Quickstep Holdings Limited

QHL Details

Non-Binding MOU with TASA: Quickstep Holdings Limited (ASX: QHL) provides advanced composite parts and manufacturing processes for the defence, marine, aerospace, automotive and other transportation sectors. As of 14 May 2021, the market capitalisation of QHL stood at ~$38.67 million. On 11 May 2021, QHL announced entering a non-binding MOU (Memorandum of Understanding) with Triumph Aviation Services Asia (TASA), a subsidiary of Triumph Group (NYSE: TGI), for providing for maintenance, repair, and overhaul (MRO) services to the airlines and MRO customers for the Australasia region. The work scope of services will be undertaken at QHL’s new Tullamarine facility in Victoria. The partnership is subject to definitive binding agreements and further updates as made in due course.  

Decline of Proposal by Chemring Australia: On 22 March 2021, Chemring Australia notified QHL of its decision to decline the proposal for the supply of MJU-68B flare housings in FY21/FY22. QHL has raised a formal protest to the Australian and US Departments of Defence regarding this decision and will update investors on further developments.

A Look at the 1HFY21 Results: During 1HFY21, QHL reported total sales of $41.5 million, up by 7.9% YoY, due to the continued increase in Joint Strike Fighter (JSF) program volumes to full-rate production. The revenue from JSF was up by 10.7% YoY during 1HFY21. QHL posted an NPAT of $0.81 million, down by 44% on a YoY basis owing to unfavourable foreign exchange rate conversion, stoppage of payroll tax concessions in December 2019 and a modest reduction in price of the C-130 contract. It generated $4.32 million of positive net cash flows from operating activities in 1HFY21. QHL invested $1.5 million of capex to introduce new technology, improve operational efficiency, and enhance capacity. At the end of 1HFY21, QHL reported a reduction in the net debt to $3.7 million, down by $2.7 million since 30 June 2020, owing to robust operating cash flows. It held a cash and cash equivalents balance of 1.88 million as of 31 December 2020.  

Financial Highlights, 1HFY21 (Source: Company Reports)

Key Risks: The company is exposed to the risk of deteriorating freight capacity via land and sea, port delays, supply of components and raw materials from the States, due to the continuing pandemic environment. 

Outlook: QHL forecasts its FY21 customer revenues to increase year on year given no change in the currency exchange rates. It is witnessing a return of COVID-19 led supply chain issues of air and sea freight. Given no change in the status quo and variables, QHL anticipates generating growth in FY21’s PBT over FY20 in its base business. However, it expects reported profits might be impacted by initial losses from the recent acquisition of BACR (Boeing Australia’s Component Repair Capability). QHL expects the BACR acquisition to be earnings accretive by next year.

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

Data Source: Refinitiv, Thomson Reuters, 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 QHL gave a negative return of 40.47% in the past three months and a negative return of 40.47% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $0.049-$0.110. The stock of QHL has a support level of ~$0.0483 and a resistance level of ~$0.0555. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount compared to its peer median, considering its lower EBIT and NPAT for 1HFY21, expected impact of the acquisition loss on the FY21 profits, and the risks associated with the supply of components, raw materials, and the pandemic situation. For this purpose, we have taken peers like Austal Limited (ASX: ASB), Electro Optic Systems Holdings Limited (ASX: EOS), Orbital Corporation Limited (ASX: OEC) and others. Considering the current trading levels, increase in top-line, decrease in net debt, increase in net operating cash flows, valuation, growth outlook for FY21, and risk of supply chain disruptions, and pandemic uncertainties, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.050, down by ~7.408% on 13 May 2021.

QHL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Droneshield Limited

DRO Details

A Look at the Q1FY21 Results: Droneshield Limited (ASX: DRO) is a manufacturer, developer, and marketer of software and hardware technology for drone detection and security. As of 14 May 2021, the market capitalisation of DRO stood at ~$64.33 million. DRO announced customer receipts of $1.7 million for Q1FY21, owing to a massive shift of receipts in Q2FY21. During the reporting period, DRO substantially completed the upgrade of its manufacturing and supply chain processes. DRO has been investing in ready-to-ship inventory and long lead components since Q4FY20 and to enable speedy fulfilment of near-term pipeline. For its latest make, DroneSentry-X^TM, a mobile C-UAS system, DRO has started with initial order shipments worth $500K. DRO has a robust demand for system demonstrations from customers and a purchase order book in the pipeline. During Q1FY21, DRO expanded its operations, premises, and team in Virginia. DRO held a cash balance of $13.6 million as of 31 March 2021.

Cash Flow from Operations, Q1FY21 (Source: Company Reports)

Key Risks: The company faces the risk of the slowdown of project work, shipment delays, supply chain bottlenecks due to the COVID-19 situation. 

Outlook: The company expects the highest amount of cash receipts in Q2FY21. It forecasts cash flow positive quarters commencing from 2QFY21 depending on any one-time expenses and inventory planning cycles. DRO expects positive macro-conditions with increasing use of drones in conflict zones, rise in Government and military’s defence budgets for counter-drones. DRO has been working on the airport work in Q1FY21 and expects airports to begin counter-drone system in 2021. It predicts that the US Federal Aviation Administration will announce system trials at five airports in the country.

Stock Recommendation: The stock of DRO gave a positive return of 22.22% in the past nine months and a positive return of 57.14% in the past year. The stock is currently trading lower than the 52-weeks’ average price level of $0.095-$0.250. The stock of DRO has a support level of $0.152 and a resistance level of $0.185. Considering the current trading levels, the expected record receipts for Q2FY21, estimated high conviction pipeline tender of over $100 million, other tenders in the pipeline, current and expected US project pipeline, positive macro-outlook for DRO’s counter-drones, and related risks of the pandemic on supply chain and project delays, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.165 on 14 May 2021.

DRO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.

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 do not hold interests in any of the securities or other financial products covered on the Kalkine website.