Stocks’ Details

Transurban Group

Material Pipeline of Opportunities in Core Markets: Transurban Group (ASX: TCL) is the owner, operator and developer of electronic toll roads and intelligent transport systems. As on 12 August 2020, the market capitalization of the company stood at ~$38.1 billion. The company has recently released its results for FY20 and reported a decline of 3.4% in proportional toll revenue to $2,492 million and a decrease of 8.6% on average daily traffic across the portfolio. The company’s performance is expected to remain sensitive to future government responses and overall economic conditions due to the outbreak of COVID-19. During the year, the company completed three projects and added two assets in July 2020. The decent financial and operational performance enabled the company to declare a final dividend of 16 cents per share, bringing the total dividend to 47 cents per share. The company has announced that Adam Watson, Chief Financial Officer, has resigned from his position, effective from mid-November 2020.

FY20 Operational Highlights (Source: Company Reports)

What to Expect: Despite significant impacts to traffic and an uncertain near-term outlook due to COVID-19, the company retained decent core fundamentals. The company has a focus on long term sustainability and will continue to invest in enhancing its position as a global sustainability leader. TCL expects FY21 distribution to be in line with free cash, excluding capital releases.

Key Risks: The company is exposed to a variety of risks including financial and business disruptions, health and safety, and environmental challenges. The company is also susceptible to unfavorable changes in the market or operating conditions, risks related to cyber security and information protection, failure of technical infrastructure, etc.

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: TCL has a material pipeline of opportunities emerging in core markets and will continue to balance the prospects with decent investment-grade credit metrics and distributions for security holders. As per ASX, the stock of TCL is trading above the average of its 52-week trading range of $9.100 - $16.440. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and arrived at a target upside of mid-single-digit (in percentage terms). Considering the current trading levels, resilience in operational performance despite the softer market conditions, and positive long-term outlook, we recommend a ‘Hold’ rating on the stock at the current market price of $13.78, down by 1.077% on 12 August 2020.

Downer EDI Limited

Downer's Off-Market Bid for Spotless: Downer EDI Limited (ASX: DOW) designs, builds and sustains assets, infrastructure and facilities and is a leading provider of integrated services in Australia and New Zealand. As on 12 August 2020, the market capitalization of the company stood at ~$2.86 billion. The company has recently lodged the Takeover Booklet to acquire the ~12% of the issued share capital of Spotless which is not owned by DOW. Under the offer, the shareholders of Spotless will receive cash consideration of $1.00 for each Spotless Share and one Downer Contingent Share Option with a zero exercise price for every 17.92741 Spotless shares. However, this is subject to future market prices of Downer shares. The company has also entered a call option deed with Coltrane Master Fund, L.P, wherein it will increase its ownership above 90% to proceed to compulsory acquisition. This offer will provide a liquidity opportunity and will support long-term growth prospects. 

FY20 Financial Highlights: During the year ended 30 June 2020, total revenue of the company went down by 0.2% to $13.4 billion and group underlying EBITA witnessed a fall of 25.8% to $416 million, down from $560.6 million in pcp. In the same time span, underlying NPAT of the company stood at $165.2 million, reflecting a fall of 43.2%.

FY20 Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks, including the ability to meet customer expectations, reliable and cost-effective assets and services, proper utilization of technology in core service offerings, etc.

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: DOW’s diversification across services in road, rail, power, gas, water, defence, and other areas has delivered resilience in earnings and cash flows. The company retains the ability to manage its activities which are required for long-term success. As per ASX, the stock of DOW is inclined towards its 52-weeks’ low of $2.538, proffering a decent opportunity for accumulation. The stock of DOW gave a return of 3.59% in the past one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation approach and arrived at a target upside of low double-digit (in percentage terms). Considering the current trading levels, bid-offer for spotless shares, and growth opportunities in the long term, we recommend a ‘Buy’ rating on the stock at the current market price of $4.30, up by 2.871% on 12 August 2020, owing to its recent release regarding the bid-offer for Spotless. 

Aeris Environmental Limited

Sustained Improvement in Gross Profit: Aeris Environmental Limited (ASX: AEI) is engaged in the development and sale of products to eliminate biofilm growth in air conditioning systems and water treatment systems to enhance indoor air quality. As on 12 August 2020, the market capitalization of the company stood at ~$140.68 million. During the quarter ended 30 June 2020, revenue of the company stood at $7.5 million, taking annual unaudited revenue for FY2020 to over $14.75 million. In the same time span, the company witnessed sustained improvement in gross margin to 61% due to an increased mix of higher-margin Aeris branded products. During the quarter, the company reported cash receipts of $5.8 million and witnessed an increase in net cash from operations.

Quarterly Cash Flow Activities (Source: Company Reports)

Operational Highlights: During the quarter, the company received strong interest from marquee customers across the USA, indicating strong demand. It also saw the successful manufacturing of multiple batches of Aeris Active at a large volume contract manufacturing facility.

Key Risks: The activities of the company exposed it to a variety of financial risks, including market risk (including currency risk, credit risk, fair value interest rate risk, and price risk), credit risk, liquidity risk, and cash flow interest rate risk.

Stock Recommendation: The Company continues to invest in broadening its range of environmental hygiene products and seems to be well-capitalised to increase its supply chain and production capacity. The AerisGuard brand is increasingly being specified by customers worldwide. As per ASX, the stock of AEI gave a return of 10.48% in the past six months. On a trailing twelve months (TTM) basis, the stock of AEI is trading at an EV/Sales multiple of 15.8x, lower than the industry average (Professional & Commercial Services) of 42.4x and thus seems undervalued. Considering the decent returns in the past six months, increasing demand for the company’s products, and improvement in gross margin, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.560, down by 3.448% on 12 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.