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How is the Business Trending in These Industrials Stocks- KLS, DCG, FLC?

Dec 03, 2021 | Team Kalkine
How is the Business Trending in These Industrials Stocks- KLS, DCG, FLC?

 

Kelsian Group Limited

KLS Details

Change of Company Name: Kelsian Group Limited (ASX: KLS) provides transport and tourism services. As announced on 5 November 2021, the company has changed its name to Kelsian Group Limited from SeaLink Travel Group Limited following the approval of shareholders at the Annual General Meeting 2021 held on 26 October 2021.

FY21 Financial & Operational Summary:

  • Despite the ongoing impact of COVID-19 on all of its operations, the company achieved record results, evident by the growth of 88.1% in revenue to $1,173.1.
  • Underlying EBITDA and NPATA for the year amounted to $167.5 million and $74.7 million, reflecting the strong growth of 85.2% and 152.6% over pcp, respectively.
  • Gross operating cash flow for the year rose by 44.1% to $157.4 million, which cemented its asset base and balance sheet.
  • During the year, the company retained the Singapore Bulim bus contract and awarded an additional contract (SembawangYishun), both 5+2-year terms.
  • The company finished the acquisition of the Go West Tours business in Western Australia, which opened doors for opportunities in the mining and resources sector.

Revenue & EBITDA (Source: Analysis by Kalkine Group)

Key Risks:

  • Competitive Landscape: The company operates in a very competitive environment; hence rising market share of peers could impact the operational and financial performance of the business.
  • Financial and Funding Risk: KLS requires an ample amount of funds in order to operate its business in an effective manner; Any shortage of funds may hamper business performance in the short run.
  • Impact of COVID-19: Due to the ongoing impact of COVID-19 and new variants, the company anticipates no international tourism in FY22. However, domestic travel will be strong as there are ease restrictions and opening of borders.

Outlook:

  • The company is optimistic about its outlook as all its contracts are performing well. KLS expects transport services would continue to provide stable growth and new opportunities.
  • In addition, warmer weather and higher vaccine rates would prove as a catalyst for Marine & Tourism in late 2HFY22.

Valuation Methodology: EV/Sales 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, KLS declared a fully franked final dividend of 9.0 cents per share, which took the total dividend for FY21 to 16.0 cents per share. The stock of KLS is trading below its 52-weeks’ low-high average of $5.890 - $10.640, respectively. The stock has been corrected by ~14.93% and ~29.69% in the past one and three months, respectively. The stock has been valued using an EV/Sales 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 EV/Sales multiple, considering the COVID-19 uncertainties and inefficiency in generating profits, etc. For the purpose of valuation, peers such as Aurizon Holdings Ltd (ASX: AZJ), Qube Holdings Ltd (ASX: QUB), Alliance Aviation Services Ltd (ASX: AQZ) have been considered. Considering the indicative upside in valuation, growth in revenue, strengthened asset base and balance sheet, new contracts, 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 $6.240, as on 02 December 2021, 12:20 PM (GMT+10), Sydney, Eastern Australia.

KLS Daily Technical Chart, Data Source: REFINITIV  

Decmil Group Limited

DCG Details

New Infrastructure Contracts: Decmil Group Limited (ASX: DCG) mainly provides services such as designing, engineering, construction and maintenance to the infrastructure, resources, energy and construction sectors in Australia. As announced on 10 November 2021, the company won two infrastructure contracts of ~$40 million, which comprised of ~$32 million with Main Roads Western Australia and ~$8 million with Queensland Department of Transport and Main Roads.

FY21 Financial and Operational Highlights:

  • Despite volatile macroeconomic conditions, the company delivered on existing contracts in FY21 and secured new work with blue-chip customers in numerous sectors in Australia.
  • DCG posted a fall in normalised revenue to $313 million against $451.3 million in FY20 due to delays and shifts of numerous contracts caused by COVID-19,
  • DCG witnessed normalised EBITDA profit of $7.6 million against EBITDA loss of $42.3 million in FY20 because of an improved normalised gross margin of 10.8% vs -0.2% in FY20.

Revenue & EBITDA (Source: Analysis by Kalkine Group)

Key Risk:

  • Legal Dispute: DCG is currently in a dispute related to its Sunraysia Solar Farm contract, which may be resolved on a commercial basis and/or through formal dispute proceedings. The timing and the outcome of this dispute are uncertain and may result in an unfavourable decision for the company.
  • Funding and Liquidity Risk: DCG’s business model requires decent funding in order to finish its contract in an effective manner. This may lead the business to a more debt position moving forward.

Outlook:

  • The company is on track to win a $95 million Albany Ring Road contract and has secured work in hand of ~$445 million for delivery in FY22.
  • At the end of FY21, the company had an order book of ~$570 million contracted and preferred, which include ~$400 million work in hand, contracted and preferred for FY22.
  • For FY22, the company is expecting revenue of ~$500 million and anticipates maintaining a gross margin of 8-9%.

Stock Recommendation: The stock of DCG is trading at par to its 52-week low level of $0.310, offering a decent opportunity for accumulation. The stock has been corrected by ~4.61% and ~15.06% in the past one and three months, respectively. On a TTM basis, DCG has an EV/Sales multiple of 0.3x, compared to the industry average (Construction & Engineering) of 9.3x. Thus, it can be said that the stock is undervalued at the current trading levels. Considering valuation on a TTM basis, new infrastructure contracts, improving earnings, decent liquidity position, decent outlook, current trading level and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.310, down by ~1.588% as on 02 December 2021.

DCG Daily Technical Chart, Data Source: REFINITIV 

Fluence Corporation Limited

FLC Details

First Volume Contract in China: Fluence Corporation Limited (ASX: FLC) provides innovative, cost-effective decentralized water, wastewater, and reuse solutions for businesses and communities globally. Recently, the company won its first volume contract of US$2.15 million for packaged plants to treat wastewater from new volume partner Yangzhou Yijian Group Co. LTD. The order is likely to address the urgent phase 1 needs of the Housing and Urban/Rural Development Bureau of Sihong County to deploy a solution before year-end.

Q3FY21 Financial and Operational Highlights.

  • FLC posted revenue amounting to US$20.0 million, indicating a rise of 46% over Q3FY20. FLC recorded an improvement in operating cash outflow to $2.0 million against $5.9 million in Q3FY20.
  • Backed by a fall of 14% in operating expenses over pcp, FLC recorded an improvement in its costs.
  • During the quarter, FLC entered a Joint Development Agreement with Beijing Enterprises Water Group Investment Limited to focus on optimizing Aspiral MABR plants with an objective to jointly sell MABR plants globally.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

  • Stiff Competition: The company operates in a very competitive environment. Hence rising market share of the peers could impact the operation and financial performance of the company.
  • Foreign Exchange Risk: The company’s business is exposed to a risk arising from the adverse movement in the foreign currency as it operates in multiple geographies.

Outlook:

  • Looking forward, the company would be focused on identifying recurring revenue opportunities in the USA. The company would also focus on winning new contracts in markets such as the US, Asia, and the Middle East.
  • FLC is well-positioned for growth and reiterates guidance for SPS sales in the ambit of US$35 – US$50 million and anticipates reporting positive underlying EBITDA in FY21.

Valuation Methodology: EV/Sales 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: The stock of FLC is trading at par to its 52-week low level of $0.155, offering a decent opportunity for accumulation. The stock has been corrected by ~11.11% and ~17.94% in the past one and three months, respectively. The stock has been valued using an EV/Sales 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 EV/Sales multiple, considering the COVID-19 uncertainties and high debt to equity ratio, etc. For the purpose of valuation, peers such as Amaero International Ltd (ASX: 3DA), Zicom Group Ltd (ASX: ZGL), and Amaero International Ltd (ASX: 3DA) have been considered. Considering the expected upside in valuation, first volume contract in China, rising quarterly revenue, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.155, down by ~3.126% as on 2 December 2021.

FLC 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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