Stocks’ Details
 

Metcash Limited

 
A Quick Look at MTS’ FY20 Results: Metcash Limited (ASX: MTS) is one of Australia’s top wholesale distribution & marketing companies with a market capitalisation of around $2.89 billion (as on 22 June 2020). In FY20, the company’s sales revenue went up by 2.9% to $13 billion, reflecting sales growth in the Food and Liquor pillars, along with growth in Hardware sales. Liquor provided its seventh consecutive year of sales growth despite the COVID-19 led closure of Australian ‘on-premise’ businesses and its New Zealand operations. In the same time span, the underlying EBIT of the company stood at $324.2 million, down 1.8% year over year. The company retained a strong balance sheet and strengthen its financial position through equity raising.
 
 

FY20 Performance (Source: Company Reports)
 
MTS Proposes Total Tools Buyout: In a recent update, the company also  announced that it has inked an acquisition to acquire 70% of Total Tools Holdings Pty Ltd (“Total Tools”), a leading participant in the professional tool segment in Australia, for a consideration of ~$57 million, which is subject to negotiation of final binding transaction documentation. The said move is in line with Metcash’s strategy to be the foremost supplier to independents in each of its three pillars. Further, the acquisition will enhance Metcash’s footing in the Australian hardware market.
 
 
Future Growth Opportunity: The company is seeking to strengthen its balance sheet and enhance liquidity to reflect the current heightened levels of uncertainty. It is well-positioned to capitalize on potential opportunities that align with the group’s strategy. The business is continuing to progress its growth initiatives to further strengthen its competitive position in the retail network market and focus more on cost-cutting initiatives.
 
Risk Analysis: The year encompassed significant challenges including distressing bushfires and the world-wide COVID-19 pandemic.Further, higher costs related to managing impacted Australian ‘on-premise’ and New Zealand customers along with costs associated with health and safety risk measures were potential headwinds.
 
Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: As per ASX, the stock of MTS gave a return of 10.98% on YTD basis and a return of 13.65% in the last one month. The stock has an annual dividend yield of 4.59%. We have valued the stock using the P/BV multiple based illustrative relative valuation method and have arrived at a target price with an upside of low double-digit (in percentage terms). Considering the decent returns in the past one month, current trading levels, decent financial performance, and positive long-term outlook, we recommend a ‘Hold’ rating on the stock at the current market price of $2.86, up by 1.06% on 22 June 2020.
 

The A2 Milk Company Limited

 
A2M Witnessed Robust Revenue Growth: The A2 Milk Company Limited (ASX: A2M) is a quality branded dairy nutritive company, whose products include the A2 beta-casein protein type. In a recent update, the company stated that the Commonwealth Bank of Australia, a substantial holder of the company, has increased its voting power from 6.34% to 7.341%. In another update, the company stated that David Hearn, Chairman at A2M, now holds 1,305,000 ordinary shares in the company after the exercise of Options.
 
Trading Update: MTS updated that it has continued to report strong revenue growth across all key regions, particularly for infant nutrition products sold in China and Australia. Revenue for the three months to 31 March 2020, stood above the expectations, reflecting the impact of changes in consumer purchase behaviour arising from COVID-19. During the first half ended 31st December 2019, the company generated revenue amounting to NZ$806.7 million, up 32% on pcp. NPAT increased by 21% and stood at NZ$184.9 million.
 

1HFY20 Results (Source: Company Reports)
 
What Investors Need to Know: For FY20, the company expects revenues to be in the range of NZ$1,700 million - NZ$1,750 million. EBITDA margin is now anticipated to be in the range of 31% to 32%.There remains significant uncertainty around the potential impact of COVID-19 on supply chains and consumer demand in A2M’s core markets. The company expects lower than expected costs for travel, and other costs due to delay in planned recruitment, as a result of COVID-19 restrictions.
 
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation Approach (Source: Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of the company gave positive returns of 17.01% in the last three months. Over a period of 6 months, the stock has generated positive returns of 24.97%. During 1H20, gross margin of the company stood at 57.2%, higher than the industry median of 41.9%. In the same time span, net margin of the company was 23.4% as compared to the industry median of 11.4%. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a price correction of low single-digit (in percentage terms). For the purpose, we have considered peers like Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), to name a few. Considering the trading levels, decent financial performance and COVID-19 impact, we have a watch stance on the stock at the current market price of $18.14, down by 2.316% on 22 June 2020.
 

Keytone Dairy Corporation Limited

 
KTD Receives Order from Nouriz: Keytone Dairy Corporation Limited (ASX: KTD) is engaged in manufacturing, packaging, and exporting dairy and nutrition products. As on 22 June 2020, the market capitalisation of the company stood at $69.28 million. In a recent update, the company announced the receipt of a major confirmed follow-on purchase order from Nouriz (Shanghai) Fine Food Co Ltd (“Nouriz”) for ~$1,391,000. These orders from Nouriz will be manufactured in the Keytone New Zealand facilities through August 2020.
 
Other Recent Update:Recently, the company stated that Mr. James Gong, a Non-Executive Director of the company, has stepped down from the Board of Directors, effective immediately. In another update, KTD announced the completion of its Share Purchase Plan offer (SPP), under which it received applications for 1,158,243 ordinary shares, at an issue price of $0.31 per share.
 
FY20 and 4QFY20 Key Highlight: During the period, the company successfully completed the construction of its state-of-the-art second manufacturing facility in New Zealand, with the first commercial run undertaken in late FY20.The company’s business was positively impacted by COVID-19, with demand for its products rising substantially. The company continued to grow its Asian and Chinese businesses, with substantial new orders from China, including repeat and larger orders from Walmart China. Sales revenue for the fourth quarter FY20 was reported at $8.7 million, as compared to $6.6 million reported in the previous quarter. Total customer cash receipts increased to $24.68 million in FY20, up from $2.86 million reported in FY19.
 

 Financial Highlights (Source: Company Reports)
 
What to Expect: The company is set to cater to the demand for dairy products, which has increased tremendously. Results of the rise in demand will be reflected in the coming quarters, as the company commenced operations at its second manufacturing facility to meet the additional demand. Moreover, the company will shortly re-launch its KeyDairy Whole Milk and Skim Milk Powders to better align with customer trends and boost sales.
 
Risk Analysis: The COVID-19 situation is still evolving, and its full economic impact remains uncertain. Further, stiff competition and foreign currency fluctuation risk remain potential headwinds to the company.
 
Stock Recommendation: As per ASX, the stock of KTD gave a negative return of 8.47% in the past one month and is trading close to its 52-weeks’ low level of $0.195. During FY20, gross margin of the company stood at 23.2%, lower than the industry median of 41.8%. In the same time span, the current ratio of the company was 1.95x, higher than the industry median of 1.64x. On TTM basis, the stock is trading at a P/BV multiple of 1.00x, lower than the industry average (Consumer Non-Cyclicals) of 4.8x. Considering the above factors, decent FY20results, positive outlook in the long run, and lower P/BV multiple as compared to industry median, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.265, down by 1.852% on 22 June 2020.
 
 
 
Comparative Price Chart (Source: Refinitiv,Thomson Reuters) 

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