Morgans CIMB initiates coverage of woodchip group, Midway
Since listing on the ASX in early December the share price of Midway (ASX: MWY) has mainly traded at a slight discount to its IPO price of $2.50. However, analysts at Morgans CIMB see value in the group and it has initiated coverage with an add recommendation and price target of $3.00.
Before we go further it should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.
By way of background, Midway is one of Australia’s largest producers of woodchips and a leading company in the Australian forestry sector, primarily involved in the production and export of high quality wood fibre to producers of pulp, paper and associated products in China and Japan.
Looking across the group’s operations, its primary source of income is derived from producing hardwood and softwood woodchips from logs acquired, mostly from private plantation owners in Victoria, South Australia, New South Wales and Queensland.
Midway then export’s woodchips from facilities in the ports of Geelong, Portland and Brisbane to producers of pulp, paper and associated products in China and Japan.
The contraction in the Australian dollar has assisted Midway, and this is a variable worth watching as it can have a significant impact on earnings. The company has factored in an AUD/USD rate of 75 cents into its earnings projections for fiscal 2017, indicating the potential for outperformance at current levels of circa 73.5 cents.
Assessing the promise of Midway’s business model, Belinda Moore from Morgans said, “Midway’s competitive advantage is its vertically integrated business model and ownership of strategic assets along the supply chain which create barriers to entry”.
She went on to say that the group is undervalued trading on a fiscal 2017 PE multiple of 11.1 based on its current trading range of $2.47
Moore anticipates that the group will generate strong free cash flow which will underpin an attractive dividend yield. On this note, the broker’s forecasts point to a dividend of 18 cents in fiscal 2017 increasing to 20 cents in fiscal 2018. This implies yields of 7.2% and 8.2% respectively.
Assessing the group’s potential to pay robust dividends, the company owns freehold plantation land of approximately 16,000 hectares with a book value of $68.3 million as at June 30, 2016.
With management flagging its intention to potentially sell-off some of these assets to buyers that could generate high-value returns for different uses, substantial gains against book value could be realised.
Similarities could be drawn with the likes of Boral which sells sites such as quarries to the likes of land developers once they become nonviable as a source of building material products.
Where to invest $1,000 right now
When the experts at Next Investors have a stock pick, it may pay to listen.
The Next Investors have been investing in ASX small cap stocks for years, with their best small cap picks yielding returns of 1,200%, 1,120%, 900% and 678%.
They have just revealed their hand-picked, FY2021 stock portfolio of high conviction long-term investments.
Click the link below to see what they are currently investing in.
S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.
Conflict of Interest Notice
S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.
The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.