Stocks’ Details 

Envirosuite Limited

Release of Q3FY21 Results: Envirosuite Limited (ASX: EVS) is a developer and marketer of environmental management technology solutions. It provides solutions spanning Air, Water, Noise segments and caters to BHP, Tata, Lendlease, Thames Water and others. As of 20 April 2021, the market capitalisation of the company stood at ~$138.52 million. EVS reported a total ARR (Annual Recurring Revenue) of $42.5 million for FY21. It recorded the highest new ARR sales of $2.1 million, up by 180% on QoQ for Q3FY21. EVS has achieved this result due to the aviation sector’s recovery, especially in the North American market and robust performance in the Waste & Wastewater, Mining & Industrial, and Water sectors. During Q3FY21, the company launched EVS Water, a SaaS solution to improve industrial, biological, and wastewater treatment infrastructure.

A Look at the 1HFY21 Results: EVS reported record revenue of $23.6 million, up by 533% YoY during 1HFY21. Its gross profit margin stood at 40.6% in 1HFY21 versus 32% for 2HFY20 and 25.6% for 1HFY20. Its recurring revenue as a % of total revenue was 85.2% for 1HFY21. Its operating expenses reduced by 5% over 2HFY20. During 1HFY21, EVS acquired AqMB Pty Limited, a water modelling R&D technology software company. EVS held a cash reserve of $9.7 million as of 31 December 2020.

1HFY21 P&L Highlights (Source: Company Reports)

Key Risks: The company faces the risk of foreign exchange fluctuations, the impact of COVID-19 uncertainties, the launch of new solutions, and the risk of technological innovation and disruption.

Outlook: For 2HFY21, EVS expects growth in recurring revenue by 4-8% on 1HFY21 as the temporary discounts given to Airport customers start fading away. It forecasts an Adjusted positive EBITDA for Q4FY21, depending on the timing of non-recurring revenue. It also expects non-recurring revenue to be higher than in 1HFY21 given the project delivery achieved during Q2FY21-Q3FY21 and weighted pipeline.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 stock of EVS gave a negative return of 19.99% in the past three months and a negative return of 33.33% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $0.105-$0.255. The stock of EVS has a support level of ~$0.126 and a resistance level of ~$0.154. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For this purpose, we have taken peers like Iress Limited (ASX: IRE), Bravura Solutions Limited (ASX: BVS), ReadCloud Limited (ASX: RCL) and others operating under the Software business. We believe that the company can trade at a slight premium than its peer median, considering the growth of ARR in Q3FY21, decent 1HFY21 financial performance, the launch of EVS Water. Considering the current trading levels, decent results of 1HFY21 (growth in top-line, gross margins, reduced op-ex), the launch of EVS Water solution, the acquisition of AqMB Pty Limited, valuation and associated risks of the technology and launch of new solutions, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.140, up by 3.703% on 20 April 2021.

Keytone Dairy Corporation Limited

Growth in FY21 Top-Line: Keytone Dairy Corporation Limited (ASX: KTD) is a manufacturer and exporter of formulated dairy products, wellness, and health products. Omniblend is its wholly owned subsidiary (WOS) and produces both dry powder and ready to drink products. The Group has six manufacturing sites in Australia and New Zealand. As of 20 April 2021, the market capitalisation of the company stood at ~$47.79 million. On 20 April 2021, KTD released its unaudited revenue figures for FY21. The company reported statutory sales revenue of $50.7 million, up by 125% YoY in FY21. All its business segments registered sales growth. KTD’s brands also recorded robust growth despite the pandemic outbreak, restrictions, and global supply chain disruptions.

“Coles” Tender Awarded: On 7 December 2020, KTD announced the grant of a significant Coles Private Label Tender by Coles Group Limited (“Coles”). The tender has been awarded for manufacturing multiple powdered SKUs in various flavours, pack formats, and sizes. KTD informed commencing production in Q1FY21 to be stocked in “Coles” through Q2FY21.

1HFY21 Financial Highlights (Source: Company Reports)

Key Risks: The company faces the risk of producing the required quality and scale of products for clients, demand from customers, risk of maintaining business with key retail partners, distributors, and suppliers, and supply chain continuity due to COVID-19 restrictions.

Outlook: Regarding KTD’s tender with “Coles”, the company will manufacture products at its Melbourne powdered facilities and forecasts sales of $5.2 million per year. The term of the deal has not been mentioned and KTD expects the term to be longer than the initial 12 months period.

Stock Recommendation: The stock of KTD gave a negative return of 19.56% in the past three months and a negative return of 17.77% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $0.165. The stock of KTD has a support level of ~$0.162 and a resistance level of ~$0.207. On a TTM basis, the stock of KTD is trading at a price to book value multiple of 1.4x, lower than the industry (Consumer Non-Cyclicals) median 1.8x, thus seems undervalued. Considering the current trading levels, revenue growth across business divisions and brands in FY21, valuation on a TTM basis, and risks associated with the logistics, manufacturing, and consumer demand during COVID-19, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.185, up by 5.714% on 20 April 2021.

Southern Gold Limited

Results from The Deokon Project (100%): Southern Gold Limited (ASX: SAU) is a developer and explorer of wholly owned projects in South Korea. SAU has 50% equity interest in Kochang and Gubong projects in South Korea held in partnership with Bluebird Merchant Ventures (BMV). As of 20 April 2021, the market capitalisation of the company stood at ~$18.98 million. On 19 April 2021, the company announced the results from the field activity of the Nettle and Thistle zones, extending the Golden Surprise Trend to at least a kilometre. SAU conducted a soil sampling program over the Trend, demonstrating that the gold-silver mineralised zone is open and confirmed potential intersecting structural trends at the Nettle zone. It has discovered a drill target at Nettle and has planned to undertake drill testing as soon as regulatory approvals are obtained (expected in late April).

Half-Yearly Results Declared: SAU reported a net loss after tax of $1 million for 1H21 versus loss of $2.49 million in 1HFY20. SAU undertook drilling at Shin Hill prospect and reported overall low-grade results at the prospect. It also reported the discovery of ‘Thistle’ and ‘Nettle’ Zones and returned Au-Ag results from the sampling of the outcrop from the Nettle Zone. During 1H21, SAU reported peak gold and silver assay results from the diamond drilling undertaken at three holes at Aphae Pit and undertook a magnetic survey. At the Weolyu Project, the drilling results demonstrated a downgrade at the Weolyu South prospect.

In September 2020, SAU raised $10.2 million via placement of 85 million shares at $0.12 per share. SAU held a cash balance of $10.15 million as of 31 December 2020.

Summary of Operating & Investing Cash Flows, 1HFY21 (Source: Company Reports)

Key Risks: The company runs the risk of discovering potential drilling targets, Au-Ag mineralisation, and interpreting assay results from the drilling programs. It also faces the threat of seeking funding and approvals for the projects. 

Outlook: At Aphae Pit, SAU will complete the Phase 2 drilling to test the structure where gold mineralization is expected. At the Weolyu project, the company will undertake further reconnaissance traverses and soil sampling programs at the identified prospective areas (to the northeast of ‘Weolyu South’). In January 2021, BMV proposed SAU to discuss alternative means regarding their pending settlement to purchase and sell their JV projects. The companies have kept the negotiation channels open with SAU, estimating over $1.93 million from the settlement.

Stock Recommendation: The stock of SAU gave a positive return of 10% in the past month and a negative return of 23.47% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level of $0.078-$0.175. The stock of SAU has a support level of ~$0.078 and a resistance level of ~$0.1. On a TTM basis, the stock is trading at a price to book value multiple of ~1x, lower than the industry (Metal & Mining) median of ~2.7x, thus seems undervalued. Considering the low trading levels, low debt levels, decent cash position and higher current ratio in 1H21, valuation on a TTM basis and associated risks of the pandemic and desired target discoveries, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.088, down by 1.124% on 20 April 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.

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