Stocks’ Details

McMillan Shakespeare Limited

A Quick Look at FY20 Results: McMillan Shakespeare Limited (ASX: MMS) is involved in salary packaging, asset management, vehicle finance, insurance, and warranty. The market capitalization of the company stood at $669.35 Mn as on 8th September 2020. As per the recent quarterly rebalance of the S&P/ASX Indices, MMS will be removed from the S&P/ASX 200 Index, which will be effective from 21^st September 2020. For FY20, the company reported revenue amounting to $494.0 million, reflecting a fall of 10% over pcp* and UNPATA for the period witnessed a decline of 22.2% to $69.0 million. The financial performance was impacted by a tough operating environment amid persistent fall in the Australian new car market, an uncertain regulatory environment, coupled with the macroeconomic impacts from the fatal bushfires and the COVID-19 pandemic.

However, the company experienced no material impact of COVID-19 on its salary packaging business. In addition, Plan Partners business added new clients and provided an uninterrupted service level. This business seems to be well-placed for customer and earnings growth in FY21. The company has generated accumulated free cash flow of $454.6 million, which has helped it to deliver shareholder distributions of $335 million over the past five years including, buy-back of $80 million in FY20.  For FY20, MMS declared a total dividend of 34 cents per share paid in March 2020.

Shareholders Return (Source: Company Reports)

Outlook: The priorities for FY21 revolves around ensuring flexibility in the funding arrangements and the introduction of new products and services as a response to changing consumer mobility needs and market dynamics. The company plans to shift towards licensed cloud and storage-based solutions in line with its strategy to reduce overall capital costs (expected financial impact of reduced capex from $14 million in FY20 to $9 million in FY21). However, the operating expense will increase by $3.8mn in FY21. The company has scheduled to conduct its Annual Shareholders Meeting on 20^th October 2020.

Key Risks:  The keys risks and sensitivities of the company largely includes COVID-19 pandemic and associated restrictions, regulation of consumer insurance products, ongoing potential risk of consumer action, and interest rates.

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:  During FY20, the company extended all revolving debt facilities beyond 12 months. The company closed the year with a net cash position of $66.7 million excluding fleet funded debt. On the technical analysis front, the stock of the company has a support level of ~A$8.259 and a resistance level of ~A$10.152. 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). Therefore, considering decent performance in plan partner and salary packaging business, decent free cash flows, consistent shareholders returns and the key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $8.480 per share, down by 1.965% on 8^th September 2020.

Emeco Holdings Limited

Equity Raising to Reduce Debt: Emeco Holdings Limited (ASX: EHL) is engaged in selling, renting and maintaining heavy earthmoving equipment to customers in the mining industry in Australia and overseas. The market capitalisation of the company stood at $427.21 Mn as on 8^th September 2020. On 31st August 2020, the company opened its retail entitlement offer to raise a further of $38 million, which will close on 15^th September 2020. The retail entitlement offer follows the successful completion of institutional entitlement offer of $111 million. The company plans to utilise the net proceeds raised from the entitlement offer for the repayment of 44% of Emeco’s outstanding March 2022 Secured Notes.

Timetable (Source: Company Reports)

Robust Growth in Earnings: For FY20, the company reported Operating EBITDA amounting to $246.1 million, reflecting a rise of 15% on a YoY basis. In addition, operating NPAT for the period witnessed an increase of 39% to $87.5 million. This growth was driven from 91% operating utilization achieved in FY20, continued tight cost control, $23million EBITDA contribution from growth assets purchased in FY19 as well as four months contribution from recently acquired Pit N Portal. The company managed to generate strong free cash flow of $71.2 million during FY20.

Key Risks: The company is exposed to a variety of business risks, which include access to and supply of used and new equipment, fleet age and maintenance expenditure risk, residual value risk and mine site interruptions.

Outlook: During FY21, the company would continue to diversify its commodity and customer mix, increase its service levels, and win long term projects, which are likely to provide a platform for growth in FY22. The company expects robust demand in gold and iron ore supporting ~15% growth in the Western Region, with greater emphasis in 2H21.  EHL is likely to conduct its Annual Shareholders Meeting on 12th November 2020.

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 future focus of the company revolves around reducing gross debt, long-term capital structure and maintaining enough liquidity to support the business. The stock price of EHL has corrected 8.81% and 28.55% in the last one and three months, respectively. As a result, the stock is trading closer to its 52-week low level of $0.457. On the technical analysis front, the stock of the company has a support level of ~A$0.453 and a resistance level of ~A$1.074. 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 taken peers such as NRW Holdings Ltd (ASX: NWH), MACA Ltd (ASX: MLD), Perenti Global Ltd (ASX: PRN), etc. Thus, in light of decent free cash flow, growth in earnings, recent equity raising, current trading levels and key business risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.850 per share, down by 0.585% on 8^th September 2020.

XTEK Limited

Equity Raising to Execute International Ballistic Protection Strategy: XTEK Limited (ASX: XTK) is in the provisioning of products and services within the homeland security industry. The market capitalisation of the company stood at $48.03 Mn as on 8^th September 2020. On 2^nd September 2020, the company announced a successful competition of Share Purchase Plan (SPP), wherein the company received valid applications for $2.9 million, which surpasses the initial SPP target of up to $2 million. The SPP follows the completion of an oversubscribed placement of $9.2 million. XTEK raised the total amount of $12 million under the Placement and SPP. The company plans to use the total proceeds to implement its international ballistic protection strategy, commercialisation of XTclave^TM technology, acceleration of growth in other operations and for working capital purposes.

For FY20, the company reported revenue amounting to $42.7 million, reflecting a YoY growth of 13%. Net profit for the period $0.3 million, indicating an increase of 80% over FY19. The growth in earnings was supported by efficiencies achieved from XTEK’s continuous investment of $542k in research and development.

Income Statement Summary (Source: Company Reports)

Key Risks: The company’s business activities are exposed to a variety of financial risks, such as Liquidity risk, Credit risk and Market risk (Including currency risk, interest rate risk and price risk).

Outlook: The company is optimistic that its revenue will surpass the toll of $30 million in FY21. The growth will be supported by sales from US ballistic, the Finnish defence ballistic order with expected future orders, ongoing SUAS support and maintenance contract and supply of additional SUAS and spare parts to the ADF.

Stock Recommendation: During FY20, the company managed to achieve robust operational cash flows, holding $3.1 million in cash on 30 June 2020. XTE seems well-placed to deliver on its key commercial objectives and milestones. At the current market price of $0.675, the stock is trading at a P/E multiple of 113.330x. The stock is trading at a price to book value multiple of 3.8x as compared to the industry median (Industrials) of 1.9x on TTM basis. The stock of XTE has moved up by 33.33% in the past six months. In addition, the stock is currently trading slightly above the 52-week low-high average of $0.385-$0.965. On the technical analysis front, the stock of the company has a support level of ~A$0.653 and a resistance level of ~A$0.894. Hence, considering the current trading levels and upside movement in the stock, we give an “Expensive” recommendation on the stock at the current market price of $0.675 per share, down by 0.735% on 8^th September 2020. We suggest investors to wait for better entry levels. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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