Stocks’ Details

Reece Limited

Completion of Institutional Offer & Placement: Reece Limited (ASX: REH) is a leading supplier of plumbing, bathroom, heating, ventilation, waterworks, air conditioning and refrigeration products with operations in Australia, New Zealand, and the US. As on 9 July 2020, the market capitalization of the company stood at ~$6.07 billion. The company has completed the institutional component of the equity raising and has raised ~$600 million. Proceeds from the equity raising will be used to enhance balance sheet flexibility, support the business during the current macro-economic uncertainty and increase liquidity and reduce net debt.

Expansion in Global Footprint and Decent Increase in NPAT: During 1H20, the company has achieved record sales revenue of $2,962 million, representing an increase of 9% on the prior corresponding period. In the same time span, normalized EBITDA was up by 1% to $263 million from $260 million in 1H19, and normalized NPAT grew by 7% to $113 million from $106 million in 1H19. During the first half of FY20, ANZ footprint expanded with the addition of five new branches, bringing the total to 639.

1H20 Financial Highlights (Source: Company Reports)

Key Risks: The group is exposed to a variety of financial risks comprising foreign currency risk, interest rate risk, credit risk, liquidity risk and fair values. The company minimizes the effects of these risks by using derivative financial instruments to hedge the risk exposure. A prolonged reduction in construction and maintenance activity across the business’ key markets due to the high degree of uncertainty surrounding COVID-19, may impact Reece’s financial performance and profitability.

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 company is setting itself for long term success and is building liquidity to manage risk. It is strengthening its balance sheet and is navigating the current market uncertainties from a position of strength through the recent equity raising. As per ASX, the stock of REH gave a return of 7.56% in the past three months. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in percentage terms). Considering the decent returns in the past three months, financial performance in the second half and liquidity position, we recommend a ‘Hold’ rating on the stock at the current market price of $9.46, up by 0.745% on 9 July 2020.

Engenco Limited

Strategic Land Purchase: Engenco Limited (ASX: EGN) is an Australian company that provides broad-based technical services to customers who rely upon heavy/complex plant and machinery or specialized rolling-stock. As on 9 July 2020, the market capitalization of the company stood at ~$134.75 million. The company has recently acquired a strategically located site in the rail maintenance precinct of Forrestfield, Western Australia. It stated that the facility is well-positioned for the further expansion of interstate rail connected maintenance network and is a good opportunity to integrate its heavy maintenance operations in Perth.

Half-Year Results: During 1H20, the Engenco group continued its multi-year strategy to increase market share through greater capacity, capability, and product innovation. During the half-year, it reported a slight increase in revenue to $88.96 million and profit before tax stood at $3.55 million.

1H20 Financial Highlights (Source: Company Reports)

Key Risks: COVID-19 pandemic has impacted parts of the business and affected sales mix to some degree. Hedemora Turbo and Diesel in Sweden is currently operating with a reduced workforce due to supply chain disruptions from European suppliers. The stock is also thinly traded with an average annual volume of 23,784, which might pose some difficulty in liquidating huge positions. 

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 company is likely to continue its multi-year strategy to expand its range of goods and services and investment in people, plant, and technology. This will deliver long-term benefits and sustained future profitability. As per ASX, the stock of EGN is inclined towards its 52-week low of $0.380, proffering a decent opportunity for the investors to enter the market. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of low double-digit (in percentage terms). Considering the current trading levels, decent half-year performance and strategic purchase of land, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.460, up by 6.977% on 9 July 2020.

XTEK Limited

Additional ADF SUAS Purchase Order: XTEK Limited (ASX: XTE) provides products and services within the homeland security industry. As on 9 July 2020, the market capitalization of the company stood at ~$43.33 million. The company has recently announced that it has received a purchase order worth ~$2.8 million from the Australian Defence Force for the supply of additional AeroVironment WASP AE Small Unmanned Aerial Systems. The company retains a strong relationship with the ADF and has delivered more than 50 AeroVironment WASP AE SUAS.

1H20 Financial Highlights: During 1H20, the company achieved record revenue of $16 million, underpinned by the SUAS supply and maintenance and 3 months of HighCom revenue. The company invested significantly in future growth to place itself in a strong position. In the same time span, gross profit of the company witnessed an increase of 62% on pcp and stood at $2.9 million.

1H20 Financial Highlights (Source: Company Reports)

Outlook: As the ADF’s SUAS fleet continues to grow, XTEK is well placed to capture additional support revenue underpinned by the existing contracts with the ADF for additional SUAS supply, spare parts, and maintenance. The company has provided guidance for FY20 and expects to deliver revenue of over $42 million. XTEK manufacturing capability also optimized with the ability to produce up to ~$40 million p.a. of revenue.

Key Risks: The group is exposed to a variety of financial risks through its use of financial instruments. It is also exposed to liquidity risk, credit risk, and market risk including, currency risk and interest rate risk.

Stock Recommendation: As global defence spending continues to grow with Governments’ focus on soldier survivability, XTEK seems well placed to capitalize on these market trends. However, the stock of XTE is trading close to its 52-week high of $0.965. During 1H20, EBITDA margin and net margin of the company witnessed a decline over the previous half. Considering the current trading levels, softer markets due to the global pandemic and decline in EBITDA and net margin, we suggest investors to wait for the better entry level, and thus, have a watch stance on the stock at the current market price of $0.850, up by 4.294% on 9 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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