Duratec Limited

DUR Details

Change in Directors Interest: Duratec Limited (ASX: DUR) provides protection, remediation and refurbishment services to assets. On 13 October 2021, one of the company’s Directors, Martin Brydon, made a change to holdings in the company via acquiring 2,072 fully paid ordinary shares at a consideration of $0.3621 per share.

FY21 Financial Summary:

• Fall in Revenue: For the year ended 30 June 2021, the company recorded revenue amounting to $235.7 million, reflecting a fall of 4.7% over pcp, mainly due to delays in contract awards, primarily in Defence and Buildings & Facades partially offset by strong Mining & Industrial sectors. The topline was also impacted by COVID-19 related project productivity impacts.
• Impact on EBITDA: As a result of lower sales and COVID-19 related delays, the normalised EBITDA for the year moved down to $18.8 million as compared to $22.0 million in FY20.
• Declaration of Dividend: The company declared a full-franked dividend of 1.50 Cents Per Share after its Initial Public offering in November 2020.

Revenue (Source: Analysis by Kalkine Group)

Key Risks:

• Contract Pricing Risk: The company is exposed to a risk arising from the change in the pricing of the contract, which could impact its topline and bottom line.
• Regulatory Risk: DUR is exposed to a more complex regulatory environment; any failure in the non-compliance could lead to fines, penalties, etc.

Outlook:

• The company possesses an order book of $236.2 million, which excludes annuity-style Master Service Agreement (MSA) contracts of circa $30 million-$40 million annually. This indicates a positive outlook for FY22.
• With respect to defence, the company expects sustainment spending to be more than double over the next decade.
• The company has scheduled to conduct the 2021 Annual General Meeting on 19 November 2021.

Stock Recommendation: During FY21, the company witnessed decent cash generation from its operations. DUR closed the year with a strong balance sheet supported by a cash balance of $41.2 million and low debt levels evident by a net cash position of $27.8 million. The stock of DUR is currently trading at its 52-week low level of $0.350, offering a decent opportunity for accumulation. The stock has been corrected by ~5.33% and ~16.47% in the past one and three months, respectively. On a TTM basis, DUR has an EV/Sales multiple of 0.3x as compared to the industry median (Industrials) of 2.1x. Thus, it seems that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, decent order book, low net debt levels, higher ROE, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating at the current market price of $0.350, as on 05 November 2021, 11:40 AM (GMT+10), Sydney, Eastern Australia.

DUR Daily Technical Chart, Data Source: REFINITIV  

Reliance Worldwide Corporation Limited

RWC Details

Q1FY22 Financial and Operational Highlights: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in designing, manufacturing and supply of high quality, reliable and premium branded water flow, control and monitoring products and solutions for the plumbing and heating industry. Previously, the company has decided to change its reporting presentation currency from Australian dollars to US dollars with effect from 1 July 2021. For the quarter ended 30 September 2021, the company recorded sales growth in all three regions with reported net sales amounting to US$246 million, indicating a rise of 8% over pcp.

• Growth in Sales: In addition, Earnings before Interest and Tax (EBIT) rose by 5% over pcp and up 4% on an adjusted basis. Moreover, the company witnessed strong demand in all three regions, showcasing continuing consumer investment in home improvement, which has bolstered repair and re-modelling activity.
• Improved Net Debt Position: The company had a cash balance of US$408 million at the end of the quarter and also used committed facilities available. RWC closed the quarter with net debt of US$160.3 million, which was lower than the pcp but was US$29.9 million higher as compared to the balance as on 30 June 2021. This was because of payment of the US$28 million purchase price on completion of the LCL acquisition in August and higher capital expenditure and planned inventory increases.

Net Sales (Source: Analysis by Kalkine Group)

Acquisition of EZ-FLO International, Inc.

• Recently, the company has inked an unconditional agreement for the 100% acquisition of EZ-FLO International, Inc, a leading manufacturer and US distributor of plumbing supplies and specialty plumbing products at a consideration of US$325 million.
• The price consideration indicates a 12.0x multiple of EZ-FLO’s Pro Forma Adjusted EBITDA before synergies and 7.0x Pro-Forma Adjusted EBITDA, including expected revenue and cost synergies.
• As a result of the acquisition, the company’s product offering would be benefitted and result in the acceleration of its growth in the North American plumbing market.

FY21 Financial Summary:

• During FY21, the company witnessed a rise of 15% in net sales to $1,341 million as compared to FY20, mainly underpinned by strong performance in America with 27% constant currency sales growth and 18% growth in Asia Pacific sales.
• Net Profit after Tax (NPAT) for the year amounted to $188.2 million, indicating a rise of 111% against FY20, and adjusted NPAT rose by 63% to $211.9 million.
• During the year, the company’s leverage ratio reduced to 0.51x net debt to EBITDA, from 1.39x in FY20.

Key Risks:

• COVID-19 Disruptions: The company’s business could be impacted by the uncertainties in relation to the COVID-19 pandemic, which could lead to disruption in its manufacturing line.
• Loss of Customer: RWC’s business is exposed to a risk arising from the loss of customers as there is no guarantee that key customers will continue to purchase the same or similar quantities of the company’s products.
• Business Headwinds: The company expects that the shipping delays, materials shortages, rising costs for copper, steel, resins and packaging, higher freight and energy costs, and other supply chain impacts are likely to remain headwinds for a major part of FY22.

Outlook:

• Looking at the demand perspective, the company is optimistic about its outlook for the key markets in FY22. In addition, RWC anticipates that the market fundamentals are likely to reflect steady demand supported by the trend of increased expenditure on home re-modelling activity as well as heightened levels of new home construction.
• The company expect price increases will support sales in FY22, and price increases are likely to fully offset the increase in commodity input cost.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: During FY20, the company recorded strong cash generation from its operations, backed by the growth of 20% to $334.3 million. The stock of RWC is trading above its 52-week low-high average of $3.770 - $6.420, respectively. The stock gave a positive return of ~29.48% and ~10.95% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of high-single-digit (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 uncertainties, low ROE, high cash cycle days, and rising copper prices. For the purpose of valuation, peers such as James Hardie Industries PLC (ASX: JHX), Boral Ltd (ASX: BLD), GWA Group Ltd (ASX: GWA) have been considered. Considering the expected correction, solid rally in the past few months, current trading levels and key risks associated with the business, we suggest investors to book profit, and give a ‘Sell’ rating on the stock at the current market price of $6.400, as on 05 November 2021, 10:31 AM (GMT+10), Sydney, Eastern Australia.

RWC Daily Technical Chart, Data Source: REFINITIV 

Note: The purple colour line in the chart depicts RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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