South32 Ltd – Strengthened the financial position and lifted share buy-back suspension.

South32 Ltd (LON: S32) is a Perth, Australia-based globally variegate Metal and Mining Company, which is engaged in the exploration, refining, transport, and marketing of a series of products.

Investment Rationale – Speculative Buy at GBX 126.00

• From a technical standpoint, 20-day SMA (119.63) is supporting the upside potential.
• As per the valuation metrics, EV/Sales, Price/Cash Flow and Price/book multiples of the S32 are currently lower as compared to the corresponding multiples of the Basic Materials industry.
• In FY20, gross margin was 61.20%, whereas the industry median was 39.20%. S32’s gross margin has remained above the industry level for the past five years.
• It has maintained FY21 guidance for all operations.

Risk Assessments

• The performance of the Company is exposed to certain risks and uncertainties, such as interruption in production due to Covid-19, change in regulations regarding environmental safety, reputational damage with operational accidents and injuries, geopolitical uncertainties hampering the ability to obtain licenses, and loss of business opportunity due to liquidity risk.
• The Company is cautious about the outlook for key commodities in the short term but expects positive demand in the long-term.
• The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations.

Recent News

30 October 2020: Claire Tolcon was appointed as an additional Company Secretary, effective from 30 October 2020.

Quarterly Report (as on 19 October 2020)

 (Source: Company Website)

• In Q1 FY21, S32 continued strong operating performance and delivered a US$70 million increase in its net cash position to US$368 million.
• It has lifted the suspension on market share buy-back as capital management program has US$121 million remaining. It will add immediate value to shareholders.
• The Company also increased metallurgical coal production by 22%, benefitted from the successful return to a three longwall configuration during the prior quarter.
• It also delivered a 19% increase in manganese ore production as South Africa Manganese returned to full production.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

While guidance will impact from COVID-19, the Company expects to increase in production in the financial year 2021. The Company has a robust liquidity profile to meet the short-term obligations in the near term. Moreover, the suspension of buyback following the strong quarterly performance, will add immediate value to shareholders. It is also progressing well with the divestment of South Africa Energy Coal and achieved record hydrate production at Worsley Alumina. The US$1.43B capital management program is 92% complete, and it still has US$121M remaining to be returned to shareholders. Stock 52 week High and Low were GBX 153.96 and GBX 80.04, respectively.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation on South32 Ltd at the current market price of GBX 126.00 (as on 23 November 2020, before the market close at 8.00 AM GMT) with lower double-digit upside potential based on 21.10x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

AdEPT Technology Group PLC – Proved resilient despite tough trading conditions.

AdEPT Technology Group PLC is a FTSE AIM All-Share Company, which independently provides managed services for unified communications, information technology, voice solutions and connectivity.

Investment Rationale – Speculative Buy at GBX 212.00

• Over the past three years (H1 FY18 to H1 FY21), revenue has surged at a CAGR of ~8.54%.
• From a technical standpoint, 14-day RSI (24.10) is supporting the upside potential.
• The customer debt collection improved to 33 days (H1 FY19: 45 days).
• The recent partnership with 8x8, Inc. will strengthen the portfolio for rapid rollout of cloud Unified Communications and Contact Centre services.
• In FY21 so far, ADT has shown resilient performance as the key performance indicators such as order intake, cash generation and project delivery has been encouraging.

Risk Assessments

• The slowdown in the UK economy has affected the demand in commercial space. Moreover, the foreign exchange fluctuations are increasing the cost of imports for UK ICT companies.
• Adjacently, the uncertainties of Covid-19 pandemic and Brexit are also posing a risk to supply chains and margins.
• Furthermore, macroeconomic uncertainties can impact consumer confidence and reduce non-discretionary expenditures.

Interim results for the six months ended 30 September 2020 (as on 17 November 2020)

(Source: Company Website)

• In H1 FY20, total revenue increased by 7.6% year-on-year, while the recurring revenue increased to 78% of total revenue (H1 FY19: 75%).
• The underlying EBITDA margin was 18.4% (H1 FY19: 19.8%) and adjusted profit after tax was £3.1 million (H1 FY19: £3.9 million).
• The adjusted fully diluted EPS was 11.4 pence (H1 FY19: 15.3 pence); however, the Company did not propose any dividend.
• As of 30 September 2020, net senior debt was £24.8 million, reflecting a reduction of £6.7 million from H1 FY19.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

Given the ongoing uncertainty, the Board was unable to provide guidance for FY21. However, the Government recognized the workforce of AdEPT Technology Group as key workers since Telecommunications and IT support has become a 4th Utility Service to keep Government, education and the economy going in the prevailing crisis. The turnover of the Company is nearly 45% contributed through public sector while 55% is contributed by the commercial sector. Looking forward, ADT believes that Covid-19 would continue to have a modest impact on the business in the medium to long term. However, AdEPT's client base is quite well-diversified across both the private and public sectors. It shall be able to expand the demand for its services since there is an acceleration in digital transformation initiatives. Stock 52 week High and Low were GBX 370.00 and GBX 160.05, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on AdEPT Technology Group PLC at the current market price of GBX 212.00 (as on 23 November 2020, before the market close at 12.32 PM GMT).

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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