Austal Limited

ASB Details

Delivery of 83 Metre Ferry: Austal Limited (ASX: ASB) is involved in the designing, manufacturing, and support of high-performance vessels for commercial and defence customers worldwide. The market capitalisation of the company stood at ~$1.2 billion as on 30^th September 2020. Recently, the company notified that it has delivered Hull 396, Queen Beetle, to JR Kyushu Jet Ferry. The company added that 83-metre high-speed trimaran ferry is the first of its kind, which has been designed to deliver an improved passenger ferry service between Fukuoka, Japan and Busan, South Korea. On 21^st September 2020, ASB announced the appointment of Ian McMillan on the role of Chief Operating Officer of Austal Australia, which would be effective from 1^st January 2021.

Growth in Topline: For the year ended 30^th June 2020, the company reported revenue amounting to $2,086.0 million, reflecting a rise of 13% over pcp. In addition, ASB also experienced revenue growth in all segments, which was largely underpinned by the expansion of commercial shipbuilding, and favourable FX translation. NPAT for the period amounted to $89.0 million, indicating a rise of 45% year over prior year. The company has paid an unfranked final dividend of 5 cents per share on 22^nd September 2020, which took the FY20 dividend to 8.0 cents per share. During FY20, the company reported operating cash flow of $164.5 million, which was in line with FY19 results.

Key Financials (Source: Company Reports)

Outlook: ASB entered FY21 with a decent order book of $4.3 billion, which is likely to be delivered through FY21 to FY24.

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

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

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

Stock Recommendation: The company possesses a strong financial position, which is allowing the company to strategically place itself to capture future steel shipbuilding opportunities in the USA and Australasia. In the past three and six months, the stock of ASB has provided a return of 6.03% and 18.02%, respectively. On a technical front, the stock of ASB has a support level of ~$3.124 and a resistance level of ~$3.802. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peer such as GUD Holdings Ltd (ASX: GUD), Electro Optic Systems Holdings Ltd (ASX: EOS), Quickstep Holdings Ltd (ASX: QHL) to name few. Therefore, considering the improving topline, decent FY20 performance and solid order book, we give a “Buy” recommendation on the stock at the current market price of $3.280 per share, down by 1.796% on 30^th September 2020.

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

Electro Optic Systems Holdings Limited

EOS Details

Wining of New Contracts: Electro Optic Systems Holdings Limited (ASX: EOS) is engaged in designing, development and production of advanced electro optic technology devices and systems. The market capitalisation of the company stood at ~$829.33 million as on 30^th September 2020. Recently, EOS announced that it has finished contract negotiations with the Commonwealth of Australia for the acquisition of 251 Remote Weapon Systems (RWS) and related materiel. The said contract has been valued over A$94 million. Previously, the company also secured two contracts of $4.25 million for the supply of R400 Remote Weapon Systems (RWS) to a European NATO country.

Reasonable Growth in Revenue: Despite the disruption in deliveries by COVID-19, the company reported revenue growth of 31% to $75 million for the six months ended 30^th June 2020. EOS posted a net loss after tax of $14 million as revenue and profit have been deferred into 2H FY20 and 2021. In addition, the company finished capital raising of $144.8 million through the institutional placement of $134 million and SPP of $10.8 million. The capital raising was well supported by investors. The company closed the half-year with a cash balance of $128 million.

Financial Summary (Source: Company Reports)

Guidance: The company is expecting to report EBIT in the range of $20-30 million during FY20. The growth priorities of the company revolve around defence sector, communication, and space technology.

Stock Recommendation: Over the upcoming 12 months, the company is anticipating strong cash flow from major contracts. The 52-week low-high range for the stock stands at $2.950-$10.800. In addition, the stock is trading at a price to book value multiple of 2.4x as compared to the industry median (Aerospace & Defence) of 2.6x on TTM basis. On a technical front, the stock of EOS has a support level of ~$5.008 and a resistance level of ~$5.938. Hence, in light of the winning of new contracts, growth in topline, expected strong cash flows, we give a “Hold” recommendation on the stock at the current market price of $5.540 per share, down by 0.18% on 30^th September 2020.

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

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