Stocks’ Details
 

Downer EDI Limited

Awarded with a New Road Maintenance Contract: Downer EDI Limited (ASX: DOW) is engaged in designing, building and sustaining assets, infrastructure and facilities. The market capitalisation of the company stood at ~$2.64 billion as on 7^th July 2020. Recently, the company announced that it has secured road maintenance contracts from the South Australian Government Department of Planning, Transport and Infrastructure (DPTI). The estimated value of the contract is $420 million over a maximum term of 13 years. The contract also includes provisions for additional minor capital works. The company added that the contract would commence on 2^nd November 2020 with an initial seven-year term with two extension options of three years plus three years. Previously, the company has expanded its relationship with Fortescue Metals Group through the provision of Early Mining and Maintenance Services contract of $450 million over five years.

The company has agreed to settle the class action commenced against Spotless Group Holdings Limited in the Federal Court of Australia in May 2017, which is subject to Federal Court approval. The following picture gives an overview of the financial performance of 1H FY20:


Financial Performance (Source: Company Reports)

Guidance: For FY20, the company has downgraded its NPATA guidance to $300 million mainly due to project underperformance in Engineering, Construction and Maintenance division, lower revenue in EC&M construction.
Key Risks: The company is exposed to various financial risks such as foreign exchange, interest rate, commodity risk, which have the potential to affect its financial performance. Moreover, the business also deals with default by the counterparty on their contractual obligations.

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

Price to Earnings 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 company has entered into a new $500 million syndicated bank facility, which was provided by four of its long-term relationship banks. The company possesses a very solid financial foundation as well as a strong pipeline of ongoing work, most of it with Government customers. Current ratio of the company stood at 1.11x in 1H FY20, reflecting YoY growth of 10.7%. This indicates that the company has improved its position to settle its short-term obligations. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price of low double-digit upside (in percentage terms).Therefore, considering the new contracts, decent financial foundation, a strong pipeline of ongoing work and improved liquidity position, we give a “Buy” recommendation on the stock at the current market price of $4.440 per share on 7^th July 2020. 

NRW Holdings Limited

Decent Growth in Topline: NRW Holdings Limited (ASX: NWH) is involved in the provisioning of services including civil contracting, mining services and equipment to the resources sector. The market capitalisation of the company stood at ~$785.1 million as on 7^th July 2020. Recently, the company provided an update in relation to Gascoyne Resources Limited and stated that Gascoyne has now agreed with NRW that the amount of the upfront payment would be 8.75% of the gross proceeds of the equity raising to be conducted pursuant to the Deed of Company Arrangement or up to a maximum amount of $7 million. For the 10-month ended April 2020, the company achieved record revenue amounting to $1.6 billion and EBITDA for the period stood at $177 million. During 1H FY20, the company experienced a rise of 55% in revenue to $808.7 million. The company stated that the integration of BGC Contracting is progressing well, and all project teams are now reporting via the NRW business structure.


Earnings Profile (Source: Company Reports)

Revenue Guidance: The company is working in a decent position and is on track to meet the revenue guidance of $2 billion for the financial year 2020.

Key Risks: The financial performance is impacted by the level of activity in the resources and mining industry. This is largely influenced by the demand for mining production, policies of mine owners, availability and cost of key resources.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: On 9^th June 2020, the company has paid an interim dividend of 2.5 cents per share, which was previously deferred due to COVID-19. Net margin of the company stood at $4.3% in 1H FY20 as compared to the industry median of 2.7%. This reflects that the company possesses decent capabilities to convert its topline into the bottom line. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Monadelphous Group Ltd (ASX: MND), Emeco Holdings Ltd (ASX: EHL) and Austin Engineering Ltd (ASX: ANG), and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the decent financial performance, revenue guidance, decent capabilities to convert its top-line into the bottom-line, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.755 per share, down by 4.62% on 7^th July 2020.

DroneShield Ltd

DroneGun Tactical^TM Selected by European Police:DroneShield Ltd (ASX: DRO) is engaged in the development, commercialisation and sales of hardware and software technology for drone detection and security. The market capitalisation of the company stood at ~$32.82 million as on 7^th July 2020. On 7 July 2020, the company announced that its substantial shareholder, Regal Funds Management Pty Ltd, reduced its holding in the company to 6.27%, from 7.6%. Recently, the company stated that the European Union police forces have selected its DroneGun Tactical^TM product as the preferred solution. The company added that the process was run by Belgium Police, with an EU-wide framework. As per the terms of the framework agreement, DroneGun Tactical^TM is likely to be rolled out throughout a range of police units across the European Union. The company has also received an order of around $460,000 from a major agency of the United States Government. During FY19, the company reported a rise of 200% in revenue mainly due to the rapid rise in global demand for drone detection and mitigation products during FY19. 


Key Metrics (Source: Company Reports)

Focused on Revenue Growth: The company is likely to generate increased revenues from the sale of its products in the future. 

Key Risks: The company is exposed to credit risk, which arises from the default of the counterparty. As the company operates from Australia, the UK and the U.S., and accordingly transactions occur in a mix of AUD, GBP and USD, which creates a risk of foreign currency due to the fluctuation in exchange rates.

Stock Recommendation: The company has entered into an agreement with R&D Capital Partners Pty Ltd, wherein the company will be receiving funds equivalent to the majority of the Research and Development Tax Incentive expected by the company to be received from the Australian Government for the period ending 31^st December 2020. The stock of DRO has EV/Sales multiple of 7.7x as compared to the industry average (Industrials) of 26.5x on TTM basis. The stock of DRO is trading at a price to book multiple of 4.9x against the industry average (Industrials) of 5.7x on TTM basis. Thus, in light of the framework agreement with European Police, order from the major agency of the United States Government, growth in revenue and key risks stated above, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.120 per share, down by 7.692% on 7^th July 2020.

People Infrastructure Ltd

Completion of Capital Raising: People Infrastructure Ltd (ASX: PPE) is in workforce management and staffing solutions. The market capitalisation of the company stood at ~$182.88 million as on 7^th July 2020. Recently, the company finished its share purchase plan and raised $5.5 million. SPP was oversubscribed and the company received 1,491 applications, and monies totalling in excess of A$43.5 million. The SPP follows the completion of institutional placement of $12.1 million. This capital raising provides additional balance sheet support for the period that the business impacted by COVID-19 as well as for future acquisition opportunities which will emerge as a result of the current volatile economic conditions. During 1H FY20, the company reported revenue growth of 45.4% to $134 million.

 
Revenue Growth (Source: Company Reports)

Future Growth: For FY20, the company expects EBITDA in the range of $24 million to $25 million. The company expects growth in its performance in FY20 on the back of continued demand for staff services across its divisions, an increase in demand for staffing in its general staffing business, increased business in its facilities maintenance business, as well as a recovery in its information technology and nursing businesses.

Key Risks: The group is mainly exposed to key financial risks such as credit risk, liquidity risk, currency risk. The business is also sensitive to market risks like interest rate risk, which arises from cash and cash equivalents. The company uses a mixture of fixed and floating rate investments in order to manage this risk.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: EBITDA margin and Operating margin of the company stood at 6.9% and 5.1% in 1H FY20, reflecting YoY growth of 0.6% and 0.2%, respectively. The stock of PPE is inclined towards its 52-week low levels of $0.900, offering a decent opportunity for accumulation. 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). Therefore, considering the decent revenue growth, completion of the capital raising of $17.6 million, long-term outlook, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.930 per share, down by 5.392% on 7^th July 2020.
 
 
Comparative Price Chart(Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.