Stocks’ Details

Appen Limited

Decent Increase in Revenue and Underlying EBITDA: Appen Limited (ASX: APX) is engaged in the provision of quality data solutions and services for machine learning and artificial intelligence applications for global technology companies, auto manufacturers and government agencies. As on 27 August 2020, the market capitalization of the company stood at ~$5.29 billion. The company has recently released its results for 1H20 and reported a track record of high growth. Over the span of 5 years from 1H15 to 1H20, the company reported a CAGR of 54% in revenue. During 1H20, revenue of the company went up by 25% to $306.2 million and witnessed a growth of 6% in underlying EBITDA to $49.1 million. In the same time span, the company saw a growth of 405% in annual contracted value to US$103 million. The decent financial and operational performance enabled the Board to declare a partially franked interim dividend of 4.5 cents per share, reflecting an increase of 12.5% on the pcp. It will be paid on 24 September 2020 with ex-date of 1 September 2020.

1H20 Financial Highlights (Source: Company Reports)

Outlook: APX continues on its long-term growth trajectory and seems to be well-positioned to win in a high growth market that will accelerate post-pandemic. It has a long-term focus on its growth investments. The company provided guidance for FY20 and expects revenue plus orders in hand for delivery of ~$475 million. The full-year underlying EBITDA is expected to be in the range of $125 million to $130 million.

Key Risks: The company is exposed to a variety of risks including the risks of retention of employees and skilled contractors, strategic positioning of global operation, alignment of customers, products and services to strategic objectives, risks related to market competition changes, market disruption, Investment in technology innovation and transformation, etc.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company retains a leading market position with highly skilled staff. It continued to witness ongoing demand for high-quality training data from major customers, which further resulted in consistent growth in revenue. As per ASX, the stock of APX gave a return of 35.85% in the past three months and a return of 19.05% in the past one month. The stock of APX is trading close to its 52-weeks’ high level of $43.66 but retains a potential for further growth. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). On Technical Front, the stock of APX has a support level of ~$36.79 and a resistance level of ~$43.67. Considering the valuation, healthy 1HFY20 performance and decent business growth, etc., we recommend a ‘Hold’ rating on the stock at the current market price of $38.65, down by 11.149% on 27 August 2020.

Nine Entertainment Co. Holdings Limited

Increased EBITDA: Nine Entertainment Co. Holdings Limited (ASX: NEC) is a media and entertainment company that is engaged in broadcasting and program production across Free to Air television and metropolitan radio networks in Australia, publishing across digital platforms and newspapers, and real estate media and technology service. As on 27 August 2020, the market capitalization of the company stood at ~$2.99 billion. The company has recently released its results for FY20 wherein it reported a growth of 17% in revenue to $2,170.6 million and an increase of 13% in EBITDA to $396.7 million. In the same time span, the company reported earnings per share of 8.3 cents. The decent financial and operational performance enabled the Board to declare a final fully franked dividend of 2 cents per share, taking the dividend for FY20 to 7 cents per share. It will be paid on 20 October 2020 with ex-date of 9 September 2020 and record date of 10 September 2020.

FY20 Financial Highlights (Source: Company Reports)

Outlook: The company is focused on achieving 60% of EBITDA from digital businesses and over 35% of revenue from subscription by FY24. The company is sharing growth and cost initiatives to boost radio and is committed to expedite expansion into broader Digital Video market. It is further investing in the content through FY21 and has an increased focus on Stan Originals.

Key Risks: The company is exposed to a variety of risks and uncertainties including a significant change to advertising market conditions which may lead to a prolonged decline in the advertising market, the risks related to NTA share of the FTA market, change in the way content is viewed or consumed by audiences; and declines in property market conditions.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company retains a healthy balance sheet with a leverage ratio of less than 1x. Despite the challenging year, the company continued to evolve and positioning itself well for further growth. As per ASX, the stock of NEC gave a return of 15.46% in the past three months and a return of 24.03% in the past one month. The stock is inclined towards its 52-week high of $2.090 and retains the potential for further growth. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target upside of higher single-digit (in percentage terms). On the technical front, the stock of NEC has a support level of ~$1.23 and a resistance level of ~$1.94. Considering the current trading levels, valuation, growth potential and resilience of the business amidst the pandemic, we recommend a ‘Hold’ rating on the stock at the current market price of $1.72, down by 1.992% on 27 August 2020.

Bega Cheese Limited

Resilient Financial Performance: Bega Cheese Limited (ASX: BGA) is engaged in the processing, manufacturing, cutting, and packaging traditional cheese products, as well as the manufacturing of other high-value dairy products. As on 27 August 2020, the market capitalization of the company stood at ~$1.04 billion. The company has recently announced results for FY20 and demonstrated the value of consistent strategy and the capacity to manage unpredictability across the supply chain. During the year, the company reported a growth of 5% in revenue to $1,493 million and generated EBITDA of $87.8 million, reflecting an increase of 11% on the prior year. In the same time span, the company reported a decrease of 18% in net debt to $236.4 million and a lower net leverage ratio of 2.35x. The statutory net cash inflow from operating activities stood at $137.7 million in FY20 as compared to net cash inflows of $100.3 million in FY19. The company also announced a final fully franked dividend of 5.0 cps, taking the total dividends for FY20 to 10 cps. It will be paid on 7 October 2020 with ex-date of 7 September 2020 and record date of 8 September 2020.

FY20 Financial Highlights (Source: Company Reports)

Outlook: The company retains a positive outlook for the milk supply in the coming years. It is focused on cash generation and reducing its costs base. It is leveraging and rationalizing existing assets and product capacities. The company is planning for growth in international branded consumer and food service business.

Key Risks: The company is exposed to a variety of risks including the risks regarding possible or assumed future performance, costs, returns, prices, potential business growth, industry growth or other trend projections. The company is also exposed to risks related to economic disruptions, geopolitical risks, etc.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company remains open to further dairy industry consolidation opportunities and has launched new brands and products. It retains a strong growth in the domestic grocery market. As per ASX, the stock of BGA gave a return of 20% in the past six months and a return of 9.95% in the past one month. The stock is trading close to 52-weeks’ high level of $5.5 but retains the potential for further growth. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at a target upside of higher single-digit (in percentage terms). On the technical front, the stock of BGA has a support level of ~$4.54 and a resistance level of ~$5.83. Considering the valuation, its focus on cash generation and cost reduction, and long-term growth potential, we recommend a ‘Hold’ rating on the stock at the current market price of $5.24, up by 7.819% on 27 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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