Stocks’ Details

Incitec Pivot Limited

Strong Fundamentals of Explosives Business: Incitec Pivot Limited (ASX: IPL) is engaged in the manufacturing and distribution of industrial explosives, chemicals and fertilisers. The market capitalisation of the company stood at $4.65 Bn as on 27^th February 2020. Mr Joseph Breunig, on 4^th February 2020, submitted his resignation from the role of Non-executive director because of external commitments. This will be effective from 28^th February 2020. For the full year ended 30^th September 2019, the company reported NPAT excluding IMIs (Individually Material Items) amounting to $152.4 Mn against $207.9 Mn in pcp. Earnings Before Interest and Tax ex IMIs stood at $303.7 Mn as compared to EBIT ex IMIs of $557 Mn in FY18. These results have been impacted by numerous non-recurring items of $197 Mn including Queensland rail outage, increased operating costs etc.

The fundamentals of explosives businesses in the Americas and the Asia Pacific stood strong in FY19. During the period, the company experienced a rise of 31% in the volumes of Electronic Detonators in the US and 54% volume growth in the Asia Pacific.


Profit & Loss (Source: Company Reports)

Guidance for Costs: For FY20, the company expects corporate costs to be around $30 Mn. Moreover, net borrowing costs are anticipated to be around $140 Mn, as a result of a lower average cost of funding after the completion of the Group’s debt refinancing in 2019.  With respect to Fertilisers Asia Pacific, the company anticipates the Phosphate Hill plant to deliver improved production of around 975k mt of ammonium phosphates.

Valuation Methodology:P/CF Based Valuation

P/CF Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Board of the company declared a final dividend amounting to 3.4 cents per share, franked to 30%. This brought the total dividend for FY19 to 4.7 cents per share. We have valued the stock using P/CF-based relative valuation approach and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Therefore, considering the strong fundamentals of the explosives business and decent upside in valuations, we give a “Buy” recommendation on the stock at the current market price of $2.830 per share, down by 1.736% on 27^th February 2020.

DroneShield Limited

Substantial Growth in Revenue: DroneShield Limited (ASX: DRO) is involved in the development, commercialisation and sale of hardware and software technology for drone detection and security. The market capitalisation of the company stood at $42.92 Mn as on 27^th February 2020. For Q4 2019 ended 31 December 2019, cash inflows from customers stood around $752,000, which is double as compared to Q3 FY19, driven by a temporary reduction in customer receipts during the September 2019 quarter.

Overall global demand for drone detection and mitigation products has increased over the course of 2019 and rising into 2020 as well. As a result, full year revenue mounted up by 200% to $3,617,488. Moreover, revenue growth has also been supported by the order from the Australian Department of Defence and the contract secured for providing counterdrone protection for the Southerneast Asian Games held from 30 November 2019 to 11 December 2019. However, net loss increased by 21% to $7.69 million due to the rise in research and development (R&D) and sales and marketing activities. Net loss for the period also included non-cash share-based payments of $1.75 Mn.


Annual Cash Receipts (Source: Company Reports)

First Shipment for DroneSentry-X^TM: DRO has received strong customer interest for DroneSentry-X^TM and anticipates first shipments in mid-2020.  The company also expects demand for drone technology to rise in 2020.
Stock Recommendation: Gross margin of the company stood at 54.8% in 1HFY19 reflecting YoY growth of 34.5%. Over the same period, the company also experienced improvement in EBITDA, operating and net margin. DRO has an EV/Sales multiple of 12.3x as compared to the industry average (Professional & Commercial Services) of 28.7x on TTM basis. As per ASX, the stock of DRO is trading near its 52-week low level of $0.090, indicating an opportunity for accumulation. Hence, considering the robust growth in revenue, improvement in key margins, and business developments, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.160 per share, down by 5.882% on 27^th February 2020.

Orora Limited

No Objection by ACCC: Orora Limited (ASX: ORA) is an innovative packaging solutions company, which provides fibre, metal and glass packaging solutions. Recently, the company received the no objection nod from the ACCC (Australian Competition and Consumer Commission) on the acquisition of Orora Fibre by Australian Paper. This decision has been provided after the assessment of the impact on other buyers of packaging paper products. This transaction includes certain assets, which are owned by Orora Limited and Orora Packaging Australia Pty Ltd, and the wholly owned Orora subsidiaries: PP New Pty Ltd (and its wholly owned subsidiary AP Chase Pty Ltd); Rota Die International Pty Ltd; and Specialty Packaging Group Pty Ltd.

Statutory net profit after tax for 1HFY20 stood at $76.6Mn, reflecting a fall of 13.3% as compared to pcp. Earnings of ORA have been impacted by subdued economic conditions throughout its geographies. However, sales revenue amounted to $1,835.2 Mn with a rise of 13.3% over pcp. During 1HFY20, the company made decent progress for completing the sale of the Australasian Fibre Business and to mitigate the challenges faced by the North American businesses.


Financial Summary (Source: Company Reports)

Challenging Market Conditions: ORA currently anticipates difficult market conditions to continue for the remainder of FY20. The company would continue to invest in efficiency, growth and innovation. Moreover, it is looking forward to the integration of recent acquisitions and finalization of the sale of Fibre business.

Valuation Methodology:EV/Sales Based Valuation

EV/Sales Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Investment of over $60.0 million was made for supporting organic capital projects and innovation during 1H FY20. Investments in innovation and growth opportunities are supported by a strong cash flow capability and robust balance sheet. We have valued the stock using EV/Sales based relative valuation approach and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $2.760 per share, up by 2.602% on 27^th February 2020.

 
Comparative Price Chart (Source: Thomson Reuters)

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