Stocks’ Details

Rural Funds Group

Improvement in Bottom Line and Top Line: Rural Funds Group (ASX: RFF) is a real estate investment trust (REIT) with a diversified portfolio of high quality Australian agricultural assets. Over the last five years, the company has witnessed significant improvement in its bottom line as well as top line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 31.47% and its net income has increased at a CAGR of 34.64%.

Distribution Update: The company recently declared a distribution of 2.71 cents per share for the quarter ending 30 June 2020. The distribution will be paid on 31 July 2020. The company is planning to release its full year results in August 2020. It expects its FY20 AFFO per unit to be around 13.5 cents. For FY21, the company expects its distribution per unit to be around 11.28 cents, in-line with its target of increasing distribution by 4% each year.

Key Metrics Forecast (Source: Company Reports)

H1FY20 Highlights: For the first half of FY20, the company reported property revenue of $37.6 million, up 22% on the previous corresponding period. Further, the company’s AFFO per unit increased by 11% to 7.1 cents per unit, mainly due to JBS Australia (JBS) transactions, cattle acquisitions, development capital expenditure and lease indexation. For H1FY20, the company paid a distribution of 5.42 cents per share, higher than the 5.22 cents per share of pcp. As at 31 December 2019, the company had a cash balance of $41.7 million.

What to expect: The company intends to look for further acquisition opportunities, particularly those which offer the potential for productivity improvements or conversion to higher and better use. Going forward, the company expects the demand for agricultural property to remain high because of low Australian dollar which effectively makes Australian assets cheaper to foreign investors; low interest rates which cause lower borrowing costs for prospective purchasers; and positive outlook for operator profitability.

Key Risks: The company is exposed to potential risks that climate change could present to RFF assets. The company is exposed to the risks arising from holding financial instruments are inherent in the Group’s activities and are managed through a process of ongoing identification, measurement and monitoring.

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

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last three months, the stock of RFF has increased by 6.84%, and it is inclined towards its 52 weeks high price of $2.420. For H1FY20, the company’s gross margin stood at 97.4%, higher than the industry median of 73.8%. For the same period, the company’s net margin stood at 83.10%, higher than the industry median of 60.9%. The company has an ROE of 5.10% and ROIC of 3.20%. We have valued the stock using EV/EBITDA based illustrative relative valuation method and have arrived at a target price of higher single-digit upside (in % terms). Considering the aforesaid facts, the company’s decent profitability margins, its decent H1FY20 performance, and FY20 forecasts, we give a “Hold” recommendation on the stock at the current market price of $2.040, up by 0.493% on 17 July 2020. 

BSA Limited

FY20 Guidance Update: BSA Limited (ASX: BSA) is a comprehensive technical services contracting company with a market capitalization of ~$147.1 million. Recently, one of the company’s Directors, Nicholas Yates, acquired 52,525 ordinary shares of the company at a price of 0.28 per share under the Company’s Dividend Re-investment Plan. In an update provided on 19 June 2019, the company informed that for FY20, it expects revenue from continuing operations to be in the range of $475 million to $485 million. Further, it expects its reported EBITDA from continuing operations to be in the range $22 million -$23 million, compared to $21.8 million for FY19.

In the first half of FY20, the company had reported decent financial performance with reported EBITDA growth of 39.1% on pcp. For the period, the company reported revenue of $258.9 million, up 30.4% on pcp. Further, the company reported EPS (continuing operations) of 1.084cps, up 14.3% on the pcp. As at 31 December 2019, the company had net cash of $15.126 million.

H1FY20 Results (Source: Company Reports)

COVID-19 Update: Due to tight cost control and focus on working capital, the company has been able to retain a strong cash position in the current challenging period. Till now, it has not observed any material impact on receivables or other working capital as a result of the COVID-19 pandemic. Earlier, due to uncertainty caused by the pandemic, the company had deferred the payment of H1FY20 dividend until 27 October 2020. However, after observing solid trading, improved certainty and BSA’s proactive focus on managing working capital, BSA paid the interim dividend of 0.5 cents per share on 8 July 2020.

Growth Aspects: The company’s long-term financial goal is to maximise growth in shareholder value. The company has recently undertaken and completed a comprehensive strategic review. It is also investigating inorganic merger & acquisition opportunities to enhance its client offering. Given the strong demand in the company’s core markets, the company seems to be well positioned for future organic growth. The company maintains a significant franking credit balance of $13.9 million and is currently considering a range of capital management options to release franking credits.

Key Risks: Although the company has not been materially impacted from COVID-19, its future operations and results are dependent on the extent and duration of COVID-19 pandemic. The group is also exposed to various risks including credit risk, market risk, interest rate risk etc.

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

P/E Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the last one month, the stock of BSA has increased by ~36% on ASX. The stock is currently trading slightly higher than the average 52 weeks trading range. For H1FY20, the company’s gross margin stood at 23.8% and net margin stood at 1.8%. The company has a ROE of 13.9%, higher than the industry median of 9.4%. The company has a ROIC of 9.7%. We have valued the stock using P/E based illustrative relative valuation method and have arrived at a target price with higher single-digit upside (in % terms). Considering the company’s decent performance in H1FY20, its FY20 guidance, and strong demand in the company’s core markets, we give a “Hold” recommendation on the stock at the current market price of $0.335, down by 1.471% on 17 July 2020.

WPP AUNZ Limited

Improvement in Top Line: WPP AUNZ Limited (ASX: WPP) is Australasia’s leading creative transformation company with a market capitalisation of ~$255.65 million. Over the last five years, the company has witnessed significant improvement in its top line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 15.23%.

Trading Update: In an update provided on 16 July 2020, the company informed that it expects its EBIT for H1FY20 or six months ending 30 June 2020 to be in between $10 million - $14 million, higher than the previous earnings guidance of headline EBIT of between breakeven and $10 million loss. This is mainly due to the company’s better trading performance in May and June and benefit of an additional $4 million in JobKeeper payments in certain qualifying businesses. WPP also expects to recognise an aggregate non-cash impairment charge of between $150 million and $190 million in its 1H20 result. The company’s leverage ratio at 30 June 2020 is expected to be around 1.7x. The Company will announce its H1FY20 results on 20 August 2020.

FY19 Results Highlights: For the year ending 31 December 2019 or FY19, the company reported total headline EPS of 7.4 cents, down 9.6% on previous year. The Continuing business headline EPS stood at 6.0 cents, down 9.6% on the previous year. The net sales from continuing operations stood at $712.5 million, down by 2.6% on the previous year. Headline Profit before tax from continuing operations stood at $77.8 million, down by 8.6% on FY18. As at 31 December 2019, the company had cash of $74.8 million and net debt of 121.4 million.

FY19 Results (Source: Company Reports)

Reducing Operating Costs and Preserving Cashflows: In order to reduce its operating costs, the company has introduced $70 million operating cost reduction program, which includes actions such as salary reductions. The company has also implemented measures to reduce capital expenditure and improve net working capital position. The company has also cancelled its FY19 final dividend and has deferred special dividend program.

Key Risks: The fact that the company has undertaken a range of measures to protect itself against the impact of COVID-19 pandemic, shows that the company is exposed to the risks associated with the spread of the virus. Further, the company is also exposed to foreign exchange risk, interest rate risk and credit risk.

Stock Recommendation: The stock of WPP has declined by ~46.90% in the past six months, and it is inclined towards its 52 weeks low price of $0.185, offering a decent opportunity for accumulation. For FY19, the company reported gross margin of 85.2%, EBITDA margin of 14.2% and a net margin of -22%. On a TTM basis, it reported a lower EV/Sales of 0.6x and EV/EBITDA of 4.1x as compared to the industry median (Media & Publishing) of 1.1x and 5.0x, respectively, showing that the stock is undervalued. Hence, considering the above-mentioned facts, the company’s expected FY20 results, its decent performance in FY19, and the recently announced operating cost reduction program, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.305, up by 1.667% on 17 July 2020.

Decmil Group Limited

Selected as a Preferred Proponent to Build a Ring road in WA: Decmil Group Limited (ASX: DCG) is a diversified industrial services provider focused on providing full cycle construction and engineering project delivery. On 14 July 2020, the company announced that Western Australian Government has selected DCG as the preferred proponent to build a $175 million ring road around Albany, Western Australia. The project will be funded by the Australian and Western Australian Governments and the construction for the project will commence in September and run through to 2023. In an update provided on 13 July 2020, the company informed that it has mutually agreed with QGC Pty Limited (QGC) to bring forward the end date of its Framework Agreement for works within the Surat Basin to September 2020. The QGC Brownfields Works contributed around $3.5 million in earnings to Decmil in FY20.

Capital Raising Update: On 19 June 2020, the company announced that it has completed its Retail Entitlement Offer of its 4.2 for 1 accelerated pro-rata non-renounceable entitlement offer of fully paid ordinary shares. Under the offer, the company is expected to issue approximately 406.7 million New Shares at the offer price of $0.05 per New Share, to raise around $20.3 million. Earlier, the company had raised $30.2 million under the Institutional Entitlement Offer. The successful raising of more than $52 million ensures that the company has the balance sheet to capitalise on the expected significant infrastructure spend in Australia over the next few years.

H1FY20 Highlights: For H1FY20, the company reported group revenue of $239 million, compared to $245.7 million in H1FY19. For the same period, the company reported a bottom-line loss of $75 million, which includes a full provisioning for loss for the amounts owed under the NZ contract of $49 million. During the period, the company secured $207 million in new contracts, primarily from government customers. As at 31 December 2019, the company had $65 million of cash.

H1FY20 Income Statement (Source: Company Reports)

What to Expect: The company expects H2FY20 to be profit positive. For FY20, the company expects the revenue to be in between $475 – $525 million, assuming that the construction sites in Australia are NOT shut down due to Coronavirus.

Key Risks: The company’s operations and its results are dependent on the extent and duration of COVID-19 as it can impact the operations at its construction sites. Further, the company is exposed to a number of macro-economic cycles, in particular capital expenditure by State and Federal Government and in natural resources. Tightening of the labour market in key regions due to a shortage of skilled labour, combined with a high industry turnover rate and a growing number of competing employers for skilled labour, may inhibit the company’s ability to hire and retain employees.

Stock Recommendation: The stock of DCG has declined by ~71.08% in the previous six months and is currently trading near to its 52 weeks low price of $0.026, offering a decent opportunity for accumulation. On a TTM basis, it reported a lower EV/Sales of 0.1x and P/BV of 0.5x as compared to the industry median (Construction & Engineering) of 0.4x and 1.4x, respectively, showing that the stock is undervalued Hence, considering the aforesaid facts, the company’s FY20 estimates, ~$52 million capital raising, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.058, up by 1.754% on 17 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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