Spirit Technology Solutions Ltd

ST1 Details

Financial Performance Update: Spirit Technology Solutions Ltd (ASX: ST1) deals in information technology (IT) and telecommunications services that provide managed IT services, includes enterprise-grade managed Wi-Fi, cybersecurity and Smart ISDN solutions for cloud transition, etc. to small and medium-sized businesses in Australia. The market capitalisation of the company as of 22 June 2021 stood at ~$182.64 million. The company has recorded robust revenue and S&P Revenue growth by ~150% to $35.7 million in FY21 (Jan to April), compared to pcp basis. In addition, ST1 has reported inbound sales up by 75% to 1596 in April FY21 against the previous month FY21. The company has reported an increase in TCV on recurring sales by 145% to $11.9 million in FY21 (Jan to April), compared to pcp. The cash position of the company stood at $23 million and available debt as of 31 April 2021. 

FY21 (Jan to April) Recurring and S&P Revenue (Source: Company Reports)

Outlook: Nexgen will commence to sell the Spirit IT & Cyber products in Q4FY21-Q1FY22. The company is driving organic growth globally by advertising and expanding SMB distribution through Nexgen salesforce and National brand campaigns.

Key Risks: ST1 has a pending services delivery at $10.4 million. The company is exposed to cybersecurity risk, technology risk, fraud, threat. Therefore, the company should invest in technology to keep it updated and secured. 

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

Data Source: Refinitiv, Thomson Reuters, 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 company expects organic sales growth through Nexgen & Spirit in H2FY21.  The stock of ST1 is trading below its average 52-weeks’ levels of $0.200-$0.450. The stock of ST1 gave a positive return of ~41.25% in the past one year and a negative return of ~21.52% in the past three months. On a technical analysis front, the stock of ST1 has a support level of ~$ and a resistance level of ~$. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation 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 to its peer median EV/Sales (NTM trading multiple), considering the uncertainty over COVID-19 impact and technology advancement risk. For this purpose, we have taken peers such as 5G Networks Ltd (ASX: 5GN), Aussie Broadband Ltd (ASX: ABB), MNF Group Ltd (ASX: MNF), to name a few. Considering the healthy balance sheet, robust revenue and strategic integration, National brand campaign and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.275, down by 1.786% as on 22 June 2021.

ST1 Daily Technical Chart, Data Source: REFINITIV 

MMA Offshore Limited 

MRM Details

Change in Substantial Holding: MMA Offshore Limited (ASX: MRM) engages in marine logistics and services to the offshore oil and gas industry that includes offtake support, supply operations support, construction support, etc., in Australia and internationally. The market capitalisation of the company as of 22 June 2021 stood at ~$156.30 million. As per a recent announcement, Perennial Value Management Limited (PVM) has undergone a change of shareholding in the company on 17 March 2021 and has voting rights of 7.15%.

Contracts Grant and Sale of Assets Update: The company has been granted new contracts, including two notable long-term vessel contracts, an offshore wind support contract in Taiwan and a further hydrographic survey scope for the Australian Department of Defence under the Hydro scheme Industry Partnership Program. It anticipates combined revenue of ~$54 million and ~$70 million including option periods.

H1FY21 Financial performance: During the period, the company has recorded a decline in its revenue by 8.4% to $119.9 million in H1FY21, compared to the previous corresponding half. MMA has reported an increased operating cash flow of $18.4 million in H1FY21. The healthy cash position of the company stood at $92.9m as of 31 December 2021, grew by 25% from H1FY20. 

H1FY21 Cashflow Statement (Source: Company Reports)

Outlook: The management strategies to diversify and expand its footprint and deliver safe and efficient operations. The company is focused on building integrated office service offering, entry into renewables and government services revenue streams.

Key Risks: Due to the COVID-19 pandemic, the demand was subdued for assets and services, particularly in the oil and gas sector. Therefore, the company should look to diversify its product offering.

Stock Recommendation: As per a recent announcement, the management has strategically subleased a substantial portion of the company's shipyard facility in Batam, Indonesia and potential sale of the company's interest to WASCO that will terminate some expenses and access to meet the company's internal needs. The stock of MRM is trading above its average 52-weeks' levels of $0.236-$0.467. The stock of MRM gave a positive return of ~40.0% in the past six months and a positive return of ~29.23% in the past one month. On a technical analysis front, the stock of MRM has a support level of ~$0.305 and a resistance level of ~$0.582. On a TTM basis, the stock of MRM is trading at a Price/CF multiple of 7.4x, higher than the industry average (Oil & Gas related equipment and services) of 2.4x. Considering the current trading levels and valuation on TTM basis, recent rally in the stock price, volatile demand for oil and gas in global markets and the 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 $0.420, down by 3.5%   (as on 22 June 2021, 11:43 PM (GMT+10), Sydney, Eastern Australia). 

MRM 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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