Stocks’ Details

JB Hi-FI Ltd

Trading at premium valuations:JB Hi-Fi Limited (ASX: JBH) is a music and electronic goods retailer in Australia. The firm has declared via a release that the UBS Group AG and its related body corporates have increased its holding in the company from 6.33% to 7.96%. As per ASIC or Australian Securities and Investment Commission, as on 20 November 2018, JBH was shorted around 19.41%.
 
In another release on ASX, the firm disclosed Q1FY19 sales update and highlight about its FY19 guidance. As per the release, the company has witnessed a total sales growth across all its segments, with the highest growth seen in their Australia operations by 5.3% in QFY19 as compared to the prior corresponding period (PCP). Moreover, the company has remained consistent with its earlier stated guidance of a sales of circa $7.1 Bn for the FY 2019, which would be contributed by its Australian, New Zealand and Good Guys division in the share of $4.75 Bn, $0.22 Bn & $2.15 Bn, respectively.
 
For the FY 2018, the company’s sales grew by 21.8% to reach at ~$6.9 Bn. One of the main catalysts behind this phenomenal sales expansion was the outperformance of their online platform which rose by 32.1% to $209.9 Mn. This growth was also driven by the hardware and services sale, however, during the same period software services saw a decline due to the accelerated decline in the movie’s category. The company’s EBIT was up by 11.4% on the PCP to reach at $292.3 Mn, this rise was seen on the back of increased volumes driven by the new products and company’s continued attention towards productivity and cutting down unnecessary expenditures.
 
 

JBH EBIT Trends (Source: Company Reports)
 
From the analysis standpoints, the company is trading at a TTM P/E multiple of around 11.51 times, while its closest peer Harvey Norman Holdings Ltd is trading at 9.02 times, which signifies that the company is trading at premium level. Also, the company is trading at price to cash flow of 9.28 times which is higher than the median ratio of specialty retailers, signifies that the firm is currently bit overpriced at current juncture. Meanwhile, the stock price has fallen over the past three months by 8.64% as on 26 November 2018, also the company is trading at premium valuation signified by its P/E multiples. Thus, considering the above rationale we maintain our “Expensive” rating on the stock at the current market price of $23.59.
 

Syrah Resources Limited

 
Growth in EV production is expected to be the turnaround factor:Syrah Resources Ltd (ASX: SYR) is a mineral exploration company. As per ASIC or Australian securities and investment commission, as on 20 November 2018, SYR was shorted 16.83%. The company has achieved 2 further sales milestones, the first is regarding the binding term sales agreement of 6kt of large flake natural graphite with “Qingdao freyr” and the second is that it has successfully produced 98% fixed carbon (“FC”) grade graphite across all sizes in the flake circuit using standard flotation processes, the first spot sale of 98% FC is to a Japanese customer. The above-mentioned installed layout is slated to produce the FC grade graphite without the requirement of chemical which would in turn result to substantial cost optimization.

For the quarter ended 30 Sep 2018, the firm has achieved a production of 38.7kt which implies a growth of 83% versus Q2. This growth was on the back of the increased recovery and production achieved on account of the improvement plan undertaken by the firm in the month of July and August. However, the same was impacted by the availability of consumables in the month of September and a gradual rate of improvement in operations.

The firm has guided that it expects to achieve a production 101kt-106kt for the FY 2018. During the recently reported quarter, the sales turned out to be 20kt. This was on the back of the fact that the firm enjoyed a better “weighted realized sale price” due to the grade, flake size, product mix, and China domestic V/s ex-china pricing. The “Battery anode material” (BAM) Project site, purchases & major supply input terms have been finalized, & commercial production of impurified spherical graphite is expected by the year-end. Moreover, the Global electric vehicle sales grew phenomenally by 56% YOY during the Jan -Aug 2018 period. By this fact it can be contemplated that the demand for fines material for use in the battery is expected to remain robust in the coming quarters. The company expects to generate positive cash flows from operations at Balama from the period Q1 2019.
 
 

 
Electric Vehicles Sales Trends (Source: Company Reports)
 
Meanwhile, the stock price has risen by 10.76% over the past one month as on 23 November 2018. However, considering the fact that there is a huge opportunity in the Electrical vehicle's market & the firm is incurring huge capex into its projects so as to be ready to reap the benefits of electrification, hence, we maintain our “Hold” rating on the stock at the current market price of $1.69.
 

Galaxy Resources Ltd

 
EV sales volume & accelerated consumption Electrical goods- Future Catalysts: Galaxy Resources Ltd (ASX: GXY) is a global lithium company, with a diverse project portfolio, consisting of both hard rock and brine assets spanning Australia, Canada, and Argentina. As per ASIC or Australian securities and investment commission, as on 20 November 2018, GXY was shorted 15.729%.
 
Recently, the company has completed the sale of its Northern tenements at Sal De Vida to Posco on November 23, 2018 for a consideration of US$280 Mn, which will now be released from the Escrow account on the registration of transfers in the courts. The proceeds garnered from this stake sale shall be utilized to ramp up the developments of the Sal De Vida projects.
 
For the quarter ended September 30, 2018 the firm had US$54.7 Mn in cash thanks to a healthy cash margin of US$ 411 per dmt and constant receipts from customers. The company is debt free as on the date. This strong cash balance is constantly supporting the funding required for ongoing project development and optimization initiatives.
 
The company has registered lower production of spodumene at 31.2kt and cash margin per tonnes sold at US$411/t for the 3Q 2018 on account of the reduced recoveries as a result of permitting the delays in planned mining access on the east of floater road and the extraction of lower feed grade. However, the recoveries of production volumes are expected in 4Q 2018 with improvements in head grade and the recoveries related with the associated mining in the east of floater roads. 
 
Going forth, the rapid growth in lithium demand shall be driven by the penetration forecast which is expected to reach a level of 15% of the automotive segment by the year 2025. Also, the Energy Storage Systems (ESS) has emerged as a key component in managing the grid stability and hence considering its consumption potential a catalyst for the near future. Moreover, the high consumption of Electronic goods and its accelerated obsolescence will support the demand for lithium.

Lithium Carbonate Demand Trend(Source: Company Reports)
   
Meanwhile, the stock price has modest returns over the past one month of 15.93% and traded at the lower level. Thus, considering the robust balance sheet and bright prospects of volume growth due to surge in the production of EV and consumption of Electrical goods, we maintain our “Hold” rating on the stock at the current market price of $2.580.
 

Orocobre Limited

 
Strong top-line growth & underlying demand:Orocobre Ltd (ASX: ORE) is a mineral exploration company. The Company's primary objective is to develop lithium-potassium brine projects. As per ASIC or Australian securities and investment commission, as on 20 November 2018, ORE was shorted more than 14.022%.
 
The production for the quarter ended September 2018 was 2,293 tonnes of lithium carbonate, this implies a rise of 7% on PCP. However, the same was down 36% on a Q-O-Q basis due to the shutdown of the plant for the two weeks and seasonally lower evaporation rates. Moreover, the company posted strong sales of US$32 Mn for the quarter, up 36% from the previous corresponding period. This was on the back of a 31% rise in the average price realization per tonne which came in at US$14,699/tonne on a FOB basis. Also, the gross cash margins came in at US$10,059/ tonne, up by 62% on PCP, thanks to the higher average pricing realized driven by a better product mix and a better overhead cost absorption rate leading to a reduction of per unit cost of production at full production rates.
 
The company had an available cash balance of US$308.7 Mn as on 30 September 2018, thanks to the increase in the average price received per tonne. This was after supporting the Advantage Lithium capital raise (US$4M), Cauchari JV expenditure and early expenses on the Naraha Lithium Hydroxide Plant.

Orocobre expects full-year production (FY19) will be higher than that achieved in FY18. December quarter production is expected to be materially higher than the September quarter, however, the company feels that the average price realization per unit may decline to go further due to the global price decline in lithium carbonate.

Orocobre Forecasted Lithium Market Supply & Demand (Source: Company Reports)
 
Meanwhile, the stock price has fallen substantially over the past six months by 30.44% and is now looking attractive for accumulation in this price range. However fundamentally the company is sound enough which is evident from its balance sheet, thus considering the above rationale we maintain our “Buy” rating on the stock at the current market price of $4.09.
 

Inghams Group Limited

 
Stellar growth in top line, however, seems a bit overpriced at this point:Inghams Group Ltd (ASX: ING) produces poultry products and serves retailers throughout Australia and New Zealand. The firm has via an ASX release said that the shareholders would be returned their capital to the tune of ~$125 Million, i.e., $0.33 per share post approval by the shareholders in the EGM meeting which’s to be held on 6th December 2018. If it will be approved by the shareholders, then the same will be paid to the shareholders by 18th December 2018 with record date of 11 December 2018. The company also stated that Jim Leighton has officially commenced the role of MD & CEO of the firm from 14th of November 2018.
 
The company posted an underlying EBITDA of $208.9 Mn for the FY 2018 vis-à-vis $195 Mn which implies a growth of 7.1% on a PCP. This was driven by the increase in the volume of core chicken and turkey sale. Also, EBITDA for the Australia segment improved due to the efficiency attained on account of the automation initiatives taken and the passing on of operational cost escalations in feed & utility costs by way of regular price increases.
 
As per ASIC or Australian securities and investment commission, as on November 20, 2018, ING was shorted more than 12.83%.The firm has seen continued improvements in working capital through tight inventory, receivables, and payables management. The firm has an Operating cash conversion 122.9%, & a Net Debt to EBITDA reduced to 0.7x. Further, the management estimates that the demand for poultry products will continue to grow, the strategy implementation remains on track, and the opportunity pipeline is strong. It expects a continuation of market price increases, reflecting increases in energy and feed costs.
It’s expected that the New Zealand market remains challenging on account of stiff competition and will remain the same in the upcoming future.
  
 
Key Financial Metrics (Source: Company Reports)
 
Meanwhile, the stock price has risen over the past three months by 11.94% and traded at the higher level. As of now, we are assuming that all positives developments have already been factored in the current prevailing market price, thus, we maintain our “Expensive” recommendation on the stock at the current market price of $4.250.
 
 

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