Stocks’ Details

Synlait Milk Limited

Dispute Settlement: Synlait Milk Limited (ASX: SM1) is engaged in producing and manufacturing nutritional milk products. The market capitalisation of the company as on 24 December 2020, stood at ~$1.01 billion. As per a recent announcement Synlait, New Zealand Industrial Park Limited and Karl Ye agreed on a settlement regarding the covenants at Synlait’s Pokeno site, resulting in the removal of the land covenants.

FY20 Financial Update: The company reported decent financial performance during the year. Revenues grew by 27% to NZ$1.3 billion during the year, compared to the pcp. There was an increase of 13% in the EBITDA to NZ$171.4 million in the same period. Lactoferrin sales grew by 46% to 30MT and consumer-packaged infant formula sales increased by 15% to 49,180MT, during FY20.

FY20 Financial Performance

Outlook: The company has updated its FY21 guidance in accordance with the guidance provided by its key strategic customer The A2 Milk Company Limited (A2M). SM1 now expects the total consumer-packaged infant formula volumes to be ~35% lower in FY21, compared to FY20. As a result, it anticipates FY21 NPAT to be approximately half of the FY20 NPAT result. However, the management seems confident in its medium to long term outlook and would continue to pursue opportunities for asset optimisation and execution of its diversification strategies in FY21.

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

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: SM1 has delivered a decent increase in top-line in FY20, despite the challenging business conditions due to the COVID-19 pandemic. The stock of SM1 gave a negative return of 16.16% in the past three months and a negative return of 11.44% in the past one month. As per ASX, the stock of SM1 is trading below its average 52 weeks’ trading range of $4.330-$8.800. On a technical front, the stock of SM1 has a support level of $4.409 and a resistance level of $5.278. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as A2 Milk Company Limited (ASX: A2M), Tassal Group Ltd (ASX: TGR), Inghams Group Limited (ASX: ING), to name a few. Considering the current trading levels, decent financial performance, modest medium to long-term outlook, diversification strategies in FY21, and potential valuation upside, we recommend a ‘Buy’ rating on the stock at the current market price of $4.720, up by 1.724% as on December 24, 2020.

Prospa Group Limited

Access to SME Guarantee Scheme 2.0: Prospa Group Limited (ASX: PGL) is engaged in providing finance to small businesses. The market capitalisation of the company as on 24 December 2020, stood at ~$139.19 million. As per a recent announcement, the company has received access to Federal Government’s SME Guarantee Scheme 2.0, to support small businesses amidst the COVID-19 pandemic.

Q1FY21 Trading Update: The company reported decent performance in the given quarter, with total originations up by 265% to $80 million, from $21.9 million in Q4FY20. The annual portfolio yield was at 31.5%. It had a comfortable liquidity position with $422.1 million available from third-party facilities and can assist in the growth of companies as business conditions improve further.

Q1FY21 Key Metrics (Source: Company Reports)

Outlook: The company saw an improvement in originations in Q1FY21 when compared to the previous quarter, and this trend has continued further in the present quarter. As there is a gradual improvement in the business environment, PGL is expected to increase its risk appetite and anticipate customer demand to drive credit originations.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock has delivered a decent Q1FY21, despite the volatility in the business environment. The company expects demand to increase in the near term as small companies will look for funding support as the economy improves. PGL gave a return of 24.63% in the past three months and a negative return of 14.85% in the past one month. As per ASX, the stock of PGL is trading below its average 52 weeks’ trading range of $0.400-$2.250, proffering a decent opportunity for the investors to enter the stock. On a technical front, the stock of PGL has a support level of $0.662 and a resistance level of $0.986. We have valued the stock using an EV/Sales multiple based illustrative relative valuation and have arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as Humm Group Limited (ASX: HUM), Money3 Corp Limited (ASX: MNY), and Mainstream Group Holdings Limited (ASX: MAI). Considering the current trading levels, robust growth in originations and increased risk appetite in a focused manner, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.860 as on December 24, 2020.

Paragon Care Limited

Dispute Settlement: Paragon Care Limited (ASX: PGC) is engaged in the supply of medical equipment, devices and consumable medical products to the health and aged care markets. The market capitalisation of the company as on 24 December 2020, stood at ~$82.78 million. As per a recent update, the legal proceedings against some former employees of the company by Western Biomedical, have been settled.

Q1FY21 Performance Update: Despite the challenging business environment due to COVID-19 outbreak, the company reported only a 4.7% decrease in revenues to $57 million in Q1FY21, from $59.8 million in Q1FY20. Revenues decreased by 4.7% to $57 million in Q1FY21, from $59.8 million in Q1FY20. There was a marginal decline in gross margins to 37.5% in Q1FY21, from 39.9% in Q1FY20 due to a temporary shift in the sales mix to lower margin products. As of FY20, the capital and consumables segment has a market share of ~7.1% and a revenue contribution of $106 million.

FY20 Market Share of Key Segments (Source: Company Reports)

Outlook: Given the uncertain business conditions due to COVID-19, PGC expects performance to be subdued in the near term. However, the company expects revenue to be in line for FY21 and further increase by more than 5% in FY22. It is anticipating an EBITDA margin of 15% from FY22 onwards.

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

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Going forward, the company expects elective surgery to ramp up and anticipates higher gross margins to aid earnings in the medium term. PGC gave a return of 51.61% in the past three months and a negative return of 11.32% in the past one month. The stock of PGC is trading below its average 52 weeks’ trading range of $0.095-$0.445. On a technical front, the stock of PGC has a support level of $0.176 and a resistance level of $0.268. We have valued the stock using a P/CF multiple based illustrative relative valuation and have arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as Compumedics Limited (ASX: CMP), Mayne Pharma Group Limited (ASX: MYX), Australian Pharmaceutical Industries Limited (ASX: API), to name a few. Considering the current trading levels, stable revenues in a tough economic environment and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.235, down by 4.082% as on December 24, 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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