Stocks’ Details

Wesfarmers Limited

Review of Target and Kmart Stores: Wesfarmers Limited (ASX: WES) is a diversified business with interests in retail operations. The market capitalisation of the company stood at ~$44.08 Bn as on 22^nd May 2020. WES operates a portfolio of cash generative businesses. The company recently provided an update on Target, wherein it stated that Kmart Group has recognised numerous actions to accelerate the growth of Kmart and address the unsustainable financial performance of Target following the completion of the first phase of the Target review. These actions primarily include the conversion of suitable Target and Target Country stores to Kmart stores. WES added that these actions and the investment in Kmart would improve the overall position of the Kmart Group.

During FY20, the company expects to recognize restructuring costs and provisions in Kmart Group of around $120 million to $170 million before tax and Non-cash impairment in Kmart Group of around $430 million to $480 million before tax. The below picture gives an overview of the financial performance of 1H FY20:

 
Financial Overview (Source: Company Reports)

Future Aspects: Wesfarmers Limited’s portfolio of cash-generative businesses is well-positioned to deliver satisfactory shareholder returns. WES is also well-placed for a range of economic conditions, considering WES’s commitment to a strong balance sheet as well as the diversity and resilience of the portfolio. 

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

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

Stock Recommendation: The company will continue to maintain its focus on improving its e-commerce offer and digital capabilities. It would continue to develop and enhance its portfolio, building on its unique capabilities and platforms to take benefit of growth opportunities within existing businesses, recently acquired investments. Itwill also pursue transactions which create value for shareholders over the long-term. Over the span of five years (2015-2019), the company has maintained positive free cash flows, reflecting the effective use of working capital. We have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms).For the purpose, we have taken peers like, Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), etc. Thus, considering the portfolio of cash generative businesses, effective use of working capital and its focus on improving its e-commerce offer and digital capabilities, we maintain a “Hold” rating on the stock at the current market price of $38.860 per share, down by 0.051% on 22^nd May 2020.
 

Bega Cheese Limited

Legal Notice by Kraft Heinz:Bega Cheese Limited (ASX: BGA) is engaged in processing, manufacturing, cutting and packaging of traditional cheese products. The market capitalisation of the company stood at ~$1.11 Bn as on 22^nd May 2020. In response to the previously announced favorable judgement of the Full Court of the Federal Court of Australia regarding the BGA’s right to use the trade dress for its peanut butter products, Kraft-Heinz (on 19 May 2020) filed an application in the High Court to seek out special permission to appeal from the judgment of the Full Court of the Federal Court of Australia.

From the analysis front, in 1H FY20, the company reported statutory EBITDA amounting to $39.3 million, reflecting a fall of 1% over pcp. Underlying earnings for the period was impacted by reduced milk supply and margins in the dairy industry mainly in Northern Victoria.


Key Financials (Source: Company Reports)

EBITDA Guidance:For FY20, the company expects EBITDA to be in the ambit of $95 million to $105 million. The company is focused on its cost structure in order to maintain a globally competitive supply chain.

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company is in constant discussions with domestic and international suppliers and customers with respect to the potential impact of COVID-19 on its businesses. Net margin of the company stood at 1.2% with YoY growth of 0.4%. This reflects that the company has improved its capabilities to convert its topline into the bottom line. During the time span of four years (2016-2019), the company reported a CAGR of 25.23% in free cash flow, reflecting prudent use of working capital. We have valued the stock using a P/CF multiple based illustrative relative valuation methodand arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers like Elders Ltd (ASX: ELD), Tassal Group Ltd (ASX: TGR), Freedom Foods Group Ltd(ASX: FNP).

Hence, considering the aforesaid facts, prudent use of working capital, improved capabilities to convert its topline into the bottom line, and focus on cost structure, we give a “Hold” recommendation on the stock at the current market price of $5.220 per share, up by 0.967% on 22^nd May 2020.
 

Electro Optic Systems Holdings Limited

Raised Funds to Boost Liquidity: Electro Optic Systems Holdings Limited (ASX: EOS) is involved in the designing, development, and production of advanced electro optic technology devices. The market capitalisation of the company stood at ~$780.01Mn as on 22^nd May 2020. Recently, the company has closed its share purchase plan and raised around $10.78 million. This follows the successful completion of A$134 million institutional placement. The company would use the proceeds from institutional placement to improve liquidity position and finance ongoing growth. During the quarter ended March 2020, the company assessed that 70% growth could be managed if the entire 2020 effort were evenly distributed in all four quarters of 2020 to smooth plant demand and to decrease production risk.


Sources and Uses of Funds (Source: Company Reports)

Expected Growth in EBIT: During Q4 FY20, the company expects to receive more than $140 million of receivables associated with delayed deliveries. For FY20, it expects EBIT of $27 million, reflecting a yoy growth of 25%.
Stock Recommendation: As on 31^st December 2019, the company’s pipeline stood at $3.1 billion with a backlog of $620 million. The stock of EOS is inclined towards its 52-week low levels of $2.950, proffering a decent opportunity for accumulation. On next twelve months (NTM) basis, EV/EBITDA multiple stands at 15.2x vis-a-vis the industry median (Industrials) of 43.1x. Moreover, the company has an EV/Sales of 2.2x which is decent enough & better than the Industry median of 4.7x. These parameters reflect that the company is undervalued at the current juncture. By looking at the aforesaid facts, recent capital raising program, decent pipeline and order book in the space, defense, and communication sector along with current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.140 per share, down by 3.745% on 22^nd May 2020.
 

Freelancer Limited

Record GPV Achieved: Freelancer Limited (ASX: FLN) is engaged in the operation of online freelancing, outsourcing and crowd sourcing marketplace. The market capitalisation of the company stood at ~$226.39 Mn as on 22^nd May 2020. During Q1 FY20, the company reported cash receipts of $13.9 million, reflecting a fall of 1.0%. Gross payment volume of the group stood at $210.2 million, up 2.9% on pcp. However, GPV of the Freelancer segment went down by 5.0% to $43.6 million due to disruption in the workforce transitioning to working online. During the quarter, the company experienced disruption in China as the country entered lockdown due to the COVID-19 pandemic.


Cash Flows (Source: Company Reports)

Plans to Achieve Growth: The Group anticipates achieving growth via expansions to other territories organically and by acquisition and forming strategic alliances and partnerships in the upcoming financial years.

Stock Recommendation: Net margin of the company stood at 0.5% in June 2019, reflecting YoY growth of 3.6%. This implies that FLN has improved its position to convert its top line into the bottom line. The stock of FLN is trading towards its 52-week low level of $0.230. The stock has provided a return of 28.21% within the time span of one month. Hence, considering the improvement in key margins, performance in Q1 FY20 and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.500 on 22^nd May 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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