Stocks’ Details

Strike Energy Limited

Signing of Binding Heads of Agreement: Strike Energy Limited (ASX: STX) is engaged in the exploration of oil and gas. The market capitalisation of the company stood at $550.88 million as on 22^nd January 2021. Recently, the company has provided an update on its high value near field exploration targets in the Greater Erregulla region, wherein it stated that it has received approval for exploration permits for EP503 and 504 from WA Department of Mines, Industry Regulation and Safety (DMIRS). With respect to South Erregulla, the company stated that it has been awarded the Maior 2D seismic survey to Velseis Seismic. During the quarter ended 30^th September 2020, the company, and its JV partner “Warrego Energy Limited” in EP469 inked a binding Heads of Agreement which ensures alignment for the development of the West Erregulla gas field in EP469. During the same quarter, the company incurred its funds mostly on the development and appraisal drilling programs for West Erregulla. The net cash outflow from operating and investing activities for the quarter came in at $842k and $4.4 million, respectively.

Cash Flow (Source: Company Reports)

Outlook: The company is confident that Greater Erregulla development strategy would support the future growth of WA’s economy.

Stock Recommendation: The company has secured a facility of $28 million from Macquarie Group in order to assist in funding its share of the West Erregulla development. As on 30^th September 2020, the cash and cash equivalents of the company stood at ~$16.9 million. The stock of STX has moved up by 66.66% and 160% in the last six and nine months, respectively. Currently, the stock is inclined towards its 52-week high of $0.355.  In addition, we have considered 14-day RSI, and it was observed that the stock is currently in the overbought zone and may witness some correction, going forward. On a technical analysis front, the stock has a support level of ~$0.265 and a resistance level of ~$0.348. Hence, considering the price movement, current trading levels, RSI levels and key risks with the business, we advise investors to book profit and give a “Sell” rating on the stock at the current market price of $0.335 per share, up by 4.687% on 22^nd January 2021.

Class Limited

Acquisition of Smartcorp: Class Limited (ASX: CL1) is engaged in the provisioning of cloud-based self-managed superannuation fund administration software solutions and services. The market capitalisation of the company stood at ~$242.56 million as on 22^nd January 2021. During the year ended 30^th June 2020, the company executed an agreement to buy 100% of the shares in Assuriti Pty Ltd (Smartcorp) for the consideration of $4.2 million. The consideration was comprised of $2.73 million on completion and $1.47 million in Class shares escrowed for 18 months. The company recorded operating revenue and other income amounting to $44.1 million, reflecting a rise of 15% over FY19. In addition, the company’s Annualised Recurring Revenue stood at $46.8 million, up by 22% against FY19.

Revenue Growth (Source: Company Reports)

Outlook: For FY21, the company is expecting to report a growth of 20% in revenue to $53 million. Additionally, the company has expanded its Total Addressable Market by 2.5X, from $140 million in FY19 to $365 million in FY20. This places the company’s business for accelerated growth in FY21 and beyond.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company closed FY20 with cash and cash equivalents of $16.5 million as compared to $17.5 million in FY19. In the last nine months, the stock of CL1 has moved up by 40.79%. The 52-week low-high range for the stock stands at $0.885 - $2.320, respectively. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with correction of high single-digit upside (in percentage terms). In addition, we have considered 14-day RSI, and it was observed that the stock is currently in the overbought zone and may witness some correction, going forward. On a technical analysis front, the stock has a support level of ~$1.811 and a resistance level of ~$2.302. Hence, considering the returns on stock, RSI levels and key risks with the business, we advise investors to book profit and give a “Sell” rating on the stock at the current market price of $1.990 per share, up by 1.530% on 22^nd January 2021.

HRL Holdings Ltd

Decent Growth in Revenue: HRL Holdings Ltd (ASX: HRL) provides environmental services, hazardous material, waste management and ongoing compliance solutions utilising technological platforms. The market capitalisation of the company stood at $71.59 million as 22^nd January 2021. In a recent trading update for Q1 FY21, the company experienced the same level of revenue as of Q1 FY20, which demonstrates a decent return of volumes across the organisation. Underlying EBITDA for the period is tracking ahead of 2019. For the year ended 30^th June 2020, the company recorded revenue amounting to $32.8 million, reflecting a rise of 7% over FY19. HRL witnessed a rise of 24% and 2.5% in Underlying EBITDA and Underlying NPAT to $6.9 million and $2.5 million, respectively.

Key Financials (Source: Company Reports)

Outlook: For 1H FY21, the company anticipates underlying EBITDA in the ambit of $3.2 million to $3.5 million. With respect to software, the company would continue to focus on NZ opportunities and ramping up business development activities.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 30^th June 2020, the company had a closing cash balance of ~$2.9 million and net debt of $1.1 million. The stock of HRL has moved up by 57.30% in the last nine months. As a result, the stock is trading above its 52-week low-high average of $0.124. Considering this, we have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price with correction of high single-digit upside (in percentage terms). In addition, we have considered 14-day RSI, and it was observed that the stock is currently in the overbought zone and may witness some correction, going forward. On a technical analysis front, the stock has a support level of ~$0.115 and a resistance level of ~$0.160. Hence, considering the high returns on stock, current trading levels, RSI levels and key risks with the business, we advise investors to book profit and give a “Sell” rating on the stock at the current market price of $0.140 per share, down by 3.449% on 22^nd January 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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