Stocks’ Details

Worley Limited 

Growth Driven by Acquisition Synergies: Worley Limited (ASX: WOR) is a leading global provider of professional project and asset services in the energy, chemicals, and resources sectors.

Financial & Operational Highlights for the Year Ended 30^th June 2020: In FY20, the company successfully integrated the ECR business and delivered cost and revenue synergies. Total revenue for the year came in at $13,068 million, up 89% on pcp. EBITA and NPATA stood at $498 million and $252 million, respectively. The company declared a final dividend of 25 cents per share, up 67% on pcp. Underlying operating cash flow for the year stood at $881 million, up from $239 million in the previous year. Leverage and gearing stood at 1.8x and 18.5%, well below the target range.

Income Statement (Source: Company Reports)

Segment Results: The Energy & Chemicals Services business reported aggregate revenue of $4,952 million, against prior year revenue of $2,855 million. The segment margin increased to 9.9% from 8.8%. Mining, Minerals & Metals Services aggregated revenue increased in line with the full 12-month contribution of ECR. Below is a snapshot of the segment-wise performance in FY20.

Segment Results (Source: Company Reports)

Outlook: Going forward, the company will continue to realise the benefits from ECR integration and remains on track to deliver the $190 million ECR acquisition cost synergy target as well as the $275 million operational savings target.

Key Risks: Supply chain issues due to COVID-19 has slowed some projects. Worley’s key markets are exposed to volatile and cyclical commodity prices which can impact performance. Moreover, the company operates in a highly competitive and dynamic environment which could lead to a loss of market share.

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

P/E 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 stock of the company gave positive returns of 9.30% in the last 3 months and is trading below the average of its 52-week trading range of $4.630 - $16.240. On the technical analysis front, the stock has a resistance level of ~$10.81 and a support level of ~$7.819. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the current trading levels, valuation, expected benefits from acquisition, and a strengthened balance sheet position, we give a “Buy” rating on the stock at the current market price of $9.750, up 3.723% on 2^nd September 2020.

BlueScope Steel Limited 

Resilient Domestic Demand: BlueScope Steel Limited (ASX: BSL) is a global leader in premium branded coated and painted steel products, serving customers across the Pacific Rim from Asia, Australia, New Zealand and to the west coast of North America.

FY20 Results Highlights: During the year ended 30^th June 2020, the company reported underlying NPAT amounting to $353.0 million. Reported NPAT for the period came in at $97 million. Underlying EBIT came in at $564.0 million despite the COVID-19 pandemic and the decline in steel spreads. The company experienced a decent demand across key markets and enhanced its liquidity position to battle COVID-19. Domestic volumes remained robust, on the back of strong construction end-market demand. On the segment front, Australian Steel Products delivered the highest EBIT of $305.1 million, followed by North Star and Building Products Asia and North America at $189.6 million and $155.3 million, respectively. Buildings North America and New Zealand and the Pacific Islands, the remaining two segments, reported an EBIT of $37.9 million and $5.8 million, respectively. During the year, the company bought back $229 million of shares on-market and declared a final dividend of 8 cents per share, to be paid on 14^th October 2020.

Financial Summary (Source: Company Reports)

Outlook: 1HFY21 began with stable despatches in Australia and near full capacity despatches in North Star. The company believes that the potential impact of COVID-19 on demand, supply chain, and operations is highly uncertain, and hence, it has not provided any guidance for 1HFY21. The company’s primary focus is the expansion of North Star, with FY21 spend on the same expected between US$375 million to US$450 million. 

Key Risks: Currently, the company’s operations are threatened by the potential impact of COVID-19 on operations and the slowdown in demand due to broader macroeconomic weakness. Declines in the price of steel, or any significant and sustained increase in the price of raw materials in the absence of corresponding steel price increases, may impact revenues. 

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 stock of the company gave positive returns of 10.96% in the last 3 months and is currently inclined towards its 52-week high of $16.170. On the technical analysis front, the stock has an immediate resistance level of ~$13.35 and a support level of ~$11.34. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the performance in FY20, resilience in domestic demand, modest outlook, trading levels, and valuation, we give a “Hold” rating on the stock at the current market price of $13.150, up 5.622% on 2^nd September 2020.

Western Areas Limited

Increase in Mineral Resource Estimate: Western Areas Limited (ASX: WSA) is engaged in the mining, processing, and sale of nickel sulphide concentrate. The company recently announced that a pre-feasibility study (PFS) for the AM6 deposit confirmed its suitability to be developed as an additional mining zone located directly adjacent to the main Odysseus mining areas. AM6 Mineral Resource Estimate increased by 26%, with maiden AM6 Probable Ore Reserve of 2.1Mt at 2.2% Ni for 47.1kt of nickel.

FY20 Results Highlights: During the year ended 30^th June 2020, sales revenue amounted to $308.4 million, up from the prior year revenue of $268.7 million. Average realised price of nickel increased to $9.42/lb. NPAT for FY20 was the highest in seven years and stood at $31.9 million. Nickel produced in concentrate stood at 20.9kt and nickel in concentrate sales came in at 19.9kt. Stronger nickel price and reliable performance from the Forrestania operations delivered a 51% increase in EBITDA and a 123% increase in NPAT. The company declared a fully franked final dividend of 1.0 cents per share. The balance sheet remained strong with a cash balance of $144.8m and zero debt at the end of the period.   

Financial Highlights (Source: Company Reports)

Guidance: In FY21, investment in exploration is expected to remain in line with FY20. Due to the current uncertainties led by COVID-19, the company has provided expanded guidance ranges to incorporate the ambiguities related to the pandemic. A snapshot of FY21 guidance is as under:

FY21 Guidance (Source: Company Reports)

Key Risks: The company’s operations are exposed to several risks, including project delays, lack of investment opportunities, failure in achieving exploration targets, volatility in nickel prices, and COVID-19 uncertainties. 

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 stock of the company has corrected by 9.92% in the last one month. On the technical analysis front, the stock has a resistance level of ~$2.524 and a support level of ~$2.047. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the increase in mineral resource estimate, decent performance in FY20, strengthened balance sheet position, and key risks, we give a “Hold” rating on the stock at the current market price of $2.270, up 4.128% on 2^nd September 2020. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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