Oge
Investors love stocks that consistently appreciate and are still trading below their fair value estimate; we call such stock cash cow as their risk of melting down is minimal while the upside potential is high.
In my company’s analysis, I will be reviewing Newrest ASL (Airservices), a stock with an upside potential that is clearly supported by its improving financials and could reward smarter investors who key into the current price of N6. Although I started accumulating the stock at N4.95, the closing price of N6.6 is grossly undervalued when compared with its estimated fair value.
Newrest ASL Nigeria Plc provides catering and related services. The Company operates inflight catering facilities, lounges, and restaurants. Newrest ASL serves the aviation industry operating in Nigeria.
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The stock is up by 10.92% on YTD as investors increase their bid in today’s trading after Q3 results were released.
Fundamentals.
Newrest ASL has just released an impressive Q3 2018 results with revenue coming out at N4 billion against N2.8 billion reported in 2017, representing a 42%.
On a breakdown, revenue growth was largely supported by Inflight catering services from Lagos branch, Handling and Laundry services. The company also commenced catering services to local flights and industry which contributed a significant N93million value to the top line.
Gross profit margin fell marginally to 65% (from 67%) but well above industry standard.
Operating margin, which was negative in the previous comparable period, was also impressive at N402 million while profit after tax increased by 191% to N1 billion respectively. Interestingly, the company had surpassed its 2017 record profit of N428 million.
Return on Equity, a measure of how the firm utilized shareholders’ fund also increased to 22% against a paltry 8.5% in 2017 while exposure to debt was scaled down as debt to equity declined from 40% to 33%.
The liquidity position of Newrest ASL as indicated by current ratio increased to 3.6 from 2.7′; the company can settle its short-term obligations with its working capital.
Cash generated from operation fell from N1.7 billion to N902 million.
Technical Analysis
The stock closed at N6.6 which is above its 20-day and 50-day moving average of N5.99 and N5.57 respectively. Technically, the stock is bullish on short-term as long as the 20-day moving average is above the 50-day MA.
While the share price is above 200-day moving average of N3.38, long-term sentiments are also positive.
Valuation
Newrest ASL didn’t only reported a 293% growth in Q3 EPS, from 44k to 173k but also surpassed previous year’s EPS of 68k. Using an adjusted discount of 15% on TTM EPS of 197k, we assign a fair value of N13 to the stock which, when compared with its current closing price of N6.6, represents 96% upside potential.
From our end, we assign a BUY rating on the stock.
