Rolls Royce
Rolls Royce (OTC: RYCEY) is a British company which operates in three core business segments: civil aerospace, power systems, and defense. The civil aerospace segment builds engines powering wide-body aircraft, regional and business jets, and offers aftermarket services. Power systems provides power solutions to multiple end markets (defense, agriculture, marine, and power generation) while the defense business provides military, ground vehicle and naval propulsion solutions.
Key highlights
Source: REFINITIV, Analysis by Kalkine Group
Financial overview
Source: Company
Risks associated with investment
A slower than expected recovery of the civil aerospace market from the COVID-19 pandemic could significantly impact its financial performance. The disruption of the group’s operations mainly due to pandemic, might result in the failure to meet agreed customer commitments and could damage the prospects of winning future orders. Also, an intense competition means that it is susceptible to significant price pressure for original equipment or services.
Stock recommendation
On the back of product diversity, the group tried to retain its operational performance in recent times, but still failed to achieve healthy numbers. During the year, the company launched the largest restructuring in its recent history and secured further liquidity through a rights issue and by raising additional debt. The company witnessed a dent in its free cash flow in FY 2020, primarily due to lower operating performance in Civil Aerospace, ITP & Power Systems. The management aim to achieve positive free cash flow of at least £750 million (excluding disposals) in 2022, although the pathway to strong free cash flow remains dependent on the recovery, notably with regards to long-haul air travel.
On the valuation front, the stock is available at a forward EV to EBITDA multiple of 11.42x, which is higher compared to the industry (Aerospace & Defense) median of 10.95x. Also, technical indicators are showing weakness in the prices. Hence, we prefer to remain on the sideline and recommend an “Avoid” rating on the stock at the last closing price of USD 1.3 on July 16, 2021.
One-Year Technical Price Chart (as on July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group
Akoustis Technologies, Inc.
Akoustis Technologies, Inc. (NASDAQ: AKTS) is focused on developing, designing, and manufacturing innovative radio frequency (RF) filter products, which is used by the wireless industry that includes products such as smartphones and tablets, cellular infrastructure equipment, WiFi Customer Premise Equipment (CPE), and military and defense communication applications.
Key Highlights:
Q3FY21 Financial Highlights:
Q3FY21 Income Statement Highlights (Source: Company Report)
Risks: The company is highly reliant on few customers for significant portion of revenue, which poses concentration risk. Further, limited supply of semiconductors in Industry may dampen the earnings.
Valuation Methodology Illustrative: EV to Sales
Stock Recommendation:
The group caters to the RF filter segment, and the corporation is pioneering next-generation materials science and MEMS wafer manufacturing. Recently, the company increased its capacity to support the growing order book, which is a key positive. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Cognex Corp, Netlist Inc, etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of USD 9.14 on July 16, 2021.
*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.
Technical Analysis Summary
One-Year Technical Price Chart (as on July 16, 2021). Analysis by Kalkine Group
*The reference data in this report has been partly sourced from REFINITIV.
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