Stocks’ Details

CIMIC Group Limited

Awarded a $2.5 Billion Contact from Jellinbah Group: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining and services group, focused on generating sustainable shareholder returns by delivering innovative and competitive solutions for its clients. On 10 July 2020, CIMIC Group announced that its mineral processing company, Thiess, has been awarded a five-year contract extension by Jellinbah Group to continue to provide mining services at its Lake Vermont Coal Mine in Queensland. The contract extension is expected to commence from 1 January 2022 and over the course of five years, this contract is expected to generate revenue of $2.5 billion for Thiess. It is worth noting that, CIMIC Group’s other mineral processing company, Sedgman, also provides CHPP operations support at the Lake Vermont Mine.

Ventia Completes Broadspectrum Acquisition: Ventia, an independent company formed by a 50/50 investment partnership between funds managed by affiliates of Apollo Global Management and the CIMIC Group, recently announced the completion of its acquisition of Broadspectrum from Ferrovial S.A. The combined group is now expected to generate revenue of more than $5 billion.

Q1FY20 Results: For Q1 FY20, the company reported revenue of $3.3 billion, as compared to $3.4 billion in 1Q19. Over the quarter, the company was focused on managing working capital and generating sustainable cash backed profits. During Q1 FY20, the company was awarded new work of $2.5 billion. The company ended the quarter in a strong liquidity position with gross cash of $4.5 billion.  The company is expected to release its H1FY20 result on 30^th July 2020.

Q1FY20 Financial Metrics (Source: Company Reports)

Rewarding Shareholders through Dividend: Over the past five years, the company has returned $2,523.9 million to its shareholders in the form of dividends and share buybacks. For FY19, the company paid an interim dividend of 71 cents per share, fully franked. Due to the BICC one-off impairment, the company decided not to declare a final dividend for FY19.

Shareholder Returns (Source: Company Reports)

Key Risks: The company’s operations are exposed to the risk of changes in economic, political or societal trends, or unforeseen external events and actions, which may affect business development and project delivery. In addition, the company is also exposed to the risk of Covid-19 as it could significantly impact its operations. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative) 

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the past six months, the company’s stock has corrected by 30.57% and is currently trading below the average of its 52-week trading range, offering a decent opportunity for accumulation. Currently, the company is in a decent financial position with a healthy balance sheet that gives it the flexibility to pursue strategic growth initiatives and capital allocation opportunities. We have valued the stock using P/E multiple based illustrative relative valuation method and have arrived at a target price with low double-digit upside (in % terms). Considering the company’s decent Q1FY20 results, a decent track record of paying dividends, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $22.310, down by 2.916% on 10 July 2020.  

Nine Entertainment Co. Holdings Limited

FY20 Results Update: Nine Entertainment Co. Holdings Limited (ASX: NEC) is one of Australia’s leading locally owned media company with a market capitalisation of ~$2.34 billion as on 10 July 2020. Recently, the company’s Chief Financial Officer, Paul Koppelman, resigned from his post due to personal reasons. NEC’s Group Financial Controller, Graeme Cassells, will now be the acting CFO of the company. The company is currently busy preparing the final year accounts and expects to release its FY20 results on 27 August 2020. For FY20, the company is expecting its EBITDA (pre-Specific Items and post AASB16) to be between $390 million -$410 million, higher than the EBITDA of $349.86 million reported in FY19. Further, the company expects to end FY20 with net debt of around $300 million.

Revised Contract with the NRL for 3 seasons: On 28 May 2020, NEC announced a revised contract with the National Rugby League (NRL) for three seasons including season 2020, 2021 and 2022. With the revised contract, the company expects a P&L benefit of around $27.5 million each year in FY21 and FY22, resulting from changes in rights fee and associated production and services arrangements. Earlier, due to the cancellation of NRL Season 2020, NEC was expecting savings of $130 million and had set a cash cost out the guidance of $289 million. However, with the recommencement of the NRL season, the cash cost out guidance of $289 million is reduced to around $225 million.

H1FY20 Results Highlights: On a statutory basis, pre-specific Items, the company had reported a revenue of $1.2 billion and EBITDA of ~$251 million in H1FY20. Over the period, the company experienced strong growth from digital video businesses. During H1FY20, the company identified synergies of around $9 million, following completion of the Macquarie Media acquisition. For the half-year, the company paid a dividend of 5 cents per share (100% franked) amounting to $85,269,663.

H1FY20 results (Source: Company reports)

Key Risks: The company is exposed to the risk of changes in advertising market conditions that could lead to a prolonged decline in the advertising market. Further, the continued development of alternative forms of media may lead to increased competition for advertising revenue. From an operational perspective, the business is subject to operational risks of various kinds, including transmission failure, systems failure, data loss, inaccurate reporting, industrial action, defamation and other execution risks.

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

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

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

Stock Recommendation: Over the last six months, the company’s stock has corrected by 26.47% on ASX, and is trading near the average of its 52 weeks price range of $0.815 - $2.090. The company is currently trading at an annualised dividend yield of 7.27%. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like HT&E Ltd (ASX: HT1), Ooh!Media Ltd (ASX: OML), and Seven West Media Ltd (ASX: SWM). Considering the company’s expected FY20 results, revised contract with the NRL, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.370, down by 0.364% on 10 July 2020.

Rural Funds Group

June Quarter Distribution: Rural Funds Group (ASX: RFF) is an agricultural real estate investment trust which manages approximately $1.3 billion of agricultural assets. On 10 July 2020, the company announced a distribution of $0.027, for the June quarter, payable on 31 July 2020. In a recent investor letter, the company highlighted its strategy of increasing distributions by 4% per annum, by owning and improving farms that are leased to good operators. RFF also reaffirmed forecast adjusted FY20 AFFO per unit of 13.5 cents, FY20 distributions per unit (DPU) of 10.85 cents and FY21 DPU of 11.28 cents. The company expects to release its FY20 results in August 2020.

FY20 Forecasts (Source: Company Reports)

H1FY20 Results Highlights: During H1FY20, the company’s Property revenue increased by 22% to $37.6 million and its Adjusted funds from operations (AFFO) per unit increased by 11% to 7.1 cents. Further, the company’s total comprehensive income earnings per unit increased by 16% to 8.9 cents in H1FY20. The H1FY20 results were driven by JBS transactions (feedlot acquisitions and J&F limited Guarantee income), cattle acquisitions, development capital expenditure and lease indexation. For the half-year, the company paid a distribution of 5.42 cents per share, higher than 5.22 cents per share in pcp.

H1FY20 Results (Source: Company Reports)

Agricultural Property Outlook: The company expects the demand for agricultural property to remain buoyant because of low Australian dollar which effectively makes Australian assets cheaper to foreign investors; low interest rates which cause lower borrowing costs for prospective purchasers; and positive outlook for operator profitability.

Key Risks: The company is exposed to potential risks that climate change could present to its assets. The company is exposed to the risks arising from holding financial instruments, that are inherent in the Group’s activities and are managed through a process of ongoing identification, measurement and monitoring.

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

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

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

Stock Recommendation: The stock of RFF is trading above the average of its 52-week trading range of $1.36 - $2.42. For H1FY20, the company’s gross margin stood at 97.4%, higher than the industry median of 73.8%. Further, the company’s net margin stood at 83.10%, higher than the industry median of 60.9%. The company currently has an annualised dividend yield of 5.45%. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of higher single-digit upside (in % terms). Considering the company’s decent profitability margins, decent H1FY20 performance, the agricultural property outlook, and FY20 forecasts, we give a “Hold” recommendation on the stock at the current market price of $2.010, up by 1.005% on 10 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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