Watkin Jones Plc – Strong second-half recovery, with increased activity in the institutional forward sale market

Watkin Jones Plc (LON: WJG) is a FTSE AIM UK 50 index listed Property Development Company, which provides solutions related to the developments of multi-occupancy accommodation projects with a focus on the ‘student accommodation’ and ‘build to rent’ market.

On 19 January 2021, the Company will release the preliminary results for the year ending 30 September 2020.

Rationale for Valuation – Speculative Buy at GBX 171.27

• The Company witnessed a strong second-half recovery and has an intention to pay a 2020 full-year dividend, reflecting the robust cash position.
• As per valuation metrics, Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiples of the WJG are currently lower as compared to the corresponding multiples of the Real Estate Operations industry.
• The Company has decent fundamental metrics as it has maintained a ROE above 10% for the last three years.
• In the last month, the Company has delivered a sparkling return of ~18%, which was higher as compared to the FTSE AIM UK 50 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 155) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The delay in project deliveries can impose penalties or fines and can cause reputation damage to the organisation.
• The macro-economic volatility can significantly impact the real estate market and consumer confidence.

FY20 Trading Update (for the year ended 30 September 2020, as on 6 November 2020)

• The Company witnessed strong second-half recovery, with revenues of approximately £350.0 million and adjusted operating profit in the range of £48-£50 million in 2020.
• In the second half of 2020, the Company has secured nine new development projects.
• For 2020 year-end, WJG expects a gross cash balance of approximately £130 million and a net cash balance of £90 million (after deducting £40.0 million of site-specific loans).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

*Peers: Keller Group Plc, Barratt Developments Plc, Berkeley Group Holdings Plc, and St. Modwen Properties Plc.

Conclusion

Despite lockdown restrictions, the Company delivered a resilient financial and operational performance, with seven developments successfully and three more expected to be secured shortly. The Company has shown a strong second half to the year and made excellent progress in growing development pipeline. Moreover, it has a robust and capital-light business model, which could play a vital role in the sustainable growth of the business. In the forward sale markets, the activity in the institutional has started to recover in the latter part of 2020. The stock made a 52-week low and high of GBX 118.17 and GBX 299.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Watkin Jones at the current market price of GBX 171.27 (as on 7 December 2020, before the market close at 1:20 PM GMT), with lower double-digit upside potential based on 14.89x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Ab Dynamics Plc - Medium-term outlook remains positive

Ab Dynamics Plc (LON: ABDP) provides the testing systems to the global motor industry. The Company designs products for automobile companies and the global automotive research and development sector.

On 13 January 2021, the Company will hold the Annual General Meeting.

Rationale for Valuation – Speculative Buy at GBX 1,760.00

• The Company delivered a strong first-half performance, with a robust balance sheet.
• The Company has decent fundamental metrics as it has maintained a profitability margin above than the industry median.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In FY20, the debt/equity ratio was 0.01x.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (around GBX 1,733) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The market conditions in which the Company operates is full of challenges and might impact the operational and financial performance.
• The ongoing outbreak of Covid-19 could impact the Company’s performance in the near term.

Recent News

On 7 December 2020, the Company announced that it had issued 1,041 ordinary shares of 1 pence each under the Bonus Shares.

Financial Highlights (for the year ended 31 August 2020 (FY20), as on 25 November 2020)

(Source: Company Website)

• The Company delivered a strong first-half performance, with robust growth in ADAS (Advanced Driver Assistance Systems) platforms and testing, and solid geographic growth in the USA and Japan.
• The Company has a significant cash balance of £31.2 million and has proposed a final dividend per share of 4.4 pence.
• It has successfully launched the new products (including Halo driving robot, aNVH, Guided Soft Target 120 and Radar Cart) and completed the construction of the new Engineering Design Centre.
• ABDP has also shown a robust balance sheet, with an operating cash flow of £6.9 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite the challenging market conditions, the Company has delivered a robust and resilient performance in 2020, with a strong financial position. In the first quarter of 2021, the demand has been consistent with the Q4 FY20 exit rate. Further, the medium-term outlook for AB Dynamics stays positive. Looking ahead, the Company remains confident that demand will recover to pre-crisis growth patterns over the medium term. The Company also declared a total dividend of 4.4 pence per share, which shows strong future pipeline. Overall, it is well placed to deliver continued growth in the financial year 2021 and beyond. The stock made a 52-week low and high of GBX 855.00 and GBX 2,400.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Ab Dynamics at the current market price of GBX 1,760.00 (as on 7 December 2020, before the market close at 1:42 PM GMT), with lower double-digit upside potential based on 50x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Iomart group Plc – Operating with a strong foundation to accelerate growth

Iomart Group Plc (LON: IOM) is a Scotland based company that provides secure and managed services that include designing, delivering, and managing technology and cloud solutions.

Rationale for Valuation – Speculative Buy at GBX 310.00

• Iomart has high levels of recurring revenue and saw signs of improved confidence within new and existing customers.
• The long-term prospects of the Company remain strong, with continuous growth and profitability as well as generating consistent returns, supported by the recurring revenue.
• As per valuation metrics, Price/Earnings, EV/EBITDA, and Price/Cash Flow multiples of the IOM are currently lower as compared to the corresponding multiples of the Software & IT Services industry.
• The Company has decent fundamental metrics as it has maintained profitability margins above the industry median.
• From the technical standpoint, 14-day RSI stood at around 44.10, which is supporting the upside movement.

Key Risks

• Any downtime experienced at the data centre will impact the services provided by the Company, and it could result in the loss of customer and reputation.
• The IT market’s remain highly competitive, and new players with differentiated products enter the market often, and if the Company is not able to provide similar services at a competitive price, it could lose business.

Financial Highlights (for the period ended 30 September 2020 (H1 FY21), as on 1 December 2020)

(Source: Company Website)

• The Company witnessed strong levels of recurring revenues, with an increase in revenue of 2% year-on-year. The growth was driven by the two smaller acquisitions, which was made in the final month of the last financial year.
• The order levels from existing managed cloud services clients were consistent with H1 FY20. While it has successfully launched the iomart Managed Security Service (iMSS) and also completed the transformational IT consultancy project for the local government customer.
• The interim dividend was at the same level as shown in the last year of 2.6 pence per share, which will be paid on 29 January 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In recent months, the Company has increased the new business discussions, reflecting the confidence in longer-term IT and digital transformation projects. In H2 FY21, the revenue and profit margins are expected to benefit from existing customers and operational efficiencies. Moreover, the demand for digital transformation would be supported by the remote working norm, and it will remain a long-term key driver to the cloud. The long-term prospects of the Company remain strong. Meanwhile, Iomart Group has delivered continuous growth and profitability. The recurring revenue stream of the Company helps in generating consistent returns. Overall, the Company is well-positioned to deliver long-term growth and has a strong balance sheet to sustain the current challenges. The stock made a 52-week low and high of GBX 219.50 and GBX 409.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Iomart group at the current market price of GBX 310.00 (as on 7 December 2020, before the market close at 10:27 AM GMT), with lower double-digit upside potential based on 25.20x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Caledonia Mining Corporation Plc – Operating with a strong operational performance

Caledonia Mining Corporation Plc (LON: CMCL) is a Gold producer, which has a profitable and cash generative business with a strong growth profile.

Rationale for Valuation – Speculative Buy at GBX 1,200.00

• The Company has improved the performance in Q3 FY20, and it has also shown the brighter outlook for 2020, with an increase in the October dividend.
• The Company has decent fundamental metrics as it has maintained a profitability margin and ROE above than the industry median.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In June 2020, the debt/equity ratio was 0.01x.
• In the last year, the Company has delivered a sparkling return of ~92%, which was higher as compared to the FTSE AIM All-Share Index.
• From the technical standpoint, 90-day RSI stood at around 45.63, which is supporting the upside movement.

Key Risks

• Mining is a hazardous business, and hence, any accident or negative incident could cause production disruption, reputational damage, and financial loss.
• Further, there are significant operational risks associated with COVID-19 related restrictions, geological and weather conditions.

Recent News

On 30 November 2020, the Company announced that it had completed the phase of fully equipping the Central Shaft and is on track to be commissioned in Q1 FY21.

Trading Update (for the quarter ended 30 September 2020, as on 12 November 2020)

• In Q3 FY20, the revenues increased by 27% year-on-year to US$25.4 million and gross profit surged by 47% year-on-year to US$12.5 million, with a gross margin of 49%.
• Led by a higher insurance premium and an increased share-based payment expense, the all-in sustaining cost per ounce surged to US$1,119 in Q3 FY20 from US$872 in Q3 FY19.
• During the quarter, the Company delivered a strong operating performance, with 15,155 ounces of gold produced and an increase of 10% year-on-year in tonnes mined and milled.
• The July dividend per share increased by 13.3% to 8.5 cents. Further, the October dividend per share increased to 10 cents.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company witnessed the strong operating performance, with an increase of 12% in gold production in the first nine months of 2020. Further, it has increased the 2020 gold production guidance to a range of 55,000 to 58,000 ounces from a range of 53,000 to 56,000 ounces. It has also shown a strong cash generation, with net cash flow from operating activities of US$7.4 million and net cash and cash equivalents of US$21.6 million. Moreover, the Company has increased its quarterly dividend, supported by the strong financial and operating performance. The stock made a 52-week low and high of GBX 582.00 and GBX 1,900.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Caledonia Mining Corporation at the current market price of GBX 1,200.00 (as on 7 December 2020, before the market close at 10:55 AM GMT), with lower double-digit upside potential based on 9.00x Price/NTM Earnings (approx.) on FY20E EPS (approx.).

*All forecasted figures and Peers Information have been taken from Refinitiv, Thomson Reuters.

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

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