Stocks’ Details

Wesfarmers Limited 

Trading Restrictions in Victoria: Wesfarmers Limited (ASX: WES) is one of Australia’s leading retail groups with a market capitalisation of around $53.72 billion as at 13 August 2020. In order to restrict the spread of COVID-19, the Government of Victory recently implemented several restrictions on retail trading activities from midnight on 5 August 2020 for a period of six weeks. Due to these restrictions, Kmart and Target stores in the Melbourne metropolitan region are unable to service customers in-store. Wesfarmers Limited is able to continue its online operations, through home delivery and contactless click and collect options. Due to the essential nature of Bunnings stores’ products, these stores will be allowed to remain open for trade customers. The company’s Officeworks stores are allowed to service business customers but will be closed for in-store retail customers. On 7 August 2020, the company assured its permanent team members who have been affected by the current Stage 4 restrictions in metropolitan Melbourne that they will remain employed and will be paid fully for the duration of the current six-week lockdown.

Sales Growth in Bunnings and Officeworks: In a trading update provided on 9 June 2020, the company informed that it has observed significant demand growth in Bunnings and Officeworks as customers continue to spend more time working, learning and relaxing at home. In the first 11 months of FY20, Bunnings and Officeworks witnessed a sales growth of 11.3% and 19.3%, respectively. The sales growth in Bunnings is underpinned by continued growth in consumer and commercial markets across all major Australian trading regions and in all product categories. In Officeworks, strong sales growth is supported by continued demand for technology, home office furniture and learning and education products.

Summary of Sales Performance to May 2020 (Source: Company Reports)

Online Sales Growth: In the first five months of calendar year 2020, the company’s retail businesses delivered total online sales growth of 89%, reflecting the significant investment across the company in respective e-commerce capabilities in recent years as well as greater customer preference for shopping online during COVID-19. In the first 11 months of FY20, the online sales grew by 60% to $1.4 billion. 

Key Risks: The company is exposed to the risks and uncertainties related to Covid-19 Pandemic as it can impact the company’s retail trading and can cause supply chain issues.  Further, the company is also exposed to the risks related to increased competition, ineffective execution of strategy, digital disruption to industry structures and business interruption arising from industrial disputes, work stoppages and accidents.

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

EV/Sales 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 WES has increased by 25.54% in the past three months on ASX and is trading close to its 52 weeks high price. The company is scheduled to release its FY20 results on 20 August 2020. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers like JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), Super Retail Group Ltd (ASX: SUL). Considering the company’s online sales growth, sales growth in Bunnings and Officeworks, we give a “Hold” recommendation on the stock at the current market price of $47.250 on 13 August 2020.

Monadelphous Group Limited 

MEA Denies Rio Tinto’s Claims on Fire Accident: Monadelphous Group Limited (ASX: MND) is a leading engineering group in Australia with a market capitalisation of $784.58 million as at 13 August 2020. Recently, Rio Tinto Services Limited initiated a proceeding in the Supreme Court of Western Australia against one of MND’s wholly owned subsidiaries, Monadelphous Engineering Associates Pty (MEA) in relation to a fire incident which occurred on 10 January 2019 at Rio Tinto's iron ore processing facility at Cape Lambert, Western Australia. Rio Tinto has alleged that MEA was in breach of the maintenance contract, thereby causing the fire. Rio Tito informed MEA that its claim is for $493 million in loss and damage. MEA has denied Rio Tinto's allegations and it intends to fully defend Rio Tinto’s legal action. 

Zenviron Secures Murra Warra Stage II Wind Farm Contract: Zenviron Pty Ltd, an incorporated joint venture in which MND holds 55% interest, recently signed a contract with General Electric International Inc for the delivery of the Murra Warra Stage II Wind Farm in regional Victoria. Under the contract, Zenviron will perform around $80 million of work. 

Secured $150 million worth of Contracts:  On 1 June 2020, MND announced that it has secured various construction and maintenance contracts in the resources and energy sectors which have a combined value of around $150 million. The company has been awarded a contract under its existing BHP WAIO Asset Panel Framework Agreement associated with the dewatering of surplus water at Mining Area C. Further, it has secured a three-year contract with Rio Tinto for the provision of maintenance services and minor projects on its Pilbara marine infrastructure. The company has also secured a one-year extensions to its two existing fixed plant maintenance and shutdown crane services contracts with Fortescue Metals Group.

In the first half of FY20, the company had secured major construction contracts at Rio Tinto’s West Angelas Project and at Albemarle Lithium’s Kemerton lithium hydroxide plant. For the half-year period, the company reported revenue of $852 million and EBITDA of $59.1 million.

H1FY20 Results (Source: Company Reports)

Key Risks: The company is exposed to the risk associated with the extent and duration of Covid-19 impacts on MND’s operational activity and productivity levels. Further, the company’s financial instruments expose it to interest rate risk, foreign currency risk, credit risk and liquidity risk.

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 stock of MND has corrected by 49.51% on ASX and is inclined towards its 52 weeks low price of $7.770, offering a decent opportunity for accumulation. The company is scheduled to release its FY20 results on 18 August 2020. For H1FY20, the company reported a current ratio of 2.05x, higher than the industry median of 1.13x. For the same period, the company has a debt to equity multiple of 0.21x, lower than the industry median of 0.49x. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose we have taken peers like Aurizon Holdings Ltd (ASX: AZJ), Fletcher Building Ltd (ASX: FBU) and Incitec Pivot Ltd (ASX: IPL). Considering the company’s recently secured contracts, expected upside in the valuation and current trading level, we suggest a “Buy” recommendation to the stock at the current market price of $8.460, up by 2.051% on 13 August 2020. 

Orora Limited 

Completed the Sale of Australasian Fibre Business: Orora Limited (ASX: ORA) provides extensive range of tailored packaging solutions to its clients. In April 2020, the company completed the sale of its Australasian Fibre Business to a wholly owned subsidiary of Nippon Paper Industries Co., Limited for an enterprise value of A$1,720 million. This transaction further enhances Orora’s strong balance sheet to deliver value creation through growth investment or long-term capital management from surplus sale proceeds and operating cash flows. 

Implemented capital management initiative: The company recently implemented capital management initiative, including the capital return and share consolidation, approved by shareholders at the Orora General Meeting held on 16 June 2020. The first stage of capital management included a pro rata cash return of around $600 million to shareholders. This includes a capital return of $150 million and a special dividend of A$450 million which equates 37.3 cents per share (50% franked). 

Change in Substantial Holding: Recently, one of the company’s substantial holder, Perpetual Limited and its related bodies reduced their holdings in the company to 10.58%, from the earlier 11.58%. Perpetual Limited and its related bodies now holds 102,090,467 ordinary shares of the company.

H1FY20 Results Highlights: In the first half of FY20, the company reported a statutory net profit after tax (NPAT) of $76.6 million and earnings per share (EPS) of 6.4 cents per share. For the period, the company reported sales revenue of $1,835.2 million, up 13.3% on the prior corresponding period (pcp). Over the half-year, the company’s net-debt increased by $106 million to $996 million, as compared to the net debt of $890 million at 30 June 2019. For the half-year, the company declared a dividend of 6.5 cents per share. The company is scheduled to release its FY20 results on 13 August 2020.

H1FY20 Results summary (Source: Company Reports)

Key Risks: The company’s future performance is dependent on various factors including changes in the legal and regulatory regimes in which Orora operates; changes in behaviour of Orora’s major competitors; changes in behaviour of Orora’s major customers; and general changes in the economic conditions of the major markets in which Orora operates. 

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 stock of ORA has corrected by 23.31% and is inclined towards its 52 weeks low price, offering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers like Pact Group Holdings Ltd (ASX: PGH), Orica Ltd (ASX: ORI), Incitec Pivot Ltd (ASX: IPL). Considering the company’s recently implemented capital management initiatives, its sale of Australasian Fibre Business, decent H1FY20 performance, and current trading level, we give a “Buy” recommendation to the stock at the current market price of $2.320, down by 2.521% on 13 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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