Aurizon Holdings Limited

AZJ Details

Substantial Shareholder: Aurizon Holdings Limited (ASX: AZJ) is engaged in the rail-based transport business and operates Coal, Network, and Bulk as its core segments. On 2 December 2021, First Sentier Investors Holdings Pty Limited became a substantial shareholder with ~5.04% voting rights in the firm.

Morgans Briefing Presentation Highlights: On 3 November 2021, AZJ’s CFO and CEO delivered a presentation on the ‘Acquisition of One Rail and Demerger of East Coast Rail’ and highlighted the following aspects:

• The acquisition of One Rail approximately doubles AZJ’s existing rail infrastructure, complements supply chain development capabilities, and helps to diversify and grow the Bulk business segment.
• It provides improved a value proposition to customers with bulk freight and intermodal operations in Northern Territory and four states.
• AZJ estimates ~$7 - $10 million synergies and the flexibility to re-use surplus rolling stock from the deal.
• The acquisition completion is targeted by early CY2022.
• AZJ plans to fund the ~$2.35 billion (via cash consideration) acquisition from its existing resources and new committed debt facilities (secured ~$500 million debt for East Coast Rail).

Key Takeaways from the AGM:

• AZJ delivered an Earnings Before Interest and Tax (EBIT) of ~$903 million in FY21, which was towards the upper end of the provided guidance range of ~$870 - $910 million.
• The company declared the highest total dividend of 28.8 cents per share (cps), 70% franked in FY21.
• It completed the divestment of the Acacia Ridge Terminal in Queensland and exited from the loss-making Intermodal business.
• The coal business secured multiple contacts such as Anglo American for the Dawson, Moranbah North, Grosvenor, and German Creek mines and Glencore, etc.

Net Operating Cash Flow Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces climate-related risks, changes in environmental and social regulations, increases in infrastructure expenditure, and delays on projects.

Outlook:

• The MD & CEO reported that the business is tracking well in Q1FY22 and reconfirmed the EBITDA guidance in the range of ~$1,425 - $1,500 million and sustaining capex between ~$475 - $525 million in FY22.
• It plans to invest ~$50 million via a Future Fleet Fund over the next 10 years for the R&D of next-gen battery and renewable energy for locomotives.
• Post One Rail acquisition completion, AZJ plans to start the sale process for the East Coast Rail through a demerger or a trade sale, whichever creates higher shareholder value.
  

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of AZJ gave a negative return of ~11.93% in the past three months and a negative return of ~12.40% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $3.305 - $4.360. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median EV/Sales multiple, considering its expected increase in debt to fund the acquisition, a decline in FY21 revenue, volume hauled, and operating profit, continuing COVID-19 risk to the business, etc. For this purpose of valuation, few peers like Qube Holdings Limited (ASX: QUB), Transurban Group (ASX: TCL), Dalrymple Bay Infrastructure Limited (ASX: DBI) have been considered. Considering the current trading levels, growth in Network business segment in FY21, a pipeline of projects for Coal, Bulk segments in FY22, expected acquisition synergies, growth in rail infrastructure assets with the acquisition of One Rail in FY22, and upside in valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.320, as of 7 December 2021, 10:19 AM (GMT+10), Sydney, Eastern Australia.

AZJ Daily Technical Chart, Data Source: REFINITIV  

Austal Limited

ASB Details

Award of A$100.4 million Contract: Austal Limited (ASX: ASB) is involved in design, construction, and movement of defence and commercial vessels for the operators globally. Recently, Austal USA secured ~A$100.4 million contract from the US Navy for the maintenance of Littoral Combat Ships (LCS) located in the Indian Ocean, Western Pacific and in the ports and countries therein.

• The contract is for 24-months from January 2022 – December 2026. It is extendable if the US Navy chooses to exercise the contract option and increase the value of agreement to ~A$298.9 million.

Recent AGM Update:

• Acquisitions: ASB acquired the MARRS shipyard assets in Alabama and BSE Maritime in Queensland in FY21.
• Building USA Steel Capability: ASB is investing in steel shipbuilding capability in the USA in a strategic move to plan revenue replacement from the closure of LCS program in FY25. It secured the first ~US$145 million vessel contract to build T-ATS (Towing, Salvage, and Rescue ships) from the US Navy in October 2021. In September 2021, Rusty Murdaugh was appointed as the US President to head the business.
• Growing Support Business: ASB now has up to 8 service centres globally and 35 vessels under sustainment contracts versus 33 previously.
• Carbon Free Vessels: ASB is evaluating a range of initiatives to reduce emissions as per its recently released ESG report. In FY21, ASB released the design of the VOLTA family of lithium-ion battery-powered electric vessels in a move to reduce fuel consumption and deploy carbon free fleet of vessels.

Key Financials (Analysis by Kalkine Group)

Key Risks: The company faces forex rate fluctuations, macro-economic uncertainty, regulatory concerns, and the persisting COVID-19 impact on the delivery of vessels and volume.

Outlook:

• ASB foresees opportunity to grow its service and support business and diversify revenue as it expands the delivery of defence vessels in Australia and the US.
• ASB has an order book of ~$2.5 billion and expects to deliver ~$1.5 billion revenue in FY22.
• In line with the overall investment strategy, ASB is on track to complete a new steel production line in May 2022 to aid the US Coast Guard and US Navy steel ships.
  

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ASB gave a negative return of ~20.12% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $1.610 - $3.000. The stock has been valued using the P/E-multiple- based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median P/E multiple, considering its lower earnings, revenue, negative impact of forex rate changes, COVID-19 impact on the timing of work and business volume, etc. For this purpose of valuation, few peers like Quickstep Holdings Limited (ASX: QHL), Codan Limited (ASX: CDA), Elsight Limited (ASX: ELS) have been considered. Considering the current trading levels, new contracts in FY21, growth in the vessel sustainment business, valuation upside, order book flowing in FY22, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $1.845, down by ~0.819%, as of 7 December 2021.

ASB Daily Technical Chart, Data Source: REFINITIV 

Electro Optic Systems Holdings Limited

EOS Details

New Director Appointment: Electro Optic Systems Holdings Limited (ASX: EOS) is involved in the design, development, and production of advanced electro-optic technological devices and systems for the defence and space sectors. EOS declared the addition of Deena Shiff as a non-executive director effectively from today. The appointment is in continuation of the Board’s ongoing renewal process.

Key Takeaways from Q3FY21 Results:

• New Contract: The US Subsidiary SpaceLink Corporation recently signed a ~US$300 million contract with OHB Systems AG (OHB) to manufacture and launch the constellation of four high-capacity satellites. It is also actively pursuing multiple opportunities expected to be contracted in the next 15 months.
• Funding Needs: The company would need ~US$700 million to deliver the above-mentioned contract. EOS plans to deploy at least ~US$300 million debt and ~US$400 million equity capital via multiple tranches to meet the funding requirement.
• Divisions Restructured: EOS combined its Communications Systems and Space Systems divisions in Q3FY21 to develop linkages between space and communications activities and derive synergies. The Defence Systems division was split into four product groups relating to CUAS, Weapons, Missile systems, and C4.
• Post the Q3FY21 end, EOS obtained $65 million cash receipts and held over ~100 million cash to be deployed for the expansion of its space and defence businesses. This cash includes a working capital facility of ~$35 million during Q3FY21.

Key Financial Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact by way of project & revenue deferrals, increased supply chain costs, and technological changes.

Outlook:

• EOS plans to invest ~$19 million in SpaceLink to meet tranche 1 of funding of the OHB contract and raise funds via a pre-IPO convertible note in SpaceLink.
• EOS estimates to achieve underlying EBIT of ~$4 - $8 million (prior to SpaceLink costs) in FY21 versus previously stated ~$18 - $21 million. The company now estimates to incur ~$19 million costs for its US subsidiary, SpaceLink, instead of ~$17 million in FY21.
• The revenue guidance has also been narrowed to $215 - $220 million for FY21, compared to the prior view of $230 - $240 million, due to the deferment of revenue in FY22.
  

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of EOS gave a negative return of ~34.99% in the past three months and a negative return of ~43.86% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $2.280 - $6.700. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average EV/Sales multiple, considering the lower revenue and underlying EBIT guidance for FY22, an expected increase in debt, the ongoing COVID-19 impact of revenue deferrals and supply chain costs. For this purpose of valuation, few peers like Quickstep Holdings Limited (ASX: QHL), Austal Limited (ASX: ASB), PTB Group Limited (ASX: PTB), and others have been considered. Considering the current trading levels, revenue growth, a new contract with OHB Systems and others in 1HFY21, internal restructuring in divisions for synergies, valuation, expected contracts in the pipeline, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $2.375, as of 7 December 2021, 10:45 AM, (GMT+10), Sydney, Eastern Australia.

EOS Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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