RHI Magnesita NV

RHI Magnesita NV (LON: RHIM) is a FTSE All-Share listed entity that supplies refractory products, systems, and solutions for high-temperature processes.

Investment Rationale – SPECULATIVE BUY at GBX 2,954.00

• Strong Momentum and Outlook: Driven by price increase, momentum improved in September 2021, and therefore, is on track to achieve €310 million in Adjusted EBITA in FY21. Moreover, it has a strong order book visibility into FY22.
• Acquisition of SÖRMAŞ: RHIM agreed to acquire an 85.22% stake in SÖRMAŞ, for a consideration of €38.8 million in cash.
• Economic Recovery: British economy has bounced back more than expected as GDP surged by 5.5% in Q2 2021, as per the Office for National Statistics (ONS).
• Technical Indicator: From a technical standpoint, 14-day RSI (~28.51) is in the oversold position, while the stock price is trading close to the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis, key valuation multiples of RHIM (EV/Sales, EV/EBITDA, and Price/Earnings) are lower against the median of the Basic Materials industry.

Key Risks

• Short-term uncertainties: The UK fuel crisis could increase project costs. Moreover, the supply squeeze can impact the construction activity. Moreover, the likelihood of China Evergrande’s debt default risk poses a systematic risk to the financial and construction markets.
• Increased finance costs: Following the increase in net debt, its leverage (Net debt to adjusted LTM EBITDA) has increased from 1.5x in H1 FY20 to 2.2x in H1 FY21.

Recent News

Completion of share buyback programme: On 05 August 2021, RHI Magnesita completed a share buyback programme of up to €50 million. It was managed by Barclays Bank Ireland PLC.

Q3 FY21 Trading Update (for the three-month period to 30 September 2021, as on 19 October 2021)

• Strong Demand: RHI Magnesita experienced a solid demand for both the Steel and Industrial businesses in Q3 FY21, and thus, it has a strong order book visibility extending into Q1 FY22.
• Better Earnings: Driven by higher prices, the Group witnessed improved earnings momentum in September 2021.
• Financial position: Due to lower profitability in Q3 FY21, and increased inventory levels to tackle supply chain challenges might keep the leverage (Net debt to EBITDA) around 2.0x at the end of FY21.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

RHIM has re-established its inventory levels to capitalize on price increases and stronger market conditions. Moreover, the sharp rebound in customer demand shall offset the inflationary pressure arising on RHIM due to supply chain disruption.

However, material global supply chain challenges can lead to significant delays and higher freight costs. Notwithstanding, it has navigated significant challenges and is on track to meet its FY21 adjusted EBITDA guidance. Meanwhile, the expected cost-saving initiatives shall also support the H2 FY21 results. The stock made a 52-week High and Low of GBX 4,762.00 and GBX 2,458.21, respectively.

Based on the positive trading momentum, revenue growth, increased shareholder returns, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on RHI Magnesita NV at the closing market price of GBX 2,954.00 (as on 18 October 2021), with lower double-digit upside potential based on 9.48x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Quartix Technologies PLC

Quartix Technologies Group PLC (LON: QTX) is a FTSE AIM All-Share listed entity that provides vehicle tracking systems and services to the fleet and insurance sectors.

Investment Highlights – SPECULATIVE BUY at GBX 420.00.

• Subscription Growth: During 9M FY21, new subscription surged 22% year-on-year, primarily driven by 35% year-on-year growth in France.
• Strong Recurring Revenue: The annualised recurring revenue of the fleet subscription base gained by £1.5 million since the start of FY21.
• Improved Market Dynamics: The economic reopening has boosted traffic on roads leading to the increase in insurance buyers and the requirement for vehicle tracking systems.
• Technical Indicator: From a technical standpoint, 14-day RSI (~16.01) indicating an oversold scenario, while the stock has gone significantly below the lower Bollinger Band.

Key Risks

• Weak Insurance Market: The UK’s motor insurance premiums plunged 16% in Q3 FY21, while the mobility restrictions, subdued new car sales, and fuel crisis can keep the market volatile.
• Macroeconomic uncertainty: British inflation rose to its highest in 10 years, while the strengthening of US Dollar with an increase in US Treasury Yields can hinder the QTX’s growth prospects.

CEO Succession Update and Trading Update (as on 13 October 2021)

(Source: Company Website)

• CEO Succession: Richard Lilwall commenced his appointment as CEO (Chief Executive Officer) and joined the Board of QTX.
• Financial Outlook: FY21’s revenue, profit, and cash flow is expected to be in line with the market expectations.
• Subscription Growth: QTX’s subscription grew significantly across all divisions.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Despite covid led disruptions, fleet revenue (major contributor to Group’s revenue) remained strong, while the Company’s new fleet subscriptions grew by 21% in H1 FY21 year on year basis. Moreover, it projects FY21 financials to be in line with the market expectations on the back of strong subscription.

As economic activities are gaining pre-Covid-19 momentum, it shall support the business prospects going forward. The stock made a 52-week high and low of GBX 580.00 and GBX 310.00, respectively.

Based on the fleet revenue increase, resilience profitability, increased subscription, with support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Quartix Technologies Group PLC at the closing price of GBX 420.00 (as on 18 October 2021), with lower double-digit upside potential based 60.90x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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