Austal Limited

ASB Details

An Update on Aulong Joint Venture: Austal Limited (ASX: ASB) is involved in the design, production, and sustainment of high-performance vessels. The company operates in two segments: USA and Australasia. The company has recently announced on 28 April 2021, regarding its discussions with Guangdong Jianglong Shipbuilding Company (Jianglong) to sell its 40% shareholding in Aulong Shipbuilding Co. Ltd. (Aulong) to Jianglong. The remaining 60% is already owned by Jianglong. ASB promotes its proven commercial aluminium vessel designs in mainland China through its 40% holding in Aulong whereas Jianglong develops local shipbuilding infrastructure through its 60% holding in Aulong. ASB’s Australia, Philippines, Vietnam, Aulong JV and Muscat operations are collectively reported under Australasia operations, which contributes approximately over 11% to the total revenues for ASB in FY17 (As per FY20 Annual Report). 

1HFY21 Financial Highlights: The company has registered a decline in its revenues to $840.32mn in 1HFY21 as compared with $1,038.76mn in 1HFY20. Despite a decline in its revenue, the company has posted an increase in its profits to $52.43mn in 1HFY21 as compared with $40.75mn in 1HFY20. The company has seen a decline in its cash and cash equivalent position to $371.89mn as on 31 December 2020 as compared with $396.66mn as on 30 June 2020.

1HFY21 Results (Source: Company Reports)

Key Risks: The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in financial losses for the company. Since the company operates in multiple countries, there is always a risk related to movement in foreign currency prices. Any severe movement in foreign currency prices may lead to financial losses for the company.

Outlook: The company has reduced its FY21 revenue guidance to $1.65bn from $1.8bn earlier on the back of negative impact of Australian dollar appreciation on translation. ASB is likely to continue investing in new designs and R&D specifically in digital systems. The company is focusing on growth of its Defence support with more vessels delivered, going forward. 

Valuation Methodology: EV/Sales based Relative Valuation Method (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: In the last one month, ASB has increased by ~12.27% and decreased by ~1.59% in the last three months. The current market capitalisation of ASB stands at ~$880.91mn as of 29 April 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$1.980-~$3.860. On the technical analysis front, the stock has a support level of ~$2.42 and a resistance of ~$2.55. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a decline in cash position, decline in revenues and impact on revenues on selling interest in Aulong. For this purpose, we have taken peers PTB Group Ltd (ASX: PTB), Xtek Ltd (ASX: XTE), to name a few. Considering an increase in profits in 1HFY21, investing in new designs to enhance growth, focusing on growth in defense support, valuation, current trading levels and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $2.47, up by ~0.816% as on 29 April 2021.

ASB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Service Stream Limited

SSM Details

Appointment of Company Secretary: Service Stream Limited (ASX: SSM) is into essential network services. Its segments include Fixed Communications, Network Construction, Energy & Water, and Comdain Infrastructure. On 14 April 2021, the company informed the market that it has appointed Mr. Jamie O’Brien as an additional Company Secretary.

Modest Revenue Growth in Utilities Segment: The utilities segment, which provides operations, design and construction services has seen a modest revenue growth in 1HFY21. The Utilities segment has registered a revenue of $199.63mn in 1HFY21 as compared with $199.15mn in 1HFY20. The Comdain infrastructure operations under Utilities segment had seen a robust growth but offset by lower metering revenue. On the other hand, the company has seen a decline in its Telecommunications segment to $209.94mn in 1HFY21 as compared with $297.89mn in 1HFY20.

Segmental Performance (Source: Company Reports)

1HFY21 Financial Highlights: The company has registered a decline in its revenues to $409.90mn in 1HFY21 as compared to $497.75mn in 1HFY20, due to lower revenues in the telecommunications segment. The company has posted a decline in profits to $16.24mn in 1HFY21 as compared with $27.29mn in 1HFY20. The company has posted a decline in its cash and cash equivalent position to $50.48mn as on 31 December 2020 as compared with $79.47mn as on 30 June 2020.

Key Risks: The company is exposed to Covid-19 situation risk. The company has witnessed delays in mobilisation programs due to border restrictions and deferral of maintenance activities resulted in higher operating costs for the company. The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in financial losses for the company.

Outlook: The company expects continuing effects of Covid-19 situation on 2HFY21. The company is likely to review its operations under Telecommunications and Utilities segments to deliver better services under key customer contracts for the future growth. 

Valuation Methodology: EV/Sales based Relative Valuation Method (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: In the last one month, SSM has decreased by ~5.96% and by ~40.75% in the last three months. The current market capitalisation of SSM stands at ~$414.49mn as of 29 April 2021. The stock is currently trading below the average 52-week price level range of ~$0.982-~$2.470. On the technical analysis front, the stock has a support level of ~$0.99 and a resistance of ~$1.04. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount as compared to its peer average, considering a decline in total revenues and profits, current global uncertainties, and stringent regulation. For this purpose, we have taken peers Monadelphous Group Ltd (ASX: MND), NRW Holdings Ltd (ASX: NWH), Southern Cross Electrical Engineering Ltd (ASX: SXE). Considering the company has posted a growth in its utilities segment, reviewing operations to enhance growth, valuation and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.025, up by ~1.485% as on 29 April 2021.

SSM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.

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