Lynch Group Holdings Limited

LGL Details

Lynch Group Holdings Limited (ASX: LGL) is a vertically integrated wholesale floral company involved in the entire process of planting, growing, merchandising, and selling flowers and plants. The company caters to major supermarket chains and commercial outlets across Australia and China.

Results Performance (FY21 Ended June 2021)

• The statutory revenue increased by 30% YoY from $230.4 million in FY20 to $300.2 million in FY21. This was driven by more robust than anticipated domestic pricing in China, which boosted production, followed by higher supermarket penetration of floral and potted products and wide merchandising of store network and delivery of new gift potted programs in Australia.
• EBITDA grew strongly by 98%, from $24.1 million in FY20 to $47.8 million, driven by higher revenue growth along with the benefits of stronger than expected domestic pricing in China and margin improvement in Australia.
• The cash conversion remained strong at 98.3%, with stable working capital and maintenance capital expenditure.

Source: Company Reports, Analysis by Kalkine Group

Key Update:

On 26 November 2021, the company released a presentation during an annual general meeting, where it reconfirmed NPATA guidance for the twelve months to December 2021 of between $31.6-$32.6 million. It also released its FY22 key operational objectives in Australia and China.

Outlook

The company has reaffirmed its CY2021 NPATA guidance of $31.6-$32.6 million, ahead of the prospectus forecast of $29.3 million. The company has planned sustained expansion of supermarket retail channels in Australia and further opportunities for growth in Australia. In China, the company is focusing on continued greenhouse expansion and increasing range to cater to additional customers and developing the consumer market in China. Besides, the company has been targeting a minimum of 50% dividend payout ratio of the annual NPATA commencing from the H1FY22 period in March 2022, expected to be fully franked.

Key Risks

The company is exposed to the risks related to the COVID-19 pandemic and an extended worsening in general economic conditions such as a rise in interest rates or a reduction in consumer and business demand, which would adversely hurt the group’s business or financial condition.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The company has delivered a 6-month and 9-month return of ~-13.93% and ~-2.48%, respectively. In addition, the stock is trading below the average of the 52-week high price of $3.96 and the 52-week low price of $3.12.

The stock has been valued using an EV/Sales multiple based relative valuation (on an illustrative basis), and the target price so arrived reflects a rise of low double-digit (in % terms). In addition, a slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the reconfirmation of its NPATA guidance for CY21 and higher ROE at 17.0% in FY21 versus 8.6% in FY20.

Considering the factors above, we give a “Buy” recommendation on the stock at the current market price of $3.13 per share as of 25^th January 2022 (Time: 3:54 PM (GMT+10), Sydney, Australia).

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 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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