DUG Technology Ltd (ASX: DUG)

Restructuring of Service Business Line: The company provides high-performance computing as a service (HPCaaS), scientific data processing services and software solutions for the global technology and resources sector. Recently, the company has restructured its service business line in order to decrease fixed costs and improve operational efficiency.  The company added that the restructuring has been focused on four initiatives relating to office space, projects, geographical business units and personnel. As announced on 9 November 2021, Managing Director, Dr Matthew Lamont, would be presenting at Market Eye’s TechOpps 2021 virtual conference, which will run on 10 and 11 November 2021.

Financial and Operational Highlights: During Q1FY22, the company finished a capital raising of A$15 million via a successful placement of shares to new and existing sophisticated and institutional investors. The company received proceeds in two tranches, i.e. A$13.41 million were received during the quarter under review and Tranche 2 proceeds of A$1.59 million were received in October 2021. The company would use the funds for financing its key expansionary activities, including Military and Space business development, renewable initiatives, expanding sales teams and purchasing computer equipment. The company earned revenue of US$8.69 million from external customers. DUG’s HPCaaS and Software business-lines performed in line with forecasts during the quarter.

The company also inked an agreement with Austal Ltd for the provisioning of high-performance computing as a service (HPCaaS) using DUG McCloud over a term of 12 months. To reduce the balance of CBA term debt to US$12.45 million, the company reapid loan of US$5.25 million. On the back of the restructuring, the company anticipates cost savings of around US$4.2 million in FY22, with further savings in FY23. The company’s business is exposed to risk arising from the uncertainties in relation to COVID-19, foreign exchange risk and regulatory risk.

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 company closed the quarter with a cash balance of US$10.54 million as compared to US$10.02 million as on 30 June 2021. During FY21, the company recorded a debt-to-equity ratio of 2.97x, compared to the industry median of 0.02x, showcasing leveraged balance sheet. The stock of DUG has been corrected by ~13.63% and ~28.30% in the past one and three months, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median EV/Sales multiple, considering the COVID-19 led uncertainties and mounting losses in business, etc. For the purpose of valuation, peers such as Livetiles Ltd (ASX: LVT), Integrated Research Ltd (ASX: IRI), Adacel Technologies Ltd (ASX: ADA), and others have been considered. Considering the expected upside in valuation, recent capital raising, restructuring of service business line, decent outlook, current trading levels, and key risks associated with business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.705 as on 10 November 2021, 03:07 PM (GMT+10), Sydney, Eastern Australia.

DUG 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.