REA Group Limited

A Quick Look at Q1 FY20: REA Group Limited (ASX: REA) provides property and property-related services on websites and mobile apps throughout Australia and Asia. The market capitalisation of the company stood at ~A$14.05 Bn as on 8^th November 2019. Recently, the company announced its results for Q1FY20 as reported by News Corporation. It added that the News Corporation report includes US GAAP financial information for REA Group and its subsidiaries for September 2019 quarter. The company delivered revenue amounting to $202.3 Mn and EBITDA from core operations stood at $114.9 Mn.  The decline in reported revenue was impacted by the extended duration of Premiere All listings from 45 to 60 days, which increased revenue deferral for the period.


Financial Results for Q1 FY20 (Source: Company Reports).

What to Expect:REA stated that Australian Residential business had the benefit of price increase, which came into effect on 1 July 2019, plus strong levels of Premiere depth product penetration on the back of the latest Premiere offering. Listings for the 1HFY20 are expected to be lower against 1H FY19, because of the comparatively favourable listings environment in 1H FY19, particularly in Melbourne and Sydney. As a result, it anticipates revenue growth to be heavily skewed towards the 2HFY20.

Stock Recommendation:The company expects that more favourable listings comparatives in the 2H FY20 would deliver a stronger revenue outcome. Debt to equity ratio of the company stood at 0.34x in FY19 as compared to 0.46x in FY18, which implies that the company’s balance sheet has been deleveraged on YoY basis. On the stock’s performance front, it produced returns of 17.24% and 31.02% in the time span of three months and six months, respectively. Therefore, considering the cost management and efficiencies in the challenging market, fall in Debt to Equity ratio on a YoY basis, expectations of gradual recovery in the market, anticipation of decline in reported costs, and fundamental strength of the business along with recent price movement, we give a “Hold” recommendation on the stock at the current market price of A$102.850 per share, down 3.608% on 8^th November 2019 taking cues from the results for September 2019 quarter.
 
 

Super Retail Group Limited

Key Takeaways from Investor Presentation:Super Retail Group Limited (ASX: SUL) is in the operations of speciality retail stores in categories such as automotive, tools, leisure and sports. The market capitalisation of the company stood at ~A$1.91 Bn as on 8^th November 2019. Recently, the company has published a presentation, wherein it stated that it has robust cash flows with a portfolio of highly cash- generative businesses. SUL’s continuous focus on working capital management supports cash flow delivery. The earnings growth and strong cash flow generation has allowed the Group to (1) Invest capital for growth, (2) Maintain a consistent dividend payout ratio, and (3) Reduce gearing.

Cash Flow Sources and Uses (Source: Company Reports)

Future Guidance:The company is expecting capex to be in alignment with D&A expense in the range of around $90 Mn-95 Mn for 2019/20. The strategic drivers of the company include (1) Growing the four brands, (2) Leveraging the closeness to its customers, (3) Connected omni-retail supply chain, (4) Simplifying the business, and (5) Excel in omni-retail execution.

Stock Recommendation:The company has an opportunity to reduce debt by around $50 million per annum. On the valuation front, the company has EV to sales multiple of 0.8x as compared to the industry median of 1.2x on TTM basis. In addition, SUL has EV to EBITDA multiple of 7.2x against the industry median of 8.3x on TTM basis. In the span of the last six months, the stock provided returns of 29.07% and rose 41.73% on YTD basis. Therefore, the company’s objectives revolve around maximising the shareholder returns via focusing on financial targets. Other objectives include maintaining strong balance sheet and retaining the financial flexibility. Also, SUL has a principle to ensure that dividend payouts are maintained within the policy of 55% to 65% of underlying NPAT, fully franked. Based on the foregoing, we maintain a “Hold” rating on the stock at the current market price of A$9.710 per share, up 0.31% on 8^th November 2019.
 
 

Speedcast International Limited

Revision of Ratings:Speedcast International Limited (ASX: SDA) is a provider of satellite network services. The market capitalisation of the company stood at ~A$208.57 Mn as on 8^th November 2019. Recently, the company announced that Mitsubishi UFJ Financial Group, Inc. has ceased to become a substantial holder in SDA on 31^st October 2019.

In another update, the company announced that S&P Global has lowered its issuer credit rating to B- from B and maintained the outlook as Negative.It was mentioned that the company continues to pursue numerous operational initiatives to improve its cost profile, working capital and cash flow performance, and other initiatives to improve the Group’s financial position. The following picture provides an idea of key underlying financial results:

Key Underlying Results (Source: Company Reports)

Future Aspects:Over the medium term, the company continues to anticipate healthy growth in Maritime in commercial shipping and in cruise, where bandwidth needs continue to grow. SDA reaffirmed its previous guidance for 2019 full year EBITDA in the ambit of $150 million to $160 million.

Stock Recommendation:Current ratio of the company stood at 1.29x in 1H FY19 as compared to the industry median of 0.76x, exhibiting decent liquidity position to address its short-term obligations. The stock of SDA is trading at a price to cash flow multiple of 2.1x as compared to the industry median of 6.7x on TTM basis. SDA has EV to Sales multiple of 1.1x against the industry median of 2.5x on TTM basis. As per the ASX, the stock is trading close to its 52-week lower levels of A$0.682. Therefore, taking into account decent outlook, valuations, strength of its product and services, current trading levels and decent liquidity position, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.930 per share, up 6.897% on 8^th November 2019.

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