Downer EDI Limited

DOW Details 

Latest Update on Agreement to Sell Part Business: Downer EDI Limited (ASX: DOW) is engaged in transportation services, utilities, facilities, engineering, construction, and maintenance (EC&M). The company is engaged in exploration drilling and mine feasibility studies, such as crushing, asset management, and mine closure and rehabilitation. The company has announced on 26 April 2021, regarding an agreement to sell its tyre management business, Otraco, to Bridgestone Corporation. The sale price represents an Enterprise Value (EV) of $79mn and expected to be completed by the end of 2021. The company has plans to exit from its Underground Mining, Open Cut Mining, Blasting Services and Snowden Consulting businesses. Sale of Otraco with Mining and Laudries assets has received $476mn so far from total proceeds of $605mn. 

1HFY21 Financial Highlights: The company has registered a decline in its top-line to $5,789.7mn in 1HFY21 as compared with $6,506.6mn in 1HFY20. Similarly, the company has posted a decline in its bottom-line to $75.6mn in 1HFY21 as compared with $91.4mn in 1HFY20. The company has posted a decline in its cash and cash equivalents to $550.4 as on 31 December 2020 as compared with $588.5mn as on 30 June 2020. The company has posted an asset held for sale amounting to $581.5mn as on 31 December 2020, which is likely to improve cash for the company, going forward.

Cash and Cash Equivalents Position (Source: Company Reports)

Key Risks: The company is exposed to liquidity risk. There is always a risk for the company to get failed in meeting its financial obligations as and when they are due to pay. The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in financial losses for the company.

Outlook: As per the company reports, the company is selling its part businesses to remain focused on its Utilities, Facilities and Asset Services and Transport business due to a capital-light business model with lower risk and more predictable revenues and cash flows. The company is expecting due payments from the sale of its assets earlier, such as $66.0mn to be received in 12 equal monthly instalments starting from February 2021 and further $30mn will be received through the sale of working capital balances. DOW is making progress well with the sale of its non-core businesses and blasting and laundries services business. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, DOW has increased by ~5.85% and by ~0.74% in the last three months. The current market capitalisation of DOW stands at ~$3.77bn as of 26 April 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$3.485-~$5.900. On the technical analysis front, the stock has a support level of ~$5.045 and a resistance of ~$5.591. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a decline in total revenues and profits and exposure towards foreign currency risks. For this purpose, we have taken peers Lycopodium Ltd (ASX: LYL), Monadelphous Group Ltd (ASX: MND), CIMIC Group Ltd (ASX: CIM). Considering the company is focusing on businesses with greater revenue visibility, increase in total current assets, capital light business model, and valuation, we recommend a “Hold” rating on the stock at the current market price of $5.420, up by ~0.556% as on 26 April 2021.

DOW Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Sunrise Energy Metals Limited

SRL Details

Latest Update on Quarterly Activities: Sunrise Energy Metals Limited (ASX: SRL) is focused on the development and use of the Clean-iX resin technology for application in the extraction and purification of a range of resources in the mining industry, including base metals and precious metals. The company has reported the award of three water treatment contracts in China, Queensland, and Oman during Q3FY21 ending March 2021. The company has also announced to run its projects on 100% renewable energy and reducing carbon emissions significantly. The company has successfully raised equity capital amounting to $35mn in 3QFY21 for the development of its ongoing projects. The company has reviewed its stance on demerging Clean TeQ Water from its mineral exploration business in New South Wales. The company is targeting to implement the demerger by Q2CY2021. 

1HFY21 Financial Highlights: The company has registered an increase in revenue and other income to $1.55mn in 1HFY21 as compared with $0.66mn in 1HFY20. The company has registered a loss of $10.13mn in 1HFY21. The company has posted an increase in its cash and cash equivalents position to $44.03mn as on 31 December 2020 as compared with $40.08mn as on 30 June 2020.

Cash and Cash Equivalents Position (Source: Company Reports)

Key Risks: The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in financial losses for the company. The company is exposed to foreign exchange risk. Any severe movement in foreign exchange prices may result in financial losses for the company.

Outlook: As per the company reports, the company is planning to demerge its Clean TeQ water business from other businesses in 2QCY2021 and utilise its raised capital to further develop its ongoing projects. The company is working towards connecting electrical transmission line (ETL) with NSW electrical grid and will progress through CY2021. 

Stock Recommendation: The current market capitalisation of SRL stands at ~$208.19mn as of 26 April 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$1.10-~$3.85. On the technical analysis front, the stock has a support level of ~$2.157 and a resistance of ~$2.895. For 1HFY21, the company reported a current ratio of 12.68x, higher than the industry median of 1.43x. The company has reported a debt/equity ratio of 0.02x in 1HFY21, lower than the industry median of 0.16x. Considering the company has been awarded with 3 contracts in various regions, increase in cash position, demerging businesses for focused approach, raising capital for development of its projects, current trading levels and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $2.36, up by ~0.425% as on 26 April 2021.

SRL Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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