Stocks’ Details

Senetas Corporation Limited 

Strategic Partnership with Thales: Senetas Corporation Limited (ASX: SEN) is a global leader in the development of high-performance encryption security solutions. As at 21 August 2020, the company had a market capitalisation of ~$69.26 million. On 28 July 2020, the company announced that its subsidiary Votiro, a cybersecurity company, has signed a deal with Thales Trusted Cyber Technologies (Thales). Per the deal, Votiro’s Secure File Gateway product line will be circulated by Thales as a new offering, facilitating government agencies to deliver effective digital services containing zero risks of malware penetration. Further, this partnership will allow government agencies to continue to focus on innovation rather than security breaches.

H1FY20 Result Highlights: For the half-year ended 31 December 2019, the company reported total revenue from operations of $10.6 million, up 7.5% on a year over year basis. The company reported gross profit of 85% in 1HFY20, up 9 pts on the pcp, reflecting lower inventory transfers as Thales utilised existing hardware inventory. As at 31 December 2019, the company had consolidated cash of $14.5 million and no debt.

H1FY20 Results (Source: Company Reports)

COVID-19 Update: In an update provided in March 2020, the company informed that it has witnessed no supply chain disruption, delays, or counterparty risk as a result of the impact of the coronavirus. Although the company had witnessed no change in the demand for Senetas encryption products, it expects delay/slowdown in sales, due to the global economic impacts of the virus. 

Key Risks: The company is exposed to risks related to the global economic impacts from the COVID-19. Further, adverse conditions in the national and global economies and financial markets may adversely affect the business and financial results with reductions in product sales, longer sales cycles, slower adoption of new technologies and increased price competition.

Stock Recommendation: Over the last three months, the stock of SEN has increased by 42.22% on ASX and is inclined towards its 52-week high levels. On the technical analyses front, the stock has a support level of ~0.044 and resistance level of ~0.08. On TTM basis, the stock has an EV to sales multiple of 2.7x, lower than the industry median of (Software & IT Services) of 6.4x. On the same basis, the stock has a price to book value multiple of 3.7x, lower than the industry median of 4.5x. Considering the aforesaid facts, decent 1HFY20 performance, robust balance sheet, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $0.064 on 21 August 2020.

RXP Services Limited 

FY20 Results Highlights: RXP Services Limited (ASX: RXP) is a leading digital services consultancy provider with a market capitalisation of ~$62.02 million as at 21 August 2020. For the full year ended 30 June 2020, the company reported revenue of $126.8 million, down by 10% on the previous year, with a relatively flat H2 despite the advent of COVID-19. Over the year, the digital services revenue grew by ~5%, representing ~90% of the RXP group revenue. The company reported an underlying EBITDA of $15.4 million in FY20, down by 8% on the previous year but pleasingly it was 29% higher in H2FY20 as compared to H1 FY20, despite the advent of COVID-19. The company has recently declared a final dividend of 2.5 cents per share, taking the full-year dividend to 3.50 cents per share. As at 30 June 2020, the company had a cash balance of $15.0 million and net debt of $4.0 million.

FY20 Results (Source: Company Reports)

Outlook: The company entered FY21 with a decent financial position and a solid pipeline of work. Further, the company is well placed to take advantage of the ongoing digital transformation caused by the COVID-19 pandemic. The company’s objectives for FY21 include achieving growth in its top & bottom line along with growth in client advocacy as well as enhancing shareholders’ value. 

Key Risks: The COVID-19 situation and associated responses are evolving rapidly. As a result, the uncertain economic outlook could potentially create some challenges, going forward. The company is also exposed to various financial risks comprising interest rate risk, credit risk, liquidity risk, and currency risk. 

Stock Recommendation: Over the last three months, the stock of RXP has increased by 46.30% on ASX and is trading below the average of its 52-week trading range. For H1FY20, the company has a debt to equity multiple of 0.26x, lower than the industry median of 0.32x.  On the technical analyses front, the stock has a support level of ~0.27 and resistance level of ~0.562. On TTM basis, RXP is trading at an EV/Sales multiple of 0.6x, lower than the industry median (Professional & Commercial Services) of 2.4x. On the TTM basis, the stock is trading at a price to book value multiple of 0.6x, lower than the industry median of 2.2x. Considering the company’s growth in the digital services revenue, the company’s solid pipeline of work and FY21 Outlook, we give a “Hold” recommendation on the stock at the market price of $0.395, up by 2.597% on 21 August 2020.  

Adacel Technologies Limited 

FY20 Results Highlights: Adacel Technologies Limited (ASX: ADA) is involved in the development of advanced simulation and control systems for aviation and defence. For the year-ended 30 June 2020, the company reported significantly improved financial results, despite the impact of COVID-19. The company’s focus on its core products and services combined with improved execution, allowed the company to achieve significant improvement in profitability. During FY20, the company reported normalised PBT of $4.8 million and normalized EBITDA of $7.1 million. Further, the company reported a gross margin of 35.2% in FY20, as compared to the margin of 26.7% in FY19. Over the year, the company witnessed improvement in cash conversion associated with progress on major ATM programs resulting in A$5.2 million cash balance at 30 June 2020. The company has declared a final dividend of 1.5 cents per share, taking the total FY20 dividend to 2.5 cents per share.

FY20 Key Financial Measures (Source: Company Reports)

Segment Wise Results: In the Services segment, the company reported revenue of $29.97 million in FY20, up 7.2% on the previous year, driven mainly by increased revenues from its FAA ATOP program. From Systems segment, the company reported revenue of $9.7 million, down by 27.3% on the previous year.

Segment Wise Performance (Source: Company Reports) 

Key Risks: The COVID-19 pandemic began to affect Adacel’s operations in March 2020. As an emerging risk, the duration and full financial and operational effects of the COVID-19 pandemic are currently unknown. Further, the company is also exposed to variety of financial risks, which include market risks, credit risk, and liquidity risk. 

FY21 Guidance: For FY21, the company expects its PBT to be in between A$6.3 million and A$6.8 million. Excluding payment of future undeclared dividends, the company is expecting to have a cash balance of A$10.0 million as at 30 June 2021. The company expects revenues from its Systems segment to increase in FY21, assuming modest and steady recovery from the COVID-19 disruption.

Stock Recommendation: The stock of ADA has provided a whopping return of 76.83% in the past three months and is inclined towards its 52-week high. On the technical analyses front, the stock has a support level of ~0.412 and resistance level of ~0.83. On TTM basis, the stock has an EV to Sales multiple of 1.4x, lower than the industry median (Software & IT Services) of 6.4x. On the same basis, the stock is trading at a price to book value multiple of 2.9x, lower than the industry median of 4.5x. Considering the company’s decent FY20 results, revenue growth in the Services segment, and FY21 guidance, we give a “Hold” recommendation on the stock at the market price of $0.725, up by 2.837% on 21 August 2020. 

Gentrack Group Limited 

Management Changes: Gentrack Group Limited (ASX: GTK) is involved in the designing, development, implementation, and support of specialist software solutions for energy utilities, water companies and airports. On 15 June 2020, the company announced the resignation of its Executive Chairman John Clifford, due to his personal health reasons. In his place, the company has appointed Independent Director Fiona Oliver as Acting Chair. The Board of GTK is currently searching its new CEO. Right now, James Spence, the CFO of GTK, is acting as the interim CEO of the company, until a new CEO is appointed. The company has recently appointed Ros Bartlett as Interim Chief Financial Officer of the company.

H1FY20 Result Highlights: For the half-year ended 31 March 2020, the company reported revenues of NZ$50.6 million, down by 7% on H1 FY19, reflecting the loss of a number of UK customers due to supplier failure or acquisition, and a drop in non-recurring revenue in the UK and Australia. The company reported committed recurring revenue of NZ$29.7 million, up by 11% on pcp, driven by the net growth in meter points and the shift to a SaaS revenue model. Over the period, the company’s profitability was impacted by the increase in costs of NZ$6.2 million over the prior year. As at 31 March 2020, the company had net cash of NZ$6.4 million.

Comparative Results (Source: Company reports) 

What to expect: The company expects to deliver a second-half EBITDA result ahead of the first half and to remain cash flow positive. With its highly efficient SaaS products, the company seems well placed to tackle the current difficult market conditions and return to consistent profit growth.

Key Risks: The economic downturn caused by the COVID-19 pandemic has had an impact on the company’s Airport and Utility customers, as a result of which, some projects are delayed and postponed in the second half. Further, the company is exposed to credit risk, liquidity risk and market risks which include foreign currency risk, commodity price risk and interest risk.

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: Over the last six months, the stock of GTK has corrected by 34% on ASX and is inclined towards its 52-week low, offering a decent opportunity for accumulation. On the technical analyses front, the stock has a support level of ~1.124 and resistance level of ~1.959. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Hansen Technologies Ltd (ASX: HSN), rhipe Ltd (ASX: RHP), Over The Wire Holdings Ltd (ASX: OTW). Considering the company’s decent outlook and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.320, down by 4% on 21 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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