Orica Limited

ORI Details

Change in Substantial holding: Orica Limited (ASX: ORI) manufactures and commercialise explosives and blasting systems to the mining, quarrying, oil & gas, and construction markets, where it offers wireless initiating systems, environmental monitoring, injectable chemicals, and foams globally. Recently, AustralianSuper Pty Ltd, a substantial holder, increased its holding from 48,785,425 to 53,395,093 with a voting power of 13.10%.

H1FY21 Financial Performance:

• The company has recorded a decline in its consolidated revenue by 8.9% to $2,623.2 million in H1FY21, compared to $2,880.3 million in H1FY20.
• Further, the company incurred a decline in statutory net profit from $165.2 million in H1FY20 to $76.7 million in H1FY21, down by 54% on a pcp basis. The decline in mainly due to foreign price fluctuations, ongoing COVID-19 pandemic, and geopolitical issues.
• Orica has reported net cash flow from operating activities of $158.1 million in H1FY21, up from $107.7 million in H1FY20.
• The cash position of the company stood at $988.8 million as of 31 March 2021.

Financial Metrics (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 Pandemic- The company has a significant impact on its operations due to the COVID-19 outbreak, and still, the uncertainty prevails.
• Geopolitical Risk- The company deals with global companies; any geopolitical issue could have an impact on the company's trade.

Outlook:

• The company is expecting to deliver $20 million in FY21 from the Exsa integration and synergies, out of which $12 million is expected to be delivered in H2FY21.
• The company is focused on several key initiatives, includes cost reduction, manufacturing optimisation and capital and cash flow optimisation. The outcome would be discussed at the announcement of the full-year result of FY21.
• Orica is focused on strategising to minimise the risk of ongoing COVID-19 by growing uptake of high margin digital solutions, stabilising on the SAP platform and capital management.

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: As per the recent update, the company has notified the dividend reinvestment plan with the issue price of 0.075. The stock of ORI is trading below its average 52-weeks' levels of $11.170-$18.500. The stock of ORI gave a positive return of ~0.627% in the past one month and a negative return of ~29.41% in the past one year. 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 might trade at a slight discount to its peers’ average EV/Sales (NTM trading multiple), considering the uncertainty over COVID-19 impact and fluctuations in foreign currency. For the purpose of valuation, peers such as Incitec Pivot Ltd (ASX: IPL), Orora Ltd (ASX: ORA), Clover Corporation Ltd (ASX: CLV) have been considered. Considering the current trading levels, indicative upside in valuation, strong balance sheet, economic recovery, increase in investment, strategic cost management and optimistic outlook, we recommend a ‘Buy’ rating on the stock at the market price of $12.855, as on 19 August 2021, 10:50 AM (GMT+10), Sydney, Eastern Australia.

ORI Daily Technical Chart, Data Source: REFINITIV

GWA Group Limited

GWA Details

FY21 Result Highlights: GWA Group Limited (ASX: GWA) engages in research, designs, manufactures, commercialises building fixtures and fittings to residential and commercial premises that offer vitreous China toilet suites, basins, plastic cisterns, and bathroom accessories globally.

• The company has recorded an increase in its revenue by 1.8% to $405.7 million in FY21, compared to $398.7 million in FY20, driven by improved demand in residential markets in the second half of FY21.
• The company has reported a decline in EBITDA by 13% to $78.9 million in FY21 against $90.7 million in FY20.
• GWA incurred a decline in its profit by 5.8% to $42.3 million in FY21 versus $44.9 million in FY20. A slowdown in the project segment and uncertainty due to COVID-19 has impacted the profit.
• The company recorded improved cash flow from operations of $103.1 million in FY21, up by 16% from $88.6 in FY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 pandemic- The lower net migration from the international border and travel restriction has a potential to impact the company’s operations
• Demand Risk- Commercial segment activity remains subdued that impacted the company’s financials.

Outlook: The company has targeted investment in local and international markets to deliver improved customer experience and drive revenue growth above the market in FY22.GWA maintains substantial operational leverage for market improvement and evolving five years strategy to generate shareholder value creations.

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: As per a recent update, the company has announced a final fully franked dividend of 6.5 cents per share. The stock of GWA is trading below its average 52-weeks' levels of $2.410- $3.940. The stock of GWA gave a positive return of ~2.059% in the past one week and a negative return of ~24.55% in the past one year. 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 might trade at some premium to its peers’ average EV/Sales (NTM trading multiple), considering the economic recovery and increase in revenue. For the purpose of valuation, peers such as Adbri Ltd (ASX: ABC), James Hardie Industries PLC (ASX: JHX), Fletcher Building Ltd (ASX: FBU) have been considered. Considering the current trading levels, indicative upside in valuation, decrease in debt-to-equity ratio, improvement in residential demand, and optimistic outlook, we recommend a ‘Buy’ rating on the stock at the market price of $2.615, as on 19 August 2021, 11:00 AM (GMT+10), Sydney, Eastern Australia.

GWA Daily Technical Chart, Data Source: REFINITIV 

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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