Stocks Details 

Atlas Arteria

June Quarter 2020 Update: Atlas Arteria (ASX: ALX) is an operator and manager of a portfolio of toll-road assets. On July 22, 2020, the company stated its 2QFY20 toll revenue and traffic statistics. During Q2 FY20, the company reported a fall of 44.2% in weighted average toll revenue over pcp and weighted average traffic went down by 51.2% compared to the prior corresponding period, reflecting the global impacts of Government policy responses to the COVID-19 pandemic. Nevertheless, performance improved gradually in the final complete week of the quarter, especially in France and Germany, where traffic was down only 15.1% and 4.8%, respectively, as compared to the same period in 2019.

June Quarter 2020 Highlight (Source: Company Reports)

Other Recent Updates: Recently, the company stated that Jeffrey Conyers, a director of the company, acquired 4,838 shares for a consideration of $29,995.60. In another update, the company announced that Lazard Asset Management Pacific Co, a substantial holder of the company, has reduced its voting power from 11.12% to 10.06%. The company also announced that a Security Sale Facility has been established for securityholders domiciled in the United States, who are not "qualified purchasers" under the US Investment Company Act of 1940.

Completion of Share Purchase Plan: Recently, the company has completed its share purchase plan and received applications of ~$180 million, exceeding the SPP target size of $75 million. The SPP followed a successful institutional placement of $420 million. The company would use the proceeds raised from the Placement and SPP for restructuring its balance sheet by repaying the MIBL debt facility, to improve resilience and to provide additional capacity for growth.

Key Risk:  As of the now, a key risk to the company involves the impact of COVID-19, which left an adverse effect on its financial performance and position.

Valuation Methodology: P/BV Multiple Based Relative Valuation Method (Illustrative)

P/BV 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 ALX gave a positive return of 21.8% during the span of three months. The stock of the company is currently trading above the average of its 52-week trading range of $3.51 - $8.54. The company is likely to release its HY20 results on 27 August 2020. The company seems to be well placed to stay buoyant in the current economic condition with strong liquidity and improved flexibility to pursue future growth opportunities. Current ratio of the company stood at 15.2x in FY19 as compared to the industry median of 0.98x, indicating a decent position to pay its short-term obligations as compared to the peer group. We have valued the stock using the P/BV multiple based relative valuation method (illustrative) and have arrived at a target price of high single-digit (in percentage terms). Thus, considering the decent liquidity position, recent equity raising and future opportunities, we give a "Hold" recommendation on the stock at the current market price of $6.74 per share, down by 0.296% on 22 July 2020.

Downer EDI Limited 

DOW Completed Institutional Entitlement Offer: Downer EDI Limited (ASX: DOW) is engaged in designing, building and sustaining assets, infrastructure, and facilities. In a recent update, the company stated that it has successfully completed the Institutional Entitlement Offer that was announced on 21 July 2020. The Institutional Entitlement Offer raised ~$339 million at the offer price of $3.75 per share and was strongly supported by eligible institutional shareholders.

Preliminary FY20 Key Highlights: For FY20, the company expects underlying EBITA to be in the range of $410 million to $420 million and underlying NPATA in the range of $210 million to $220 million. Further, DOW expects FY20 underlying EBITA for core Urban Services businesses to be ~$511 million, as compared to FY19 figure of $525 million. The company remains resilient in earnings and cash flows despite COVID-19 led crisis, on the back of diversification of markets across critical services, health and education and government housing and facilities. The company expects operating cash conversion for FY20 to be around 40%. Statutory FY20 NPAT loss is expected to be in the ambit of $150 million and $160 million. The company is likely to report its FY20 results on 12 August 2020.

Key Financial Highlight (Source: Company Reports)

DOW Achieves 100% Stake in Spotless: The company also stated that it will make an unconditional offer to obtain 100% ownership of Spotless for an upfront cash consideration of $1.00 per Spotless share plus for each 17.92741 Spotless shares received into the Spotless Offer. The company expects to obtain around $10m - $15m per annum synergies through the acquisition.

Awarded with a New Road Maintenance Contract: Recently, the company announced that it has secured road maintenance contracts from the South Australian Government Department of Planning, Transport, and Infrastructure (DPTI). The estimated value of the contract is $420 million over a maximum term of 13 years. The following picture gives an overview of the financial performance of 1H FY20:

Financial Performance (Source: Company Reports)

Key Risks: The company is exposed to various financial risks such as foreign exchange, interest rate, commodity risk, which have the potential to affect its financial performance. Moreover, the business also deals with default by counterparties on their contractual obligations.

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 stock of DOW gave a positive return of 13% during the span of three months. The stock of the company is currently trading below the average of its 52-week trading range of $2.538 - $8.777. The company possesses a decent financial foundation as well as a decent pipeline of ongoing work, most of it with Government customers. Current ratio of the company stood at 1.11x in 1H FY20, reflecting YoY growth of 10.7%. This indicates that the company has improved its position to settle its short-term obligations. 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 percentage terms). Therefore, considering the recent FY20 update, decent financial foundation, a decent pipeline of ongoing work and improved liquidity position, we give a "Buy" recommendation on the stock at the current market price of $4.30 per share, up 0.939% on 22 July 2020.

Reliance Worldwide Corporation Limited

Strong Cash Generation Initiatives: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in the manufacturing, designing, & supply of water flow and control products and solutions for the plumbing industry. In a recent update, the company stated that Ian Rowden has been appointed as an independent non-executive director of the company. The company also appointed Andrew Johnson as Group Chief Financial Officer. In another update, the company stated that Bennelong Australian Equity Partners Ltd, a substantial holder of the company, has reduced its voting power from 15.6602% to 10.3183%. Further, the company also stated that it has cancelled 739,870 unquoted options, which were earlier granted to former Group CFO Gerry Bollman.

Impact of COVID-19 on Business: On 1 May 2020, the company stated that it is taking necessary measures to curb the impact of COVID-19 outbreak. In Australia region, the company opted to reduce its manufacturing operations to 4 days a week from 5 days, from 11 May 2020. The company has also stated that more than 40% of the UK workforce had been placed on unpaid leave. In North America, the company's manufacturing operations remain unaffected. Considering the COVID-19 pandemic, the company also stated that the executive team members decided to accept a 20% reduction to their base salaries and RWC's non-executive directors agreed to cut 20% of their fees, effective for two months. The company further added that all non-essential capital expenditure has been suspended to boost cash flow during the time of global uncertainty from COVID-19.

1HFY20 Key Highlights: During the period, the company reported net sales of $569.3 million, up 5% year over year. EBITDA and adjusted net profit after tax stood at ~$126.3 million, and ~$63.7 million, respectively. Operating cash flow for the period stood at $112.8 million, up 163% year over year.

Key Highlights (Source: Company Reports)

Outlook: Due to increasing uncertainty on the back of coronavirus outbreak, RWC has suspended its guidance for FY20. Nevertheless, the company will continue to engage in opportunities to drive further efficiency enhancements and to optimize its manufacturing footprint.

Key Risks: The company is exposed to economic sustainability risks associated with its business activities. Manufacturing operations primarily involve the use of heavy machinery and hazardous processes, the interruption of which may adversely impact business reputation.

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

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

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company gave negative returns of 33.03% over a period of six months and is currently trading below the average of its 52-week trading range of $1.63 - $4.76. The market capitalisation of the company stood at $2.31 billion as on 22 July 2020, with an annual dividend yield of 3.25%. The company is likely to release its FY20 results on 24 August 2020. We have valued the stock using a P/CF multiple based relative valuation method (illustrative), and for the purpose, we have taken peers such as James Hardie Industries PLC (ASX: JHX), GWA Group Ltd (ASX: GWA), GUD Holdings Ltd (ASX: GUD) and arrived at a target price with an upside of low double-digit (in percentage terms). Hence, considering the performance in 1HFY20, recent measures to curb the impact of COVID-19 outbreak and current trading levels, we give a "Buy" recommendation on the stock at the current market price of $2.89 per share, down by 1.027% on 22 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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