Orica Limited

ORI Details

Change in Substantial Holding: Orica Limited (ASX: ORI) is one of the leading providers of commercial explosives and innovative blasting systems to the mining, quarrying, oil and gas and construction markets. The company is also a global leader in the provisioning of ground support in mining as well as tunnelling. The company recently announced that AustralianSuper Pty Ltd has increased its holdings to 13.10% against previous holdings of 11.99%.

1HFY21 Performance Highlights

• Decline in Revenue and NPAT: The ongoing COVID-19 disruptions, geopolitical issues as well as unfavorable foreign exchange movements in half year deteriorated company’s financial health, reflected in fall of sales revenue by 9% to $2,623 million and statutory Net Profit After Tax (NPAT) to $77 million, down by 54% over pcp.
• Rise in Operating Cashflow: Despite the aforesaid challenges, the company efficiently managed its balance sheet and capital management. This is being evident by growing net operating cash flow to $158 million against $108 million in 1H FY20, supported by improved trade working capital position.
• Decine in Net Debt: ORI managed to improve its net debt level to $1734 million vs $1821 million in FY20.

Net Operating Cash Flow Trend (Source: Analysis by Kalkine Group)

Key Risks:

• The company is exposed to significant foreign exchange (FX) translation, which has impacted company’s recent earnings.
• On macro front, Australian trade tensions with China could be an obstacle in the company’s growth moving forward.

Outlook:

• Looking forward, the company anticipates the factors to reverse, which has impacted the business in first half.
• In addition, the company is likely to focus on achieving numerous strategic targets, which include contributions from new technology and realizing the financial and synergistic benefits from its recent Exsa acquisition.

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 1HFY21 with solid liquidity position of $1.9 billion. In addition, it possesses gearing within 30-40% target range, which provides significant headroom against the 57.5% debt covenant. The stock of ORI has corrected 9.13% and 12.03% in the past one and three months, respectively. The stock has been valued using 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 some discount to its peers’ median, considering the COVID-19 disruptions and geopolitical issues. For the purpose of valuation, peers such as Incitec Pivot Ltd (ASX: IPL), Nufarm Ltd (ASX: NUF), Orora Ltd (ASX: ORA), and others have been considered. Considering the expected upside in valuation, rising net cash flows, decent long-term outlook, efficient management of liquidity, we recommend a ‘Buy’ rating on the stock at the current market price of $11.60 as on 21 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

ORI Daily Technical Chart, Data Source: REFINITIV 

Macmahon Holdings Limited

MAH Details

Signed Mining Service with CAI: Macmahon Holdings Limited (MAH) provides mining services to miners across Australia and Southeast Asia. The company’s services include contract mining, civil engineering and quarrying. MAH has recently inked a mining services contract with Calidus Resources Limited (ASX: CAI) for the Warrawoona gold project in Western Australia, which is likely to generate revenue of around $210 million.

FY21 Financial Highlights:

• During FY21, the company has maintained track record of earnings growth and the numbers were in line with the reiterated guidance. The company experienced a slight fall of 2% in topline to $1351 million against $1380 million in FY20.
• The company recognized Deferred Tax Asset of $17.3 million resulting from a change in the Australian income tax legislation announced in the October 2020 Federal budget. This helped MAH in increasing statutory Net Profit After Tax by 19% to $77.2 million.
• MAH possesses solid order book of $5.0bn and significant tender pipeline of $7.1bn.
• The company declared final dividend of 0.35cps, which took the FY21 total dividend to 0.65cps, reflecting growth of 8%.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: The company experienced least impact on its financials during the year. However, there is a risk that the prolonged continuation of these circumstances across worldwide may leave a material impact on the Group in the upcoming period.
• Commodity Price: The company has indirect exposure to movements in commodity prices, which can be beyond the company’s control.

Outlook:

• For FY22, the company is expecting to report revenue in the range of $1.4bn – $1.5bn and underlying EBIT in the ambit of $95m – $105m. The company has already secured $1.3bn of FY22 revenue.
• The company is in a decent position to focus its business development efforts on lower capital and higher return projects in Underground and Mining Support Services.

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: At the end of FY21, the company had decent liquidity of $288 million (including cash on hand of $182 million), which would help the company to finance future growth projects. The stock of MAH gave a negative return of ~15.21 % in the past one month. The stock has been valued using 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, considering the COVID-19 disruptions, global commodity cues, and high debt to equity. For the purpose of valuation, peers such as MACA Ltd (ASX: MLD), Perenti Global Ltd (ASX: PRN), Monadelphous Group Ltd (ASX: MND), and others have been considered. Considering the expected upside in valuation, solid order book, decent liquidity position and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.190 as on 21 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

MAH 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.

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