Synlait Milk Limited

SM1 Details

Update on Dunsandel Facility Operations: Synlait Milk Limited (ASX: SM1) is involved in dairy manufacturing and sells milk powder and milk-powder related products. SM1 recently updated on its Dunsandel facility operations owing to a heavy rainfall causing floods in Canterbury. It informed the restoration of onsite operations from 1 June 2021 and no material impact of this event on its guidance outlook or production plan for FY21. SM1 is focusing on supporting the impacted farmer suppliers to control the situation.

Increased Forecasted Milk Price: On 31 May 2021, SM1 announced an increase in the estimated base milk price from NZ$7.20 to NZ$7.55 kgMS for the FY20/21 season. The opening price estimate for the 2021 / 2022 season is N$8.00 kgMS. SM1 is monitoring price movements and will inform the farmer suppliers with relevant updates. It will confirm the final milk price for the 2020 / 2021 season as it releases its FY21 results on 27 September 2021. SM1 will also update 2021 / 2022 season estimates at the same time.

1HFY21 Key Takeaways: The company reported NZ$664.18 million revenue in 1HFY21, up by 19% YoY. Its NPAT was down by 76% YoY to NZ $6.4 million in 1HFY21. SM1 registered lower sales of 18,085 mt for its consumer-packaged infant formula in 1HFY21, down by 16% YoY. The company has captured NZ $10.8 million operational cost savings and NZ $11 million value chain savings in 1HFY21, given its short-term cost control focus. It held a cash and cash equivalents balance of NZ $9.133 million as of 31 January 2021.

Revenue & Net Income Trend from FY19-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces shipping delays, consumer behaviour and milk prices changes, inventory management issues, and adequate finance to scale up the operations. It is exposed to floods and heavy rainfall, damaging its farm network and operations facility. 

Outlook: For FY21, SM1 has estimated a net profit after tax loss of between NZ $20-$30 million. SM1 is working closely with the bank for suitable funding for FY22 and intends to avoid a capital raising exercise. SM1 plans to launch new products in the next twelve months to its business (B2B) and business to consumer (B2C) segments. Lower prices for ingredient products and shipping delays are expected to continue.

Valuation Methodology: EV/Sales 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: The stock of SM1 gave a positive return of 19.01% in the past month and 6.96% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $2.640- $6.790. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount than its peer median, considering its fall in EBITDA, NPAT, and lactoferrin production for 1HFY21. For this purpose, we have taken peers like Bega Cheese Limited (ASX: BGA), Beston Global Food Company Limited (ASX: BFC), Ridley Corporation Limited (ASX: RIC) and others. Considering the low trading levels, increase in revenue in 1HFY21, launch plans for new products, higher cash receipts from customers in 1HFY21, valuation, and the related risks of shipping delays, inventory management, and flood situation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.380, down by 0.589% on 29 June 2021.

SM1 Daily Technical Chart, Data Source: REFINITIV 

Shine Justice Limited

SHJ Details

Settlement Deed Implemented: Shine Justice Limited (ASX: SHJ) is the holding company of several legal services provider firms. As of 29 June 2021, the market capitalisation of SHJ stood at ~$195.78 million. On 28 May 2021, SHJ announced the lapse of 35,634 unlisted performance rights (FY20) and 38,929 unlisted performance rights (FY21) offered under its Performance Rights Plan owing to the exit of a plan participant. On 28 April 2021, SHJ announced implementing a settlement deed of a class action (lawsuit) put forward by its subsidiary Shine Lawyers Pty Limited in the Federal Court of Australia. The class action was against Westpac Life Insurance Services Limited (Westpac Life) and Westpac Banking Corporation. The deed resolves the action for $30 million (capped) and is subject to the court sanction. The settlement will not affect SHJ’s FY21 results and is estimated to have a net favourable impact on the company’s gross operating cash flows in FY22.

Key Takeaways for 1HFY21: The company posted revenue of $93.56 million in 1HFY21, up by 4.6% YoY due to growth in its new practice areas, consisting of abuse and medical law and class actions. SHJ registered a net profit after tax of $10.05 million in 1HFY21, up by 13.9% YoY. It paid an interim dividend of 2 cents per share unfranked per share in 1HFY21. It generated net cash inflows of $31.29 million from its operating activities in 1HFY21. It held a cash balance of $49.51 million as of 31 March 2021. 

Revenue & Net Income Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks: The company faces the uncertainty prevailing with the COVID-19 restrictions. It faces the risk of change in legal regulations and technological advancements disrupting the business flow.

Outlook: SHJ expects a high-single-digit percentage growth in EBITDA growth in FY21, given the COVID-19 uncertainties. Its underlying profit is in sync with the guidance expectations. SHJ has a pipeline of acquisition and organic avenues. It expects a robust momentum and will continue to invest in technology in FY21.

Valuation Methodology: Price to Earnings 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: The stock of SHJ gave a positive return of 26.11% in the past three months and a positive return of 28.97% in the past six months. The stock is currently trading higher than the 52-weeks’ average price level of $0.580-$1.150. We have valued the stock using the Price to Earnings based illustrative relative valuation method and have arrived at a target price with a correction of high-single digit (in % terms).  We believe that the company can trade at some discount than its peer median, considering its high debt to equity ratio, low ROE, and profit margins in 1HFY21. For this purpose, we have taken peers like Slater & Gordon Limited (ASX: SGH), Mayfield Childcare Limited (ASX: MFD), G8 Education Limited (ASX: GEM) classified under the Consumer Services segment. Considering the high trading levels, decent returns in the past three and six months, valuation, high debt equity ratio, we give a ‘Sell’ rating on the stock at the current market price of $1.135 (as on 29 June 2021, 12: 37 PM (GMT+10), Sydney, Eastern Australia).

SHJ Daily Technical Chart, Data Source: REFINITIV

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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