Synlait Milk Limited

SM1 Details

SM1 Partners with Government for Soil Health Study Project: Synlait Milk Limited (ASX: SM1) manufactures dairy products, specialty food ingredients, infant and adult nutritional solutions, and value-added products. SM1 exports its products in the Middle East & Africa, Asia, and other regions. On 6 December 2021, SM1 declared entering a partnership with the Ministry for Primary Industries (MPI) Sustainable Food and Fibre Futures Fund, AgResearch, a science provider), and Danone.

• The alliance is for soil health project study on ten (10) farms in Canterbury, Waikato, Otago for five (5) years to ascertain the impact of soil health changes on farms, production, and climate. SM1 will contribute $1 million to the said project.

AGM Presentation Highlights:

• Min Chen has recently joined as the new Bright Dairy Appointed Director and replaced Ms. Min Ben.
• The company witnessed a significant reduction in the demand and production volume of consumer-packaged infant formula in FY21. It incurred a net loss of $(28.5) million in FY21.
• Plans to Rebuild in FY22: Due to the fall in demand for the packaged infant formula in FY21, SM1 decided to diversify and manufacture ingredient products. It recently appointed Dr. John Penno as the new CEO and proposed governance changes to investors in the AGM address. The company re-established its banking facilities, restructured inventory, and improved working capital management to release cash.
• The company is implementing its strategy to diversify towards the production of ingredients, grow revenue from the Beverages, Cream, and Consumer Foods business units, and target considerable cost savings from Dairyworks business, and Talbot Forest Cheese (product), and Synlait.

Cash Flows from Operating Activities from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact on customer demand, inventory levels, and supply chain. It faces foreign exchange currency risk due to its exposure to overseas markets.

Outlook:

• SM1 plans to return to profitability in FY22 & FY23 based on restoration of normal trading conditions, improvement in infant base powder volumes, etc.
• In FY22, SM1 plans to branch out its ingredients business and focus on achieving an efficient cost structure and manufacturing.
• SM1 plans to increase the utilisation levels for its Nutritional product line for the next three (3) years.
• SM1 aims to develop a high-value product suite of packaged beverages, foodservice cream products, and instant infant formula in FY22 to cater to markets in Australia, New Zealand, and China.
• Based on its recovery plans, SM1 aims to generate significant cash flows and reduce debt levels considerably in the next two years.
• SM1 expects operating costs (S&GA) for FY22 to remain consistent with the last year’s spending and estimates ~$7 million savings from the organisational restructuring.

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 SM1 gave a positive return of ~2.59% in the past three months and a negative return of ~0.62% in the past six months. The stock is currently trading towards lower than the 52-weeks’ average price level band of $2.640 - $5.310. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average EV/Sales multiple, considering the leveraged balance sheet, increased SG&A costs, lower sales price in FY21, and the continuing COVID-19 impacts on consumer demand, volume, and inventory. For this purpose of valuation, few peers like Bega Cheese Limited (ASX: BGA), Inghams Group Limited (ASX: ING), Graincorp Limited (ASX: GNC), and others have been considered. Considering the current trading levels, revenue growth & decrease in net debt in FY21, targeted cost savings in FY22, plans to become profitable and grow Beverage & Consumer Food business, valuation, and associated key  business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.160, as of 9 December 2021, 2:33 PM (GMT+10), Sydney, Eastern Australia.

SM1 Daily Technical Chart, Data Source: REFINITIV

VGI Partners Limited

VGI Details

Chairman’s AGM Address: VGI Partners Limited (ASX: VGI) is a global equity manager and manages capital for its clients- HNIs, VG1, VG8, and family offices. In a recently held webinar on 16 November 2021, VGI presented the portfolio update on its two listed investment firms, VGI Partners Global Investments Limited (ASX: VG1) and VGI Partners Asian Investments Limited (ASX: VG8).

• VG1’s global portfolio comprises a long investment in North American exchanges (~60%), in the UK/ Europe (~25%), and Asian exchanges (~15%) as of 31 October 2021.
• VG8 Long Portfolio Update:
• It derives maximum revenue from long investments in Japan (~37%), Other Asia (~14%), followed by other geographies in relatively lower percentages.
• VG8 incurred a negative return and reported a loss position on its specific Chinese investments in Tencent Music Entertainment Group (TME) and Ping an Healthcare & Technology since July. VG8 plans to observe the developing situation in China closely for investment avenues and risks.
• VG1 and VG8 have appointed a new CEO Mr. Jonathan Howie and head of distribution to fast-track adviser engagement.
• Initiatives to Reduce the Discount to NTA:
• VGI (the Manager) made considerable investments in technology such as Customer Relationship Management (CRM) software upgrade and expansion of its team to enhance adviser & shareholder engagement and marketing to reduce the discount to NTA.
• VGI plans to update VG8 on its quarterly portfolio with the senior investment team.

Normalised NPAT Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces volatile movements in the equity markets due to events such as COVID-19, macro-economic policy changes. It faces credit risk, interest rate risk, and regulatory risk on the business.

Outlook:

• VG1 and VG8 target a fully franked dividend yield of 4% per year.
• To address the discount to NTA issue, VGI has is engaging with external advisers to help in evaluating other options to address issue and improve the NTA (Net Tangible Asset) going forward. VGI is undergoing the review process and plans to complete it by Q1CY22.

Stock Recommendation: The stock of VGI gave a negative return of ~33.33% in the past three months and a negative return of ~31.70% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $4.060 - $8.660. On a TTM basis, the stock of VGI is trading at an EV/Sales value multiple of 2.7x lower than the industry (Investment Banking & Investment Services) median of 4.2x, thus seems undervalued. Considering the current trading levels, track record of portfolio returns, rise in NPAT & net margin in FY21, valuation on a TTM basis, lower debt levels, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.200, as of 9 December 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

VGI Daily Technical Chart, Data Source: REFINITIV 

AMA Group Limited

AMA Details

Issue of Performance Shares: AMA Group Limited (ASX: AMA) is engaged in the vehicle accessories market and vehicle accident repairing. It runs through two (2) segments of vehicle panel repairs, and automotive parts and accessories. On 9 December 2021, Director Carl Bizon was granted/issued ~2.90 million performance rights post-approval at the recently held AGM on 18 November 2021.

CFO Appointed: AMA appointed Geoff Trumbull as the Group CFO on 7 December 2021.

Chair Address to Investors:

• AMA hired Paul Ruiz and Kyle Loades as new Independent Non-Executive Directors. The company declared that Simon Morre is retiring as the Chair of the Audit and Risk Committee and Leath Nicholson is stepping down as a long-standing Director.
• In October 2021, the Group raised ~$100 million via a non-renounceable share entitlement offer at ~$0.375 per share to repay debt, working capital needs, and liquidity to facilitate growth measures and manage COVID-19 disruptions. AMA repaid ~$72.5 million in bank debt via the net proceeds of the capital raised.
• AMA held over $100 million cash at the close of October 2021.
• The company is witnessing the impact of COVID-19 related restrictions in the ongoing Q2FY22.
• AMA is experiencing a rise in traffic in New South Wales and Victoria and is hence confident that the repair volumes would rebound strongly.

Key Financial Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces reduced mobility and repair volume due to prolonged COVID-19 lockdowns in Victoria and New South Wales. It faces the risk of business integration and synergies from partnerships and acquisitions.

Outlook:

• AMA invests ~$350 million on purchasing parts in a regular year and anticipates enormous supply chain opportunities in this area either organically or via acquisition.
• The company plans to focus on expanding margins via operational excellence and deep volume capabilities across repair and vehicle types. AMA plans to undertake acquisitions in a targeted and cautious manner.
• AMA expects improved trading conditions once the lockdowns ease based on the experience in the previous lockdowns.
• Finally, it intends to build deep relationships with fleet partners and insurers and strive for mutually beneficial contracts.

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 AMA gave a positive return of ~12.24% in the past month and a negative return of ~5.35% in the past three months. The stock is currently trading towards its 52-weeks’ average price level band of $0.383 - $0.807. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median EV/Sales multiple, considering the prolonged COVID-19 lockdowns, higher debt-to-equity ratio, reduced volume repairs in Q1FY22. For this purpose of valuation, few peers like Eagers Automotive Limited (ASX: APE), SG Fleet Group Limited (ASX: SGF), Super Retail Group Limited (ASX: SUL), and others have been considered. Considering the current trading levels, well capitalisation, $72.5 million debt payment, expected improvement in trading conditions, increase in traffic volumes in the ongoing Q2FY22, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.420, as of 9 December 2021, 10: 30 AM (GMT+10), Sydney, Eastern Australia.

AMA 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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