Stock updates: Ridley, GWA and eBet

Ridley Corporation (RIC)

We recently wrote about Australian-based agribusiness Ridley, the country's leading producer of premium animal nutrition solutions and its undervalued property portfolio. There are two points that we think are worth updating readers on.

As a brief recap, Ridley has been periodically realising small parcels of land at above its carrying value. You can read about this in further detail here.

While much of Ridley's property sales have been modest in size in recent times, the company has a number of property holdings, which have the potential to realise significant value over the coming years. As at December 2014, these land holdings had a book value of $39.6m.

The most significant of the property holdings include:

• 5,000 hectares (Ha) at Dry Creek (12 km's from Adelaide CBD)
• 475 Ha at Moolap (3 km's from Geelong CBD)
• 912 Ha at Lara (adjacent to Avalon Airport).

The property portfolio isn't simply a hidden asset that is being ignored by management but rather a reporting segment in the company's accounts. However, with negligible associated accounting revenue and small reported losses in recent years it doesn't appear to receive much attention from the market. However, the realisation of these assets is progressing.

Dry Creek – an upcoming catalyst: This salt field is about 12km from the Adelaide CBD. The site comprises four sections relating to potential development or use of the land. At the first-half FY15 result management noted positive response from an expression of interest process relating to proposals to sell or develop the land.

It is our understanding that binding offers where required to be submitted in April 2015, with Ridley intending to execute contracts regarding the development or sale of this land by 30 June 2015. As a result, we expect news flow on the future of this significant land holding in the coming weeks.

Moolap – subject to Government led delay: In early June, the Victorian State Government discontinued exclusive negotiations with RIC regarding crown land associated with Moolap in order complete a strategic land use assessment of the broader area in which Moolap resides.

While Ridley management remain confident that its Nelson Cove project with Sanctuary Living can remain a cornerstone project of the broader region, clearly the assessment will delay any value to be realised by RIC shareholders.

Outlook: Ridley is currently trading on a FY16 PE of 15 times. We view this as fair value relative to the market, but note that it ascribes little value to the company's property assets. 

We remain of the view that the current book value of $0.13 per share of the property portfolio likely materially undervalues the realisable value of the assets. However, we do acknowledge that the timing and structure of how this value will be realised remains largely uncertain.

With an announcement on the future of the Dry Creek land holding imminent we believe that the current share price provides a free option on a neutral to positive outcome. While it is somewhat difficult to quantify the sale/development potential due to a range of potential deal structures/time lines/remediation costs, etc., we believe the value realised will be materially higher than the $0.115 current book value per share.

We increase our price target to $1.40 and introduce RIC as a speculative “buy” for those seeking exposure to a potentially positive outcome on the Dry Creek sale process.  

To see Ridley's forecasts and financial summary, click here.

GWA Group (GWA)

In recent weeks GWA held an Extraordinary General Meeting in which shareholders approved a number of proposals including:

• The payment of a $0.06 per share special dividend (76.65 per cent franked)
• The payment of a capital return of $$0.228 per share
• A share consolidation of 0.91 shares for every one share on issue.

Last week GWA affected the share consolidation and capital management initiatives and accordingly, we have taken the opportunity to update our earnings forecasts, which are outlined here.

We continue to have a positive view on GWA as the company puts the recent restructuring behind it. As a reminder, the recent restructuring initiatives that have been implemented include:

• Closure of Wetherill Park vitreous china manufacturing facility in 2014.
• Norwood plastics operations being phased out over the next three years.
• Transition to sourcing plastics and vitreous china products from overseas suppliers.
• Sale of Wetherill Park site in April 2015 for $33m. The company will lease back the premise for three years for its warehousing capacity.
• Divestment of Dux hot water for $46m.
• Divestment of Brivis Climate Systems for $49m.

As the company completes the sale of Gliderol (its underperforming garage door business), returns to paying a dividend and delivers above market EPS growth we expect GWA to provide a robust return to shareholders.

Certainly, at 15 times FY16 EPS there appears to be a limited amount currently priced in for these outcomes occurring. We think the company will trade towards a market PE as the market fully appreciates the cyclical tail winds, above market EPS growth and further capital management initiatives.

To see GWA Group's forecasts and financial summary, click here.

eBet (EBT)

Last week eBet held an investor strategy day where management updated the market on the company's key growth initiatives.

Specifically, the management discussed the expansion into the Victorian gaming market, the Flexi-net acquisition and the Redcape rollout.

Ultimately, there was not a great deal of new news, however, we are encouraged by the fact that management reiterated FY15 NPAT guidance of $5.5-5.8m.

We believe that eBet is well positioned to deliver above market EPS growth out to FY17, while concurrently offering an undemanding valuation of around a 13 times FY16 price-earnings (PE) multiple.

Specifically, earnings growth should be driven by the growth initiatives management outlined at the strategy day, which we have also previously discussed (here). We anticipate that as management continue to discuss these growth initiatives and as they become evident in reported earnings that eBet share price will re-rate accordingly.