HRL Holdings Ltd.

Robust EBITDA growth, however, softness in methamphetamine screening business is a concern: Environmental and geotechnical solution provider, HRL Holdings Ltd. (ASX: HRL), has via an ASX release gave the trading update for the Q1 2019, in which it outlined about the stabilizing earnings from the methamphetamine screening and laboratory testing services which were on the surge at the beginning of the fiscal. Resultantly, the company expects the revenues from this segment to decline to approximately AUD$1.9m in FY19, from the erstwhile AUD$4.6m in FY18. This would result in an adverse impact on the EBITDA of $2.2Mn-$2.5Mn for the period.

For the FY 2018, the company’s top line expanded by 100% on a YoY basis and thus came in at $27.30 Mn. This was on the back of robust contribution from the HAZMAT, and Analytica business along with the pleasing revenues garnered from the honey testing services in New Zealand.

Firm’s EBITDA rose by an astounding 382% over the previous fiscal and was clocked at $5.80 Mn. This phenomenal growth was driven by a robust performance in the company’s HAZMAT division and the recently acquired Analytica business. The EBITDA margins also rose due to the scalability achieved in the operations. Resultantly, the cost to revenue ratio declined to a mere 4.8% from the earlier 11%.

HRL’s Revenue growth trends along with price movements (Source: Company report)

Outlook: Going further, the trading scenario will continue to remain challenging and hence the firm will focus upon leveraging its acquired Analytica intellectual property to foray into the new services lines in both Australia and New Zealand. The firm will also focus on the cross-selling of its products and services across its various business units. The firm will also use the OCTFOLIO software platform to acquire new customers & also provide better offerings to existing customers of other business units. Overall, the earlier margins that grew at a significant level now look under pressure. Group’s fiscal 2018 return on equity was also down to -6% from 1.2% of 2017.

Meanwhile, the stock price has fallen by 42.86% over the past six months as on 12 December 2018. Hence, considering the challenging trading scenario and falling earnings from the methamphetamine screening business, we advise a wait and watch strategy on the stock at the current market price of $0.100 as on 13 December 2018, while it may look to be trading at a lower level.  

Reliance Worldwide Corporation Ltd.

Expected synergies coupled with a better product mix - Key Drivers: Leading manufacturer of water delivery, control and optimization systems, Reliance Worldwide Corporation Ltd. (ASX: RWC), has posted decent numbers for the FY 2018. The company has during the financial year achieved a top line expansion of 28% on a YoY basis and hence the revenue came in at $769.40 Mn.

This growth was driven by a phenomenal growth witnessed in the core SharkBite PTC fittings and accessories segment as well as first full year contribution from the Holdrite sales. As well as strong external sales growth in the APAC and EMEA segments and the inclusion of one month of John Guest sales helped the group. EBITDA (before contribution from John Guest) was clocked at $150.90 Mn, up by 25% for the year. This was on the back of the strong sales witnessed across the product segment. Also, a better product mix, i.e. inclusion of the higher margin Holdrite product aided to the cause. Apart from above factors, scalability and improvements in the procurement process as well as operations led to cost optimization and hence a robust growth in the EBITDA.

Outlook: Going further, the company has guided the EBITDA to be in the range of $280-290 Mn for the FY 2019. The guidance is on account of the $ 10 Mn synergies that are expected in the year from the acquisition of John Guest. Also, the management currently expects annual synergy realisation to exceed $30 Mn on a run rate basis by the end of FY2020. Moreover, this growth shall be mainly fuelled by the strong top line growth expected in all regions, which will include ongoing expansion in the core business and strong growth in the new products.


RWC’s Financial Performance (Source: Company report)

Meanwhile, the stock price has fallen by 16.76% over the past six months as on 12 December 2018. The stock’s fundamentals, given the recent fall seem to have value while resistance around $5 and support around $4.4 are noted. Hence, considering the expected synergies out of latest acquisitions and an improved product mix, we reiterate our “Buy” recommendation on the stock at the current market price of $4.60 as on 13 December 18.
 

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