Stocks’ Details 

Evolve Education Group Limited

Acquisition of Child Care Centres: Evolve Education Group Limited (ASX: EVO) offers early education for children through parent-led and teacher-led services in New Zealand and Australia (ANZ). As of 8 March 2021, the market capitalisation of the company stood at ~A$175.48 million. The company recently announced entering conditional contracts to acquire ten childcare centres in Australia with a total authorised capacity of 816 children per day. The acquisition is subject to the grant of licences and an upfront price of NZ$27.13 million for an EBITDA generation of NZ$6.93 per year. A deferred sum of NZ$5 million will have to be paid upon EBITDA generation of NZ$1.27 million after one year of settlement. The deal’s execution will take the total number of centres in operation by EVO to 20 in Australia and 116 in New Zealand. The company also announced the resumption of a dividend payment from Q4FY21.

FY20 Result Highlights: EVO has changed its balance sheet from 31 March to 31 December during CY20. Hence, it has released audited results from 1 April 2020-31 December 2020. The company reported an audited revenue of NZ$102.6 million for nine months ending to 31 December 2020, whereas the unaudited revenue for CY20 is NZ$136.8 million. Its revenue fell by 27% YoY to NZ$102.63 million in FY20 on a pcp basis. However, it registered a net profit after tax of NZ$7.57 million, up by 156.9% on pcp due to change in the Board, stabilised occupancy levels, streamlined office functions, reduced Board fees. EVO received government support under JobKeeper and Wage subsidy to mitigate the COVID-19 impact on the business for FY20. The Group generated net cash flows of NZ$25.78 million from the operating activities during FY20. EVO held a cash balance of NZ$59.1 million for the CY20.

On 27 January 2021, Wilson Asset Management Group (WAM Group) increased its stake in EVO to 8.94%. In December 2020, the Group Evolve Education Group Limited completed the consolidation of shares in the ratio of 8:1. In December 2020, EVO Group raised NZ$35 million five-year notes and used part proceeds to repay bank facilities (100%) and allocated the rest for future acquisitions in ANZ.

Comparative Summary 2020 vs 2019, Highlights (Source: Company Reports)

Key Risks: The company faced the impact of the COVID-19 lockdown restrictions in New Zealand and Australia. Its centres were closed from August-September 2020 in Victoria, ANZ, due to imposition of stage 4 restrictions. The financial statements’ items particularly exposed to risk and affected by the pandemic were right-of-use assets, property, plant and equipment and impairment of intangible assets.

Outlook: EVO has notified that it expects positive EPS from the acquisition settlement and will incur minimal additional support office costs to manage the ten new centres. It will fund the acquisition from the current cash reserves. The management believes that it has a healthy balance sheet position to undertake acquisitions in Australia. For New Zealand it plans to continue making operational improvements.

Valuation Methodology: EV/EBITDA 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.

** 1 NZD= ~0.93 AUD

Stock Recommendation: The stock of EVO gave a positive return of 75% in the past six months and a positive return of 43.18% in the past nine months. The stock is currently inclined towards its 52-weeks’ high price level of $1.48. The EVO stock has a support level of ~$1.096 and a resistance level of ~$1.473. We have valued the stock using Enterprise Value to EBITDA based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For this purpose, we have taken peers like G8 Education Limited (ASX: GEM), 3P Learning Limited (ASX: 3PL), (ASX: IDP Education Limited (ASX: IEL), to name a few. We believe that the company can trade at a slight discount as compared to its peer average, considering reduced occupancy level, impact from COVID-19 pandemic, and while also taking into account the that the company has been trading at a discount in the past 3-years over its peer average. Considering improving bottom line, high ROE & EBITDA margin, acquisitive growth outlook for ANZ, news of resumption of dividend from Q4FY21, positive operating cash flows for FY20, and expected recovery in occupancy level, we give a ‘Hold’ rating on the stock at the current market price of $1.260, up by 0.398% on 8th March 2021.

Legacy Iron Ore Limited

Raise of $3.15 million via Share Placement: Legacy Iron Ore Limited (ASX: LCY) is an explorer and developer of diversified asset base - gold, base metals, iron ore, rare earth elements, tungsten. As of 8 March 2021, the market capitalisation of the company stood at ~$96.07 million. On 3 March 2021, NMDC Limited changed its shareholding from 92.32% to 90.05% in LCY and held 5,767.2 million voting shares. Recently, LCY issued ~157.5 million new shares to raise $3.15 million at $0.02 per share, ~20% discount to the last closing price of trading. It will use the proceeds to undertake feasibility studies and additional expansion drilling at the Mt Celia gold project. LCY announced the completion and considerable increase (an ~72% conversion of resources) to the JORC Indicated category resource for the Blue Peter and Kangaroo Bore deposits at the Mt Celia project. The resource has been capped to 150 metres from the surface and will be drilled deeper at known mineralisation levels. LCY has started mining studies on the project to determine its economic viability.

December 2020 Quarter Result Highlights: During Q3FY21, LCY completed drilling programs for Kangaroo Bore & Blue Peter prospects at Mt Celia. The drilling results from the previous quarter at Mt Celia had indicated the potential for additional resource definition. At the Yilgangi project, LCY drilled 854 metres of 13 holes during December 2020 and has received the assay results from the drilling. It is currently reviewing them. At Patricia north tenement, LCY announced the assay results of rock chip sampling in November. It delivered a high yield of 2.46g/t to be drill tested later during the year. At the Koongie Park project, LCY undertook limited fieldwork, completed a fixed loop electromagnetic survey out of the six potential targets identified for the survey. It plans to finish the additional survey work on the five other targets as well. LCY incurred an exploration and evaluation expenditure of $670k in Q3FY21. LCY held a cash balance of $7.41 million as of 31 December 2020.

Cash Flows from Operating Activities, Q3FY21 (Source: Company Reports)

Key Risks: The company faced delays in drilling programs and exploration work at its various projects (at Yilgangi, Sunrise Bore, East Kimberley tenements) due to the COVID-19 travel restrictions. It faces the risk of inaccurate resource estimation, lack of desired/robust results from the drilling programs, regulatory hurdles seeking exploration licenses and failure to commercialise projects. 

Outlook: During the March 2021 quarter, LCY aims to complete its exploration planning for FY21 across all projects. Particularly at Mt Celia, it currently seeks to discover a resource upgrade and conduct project feasibility evaluation studies. At Yilgangi, it will review and follow up on the last drilling results and plan new drilling.

Stock Recommendation: The stock of LCY gave a positive return of 100% in the past three months and a positive return of 180% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $0.001. The stock of LCY has a support level of ~$0.012 and a resistance level of ~$0.017. On a TTM basis, the stock is trading at a price to book value multiple of ~4.4x higher than the industry median of ~2.9x, thus seems undervalued. Considering the current trading levels, volatility in the price movement, net loss after tax from FY16-FY20, and valuation on a TTM basis, we give an ‘Avoid’ rating on the stock at the current market price of $0.014, down by 6.667% on 8^th March 2021.

Auroch Minerals Limited

Entering a Drill Rig Contract: Auroch Minerals Limited (ASX: AOU) is engaged in exploring and developing mineral projects. It operates the Saints & Leinster nickel project, Nepean nickel project (80% interest), Bonaventura, Arden project, and Torrens East Copper project. Recently, AOU entered into a drilling contract with Seismic Drilling Services Pty Limited (SDSL) to lock in a drill rig for the next one year at the Nepean, Leinster, and Saints Nickel projects in Western Australia. Currently, an LMP 2k multipurpose drill rig is on the Nepean Nickel Project site to complete a 3.5k metres reverse circulation (RC) programme.

Acquisition of Goldfellas Pty Limited Proposed: On 17 February 2021, Lodestar Minerals Limited (LSR) signed a binding term sheet with certain shareholders of Goldfellas Pty Ltd (GPL) to acquire 100% of the issued share capital of GPL. The GPL’s Board will recommend its shareholders to accept LSR’s offer. Currently, AOU and GPL have an 80:20 interest in the Nepean project.

Q2FY21 Result Highlights: At the Leinster nickel project, the company undertook a diamond drill (DD) programme of 1,500 metres at the Valdez and Horn nickel sulphide prospects. The assay results received exhibited huge nickel sulphide zones at HNDD001, HNDD002 and HNDD003. At Firefly and North Sinclair prospects, AOU conducted an air-core (AC) programme during the quarter. At the Saints nickel project, AOU completed an air-core (AC) programme at the T4, T5 and T6 prospects, and the results are awaited. During the quarter, AOU signed a binding contract to buy 80% of the shares in Eastern Coolgardie Goldfields Pty Ltd (ECG), the holder of the Nepean project. GPL will acquire the remaining 20% stake.

During Q2FY21, AOU completed a share placement of 42.64 million fully paid ordinary shares to raise ~$2.9 million (before costs) at $0.068 per share. AOU received ~$1.59 million in cash from the conversion of 15.89 million of unquoted options at $0.10. During the quarter, AOU held a cash balance of ~$3.2 million.

Cash Flows from Operating Activities, Q2FY21 (Source: Company Reports)

Outlook: At Nepean, AOU will conduct 3,500 metres RC drill programme and it will drill known high-priority targets along the 10 km of underexplored area. At Leinster project, AOU awaits the DHEM survey results for the Horn holes and is currently processing the geophysical data. An RC drill programme of 1,500 metres is scheduled at the Saints project at the T4, T5 and T6 prospects for the March quarter.

Stock Recommendation: The stock of AOU gave a positive return of 182.05% in the past six months and a positive return of 238.46% in the past nine months. The stock is currently trading towards its 52-weeks’ high level of $0.32. The stock of AOU has a support level of ~$0.211 and a resistance level of ~$0.24. On a TTM basis, the stock is trading at a price to book value multiple of ~6.5x higher than the industry median of ~2.9x, thus seems overvalued. Considering the current trading levels, significant returns in the past 3 months and 6 months, and valuation on TTM basis, we are of the view that most of the positives have been factored in at the current juncture. Hence, we suggest investor wait for better entry levels and give a ‘Expensive’ rating on the stock at the current market price of $0.220, down by 8.334% on 8 March 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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