Mosaic Brands Limited

MOZ details
 
Initiatives for COVID-19 Outbreak: Mosaic Brands Limited (ASX: MOZ) is engaged into retailing of women’s apparel and accessories. The market capitalisation of the company stood at $29.04 million as on 25^th March 2020. Recently, the company took numerous initiatives in order to control the rising toll of COVID-19. Under the initiatives, the company has decided to close all store operations temporarily to comply with the social distancing recommendations by the Government. Suspension of store operation will be effective from 26^th March 2020.

MOZ has witnessed a significant fall in store traffic and revenue due to the community’s response to the COVID-19 as well as the government’s social distancing recommendations. However, the online operations of the company would continue during the period, and the customers can purchase from all the nine brand websites of MOZ. The below picture depicts an idea of trading performance for 1H FY20:


Trading Performance 1H FY20 (Source: Company Reports)

Future Aspects: The group is currently facing challenges from the COVID-19. However, it is optimistic that the strategic actions by the management would help in delivering a sustainable earnings growth.

Stock Recommendation: MOZ is strategically well placed along with a sound balance sheet. At the end of 1H FY20, the cash holdings of MOZ stood at $49.1 million with a net cash position after debt amounting to $4.5 million. Over the period, the company’s gross margin increased from 57% to 60%. During 1H FY20, the company experienced a rise of 12.4% in Underlying EBITDA, which reflects the success of its strategies, as well as its focus on prioritising gross margin over sales. Net Margin of MOZ stood at 2.8% in 1H FY20 against 2.1% of 1H FY19. This implies that the company has improved its position for converting its top-line into the bottom-line. Hence, considering the decent performance in 1H FY20, sound balance sheet and expected earnings growth, we maintain a “Hold” rating on the stock at the current market price of $0.230 per share, down by 23.333% on 25^th March 2020. 

 
MOZ Daily Technical Chart (Source: Thomson Reuters)
 

Reliance Worldwide Corporation Limited

RWC Details
 
A Quick Look at Decent Trading Performance: Reliance Worldwide Corporation Limited (ASX: RWC) is involved in the designing, manufacturing and supply of water flow and control products and solutions for the plumbing industry. The market capitalisation of the company stood at $1.37 billion as on 25^th March 2020. The company’s sales for the month of January and February 2020 stood in line with the expectation. The manufacturing facilities and distribution centres in the USA, Australia and the UK were fully staffed and operational. The company continues to have significant funding lines available in order to assist with working capital as well as cash flow requirements.

RWC added that all non-essential capital expenditure has been halted to optimise cash flow during the time of significant uncertainty from COVID-19. The company would consider increasing finished goods inventories in order to ensure it can continue to address customer demand if one or more plant closures are required. The following picture provides a financial overview for 1H FY20:


Financial Performance 1H FY20 (Source: Company Reports)

Suspension of FY20 Guidance: In light of uncertainty from potential effects of COVID-19 on future operations and financial performance, RWC has suspended its guidance for FY20, which include adjusted Net Profit after Tax range of $140 million to $150 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During 1H FY20, the company reported a strong cash generation with net cash flow from operating activities of $112.8 million, reflecting a rise of 163%. Gross margin and EBITDA margin of the company stood at 42.9% and 23.5% in 1H FY20, reflecting YoY growth of 0.1% and 1.3%, respectively. Debt to equity of RWC stood at 0.28x in 1H FY20 as compared to 0.37x of 1H FY19. We have valued the stock using EV/Sales multiple based relative valuation method, and for the purpose, we have taken peers such as CSR Ltd (ASX: CSR), James Hardie Industries PLC (ASX: JHX), Boral Ltd (ASX: BLD) and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Hence, in light of sales performance in January and February 2020, strong orders, improvement in key margins and deleveraged balance sheet, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.940 per share, up by 11.494% on 25^th March 2020. The upside is mainly due to the release of recent trading performance.

 
RWC Daily Technical Chart (Source: Thomson Reuters)

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