving equipment and associated services, supply chain risks and disruption to the operations of its customers. In addition, the business is also exposed to financial risks, such as credit risk, liquidity risk, and market risk.

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 has decreased Secured Notes outstanding from $442 million to $250 million. The company is likely to retain significant pro forma available liquidity of around $153 million. On the technical analysis front, the stock of the company has a support level of ~$0.827 and a resistance level at ~$2.407. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as NRW Holdings Ltd (ASX: NWH), Macmahon Holdings Ltd (ASX: MAH), Perenti Global Ltd (ASX: PRN), etc., and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the recent capital raising, growth in earnings, reduction in debt, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.920 per share, down by 11.111% on 25^th August 2020.

Decmil Group Limited

Expansion in Order Book During FY20: Decmil Group Limited (ASX: DCG) provides engineering construction services for the infrastructure, resources, and renewable energy sectors. The market capitalisation of the company stood at $65.66 Mn as on 25^th August 2020. For FY20, the company reported revenue amounting to $451 million as compared to $551 million in FY19. DCG recorded a statutory after-tax loss of $140 million mainly due to $85 million of one-off write-downs on disputed contracts and assets. In addition, the recent contract wins by the company have expanded the order book to $446 million, as Government spending on infrastructure development gathers momentum. During the year, the company experienced a minimal impact of COVID-19 on its operations.

New Contract from Western Australia Government: On 14^th July 2020, the company notified the market that it has been selected as preferred proponent by the Government of Western Australia to develop a $175 million ring road around Albany, Western Australia. The road construction has been scheduled to begin in September. This contract is likely to be finished in two phases, wherein, the first phase work includes the construction of a new interchange at Albany Highway and Menang Drive; construction of the section of the Ring Road south to Lancaster Road; and design of Phase Two, while the construction of the second phase is likely to start upon the receipt of environmental approvals and will extend the Albany Ring Road from Lancaster Road to Princess Royal Drive. This contract indicates the strong pipeline of work that is currently available in the infrastructure sector.

Pipeline Value (Source: Company Reports)

Capital Raising: On 19^th June 2020, the company announced that it has completed a Retail Entitlement Offer and raised ~$20.3 million (before expenses). This follows the successful completion of the Institutional Entitlement Offer of ~$30.2 million (before expenses). The company has also completed top-up placement to Cornerstone Sub-underwriters, which took the total amount raised to $52.4 million. DCG will use the proceeds to strengthen its general working capital position, maintain a strong net cash position, improve the current ratio for accreditations, and to fund the strong pipeline of tenders.

Key Risks: The company is exposed to numerous macro-economic cycles, particularly capital expenditure by State and Federal Government and in natural resources. Any vulnerability in the broader construction and engineering sector, as well as a reduction in growth capital expenditure in major new natural resource projects may impact the company’s performance.

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

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

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

Stock Recommendation: The company is aiming for a pipeline of $7-8 billion, which is likely to drive growth beyond FY21. The successful raising of over $52 million confirms that the company has a decent balance sheet to capitalise on the expected significant infrastructure spend in Australia over the next few years. The stock of DCG is inclined towards its 52-week low of $0.026, offering a decent opportunity for accumulation. On the technical analysis front, the stock of the company has a support level of ~$0.025 and a resistance level at ~$0.160. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price offering an upside of low double-digit (in percentage terms). For the said purposes, we have considered GR Engineering Services Ltd (ASX: GNG), Primero Group Ltd (ASX: PGX) and Southern Cross Electrical Engineering Ltd (ASX: SXE), etc., as peers. Hence, considering the expansion in the order book, contract from Western Australia Government, recent capital raising, current trading levels, and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.050 per share,  down by 1.961% on 25^th August 2020. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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