Empired Limited

EPD Details

Contracts with Western Power: Empired Limited (ASX: EPD) is a diversified IT services company with a market capitalisation of $69.69 Mn as on 10^th August 2020. Recently, the company has won two contracts with Western Power having an estimated value of $61 million over the initial five-year term. As per the terms of the contract, EPD will provide a diverse range of digital services for up to seven years. These contracts include an Infrastructure Managed Services contract of $31 million and a preferred Master IT Supply Contract of $30 million. In addition, the company also secured a new 3-year IT Supply contract with Rio Tinto. During 1H FY20, the company reported revenue amounting to $84.4 million, reflecting a fall of 5% on pcp. Revenue for the Australian segment moved down by 16% as the company completed the Main Roads WA contract. During the half-year, the company reported EBITDA of $8.4 million with a decline of 22% on pcp.

Key Financials (Source: Company Reports)

Guidance: For FY20, the company anticipates a material increase in NPAT & EPS. Also, the company expects a higher 2H EBITDA as compared to 1H FY20. However, the company is likely to report revenue in line with FY19.

Key Risks: The company’s business is exposed to risks that might impact the operational performance. These risks include general macro-economic risks, business risks, operational risks, and financial risks.

Stock Recommendation: Debt to equity multiple of the company stood at 0.49x in 1H FY20. EPD has an EV/EBITDA multiple of 7.4x, which is higher than the industry average (Software & IT Services) of 2.7x on TTM basis. The stock of EPD has moved up by 24.29% and 29.85% in the past one and three months, respectively. The stock is inclined towards its 52-week high of $0.455. Thus, considering the current trading levels along with price movements in the past few months, we advise investors to book profit and give a “Sell” recommendation on the stock at the current market price of $0.430 per share, down by 1.149% on 10^th August 2020.

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

GR Engineering Services Limited

GNG Details

Funding Finalised for Lake Way Project: GR Engineering Services Limited (ASX: GNG) is involved in the provision of engineering, design and construction services to the mining and minerals processing industries. The market capitalisation of the company stood at $135.98 Mn as on 10^th August 2020. On 15^th June 2020, GNG had entered contracts with Salt Lake Potash Limited (SO4) for the design and construction of the Lake Way Project processing plant and non-process infrastructure with a combined value of around $107 million. On 5^th August 2020, GNG notified the market that SO4 has finalised its funding for the Lake Way Project. In addition, the company has secured an engineering, procurement, and construction contract with Ora Banda Mining Limited for a value of $10.8 million. During 1H FY20, the company reported sales revenue of $95.3 million, an underlying EBITDA of $2.0 million and a loss before tax of $16.7 million.

Key Financials (Source: Company Reports)

Outlook: The company is likely to witness progress on its major design and construction projects into commissioning and testing phases in the future.

Key Risks: GNG is exposed to risks in relation to its financial instruments, which include market risk (consisting of foreign currency risk and interest rate risk), credit risk, and liquidity risk. In addition, the company is also exposed to credit risk, which is influenced by the default of counterparties in its  contractual obligations.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Debt to equity multiple of the company stood at 0.15x in 1H FY20 as compared to 0.01x in 1H FY19. The stock of GNG is inclined towards its 52-week high of $1.010. We have valued the stock using the P/E multiple based illustrative relative valuation method and for the purpose, we have taken peers such as MACA Ltd (ASX: MLD), Perenti Global Ltd (ASX: PRN), Mitchell Services Ltd (ASX: MSV), etc., and arrived at a price correction of low-double digit (in percentage terms). Therefore, considering the increase in D/E multiple, losses in 1HFY20 and current trading levels, we give a “Sell” recommendation on the stock at the current market price of $0.910 per share, up by 2.825% on 10^th August 2020.

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

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