Top 5 Picks for March 2022- TLS, BPT, TNE, CUV, RMC

 

 

Telstra Corporation Limited

TLS Details

On Market Buy-Back of Shares: Telstra Corporation Limited (ASX: TLS) provides information and telecommunications services to domestic and overseas customers. TLS informed the market to buy-back ~5.302 million securities on 25 February 2022 and has ~11.89 billion shares on issue in the class of shares to be bought back. 

Landmark Deal Between TPG Telecom & TLS:

1HFY22 Highlights:

• In 1HFY22, the company’s reported total income declined by ~9.4% YoY to ~$10.88 billion, primarily due to the adverse transitional effects of migration to the NBN network.
• The underlying EBITDA increased by ~5.1% YoY to ~$3.5 billion, reflecting the positive momentum in TLS’ core business and growth in mobiles business performance in 1HFY22.
• The productivity improvements delivered a reduction in total operating expenses from ~$7.94 million in 1HFY22 to ~$7.41 million in 1HFY21, down by ~6.7% YoY.
• TLS progressed on its T22 strategy during 1HFY22 and is on track to deliver more than 80% of metrics.
• The Board has declared to pay a fully franked dividend of ~8 cps for 1HFY22, including ~6 cps of ordinary dividend and ~2 cps special dividend with the reinstatement of its dividend Reinvestment Plan (DRP).
• TLS held ~$1,648 million cash and cash equivalents as of 31 December 2021, up by 27.3% YoY from ~$1,295 million as of 31 December 2020.

Productivity Enhancements from 1HFY21 -1HFY22; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of technological changes, partnership issues, increased investment in infrastructure, and network growth. A tight regulatory environment and breach of cyber security can also disrupt business operations.

Outlook:

• TLS remains on track to witness another reduction of ~$430 million in underlying fixed costs for FY22.
• Guidance Provided for FY22:
  

Valuation Methodology: P/E 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 stock of TLS gave a positive return of ~3.39% in the past six months and a positive return of ~13.36% in the past nine months. The stock has a 52-weeks low level of $3.040 and a high-level of $4.310. The stock has been valued using the Price to Earnings-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median P/E multiple, considering the decline in TLS’ reported financial performance, rise in cash cycle days, and continued risk of cyber-attacks and technological changes. For this purpose of valuation, a few peers like Chorus Ltd (ASX: CNU), Spark New Zealand Ltd (ASX: SPK), TPG Telecom Ltd (ASX: TPG), and others have been considered. Considering the current trading levels, growth in underlying EBITDA, robust mobile business performance, expected revenue from the MOCN agreement, indicative upside in valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.950, as of 28 February 2022, 10:45 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

TLS Daily Technical Chart, Data Source: REFINITIV  

Beach Energy Limited

BPT Details

Growth in Earnings in 1HFY22 (Ended 31 December 2021): Beach Energy Limited (ASX: BPT) is an oil and gas exploration and production firm with operations across segments namely South Australia and Western Australia (SAWA), Victoria, and New Zealand..

• BPT sales revenue increased from ~$705 million in 1HFY21 to ~$786 million in 1HFY22, up by ~11% Y-o-Y led by the higher realised price of oil (up ~75% on pcp) and gas (up ~5% on pcp).
• The EBITDA margin improved to ~65% in 1HFY22 versus ~58% in 1HFY21. The bottom line (NPAT) grew from ~$128 million in 1HFY21 to ~$213 million in 1HFY22, up by ~66% YoY in 1HFY22.
• The company closed 1HFY22 with a net cash position of ~$73 million as of 31 December 2021 vs net debt position of $48 million as at end of 1HFY21.

Growth in EBITDA & Net Operating Cashflows, Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of changes in oil prices, climatic conditions, production levels, and demand for energy globally. The business needs to ensure capital investment to expand production and upgrade operations.

Outlook:

• The company expects FY22 oil and gas production in the range of ~ 21.0 - 23.0 MMboe. The key development projects are advancing on track. The FY22 capex guidance stands between ~$900 - ~$1,100 at an operating cost of ~$11.50 - ~$12.50 per boe.
• BPT plans to restart the oil exploration at the Western Flank project and begin the well exploration for the Waitsia project development in FY22.

Estimated Production & Capex for FY22, Highlights; (Analysis by Kalkine Group) 

Valuation Methodology: Price to Earnings 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 stock of BPT gave a positive return of ~26.04% in the past three months and a positive return of ~41.35% in the past six months. The stock is currently trading slightly above the 52-weeks’ average price level band of $1.010 - $1.830. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median P/E multiple, considering the decline in sales volume, a new ~$600 million revolving debt facility, and continued weather and COVID-19 linked risks. For this purpose of valuation, a few peers like Santos Ltd (ASX: STO), Woodside Petroleum Ltd (ASX: WPL), Senex Energy Ltd (ASX: SXY), and others have been considered. Considering the current trading levels, growth in earnings, delivery of key milestones in 1HFY22, a favourable net cash position, and indicative upside in valuation, we give a ‘Buy’ rating on the stock at the current market price of $1.5125, as of 28 February 2022, 11:55 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

BPT Daily Technical Chart, Data Source: REFINITIV  

Technology One Limited

TNE Details

Managerial Changes: Technology One Limited (ASX: TNE) is an ERP Software as a Service (SaaS) company, which is engaged in developing, marketing, sales, implementation, and support of fully integrated enterprise business software solutions. Recently, the company announced that, Adrian Di Marco would be stepping down from his post, after the release of TNE’s 1HFY22 results. The company will replace Adrian Di Marco with the appointment of Pat O’Sullivan, taking on the role of Non-Executive Chair of TNE.

AGM Highlights:

• In FY21, SaaS Annual Recurring Revenue (ARR) grew by 43% year over year. The company currently has ~637 large-scale enterprise customers, up 18% year over year. Notably, the total ARR in FY21 came in at $257.5 million, depicting a rise of 16% on pcp.
• In FY21, profit before tax stood at $97.8 million, up 19% year over year, owing to fast growth of TNE’s global SaaS ERP solution. Notably, SaaS & continuing business revenue went up by 9% on pcp.
• During the period, TNE invested $77 million in R&D, as the company is undertaking opportunities to invest in exciting new ideas and innovations, including its new Digital Experience Platform for Local Government and Higher Education.
• The company exited FY21 with a cash balance of $142.9 million, up ~14% on pcp. The company has a strong balance sheet with net cash inflows of $114.9 million in FY21, up from $103.5 million in FY20.

NPAT Highlight; Analysis by Kalkine Group

Risk Analysis: The company’s financial performance might get impacted by caution in buying behaviour. The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions. TNE is spending more on R&D to embrace new technologies, new concepts, and new paradigms. This might limit margin growth in the future.

Outlook: An enhanced focus on R&D is expected to aid TNE in expanding its Global SaaS ERP solution capabilities. The company expects continued strong growth in SaaS ARR and profit in FY22 and beyond. It anticipates annual recurring revenues to increase to over $500 million by FY26.

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 stock of the company has been corrected by ~17.19% in the past three-months. Currently, the stock is trading below the average of its 52-week high and low levels of $13.6 and $8.44, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering integration risk, rising expenditure, loss of key customers, etc. For the purpose of valuation, peers such as Altium Ltd (ASX: ALU), Nitro Software Ltd (ASX: NTO), Readytech Holdings Ltd (ASX: RDY) and others have been considered. Considering higher revenue base, decent liquidity position, long-term positive outlook, rising customer base, synergies from acquisition, current trading levels, and upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $9.82 as on 28 February 2022, 12:30 PM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

TNE Daily Technical Chart, Data Source: REFINITIV 

Clinuvel Pharmaceuticals Limited

 

CUV Details

Key Findings from 1HFY22 Results (Year Ended 31 December 2021):  Clinuvel Pharmaceuticals Limited (ASX: CUV) is engaged in developing drugs to treat a broad range of severe skin illnesses. The company’s branded first-in-class photoprotective drug called SCENESSE®, is utilised to treat phototoxicity in adult patients with erythropoietic protoporphyria (EPP).

• Increase in Revenues: The company reported 1HFY22 revenues of ~$24.63 million, depicting a rise of ~56% on a year over year basis, owing to higher demand experienced for SCENESSE® in Europe and consistent growth in the patients’ treatment in the United States.
• Rise in Net Profit before Tax: During the period, the company’s net profit before tax increased a whopping 50% year over year and came in at ~$8.73 million. This represented CUV’s twelfth consecutive half-year net profit.
• Decline Earnings Per Share: Earnings during the period came in at $0.119 per share, depicting a decrease of 11% on pcp.
• Increase in Cash Balance: The company exited 1HFY22 with a cash balance amounting to $98.99 million, up 20% from the end of 30 June 2021. The company has nil debt at the end of 1HFY22, providing a robust foundation to finance future growth and expansion.

Revenue Highlight; Analysis by Kalkine Group

Risks: Any adverse movement in foreign exchange price may impact the financial performance of the company. The clinical trial process is designed to assess the safety and efficacy of a medical device before commercialisation. A failure to achieve the desired results may hamper the company’s financial performance. 

Outlook: The company is well equipped to invest in new technology and service enhancement. Moreover, with a robust commercial and operations excellence, higher European orders for SCENESSE® products and a leading biotechnology company, CUV remains well-placed for long-term growth. 

Valuation Methodology: Price/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 stock of the company has been corrected by ~43.37% in the past six months. Currently, the stock has a 52-week high and low level of $44.67 and $18.11, respectively. The stock has been valued using the price-to-sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount its peers, considering its supply chain disruption risk, increased costs, Russia-Ukraine crisis expenditure with commercialising SCENESSE®, foreign currency risk, and strict regulatory approval, etc. For that purpose, peers such as Paradigm Biopharmaceuticals Ltd (ASX: PAR), Telix Pharmaceuticals Ltd (ASX: TLX), Mesoblast Ltd (ASX: MSB) have been considered. Considering higher demand from its key product SCENESSE®, decent liquidity position and 1HFY22 performance, encouraging long-term outlook, geographical diversification, current trading levels, and indicative upside in the valuation, we recommend a “Buy” rating on the stock at the current market price of $19.26 as on 28 February 2022, 10:45 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

CUV Daily Technical Chart, Data Source: REFINITIV  

Resimac Group Limited

RMC Details

Key Takeaways of 1HFY22 (Ended 31 December 2021): Resimac Group Limited (ASX: RMC) is involved in residential mortgage and asset finance lending business via multiple channels in Australia and New Zealand.

• The NPAT rose to ~$53.5 million, up by ~6% YoY during 1HFY22 because of the higher net interest income (NIM) (up by 2% YoY) and lower impairments.
• The company declared an interim dividend of ~4.0 cents per share (cps) in 1HFY22 versus ~2.4 cps in 1HFY21, up by ~67% on pcp.
• The home loan settlements increased by ~63% YoY to ~$3.5 billion in 1HFY22 compared to ~$2.1 billion in 1HFY21.

Key Financial Highlights; (Analysis by Kalkine Group)

Key Risks: RMC must meet the capital adequacy norms and a host of stipulated regulations due to operations in the financial services business. In May 2022, there are Federal elections in Australia that may change the macro-economic framework and disrupt the prevailing business policies.  

Outlook:

• The company foresees growth avenues across all segments as its market share expands in the asset finance segment and the fixed rate home loan pricing rises.
• RMC plans to deliver ~$8 billion in home loan settlements by FY24.
• RMC expects to roll out Phase 1 of the new loan originations platform for its Asset Finance division in Q1FY23 expected to provide material advantages of scale for the application process.
• The company has introduced its new core banking platform in New Zealand (NZ). It now plans to introduce it in Australia (AU) by mid-2022 to offer improved customer banking functionality

Valuation Methodology: Price to Book Value 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 stock of RMC gave a positive return of ~8.92% in the past three months and a negative return of ~27.75% in the past six months. The stock is currently trading below its 52-weeks’ average low and high price level band of $1.525 and $2.580, respectively. The stock has been valued using the Price to Book Value-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ average P/BV multiple, considering the digital transformation underway in AU and NZ, launch plans for a new loan origination system, and ~$120 billion plus addressable market opportunity for its asset finance division, etc. For this purpose of valuation, a few peers like Australian Finance Group Ltd (ASX: AFG), Pepper Money Ltd (ASX: PPM), Australia and New Zealand Banking Group Ltd (ASX: ANZ) have been considered. Considering the current trading levels, growth in home loan AUM, growth of the asset finance division, rise in NIM & NPAT, and indicative upside in valuation, and decent outlook, and key associated risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.770, as of 28 February 2022, 12:20 PM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

RMC 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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