Stocks’ Details

Orocobre Limited 

Decent Production Results for September Quarter:Orocobre Limited (ASX: ORE) is in the exploration, development and production of lithium. 

Key Highlights of September’19 Quarter:At Olaroz Lithium facility, where ORE has interest of 66.5%, production increased by 35% to 3,093 tonnes, on the previous corresponding period.Quarterly sales revenue decreased by 21% on q-o-q to US$22.1 Mn with a realised average price of US$7,111/tonne on a free on-board basis (FOB). Sales volume for the quarter decreased by 8% to 3,108 tonnes on Q-o-Q. Gross cash margins (excluding export tax) was reported at US$2,226/tonne, a decrease of 40% on Q-o-Q, mainly due to the lower average price received. Cash costs for the quarter (on cost of goods sold basis) stood at US$4,885/tonne, an increase of 9% on Q-o-Q, excluding the export tax of US$420/t applicable since September 2018.

Commencement of construction at Naraha Lithium Hydroxide Plant was marked by representatives from ORE, Toyota Tsusho Corporation (TTC) and Toyotsu Lithium Corporation (TLC).

Sales volume at Borax Argentina for the quarter increased by 6% on q-o-q and 33% on pcp to 12,480 tonnes. Sales revenue stood same as q-o-q with decrease in average price received by 6% on q-o-q. Cash balance after expenditure related to funding Olaroz expansion activities, corporate costs and Cauchari JV expenditure was reported at US$223.5 Mn. The net cash with inclusion of Sales de Jujuy S.A. (SDJ) and Borax Argentina S.A. (Borax) cash, project debt and working capital facilities stood at US$151.2 Mn.


Quarterly Key Metrics (Source: Company Reports)

FY20 Guidance:Full-year production for FY20 is expected to be at least 5% higher than FY19. The average sales price in the December quarter has been estimated in the range of US$6,200 - US$6,500/tonne.

Stock Recommendation:ORE’s share generated a negative YTD return of 18.93%. The stock is trading close to its 52-week low of $2.180, proffering an opportunity for share accumulation. Stock experienced a short interest of ~13.716% (as per the ASIC report of 22 November 2019). Its gross margin and net margin for FY19 stood at 45.2% and 67.3%, better than the industry median of 41.1% and 11.0%, respectively, implying decent fundamental of the company. Its current ratio for FY19 stood at 3.27x, better than the industry median of 1.87x, implying decent liquidity position for the company. Moreover, its EV/Sales multiple on TTM basis stands at 5.3x, lower than the industry median of 29.9x, indicating an undervalued position at the current juncture. Hence, considering the company’s decent September quarter production results, better FY20 guidance, profitability margins and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $2.570 on November 28, 2019.
 

Galaxy Resources Limited

Business Update and Corporate Strategy for FY20:Galaxy Resources Limited (ASX: GXY) is involved in the production of lithium concentrate and exploration of minerals in Australia, Canada and Argentina. On November 18, 2019, GXY published its corporate strategy and projects update with the highlight that the company is committed to leverage its two world-class development assets to create a sustainable, large scale, global lithium chemicals business via organic growth, majorly to advance Sal de Vida to execution in 2020. Galaxy is targeting final investment decision (FID) for stage one in Q2-Q3 2020 with first production in 2022.

For Mt Cattlin, the company is expected to implement a lower activity mine plan focused on reducing volumes and costs to maintain positive cash margins and preserving resource life. Production and existing inventory are expected to be sufficient to satisfy contracted commitments and additional product demand in 2020. Other significant development for FY20 includes, a comprehensive value engineering exercise, a detailed geotechnical program at James Bay and a continuation of permitting activities and Impact and Benefit Agreement negotiations with the Cree Nation of Eastmain.


Production & Sales Statistics (Source: Company Reports)

Key Highlights of September’19 Quarter:Total shipment volume of lithium concentrate (grade 6.0% Li₂O) for the period was reported at 58,278 dry metric tonnes (dmt), the midpoint of the stated production guidance of 45,000 – 55,000 dmt. Production volume of lithium concentrate (grade 6.0% Li₂O) at Mt Cattlin for the period was reported at 50,014 dmt, the midpoint of production guidance of 45,000 – 55,000 dmt. Cash balance at the end of the period was reported at US$169 Mn, with a debt of US$32 Mn.

Stock Recommendation: GXY’s share generated a negative YTD return of 55.25%. The stock is trading towards its 52-week low of $0.815, proffering an opportunity for accumulation. Stock experienced a short interest of ~16.88% (as per the ASIC report of 22 November 2019).Its EBITDA margin for H1FY19 stood at 30.9% better than the second half of FY18 at 21.2%. Its current ratio for H1FY19 stood at 4.97x, better than the industry median of 1.82x, which implies that the company is in a position to address its short-term obligations. Its debt to equity ratio for H1FY19 stood at 0.07x, lower than the industry median of 0.09x. Moreover, its price to book value multiple on TTM basis stands at 0.8x, lower than the industry median of 1.5x. Hence, considering the company’s decent cash position, business update and corporate strategy for FY20 and current trading levels, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.945, down 3.571% on November 28, 2019.
 

GWA Group Limited

Decent Top-line and Bottom-Line Performance for FY19:GWA Group Limited (ASX: GWA) is involved in the research, designing, manufacturing, import and marketing of building fixtures and fittings to residential and commercial premises. The company distributes these various products through a range of distribution channels in Australia, New Zealand and selected international markets. Recently, Mitsubishi UFJ Financial Group, Inc. ceased to be the substantial holder in the company, effective from November 18, 2019.

FY19 Key Highlights for the period ended June 30, 2019:Total revenue for the period improved to $381.7 Mn from $358.6 Mn in FY18. Normalised Group Earnings After Interest and Tax from Continuing Operations increased by 3.2% to $51.8 Mn. Reported Net Profit After Tax for the period was reported at $95.0 Mn as compared to $54.3 Mn in the prior year. The Board of Directors declared fully franked dividend of 9.5 cps with record date and payment date on August 27, 2019 and September 4, 2019, respectively.


FY19 Key Metrics (Source: Company Reports)

Outlook: Company focuses on growing Methven in Australia and New Zealand by leveraging GWA’s scale and customer relationships. It aspires to drive revenue opportunities in Asia and the United Kingdom while continuing to expand and invest in Caroma Smart Command; and maintain cost discipline for margin maintenance and continued investment in medium term growth initiatives.

Stock Recommendation:The divestment of the Door & Access Systems’ business and the subsequent acquisition of Methven, are expected to help the company in focusing on its core business. Weaker consumer sentiment, credit tightening and falling house prices are expected to lead to a small decline in GWA’s addressable market in FY20, driven predominantly by the residential new build segment in multi-residential and detached housing. However, the impact is expected to be subdued from the recent changes to personal income taxes and interest rate reductions along with relaxation of lending requirements. Commercial activity across both new build and renovation and replacement is expected to remain strong, primarily on the eastern seaboard, driven by both government and non-government spending over the next 24 months in areas, including health & aged care, hotels and offices. Stock experienced a short interest of ~15.478% (as per the ASIC report of 22 November 2019).On valuation front, EV/Sales and EV/EBITDA multiples for TTM basis stand at 2.6x and 12.2x, higher than the industry median of 0.8x and 5.5x, respectively, indicating an over-valued position at the current juncture. Hence, we have an “Expensive” rating on the stock at the current market price of $3.330, down 1.77% on November 28, 2019.
 

Inghams Group Limited

NPAT for FY19 Improved by 10.1% On Previous Year:Inghams Group Limited (ASX: ING) is involved in the production and sale of chicken and turkey products across its vertically integrated primary, free range, value enhanced, further processed and ingredient categories. Recently, Sumitomo Mitsui Trust Holdings, Inc. and its subsidiaries became substantial holder in the company with stake of 5.02%, effective from November 26, 2019.

FY19 Key Highlights for the period ended June 29, 2019:Core poultry volumes for the period increased by 4.3% to 414.9kt. Underlying Gross Profit increased by 3.0% to $480.2 Mn. Underlying EBITDA for the period increased by 2.9% to $208.6 Mn. NPAT increased by 10.1% to $126.2 Mn. Net Cash provided by operating activities excluding interest and tax, for the period was reported at $221.5 Mn. Net debt at the end of the period was reported at $263.8 Mn. The Board of Directors declared fully franked final dividend of 10.5 cents per share, with record date and payment date on September 18, 2019 and October 9, 2019, respectively.


FY19 Income Statement (Source: Company Reports)

What to expect:As per the release, poultry demand continues to grow as consumers are attracted by the relative affordability of chicken as a healthy protein. Stronger customer demand has impacted operations and resulted in higher costs, and a significant financial impact is expected over company’s earnings by FY20. New Zealand performance is returning to year-on-year growth and remains well below historical profit levels. Therefore, EBITDA in FY2020 is expected below underlying FY2019 with a return to growth expected in FY2021. Dividend policy in FY2020 is expected to maintain payout ratio of 60-70% of underlying NPAT.

Stock Recommendation:Poultry is an attractive sector with entrenched advantage, and growth prospects. Company’s investments in the new technology to enhance supply chain in order to maximise genetic potential, improve growth and feed conversion rate (FCR), is expected to help it to deliver sustainable value for its shareholders in the coming times. Moreover, its ROE for FY19 stood at 59.3%, better than the industry median of 12.9%. Its EV/Sales and EV/EBITDA multiples on TTM basis stand at 0.6x and 7.2x, lower than the industry median of 1.8x and 9.0x, respectively, indicating an undervalued position at the current juncture. Stock experienced a short interest of ~14.03% (as per the ASIC report of 22 November 2019).Hence considering the aforesaid facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $3.240 on November 28, 2019.


Comparative Price Chart (Source: Thomson Reuters)

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