HRL Holdings Unscathed From Lockdowns

Small Caps | Jun 15 2020

HRL Holdings has emerged from the depths of the lockdown relatively unscathed but the uncertain economic outlook is likely to weigh on FY21.

-Tough year ahead but improvement expected in FY22
-Food service, Hazmat businesses untroubled
-Further guidance on the outlook anticipated with results in late July

 

By Eva Brocklehurst

Demand for the services of HRL Holdings ((HRL)) in Australasia has emerged from the depths of the coronavirus lockdowns relatively unscathed, such that the company has reinstated FY20 guidance. Moreover, new guidance is ahead of what many brokers had been anticipating. The company has a robust working capital balance and will exit FY20 in a good position.

The new guidance is for revenue of $32-32.7m, up 4-6% on FY19, with operating earnings (EBITDA) of $5.5-5.8m. The company has benefited from the food services part of its Analytica business as it was deemed an essential service.

Strict cost controls were also a key reason that guidance could be improved. Guidance is materially ahead of Canaccord Genuity's previous expectations. The broker retains a Hold rating and $0.15 target and lauds management's competent performance.

Yet, economic uncertainty and a material second half skew in earnings means the broker's forecasts are revised down for FY21, with operating earnings of $6.5m now expected.

The company will benefit from wage subsidies in the June quarter and a -20% reduction to board and executive earnings. Along with better-than-expected second half earnings this should generate positive cash flow.

Morgans had assumed a shutdown of around two months for non-essential services in New Zealand but the entire NZ operations resumed in mid May. A favourable Manuka honey harvest and strong demand for these products has ensured the Analytica honey (and dairy) service lines traded through the restrictions.

In Australia, all operations traded without interruption. Morgans also understands cash collection has been very strong with blue-chip customers paying promptly.

Outlook

Morgans expects a subsequent deterioration in economic conditions is likely to weigh on FY21 with growth resuming in FY22 because of the recent investment in new service lines.

A challenging economic outlook will still have its impact of the south-east Queensland geotechnical business, which comprises 22% of FY20 revenue and around 6% of operating earnings.

The recently developed environmental service line from Analytica will be affected as private commercial and engineering construction activity slows. Still, the geotechnical business could benefit from highway upgrades along the Sunshine Coast, Morgans asserts.

Otherwise, food testing service lines and hazmat businesses should prove relatively resilient. The broker believes management is done a good job in managing the factors under its control and shareholder patience should be rewarded, retaining an Add rating with a $0.14 target.

Bell Potter also erred on the side of caution in its estimates and finds the reinstatement of better guidance a strong positive, given the difficult circumstances. The broker only revises estimates up modestly for FY21 and FY22 to reflect the fact that a strong rebound was already assumed as lockdowns were lifted.

Nevertheless, there is still some level of uncertainty in forecasting and further guidance is expected in late July with the full-year results. Bell Potter retains a Buy rating with a $0.15 target.

HRL Holdings provides sampling, laboratory testing and data management services and its customers include food, agriculture and construction industries. There are four distinct business units including food & environmental; occupational hygiene; geotech & construction materials; and software.

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