Transurban Group

TCL Details

Completion of Entitlement Offer: Transurban Group (ASX: TCL) owns, operates and develops electronic toll roads and intelligent transport systems. Recently, the company has finished capital raising of around A$3.97 billion through an entitlement offer. The company would use the proceeds raised from the entitlement offer for the acquisition of 49% equity stake in WestConnex by Sydney Transport Partners.

FY21 Financial Highlights:

• Fall in Average Daily Traffic: During the year, TCL recorded a fall of 0.4% in average daily traffic (ADT) against FY20. Excluding the contribution from new assets, M8/M5 East and NorthConnex, ADT fell by 7% over pcp.
• Sale of Chesapeake Assets: The company recorded total revenue amounting to $2,886 million against $3,169 million in FY20. Statutory profit for the year amounted to $3,272 million, which include benefits of $3,726 million received from the sale of Transurban Chesapeake assets.
• Impacts on Free Cash: As a result of reduced traffic in Melbourne and North America due to COVID-19 related mobility restrictions and a rise in cost related to strategic growth projects, TCL’s free cash flow plunged by 13.5% to $1,278 million.

Average Daily Traffic (Source: Analysis by Kalkine Group)

Key Risks:

• West Tunnel Gate Project: The company is likely to experience challenges on the project due to disputes arising between the project parties relating to changes in the requirements for the disposal of soil contaminated with PFAS. The company has expended $2.7 billion in the form of capital expenditure on the project.
• Environmental Risk: The company is exposed to environmental risk as it deals in the construction of roads and other infrastructure projects.

Outlook:

• Looking forward, the company possesses a large pipeline of opportunities in core markets with funding optionality on the back of sound business model and balance sheet.
• The company expects to pay a distribution of 15.0 cps for 1H FY22 and anticipates free cash for the half-year to be higher or lower than the 1H22 distribution guidance because of the ongoing uncertainty from COVID-19.

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 on 30^th June 2021, the company had corporate liquidity of $6 billion, which comprised of $3.3 billion of cash and $2.7 billion of undrawn borrowing facilities. TCL is managing its balance sheet in a prudent manner to maximise optionality for investment in the pipeline of new opportunities.  The stock has support and resistant level of $13.845 and $14.385, respectively. The stock of TCL gave a positive return of ~10.02 % in the past six months. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation and arrived at a target price of high single-digit upside (in % terms). The company can trade at a slight discount to its peers’ average EV/Sales multiple, considering the COVID-19 disruptions, falling free cash and challenges from the west tunnel gate project. For the purpose of valuation, peers such as Atlas Arteria Group (ASX: ALX), Qube Holdings Ltd (ASX: QUB), and Sydney Airport (ASX: SYD) have been considered. Considering the expected upside in valuation, recent capital raising, pipeline of opportunities, increasing gross margin and decent liquidity position, we recommend a ‘Hold’ rating on the stock at the current market price of $14.130, up ~0.569% as on 27 September 2021.

TCL Daily Technical Chart, Data Source: REFINITIV  

Engenco Limited

EGN Details

Capital Investment Program: Engenco Limited (ASX: EGN) provides broad-based technical services to customers who rely upon heavy/complex plants and machinery. During FY21, the company continued its capital investment program in order to focus on growth assets and spent $9.9 million as capital expenditure. Looking at the increasing demand for wheelset machining services, the company invested in a new underfloor wheel lathe. As a result, this facility is in a decent position to increase its share and diversity of rolling stock maintenance work in Queensland.

FY21 Financial Summary:

• Revenue Impacted by Pandemic: For the year ended 30 June 2021, the company recorded revenue amounting to $165.6 million, reflecting a fall of 7.0% over pcp, mainly impacted by constrained trading conditions during the pandemic.
• Fall in Profits: As a result of progressive recognition of past tax losses, EGN posted a fall in net profit after tax to $12.0 million against $13.4 million in FY20.
• Increase in Net Operating Cash Flow: The company posted a rise of 2.8% in net operating cash flow to $14.5 million as compared to $14.1 million in FY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: Uncertainties arising from the going pandemic could impact the company’s financial health, as it has impacted in FY21.
• Health and Safety Risk: The company’s business model leads to health risk as it deals in heavy machinery. Hence, the rising number of injuries could be a growth obstacle.

Outlook:

• The company is optimistic that its multi-year growth strategy is likely to develop a larger, more scalable platform, which is closely aligned to its customers in the industries such as mining, transport, logistics, and defence.
• Looking forward, the company anticipates capitalising on growing demand throughout the rail corridor and enhancing its presence to develop within the high-risk traffic management and construction markets.

Stock Recommendation: The company closed FY21 with cash and cash equivalents of $12.09 million and nil debt with undrawn bank facilities of $20 million. Also, the company paid a fully franked total dividend of 2.0 cents per share. The company is trading near to its 52-week low level of $0.440.  The stock of EGN gave a negative return of ~7.99 % in the past one month. On a TTM basis, EGN has an EV/Sale multiple of 0.9x against the industry median (Industrials) of 2x, thus seems undervalued. Considering the decent long-term outlook, nil debt position, decent liquidity position, current trading levels, valuation on TTM basis, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.460 as on 27 September 2021.

EGN 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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