Austal Limited

ASB Details

New Contract Secured by Austal USA: Austal Limited (ASX: ASB) is involved in the designing, manufacturing and support of high-performance vessels for commercial and defence customers globally. Recently, Austral USA has secured a US$72.5 million contract from US Navy to perform maintenance on Littoral Combat Ships (LCS) deployed to the Western Pacific, Indian Ocean, and the countries and ports.

• ASB added that the contract value may increase to US$215.9 million if the US Navy exercises the option to increase periods contained in the contract.
• As announced on 10 November 2021, Austal USA has received approval to assume the lease of Marine Group Boat Works in the Port of San Diego, USA, from the San Diego Port of Commissioners.

FY21 Financial Highlights:

• Fall in Revenue: Due to lower throughput and support work in the US, COVID-impacts, as well as an appreciating Australian Dollar against the US Dollar, ASB recorded a fall of 25% in revenue to $1,572 million as compared to $2,086 million in FY20.
• Record NPAT and EBIT: During FY21, the company posted its second largest NPAT and EBIT in its history of $81.1 million and $114.6 million, respectively, despite the fall in its topline. The EBIT result was mainly backed by improved shipbuilding margins, specifically in the USA.

Revenue & NPAT (Source: Analysis by Kalkine Group)

Key Risks:

• Macro-Economic Uncertainty: The company’s operation could be impacted by any macro-economic events like COVID-19, and financial and operational health could be under threat.
• Forex Headwinds: ASB’s increasing expansion in multiple geographies may create forex risk to its financial health caused by unfavourable movement in the currency.

Outlook:

• The company possesses an order book of $2.5 billion, which may help the company in running its operations smoothly until 2025.
• The company is on the way to being steel ready by May 2022 and is engaged in its first program to demonstrate steel capability with the help of the T-ATS programme.
• ASB anticipates revenue for FY22 to be at ~$1.5 billion, which is based on an assumed USD / AUD exchange rate of 0.75.

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

Source: 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: ASB has recently eliminated a $32.2 million liability and the corresponding asset from its balance sheet as National Australia Bank (NAB) formally advised ASB that it will not trigger Austal’s residual buyback guarantee for Cape Class Patrol Boats (CCPB) 9 & 10. The stock of ASB is trading below its 52-weeks’ low-high average of $1.610 - $3.01, respectively. The stock has been corrected by ~3.84% and ~20.21% in the past three and six months, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering macroeconomic uncertainties, and forex headwinds, etc. For the purpose of valuation, peers such as Electro Optic Systems Holdings Ltd (ASX: EOS), PTB Group Ltd (ASX: PTB), and Quickstep Holdings Ltd (ASX: WHL) have been considered. Considering the expected upside in valuation, a new contract to Austal USA, decent order book, higher margins, decent outlook, 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 $1.865, as on 25 November 2021, 11:00 AM (GMT+10), Sydney, Eastern Australia.

ASB Daily Technical Chart, Data Source: REFINITIV  

Emeco Holdings Limited

EHL Details

Initial Substantial Holder:  Emeco Holdings Limited (ASX: EHL) provides open cut and underground mining equipment, maintenance and project support solutions and services. On 22 November 2021, Vinva Investment Management Limited became a substantial holder in the company with a voting power of 5.10%.

FY21 Financial and Operational Highlights:

• Increase in Revenue: For the year ended 30 June 2021, the company recorded revenue amounting to $620 million as compared to $540 million in FY20. This indicates a rise of 15%, supported by increased services revenue and full-year Pit N Portal contribution.
• Achieved EBITDA Guidance: Operating EBITDA for the year was at the upper end of the guidance range ($235-$238 million) and stood at $238 million in spite of challenges caused by COVID-19 and trade tensions with China which affected coal prices.
• Decent ROCE: Return on Capital Employed (ROCE) for the year moved down to 17% against 21% in FY20. However, ROCE was above its underlying cost of capital of 7.2% during the year (adjusted for market and asset-specific risks).

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Liquidity and Funding Risk: The company operates a high capital-intensive business, which requires a consistent flow of funding; any shortage of funds could impact its business operations.
• Regulatory Risk: EHL is exposed to a more complex regulatory environment; any failure could lead the business to fines, penalties, etc.

Outlook:

• The company’s strategy revolves around maintaining a healthy balance sheet with leverage below 1.0x. EHL would also focus on generating strong free cash flow providing capital allocation optionality to invest in the business.
• EHL is aiming a balanced customer and project mix in order to navigate reliance on any single customer, customer type, project, commodity or region.
• For 1HFY22, the company anticipates operating EBITDA in the ambit of $120 to $125 million.

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

Source: 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: During FY21, the company posted a growth of 12% in free cash flow to $87 million and believes that it would be benefited from interest savings in FY22 onwards. The stock of EHL is trading below its 52-week low-high average of $0.860 - $1.370, respectively. The stock has been corrected by ~6.84% and ~10.91% in the past one and three months, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 disruptions, and ineffective cost structure, etc. For the purpose of valuation, peers such as Coventry Group Ltd (ASX: CYG), Stealth Global Holdings Ltd (ASX: SGI), and Acrow Formwork and Construction Services Ltd (ASX: ACF) have been considered. Considering the expected upside in valuation, increasing revenue, decent liquidity position, decent outlook, 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 $1.010, as on 25 November 2021, 11:00 AM (GMT+10), Sydney, Eastern Australia.

EHL 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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