Bendigo and Adelaide Bank Limited (ASX: BEN)

BEN provides banking and financial services in Australia. Its broad spectrum of services encompasses deposit-taking, payments services, wealth management, and superannuation, treasury, and foreign exchange services.

H1FY22 Financial and Operational Summary:

• The bank posted strong results with cash earnings after tax of $260.7 million in H1FY22 in contrast to $219.7 million in PcP.
• With the highest NPS, the bank was able to grow its customer base reaching to 2.12 million.
• It had made a higher investment in digital technology with the acquisition of Ferocia and was aable to maintain low operating costs a with cost-to-income ratio receded at 59.3% in H1FY22 as compared to 60.9% in the prior year.
• The bank had disposed off its non-core assets and continue to move its applications to cloud-based. It had offered fully digital home loans with reduced processing time.
• The bank progressed well on the asset quality front with total provisions at $388.4 million, lower than $445.8 million in last year underpinned by improving economic conditions.
• It continues to operate with adequate capital buffers with a common equity Tier-1 ratio at 9.85% in H1FY22, up from 9.36% in H1FY21.

Key Risks: BEN operates in a challenging and dynamic market wherein an increase in the cash rate by the RBA may directly affect lending activities and compress margins.

Outlook:  The community bank model to continue to add customers. It is expecting residential loan growth to continue to exceed system-wide growth and the agricultural business to return on favorable seasonal conditions.

Valuation Methodology: Price to Book Value 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 BEN gave a positive return of ~9.49% in the past three months. The stock is currently trading slightly below to its average of the 52-weeks’ low-high range of $8.430-$11.680. The stock has been valued using the Price-to-Book Value-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit upside (in % terms). The company might trade at a slight discount than its peers, considering the monetary tightening stance and its impact on lending activities. For this purpose of valuation, a few peers like Bank of Queensland Ltd (ASX: BOQ), Westpac Banking Corp (ASX: WBC), AMP Ltd (ASX: AMP), and others have been considered. Considering the current trading levels, increase in cash earnings in H1FY22, downside indicated by the valuation, and key risks associated with the business, we recommend investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $10.040, as of 15 February 2022, 12:04 PM (GMT+10), Sydney, Eastern Australia.

BEN Daily Technical Chart, Data Source: REFINITIV 

Sims Limited (ASX: SGM)

SGM is engaged in processing ferrous and non-ferrous recycled metals. It operates through North America Metal, Australia/New Zealand Metal, UK Metal, Global Trading, Investment in SA Recycling, and Sims Lifecycle Services segments.

H1FY22 Financial and Operational Summary:

• SGM reported strong half-year results with sales reaching $4.26 billion in H1FY22, an increase of 73.9% over PcP. This was backed by increased sales prices and higher sales volumes.
• The company witnessed strong growth in its core metal business. Its intake volumes surpassed pre-COVID levels.
• Trading margin surged 45% with disciplined buy/sell spread due to increase in selling price.
• The company incurred higher costs owing to the newly acquired businesses and greenfield investments. Nevertheless, its statutory NPAT showcased an astonishing growth of 377.7% to reach $253.2 million.
• It had announced that it will distribute $135 million in cash payments, which is equivalent to 50% of H1FY22 underlying profit. The payment was composed of dividends of 41 cents per share and an on-market buyback totaling $54.0 million. The company plans to complete the distributions in 2HFY22.

Key Risks: Changes in metal prices and government regulations on net-zero carbon emission had a significant impact on the operations.

Outlook:  SGM acquisition of PSC Metals will see full contribution in results in 2H FY22. It is expecting the demand for ferrous and non-ferrous to remain robust.

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: SGM delivered a positive return of ~15.76% in the past three months. The stock is trading closer to its 52-week high price of $18.280. The stock has been valued using the Price-to-Earnings based illustrative relative valuation method and arrived at a target price with a correction of high single-digit upside (in % terms). The company might trade at a slight discount than its peers, considering the volatile metal prices and inflationary pressures. For this purpose of valuation, a few peers like Red River Resources Ltd (ASX: RVR), BlueScope Steel Ltd (ASX: BSL), Cokal Ltd. (ASX: CKA), and others have been considered. Considering the current trading levels, the retirement of its Chief Technology Officer and its related uncertainties, downside indicated by the valuation, surging freight costs and likely impact on profitability, and key risks associated with the business, we recommend investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $17.710, as of 15 February 2022, 01:35 PM (GMT+10), Sydney, Eastern Australia.

SGM Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

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