Stocks’ Details
 

5G Networks Limited

Substantial Increase in EBITDA and Operating Cash Flow: 5G Networks Limited (ASX: 5GN) is a provider of high-speed data networking, cloud and data centre services and managed services. As on 20 February 2020, the market capitalisation of the company stood at ~$68.86 million. The company has recently released its interim results for the period ending 31 December 2019, wherein it reported a growth of 8% in revenue to $25 million and an increase of 236% in EBITDA to $3.0 million as compared to pcp. The company’s strong financial performance was mainly due to the successful transition to higher margin annuity revenue. The company also reported a record operating cash flow of $3.3 million, representing an increase of 80% on pcp. 


1H20 Financial Performance (Source: Company Reports)

What to Expect: The company has re-affirmed FY20 guidance and expects revenue to be in the range of $55 million to $65 million. The company is maintaining its focus to continue the successful EBITDA performance throughout FY20 and is also anticipating a growth of 8-12% in EBITDA margin. 5GN is strategizing stronger customer base with cross & upsell strategy and is focusing on expansion in infrastructure.

Stock Recommendation: As per ASX, the stock of 5GN gave a return of 37.25% on the YTD basis and a return of 11.75 in the past one month. During FY19, gross margin of the company stood at 51.8% as compared to the industry median of 61%. Over the span of 2 years, ROE of the company witnessed a substantial decline. On TTM basis, the stock is trading at a price to book value multiple of 4.2x, higher than the industry median (Telecommunications Services) of 2.6x. Considering the returns, lower gross margin and stretched valuations, we recommend a ‘Sell’ rating on the stock at the current market price of $1.035, down by 1.429% on 20 February 2020. 

Accent Group Limited

Record H1 FY20 Profit: Accent Group Limited (ASX: AX1) owns and operates several footwear and apparel businesses in the performance and active lifestyle sector. As on 20 February 2020, the market capitalization of the company stood at ~$1.05 billion. The company has recently released its interim results wherein it reported an increase of 10.5% in EBITDA to $67.70 million and a growth of over 9.7% in NPAT to $35.28 million. This result was mainly due to growth in sales from new stores and digital, profit growth in The Athletes Foot, improvement in underlying gross margin and a focus on cost of doing business.


1H20 Financial Highlights (Source: Company Reports)

Growth Opportunities and Future Expectations: The company is planning to open 70 new stores in FY20 across all banners. AX1 is also expecting to generate sales of approximately $1.5 million per store and store EBIT margin in between 13% to 15% in The Athlete’s Foot. It will continue to expand its vertical product program and is on track to deliver $15 million in sales in FY20.

Valuation Methodology: EV/Sales Based Valuation

EV/Sales Multiple Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of AX1 gave a return of 32.53% in the past 6 months and a return of 11.21% in the past one month. The stock is also trading very close to its 52-week high of $2.180. During FY19, gross margin of the company stood at 57.4%, higher than the industry median of 22.3%. In the same time span, ROE of the company was 13.6% as compared to the industry median of 14.5%. Considering the returns, trading levels, decent financial performance and modest outlook, we have valued the stock using EV/Sales valuation approach and have arrived at a downside of lower double-digit (in percentage terms). For the said purposes, we have considered City Chic Collective Ltd (ASX: CCX), Mosaic Brands Ltd (ASX: MOZ) etc. as peers. Hence, we suggest our investors to book profit and give a “Sell” rating on the stock at the current market price of $2.130, up by 10.078% on 20 February 2020, owing to its recent release of interim results. 

New Energy Minerals Ltd

Settlement of Disputes with Regius: New Energy Minerals Ltd (ASX: NXE) is engaged in the exploration and development of graphite. As on 20 February 2020, the market capitalisation of the company stood at ~$1.5 million. The company has recently announced that it has reached a complete settlement with Regius Resources Group Ltd and has appointed Regius as consultants for the completion of sale transactions in Mozambique for a remuneration of $120,000. The company will further make a payment of $600,000 to Regius inclusive of consideration for a 100% reduction in the shareholding of Regius in NXE.

Update on Fura Transaction: The company has recently announced that it has entered into a restated merger of Ruby Assets Agreement with Fura Gems Inc. for a reduced cash payment of $1,400,000 from $2,800,000. NXE also stated that the $2.8 million loan agreement with Fura is formally terminated since no draw-down was possible due to the non-satisfaction of its conditions. During the December Quarter, NXE announced an extension of the Conditions Precedent End Date under the SPA agreement with Auspicious Virtue Investment Holding Limited to allow for the satisfaction of the outstanding conditions. Following the completion of share sale and purchase agreement, the company will have no further interest in the Caula project, which was the main undertaking of NXE.

Key Margins: Over the span of 5 years from FY15 to FY19, net margin and Return on Equity witnessed a substantial decline. This implies that the company is not able to manage its expenses and hence, there is a decline in efficiency of the company in creating profits. During FY19, Debt/Equity ratio of the company stood at 0.3x, higher than the industry median of 0.13x, indicating the aggressive nature of the company in financing its growth with Debt.


Key Margins (Source: Company Reports)

Stock Recommendation: As per ASX, the stock of NXE gave a negative return of 40% in the past 3 months and a negative return of 35.71% in the past one month. The stock is also trading very close to its 52-week low of $0.007. As per the recent announcement, NXE is working towards settling the sale of its remaining 50% interest in Balama Resources Pty Ltd and the sale of its ruby project to Fura Gems Inc. NXE is focusing on short-term objectives and is estimating cash outflows of $990,000 for the March 2020 quarter. Considering the trading levels, negative returns and decline in margins, we recommend a ‘Sell’ rating on the stock at the current market price of $0.008, down by 11.111% on 20 February 2020. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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