Stocks’ Details

Reliance Worldwide Corporation Limited

Melbourne Manufacturing Facility Continues to Operate: Reliance Worldwide Corporation Limited (ASX: RWC) manufactures and supplies water flow and control products and solutions for the plumbing industry. The company recently updated that its Melbourne manufacturing facilities are included in the permitted industry category as per the Victorian Government’s guidelines and will continue to operate. The company has also maintained sufficient inventory levels for its channel partners to mitigate any supply disruptions. The company expects to release its FY20 results on 24^th August 2020.

Operations and Guidance Update: The company’s sales in January and February were in-line with expectations, followed by strong customer orders in March. The company has set up a COVID-19 response task force and has made changes to its plants and distribution centres to minimise potential exposure to COVID-19. In response to COVID-19, the company has scaled back the Australian manufacturing operations from 5 days a week to 4 days. Executive team members and Non-Executive Directors also agreed to a pay cut to support RWC’s financial well-being.  To manage its cash resources, the company has deferred the payment of FY20 interim dividend to 9^th October 2020. Moreover, the company has also withdrawn the NPAT guidance provided earlier.

1HFY20 Highlights: During the half-year ended 31^st December 2019, net sales went up by 5% to $569.3 million. EBITDA and NPAT came in at $63.7 million and $50.1 million, respectively. The period was marked by decent cash generation, with operating cash flow increasing by 163% to $112.8 million.

Financial Highlights (Source: Company Reports)

Key Risks: The company’s operations involve heavy machinery and equipment, which exposes it to the risk of machinery failure and accidents on the plant site. Any such event can disrupt its operations and impact financial performance. The company’s operations are also impacted by changes in the residential and commercial repair and renovation and new construction end-markets across various geographies. In addition, increased global presence and exposure to international currencies increases the threat of exchange rate movements. 

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

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

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

Stock Recommendation: The stock of the company corrected by 40.23% in the last six months and is currently inclined towards its 52-week low of $1.630. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have considered GWA Group Ltd (ASX: GWA), GUD Holdings Ltd (ASX: GUD), James Hardie Industries PLC (ASX: JHX), etc., as peers. Considering the current trading levels, valuation, decent operational performance, and long-term outlook, we give a “Buy” rating on the stock at the current market price of $2.660, up 1.141% on 5^th August 2020.

Downer EDI Limited

Awarded Contracts Worth of ~$324 million: Downer EDI Limited (ASX: DOW) is a leading provider of integrated services in Australia and New Zealand. The company recently updated that the voting power of FIL Limited, a substantial shareholder, increased from 6.52% to 7.58%. In another recent announcement, the company notified that its Asset Services business has been awarded contracts worth ~$324 million in the power generation, oil and gas, and industrial sectors, demonstrating its leading position in the delivery of major maintenance and specialist services to customers.

Capital Raising: The company has completed the institutional component of its 1 for 5.58 accelerated pro-rata non-renounceable entitlement offer, raising ~$339 million at an offer price of $3.75 per share. The retail component of the offer is expected to raise ~$61 million and will close on 14^th August 2020. Proceeds from the offer will be utilised to strengthen the balance sheet, acquisition of the remaining shares in Spotless and to provide flexibility for continued investment in the core Urban Services business. Cash performance in 2HFY20 improved materially, with operating cash conversion at ~74% of Underlying EBITDA. Below is a snapshot of FY20 preliminary and unaudited earnings:

Unaudited Underlying Results – FY20 (Source: Company Reports)

Guidance: Underlying EBITA for FY20 is expected in the range of $410 – $420 million and underlying NPATA is expected between $210 – $220 million. The statutory loss for FY20 is estimated between $150 – $160 million. Outside its underlying result, the company expects to recognise $386 million of charges for goodwill impairment, payroll remediation, restructuring and portfolio review costs, legal settlements and historical contract claims adjustments. The company expects to release its FY20 results on 12^th August 2020.

Key Risks: The company undertakes certain transaction in foreign currency and is exposed to exchange rate risk, mainly in relation to USD, EUR, JPY and NZD. Funds borrowed by entities at floating exchanges rates expose the company to interest rate risk. In addition, trade receivables and contract assets from a large number of customers give rise to credit 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: The stock of the company corrected by 41.50% in the last six months and is currently inclined towards its 52-week low of $2.538. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the performance in FY20, recent capital raising, newly secured contracts, trading levels, and valuation, we give a “Buy” rating on the stock at the current market price of $4.020, down 3.597% on 5^th August 2020.

Bingo Industries Limited

Decent Performance in Q3FY20: Bingo Industries Limited (ASX: BIN) provides recycling and waste management solutions across building and demolition and commercial and industrial waste streams.

Business Update: The company’s Q3FY20 financial performance remained on track to deliver the pre-COVID market guidance. The company was focused on preserving cash and maintained a strong balance sheet, with significant property, plant and equipment assets of approximately $700 million. In Q3FY20, group EBITDA margin remained above 30%. The quarter was marked by solid cash collection and improving cash conversion YTD. The company has an asset mix weighted towards post-collections infrastructure, with increased exposure to Post-Collections from the acquisition of DADI. The segment now represents ~70% of the Group’s total EBITDA and will benefit from fast tracked fiscal stimulus on infrastructure projects. As at April 2020, net bank debt stood at $340 million.

What to Expect: The company expects capex in Q4 to be ~$20 million. In FY21, it has a minimum capex outlay ability of $50 million. Decline in C&I revenue is expected to continue in Q4FY20, with a steep rebound expected post-lifting of restrictions. Significant investments in the post-collections network of infrastructure assets have strengthened the company’s medium-term outlook.

Future Growth Drivers (Source: Company Reports)

Key Risks: Some of the potential headwinds to the business include, COVID-19 impact on the operating environment, near-term economic recession and the resultant reduction in migration, decline in construction activity, increased pricing pressure from competition in B&D collections and post-collections, time lag between announced infrastructure projects and commencement, etc.

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

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company corrected by 27.76% in the last six months and is currently inclined towards its 52-week low of $1.470. Despite the impact of COVID-19 and potential uncertainties, the company seems well-positioned to benefit from future opportunities with a decent balance sheet position and no near-term funding requirements. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the aforesaid factors, we give a “Buy” rating on the stock at the current market price of $1.905, down 3.053% on 5^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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