Stocks’ Details
 

IPH Limited

Proposed Acquisition of Baldwins Intellectual Property: IPH Limited (ASX: IPH) is engaged in the provisioning of intellectual property services. The market capitalisation of the company stood at $1.61 billion as on 11^th June 2020. The company recently announced that its subsidiary AJ Park IP has inked an agreement to acquire the New Zealand intellectual property firm Baldwins Intellectual Property for the total purchase consideration of around NZ$7.9 million, including deferred consideration of NZ$0.4 million. The initial purchase consideration is to be paid through cash of around 65% and the remaining 35% by new IPH shares. Deferred consideration is to be settled in cash. The cash consideration would be financed through cash and/or existing debt facilities. As per the Managing Director of AJ Park, this acquisition would give its merged businesses greater depth and provide its clients with access to a complementary team of experienced IP professionals. However, the acquisition is subject to numerous conditions, including clearance of by the New Zealand Commerce Commission.

The company earns a substantial portion of revenue in Australia from PCT national phase patent applications. During 1H FY20, IPH reported statutory NPAT amounting to $27.2 million, reflecting a rise of 12% and diluted earnings per share went up by 6% to 12.9 cents. These results indicate ongoing improvement from its pre-existing business and a solid performance from the Xenith IP businesses, acquired on 15 August 2019.


Key Financials (Source: Company Reports)

Strategic Priorities: The strategic priority of the company revolves around organic growth, margin improvement in Australia and New Zealand businesses and international and domestic acquisition.

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

P/BV Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is in a strong financial position with decent liquidity. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target with an upside of lower double-digit (in percentage terms). The stock of IPH has corrected 3.10% and 8.10% in the past three months and six months, respectively. Thus, it can be said that the stock of IPH is undervalued at current trading levels. Hence, considering the proposed Acquisition of Baldwins Intellectual Property, decent financial position and robust balance sheet, we give a “Buy” recommendation on the stock at the current market price of $7.810 per share, up by 4.272% on 11^th June 2020.

Redflow Limited

Capital Raising Through Entitlement Offer: Redflow Limited (ASX: RFX) is in the development, manufacturing and sale of its zinc-bromine flowing electrolyte battery module. The market capitalisation of the company stood at $26.55 Mn as on 11^th June 2020. Recently, the company announced an equity raising of up to $22.9 million before offer costs with an immediate target of around $6.25 million through 1 for 1 pro-rata, non-renounceable entitlement offer in order to finance its program of activities to at least 30 June 2021. During the nine months ended 31 March 2020, the company experienced a rise of 166% to $1.7 million in sales against pcp. RFX secured an initial order from Vodacom for nearly 30 telecommunication tower sites in South Africa. The company also expanded into China through a collaboration agreement with ZbestPower Co. for the deployment of a 10-battery demonstration site in Qinghai Province.


Key Dates (Source: Company Reports)

Focus for Future: For the upcoming 12 months, the objective of the company mainly revolves around(1) accelerating key engineering projects to deliver a more cost-competitive product via Gen3 Battery, (2) successfully commencing customer trials of the Gen3 Battery by the end of calendar 2020; and (3) orientating Redflow Thailand to focus on testing, development and retooling for Gen3.

Stock Recommendation: The company would continue its current discussions with potential strategic investors and partners in Australia and overseas. RFX has experienced a decent improvement in key margins over the past years. The stock of RFX has corrected 21.62% and 39.58% in the last three months and six months, respectively. As a result, the stock of RFX is inclined towards its 52-week low levels of $0.020. The stock of RFX is trading at a price to book value multiple of 1.9x as compared to the industry average (Industrials) of 4.7x on TTM basis. Hence considering, decent sales growth, recent capital raising and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.025 per share, down by 13.793% on 11^th June 2020.

Emeco Holdings Limited

New Five-Year Contract: Emeco Holdings Limited (ASX: EHL) is involved in selling, renting, and maintaining heavy earthmoving equipment to customers in the mining industry. The market capitalisation of the company stood at $484.64 Mn as on 11^th June 2020. The company expects high demand for mining equipment rental and the underground segment of EHL is well placed for growth. In a recent announcement, the company stated that the recently acquired Pit N Portal business has executed a 5-year contract with Mincor Resources NL at its Kambalda Nickel Operations in Western Australia. However, it is subject to Mincor issuing to Pit N Portal a notice to proceed by 31 March 2021.

During 1H FY20, the company reported operating EBITDA amounting to $119.1 million, reflecting a rise of 16% over 1H FY19 at an improved operating EBITDA margin of 48.3%. EHL delivered operating NPAT of $42.1 million with an increase of 33%. The strong growth in earnings was due to strong demand from customers in metallurgical coal, improving conditions in WA and the earnings contribution from growth assets purchased in FY19.


Operating Financials (Source: Company Reports)

Guidance: For FY20, the company anticipates operating EBITDA in the range of $244 million to $247 million. It expects net debt to EBITDA ratio of 1.5x at the end of FY20.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

 
Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company continues to generate strong positive cash flows in the upcoming years. Net margin of the company stood at 11.0% in 1H FY20 as compared to the industry median of 7.5%. This implies that the company has decent capabilities to convert its topline into the bottom line. Current ratio of the company stood at 1.70x in 1H FY20 against the industry median of 1.34x, reflecting a decent position of EHL to address its short-term obligations.We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as MACA Ltd (ASX: MLD), NRW Holdings Ltd (ASX: NWH), Perenti Global Ltd (ASX: MAH).

Therefore, in light of recent contract to Pit N Portal business, performance of 1H FY20, decent liquidity position and improved net margins, we give a “Buy” recommendation on the stock at the current market price of $1.245 per share, down by 5.323% on 11^th June 2020.

Alliance Aviation Services Limited

Equity Raising for Growth Opportunities: Alliance Aviation Services Limited (ASX: AQZ) provides fly-in, fly-out transportation to the mining and energy sector. The market capitalisation of the company stood at $395.16 Mn as on 11^th June 2020. The company recently announced that it is undertaking an equity capital raising comprising of A$91.9 million fully underwritten institutional placement and a non-underwritten share purchase plan (SPP) to raise up to an additional $30.0 million to place AQZ in a decent position to evaluate and potentially capture prospective expansion opportunities presented by COVID-19. The company is intending to acquire additional aircraft to take benefits of growth opportunities.


Key Dates (Source: Company Reports)

Profit Guidance: For FY20, the company expects profit before tax of more than $40 million. It added that the demand for ad-hoc charter services as a replacement to regular public transport (RPT) services is anticipated to continue at heightened levels through FY21.

Stock Recommendation: The company mentioned that the impact of COVID-19 on the aviation sector in Australia and globally has been devastating and the company anticipates that these effects would continue to shape the sector for many years to come. AQZ believes that it is well-placed to adapt and respond to the challenges arising from the changes it is observing in the operational and competitive landscapes. Alliance successfully extended the term of its debt facilities with its existing lenders on 28 May 2020. The securities of AQZ are currently on a trading halt on a pending announcement with respect to equity raising. The securities will remain in a trading halt until the earlier of the commencement of normal trading on 15^th June 2020 or when the announcement is released to the market. The stock last traded at $3.100 per share, down by 0.322% on 10^th June 2020.
 
 
Comparative Price Chart(Source: Refinitiv, Thomson Reuters)

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