Lynch Group Holdings Limited

LGL Details

Lynch Group Holdings Limited (ASX: LGL) is involved in the horticultural production and wholesale of flowers and plants. The company happens to be the vertically integrated value-added wholesaler and grower of flowers and potted plants. It also possesses a strong market position in both the Australian and Chinese floral markets.

Results Performance (FY21 Ended June 2021)

• The 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.
• The pro forma EBITDA was $58.6 million, 12.0% ahead of the prospectus forecast and 93.0% up on COVID- affected FY20.
• The company has been targeting a dividend payout ratio of a minimum of 50% of the annual NPATA commencing from the H1FY22 period in March 2022, expected to be fully franked.

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 strategic priorities in Australia and China.

Outlook

The company has reaffirmed its CY 2021 NPATA guidance of $31.6-$32.6 million, ahead of the prospectus forecast of $29.3 million. The company has planned continued expansion, and it is also responding to the growing domestic demand in China and opportunities for growth in Australia. As a result, the company has strengthened the leading market position in China during FY 2021, with 9.9ha of greenhouse development in the period bringing the company’s total area under greenhouse cultivation to 61.1ha throughout four farms.

Key Risks

The company is exposed to the risks related to the COVID-19 pandemic. In Australia, reinstated lockdowns from June impacted the company’s central east coast markets, with the primary impact witnessed in NSW. Notably, the restrictions have initial consequences (up to 4 weeks), including inventory loss, sales declines, and disruptions to production efficiency.

Stock Recommendation

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 3-month and 6-month returns of ~-8.60% and ~-5.56%, 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 a decreased debt to equity at 0.37x in FY21 versus 1.39x in FY20 and higher ROE at 17.0% in FY21 versus an industry median of 14.0%.

Considering the factors above, we give a “Speculative Buy” recommendation on the stock at the current market price of $3.33 per share as of 26^th November 2021 (Time: 3:55 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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