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 

• Deteriorated free cash flows: The company witnessed a dent in its free cash flow in FY 2020 to £ (4.2) billion from £ 0.9 billion in last year, primarily due to lower operating performance in Civil Aerospace, ITP & Power Systems. The company expect free cash outflow in the region of £ (2.0) billion in 2021, based on engine flying hours recovering to around 55% of 2019 levels. Furthermore, the management aim to achieve positive free cash flow of at least £750 million (excluding disposals) in 2022.
  

• • Declining operating margins on annual basis: The Company failed in maintaining its pace and witnessed lower performance across its margin matrix on a continues basis, which exhibits the pressure on company. In FY 2020, the company witnessed a huge decline in its net margin to (26.8%) from (7.9%) in the previous corresponding period.
    

• Stock Price breached key support levels: On the daily price chart, the stock breached its key support level. The stock closed below the 50-days and 100-days SMA, indicating a bearish price trend.

Source: REFINITIV, Analysis by Kalkine Group 

Financial overview

Source: Company 

• In FY 2020, the company posted lower revenue at £11.8 billion compared to £16.5 billion in the previous corresponding period. The decline in revenue was largely due to the impact of COVID-19 on end-market demand.
• On the back of gross loss of £210 million and higher R&D cost, the company reported higher operating loss of £2.0 billion in FY 2020, compared to a loss of £852 million in pcp.
• The company generated a net loss of £3.1 billion compared to a net loss of £1.3 billion in pcp, mainly due to higher operating loss coupled with an increase in finance cost.
  

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:

• Improved Demand dynamics from radio frequency (RF) segment: The company caters to the radio frequency (RF) segment, and due to the installation of 5G services across the major regions, the demand has surged in the recent past, and the same is likely to continue for the coming years. In terms of per-device usage, RF filter growth has remained elevated since 2014, supported by the upgradation of technology. Moreover, the installation of Wifi and 5G services are likely to remain strong, and in order to cater the growing demand the group would increase its capacity utilization to roughly 500 million Filters per year by the end of CY2021.                                                

• Ample Liquidity: The company has a cash balance of USD 90.4 million and a positive working capital of USD 88.3 million. This seems to be sufficient to fund its operations in the near term. Moreover, the company does not have any borrowings, which is a key positive, as the company does not have any compulsion of paying interest expenses.
  

• Update of recent orders:

1. Recently, the group received WiFi 6E diplexer order from a tier-1 personal computing chipset maker. With the passive radio-frequency filter product, the group would allow two distinct frequency bands, such as the 5 GHz and 6 GHz frequency bands in WiFi 6E, to transmit and receive over the same antenna. The above is expected to ship by Q1 of CY22.
2. The group signed a foundry agreement with a mobile RF front-end customer for the manufacture of XBAW^®filters for 5G mobile handsets and other wireless devices. AKTS would manufacture RF filter by using its patented and proprietary XBAW^® The above production is expected to start by the second half of CY22.

Q3FY21 Financial Highlights:

• AKTS announced its quarterly result, wherein the company posted strong momentum in its topline, which stood USD 2.517 million, as compared to USD 0.363 million in the previous corresponding period (pcp). The increase of USD 2.1 million was supported by growth from the non-recurring engineering services and RF product revenue from the previous corresponding period.
• The group encountered a tremendous surge in cost of revenue (USD 2.973 million v/s USD 0.217 million in pcp), which lead to a gross loss of USD 0.456 million, as compared to a gross profit of USD 0.146 million in pcp.
• Loss from operations widened to USD 9.076 million, from a loss of USD 8.212 million in pcp. The above was primarily due to a gross loss coupled with an increase in total operating expense (USD 8.620 million v/s USD 8.358 million in pcp).
• Net loss widened to USD 10.175 million, from a loss of USD 7.774 million in Q3FY20.

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.