Stocks’ Details

Aurizon Holdings Limited

 
Total Liquidity of Over $1.1 Billion:Aurizon Holdings Limited (ASX: AZJ) is engaged in the maintenance and renewal of network assets, transport of coal and bulk mineral commodities. The company recently announced the cancellation of 1,947,511 ordinary shares as a part of share buy-back event, at an aggregate cost of $9,466,713.91. Thus, the total number of shares on issue (after cancellation) has been 1,914,642,832.
 
Debt Refinancing:On 3^rd June 2020, the company released an announcement stating that it has executed the refinancing of Aurizon Network’s bank facilities worth $1.3 billion, representing an increase of $420 million as compared to the existing facilities. To enter the new debt facilities, the company will cancel and repay the existing syndicated debt facilities. The new bank facilities will be maturing in 2023 and 2025.
 
Sale of Acacia Ridge Terminal:In another announcement on ASX, the company updated that it will now be able to progress the sale of the Acacia Ridge Terminal to Pacific National after the Full Bench of Federal Court dismissed the appeal made by the Australian Competition and Consumer Commission. The sale involves a non-refundable payment of $35 million that has already been received by the company. The balance consideration of $170 million will be paid after the transaction is completed.

 
March Quarter Update: During the quarter, the total above rail volumes stood 2% higher at 63.3 mt, backed by increased volumes in Bulk. Coal volumes for the period remained flat in comparison to pcp.
 
1HFY20 Highlights: During the half-year ended December 2019, revenue went up by 5%. Underlying EBIT for the period stood at $456 million, up 12%, delivered by higher EBIT performance in the Network business delivered by increased revenue from the UT5 Undertaking, coupled with a strong performance by the Bulk business on account of new contracts and operational efficiencies. Underlying NPAT increased by 19%, reflecting the profit on the sale of Aurizon’s Rail Grinding business.
 

 Guidance & Outlook: For FY20, the company expects underlying EBIT in the range of $880 million - $930 million. Coal volumes for the year are estimated between 210 – 220 mt.
 
Key Risks: Due to the pandemic, the company has witnessed some impact on coal demand in Asia and on the Indian sub-continent. While the weakness in demand has not impacted the earnings to date, it can be a potential threat to the business if the crisis continued to accelerate, as coal forms a large portion of the company’s revenues. Moreover, the demand for coal is dependent on several other factors, including energy policy, fuel-mix decision driven by energy costs, energy security, regulation of greenhouse gas emissions, etc.
 
Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)

P/E 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 stock of the company gave positive returns of 25.46% in the last three months and is trading above the average of its 52-week trading range of $3.38 - $6.11. With the recent refinancing, the company will have over $1.1 billion of liquidity and will not need any further refinancing until 2023. During the pandemic, the company’s operations continued with minimum impact on volumes and earnings. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms).. Hence, we give a “Buy” recommendation on the stock at the current market price of $4.82, up 0.837% on 24^th June 2020.

Incitec Pivot Limited

Strong Operating Cash Flows in 1HFY20:Incitec Pivot Limited (ASX: IPL) is engaged in the manufacturing and distribution of industrial explosives, industrial chemicals, and fertilisers. The company recently updated that Jeanne Marie Johns, Director of the company, acquired 101,671 and 15,000 ordinary shares on 12^th June 2020 and 16^th June 2020, respectively.

Completion of SPP: On 12^th June 2020, the company released an update on the completion of its Share Purchase Plan, raising ~$57.5 million at $2 per share. Exactly a month back on 12^th May 2020, the company had announced the completion of a $600 million Placement, through the issue of 300 million shares at $2 each.

1HFY20 Highlights: During the half-year ended 31^st March 2020, the company reported EBIT of $159 million, up 34% on pcp, reflecting the benefit of the absence of non-recurring items of $141 million present in pcp and lower Australian dollar of $32 million.Net profit after tax came in at $65 million, up 54% on pcp. The company witnessed a strong improvement in operating cash flows driven by improved business earnings and ongoing working capital management. Net debt at the end of the period came in at $1,876 million, representing a normal seasonal TWC increase. Net debt/EBITDA multiple remained flat in comparison to the previous half at 2.8x.


Cash Flow Statement (Source: Company Reports)
 
Outlook: Under the American Explosives segment, the company expects demand weakness for Coal, which forms 25% of the revenue, to continue through 2020. Outlook for Base & Precious Metals, which form 36% of revenue, remains decent with strong global demand for gold. Quarry & Construction, forming 39% of the revenue in the region, witnessed a slow start to 1HFY20 due to COVID-19 and may pick pace after infrastructure renewal. In the Asia Pacific Explosives segment, the company expects contract losses impact in Western Australia amounting to $10 million.

Key Risks: One of the major risks to the business relates to fluctuation in commodity prices that could adversely affect the business. The duration of the impact on commodity prices and customer demand due to the current uncertain environment remains a key factor in defining the future of the business. Demand for industrial explosives is also impacted by the changing global economic and business climate, which is a crucial factor to look at after the COVID-19 led economic downturn.

Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)

P/E 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 stock of the company gave positive returns of 18.26% in the last three months and is inclined towards its 52-week low price of $1.565. The newly raised capital through the SPP and the Placement will boost balance sheet strength and liquidity position, and will help IPL in maintaining a strong investment grade credit rating profile and capital structure. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms).For the purpose, we have taken peers such as Orica Ltd (ASX: ORI) and Nufarm Ltd (ASX: NUF). Hence, we give a “Buy” recommendation on the stock at the current market price of $1.96, down 0.759% on 24^th June 2020.

Qube Holdings Limited

Development Management Agreements with Woolworths Group: Qube Holdings Limited (ASX: QUB) is primarily engaged in providing comprehensive logistics solutions across multiple aspects of the import-export supply chain. The company recently updated that it has secured two agreements for lease and two development management agreements with the Woolworths Group for the development of new major warehousing at Moorebank Logistics Park. Under the two Development Management Agreements, Woolworths is developing the warehouses, with Qube funding their construction, comprising capital commitment for the base building construction between $420 and $460 million which will be incurred over the next 3 to 4 years with revenue of approximately $30 million per annum when fully operational.

Capital Raising: In May 2020, the company completed the retail component of its Entitlement Offer, raising ~$236 million at $1.95 per share. The institutional component of the offer, which was completed in April, raised approximately $264 million.

Business Update for the Period to 31^st March 2020: The company’s operations continued to operate pursuant to the declaration of the freight and logistics sector as an essential service in Australia and New Zealand.Bulk activities continued to witness normal volumes. Oil and gas activities remained steady, reflecting benefits from the ramp up of the new Shell contract and Qube’s logistics support to existing producing facilities. Container volumes weakened due to economic slowdown in Australia, the impact of manufacturing and port closures in China, and global supply chain disruptions.

1HFY20 Highlights: During the half-year ended December 2019, the company reported a 12.9% increase in underlying revenue and a 2.1% increase in underlying EBITA. Earnings increased despite continued headwinds in several of Qube’s key markets reflecting Qube’s diversified earnings base and strong market positions.


Key Financial Highlights (Source: Company Reports)
 
Outlook: The company is focused on increasing its liquidity to fund suitable growth opportunities in the future. In response to the current environment, the company is reducing its cost base by deferring non-essential expenditure. Due to difficulty in predicting activity levels for the remainder of FY20, the company has withdrawn the guidance issued earlier.
 
Key Risks: The company’s revenue and earnings are prone to the risk of adverse global and domestic economic conditions which may impact the demand for Qube’s customers’ products. To minimise the impact, the company has developed and retained a loyal, diverse customer base so that it is not unduly dependent on any individual customer, product or geography. However, in the current uncertain environment, volumes could get impacted in its key markets.
 
Valuation Methodology:P/CF Multiple Based Relative Valuation (Illustrative)

P/CF 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 stock of the company gave positive returns of 62.94% in the last three months and is inclined towards its 52-week high price of $3.572. With the capital raised via the Entitlement Offer, the company will invest in its core businesses and pursue growth opportunities that are expected to arise from the current environment. The company continued to benefit from its diversified operations and a variable cost base that supports positive earnings and cashflows despite declining volumes. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $2.85, down 2.062% on 24^th June 2020.

 
 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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