Stocks’ Details

Rural Funds Group

Purchase of Assets: Rural Funds Group (ASX: RFF) owns a diversified portfolio of high-quality Australian agricultural assets. The company generates income from leasing its assets to suitable counterparts and capital growth through any appreciation in the value of those assets. In a recent announcement on ASX, it was notified that Rural Funds Management Limited (RFM), as responsible entity and manager for RFF, has entered a contract to acquire 5,409 ha of sugar cane farms with associated plant and equipment and 8,060 ML of water entitlements from MSF Sugar Pty Ltd. The company is expected to pay a consideration of $81.1 million under the contract. Settlement of the contract is expected in October 2020 through an increase in RFF’s debt facility. RFM aims to convert the farms to approximately 2,200 ha of macadamia orchards. A substantial portion of the remaining area will be used for cropping.

Distribution Update & Guidance: On 31^st July 2020, the company paid a distribution of $0.027 per stapled security. Total FY20 distributions per unit were estimated at 10.85 cents, up 4% on the previous year. For FY21, the company’s distribution per unit is estimated at 11.28 cents.

H1 Results & AFFO Guidance: During the half-year ended 31^st December 2019, property revenue increased by 22% to $37.6 million. Adjusted funds from operations per unit increased by 11% to 7.1 cents. Total Comprehensive Income earnings per unit witnessed a rise of 16% and stood at 8.9 cents. Performance during the half was largely supported by JBS transactions, cattle acquisitions, development capital expenditure, and lease indexation. Adjusted funds from operations (AFFO) for FY20 are expected at 13.5 cents per unit.

H1 Highlights (Source: Company Reports)

Key Risks: The company is exposed to interest rate risk, price risk, credit risk and liquidity risk, through its holding of financial instruments in the form of loans and receivables, cash at bank, bank overdraft, etc. In addition, RFF’s assets are also exposed to the risk of climate change and other environmental aspects, which can impact operations.

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

EV/EBITDA 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 stock of the company gave positive returns of 11.54% in the last six months and is currently inclined towards its 52-week high of $2.4. The company’s pro forma gearing stands at 29.3% against its target range of 30-35% and its pro forma loan to value ratio is 41% against the covenant of 50%, representing appropriate capital management. Moreover, the company has a good investment profile with a high-quality counterpart that will underpin future growth. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the trading levels, valuation, and growth prospects, we recommend a “Hold” rating on the stock at the current market price of $2.080, up 2.463% on 4^th August 2020.

Zoono Group Limited

Decent Sales Performance in Australia & New Zealand: Zoono Group Limited (ASX: ZNO) is a global biotech company that develops, manufactures and distributes a suite of long-lasting and environment-friendly antimicrobial solutions. The company recently updated that Bank of America Corporation along with its related bodies corporate, now has a shareholding of 8.06% in the company, against the previous shareholding of 9.62%.

Q4FY20 Highlights: During the quarter ended 30^th June 2020, the company’s unaudited revenue came in at NZ$20.9 million, up by NZ$5.2 million on the previous quarter. Sales in Australia and New Zealand continued to be strong, with continued positive momentum in the UK & Europe. In China, the company has reshaped its business and intends to take direct control of the region, with a focus on relationships with channel partners, reducing costs, and increasing margins. Operational cash flow for the quarter came in at NZ$5.3 million, with customer receipts amounting to NZ$19.8 million.

Operating Cash Flow (Source: Company Reports)

Plans in Pipeline: The company has signed a deal with Ali Baba in China and is planning to open an international online store on Ali Baba to be followed later this year by a TMall flagship store. The company also aims to grow its North American business over the next 2-3 years, with increased resources to be allocated from H1FY21.

Key Risks: The majority of the company’s transactions are carried out in $NZD and British Pound (GBP), exposing it to exchange rate risk from the group’s overseas sales and purchases. The company is also exposed to interest rate risk through cash and deposits held. Credit risk arises from the carrying amount, net of any provision for impaired receivables.

Stock Recommendation: The stock of the company gave positive returns of 127.66% in the last six months. In the last one month, the stock has corrected by 29.61% and is currently inclined towards its 52-week high of $3.29. As on 30^th June 2020, the company’s cash at bank increased to NZ$10.3M from NZ$5.7M in Q3. During 1HFY20, the company had a gross margin of 52.1%, up from the pcp gross margin of 40.9%. Debt to equity multiple for the half stood at 0.18x. Considering the decent fundamentals, price movements, and current trading levels, we have a wait and watch stance on the stock at the current market price of $2.19, up 2.336% on 4^th August 2020. 

IncentiaPay Limited

Increased Sales and Marketing Expenses: IncentiaPay Limited (ASX: INP) is the owner of The Entertainment Group and the producer of Australia & New Zealand’s Entertainment Membership and corporate Frequent Values product. The company has recently announced a strategic partnership with Paywith Worldwide Inc., to deliver new products and value propositions for customers through a combination of PayWith’s Processing Engine, Offers Marketplace and Syndication Platform with IncentiaPay’s content and relationships. The objectives of this partnership will be funded from a capital expenditure facility provided by Skybound Fidelis Investments Limited. Notably, INP has also entered into a multi-year licencing agreement to licence Paywith’s platforms.

Q4 Results: During the quarter ended 30^th June 2020, cash receipts amounted to $7.78 million. Cash inflows during the fourth quarter aligned more closely with the prior corresponding period, following lower than expected Q3 cash inflows due to COVID-19. The company also notified about an increase in funding lines with Skybound Fidelis Credit Fund, with an additional $1.2 million specific purpose facility for capital growth initiatives. The company’s cash flows are highly seasonal, with the majority of the revenue earned between February and July. During the June quarter, the company spent on sales and marketing efforts to recover lost inflows from March, April and May by extending the sales season. The company reported a net cash inflow (operating activities) of $1.399 million for the period as compared to a cash outflow of $3.566 million in Q3, backed by the increase in membership sales in late May and June.

Operating Cash Flow (Source: Company Reports)

Outlook: The company is currently working towards extending its membership sales season to increase revenue inflows. The company is constantly monitoring its costs and cash flows to align them with the impact of COVID-19. In the coming quarter, the company’s key focus involves its IT transformation strategy, which is expected to drive future success.

Key Risks: The company is exposed to funding risks i.e. the availability of adequate funds as per its capital requirements. The company’s dependence on technology to deliver its services exposes it to the risk of technology outage, which can adversely impact its reputation and financial performance. Further restrictions imposed in some Australian states due to COVID-19 outbreak are expected to impact short-term membership revenue and can challenge the timely achievement of targets.

Stock Recommendation: The stock of the company gave positive returns of 53.57% and 377.78% in the last one month and three months, respectively. Currently, the stock is inclined towards its 52-week high of $0.059. As on 31^st December 2019, the company had cash and short-term investments amounting to $4.5 million and total debt amounting to $21.87 million. Considering the company’s expanded offerings through the partnership agreement, performance during the June quarter, COVID-19 challenges, key risks, price movements, and current trading levels, we have a wait and watch stance on the stock at the current market price of $0.034, down 20.93% on 4^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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