Hollysys Automation Technologies Ltd.

HOLI Details

Hollysys Automation Technologies Ltd. (NASDAQ: HOLI) is an automation control system solutions provider in China, with overseas operations in eight other countries and regions throughout Asia. The company derives its revenues mainly from two segments, namely 1) Industrial Automation, focused on delivering the full spectrum of automation hardware, software, and services spanning field devices, control systems, enterprise manufacturing management, and cloud-based applications, and 2) Rail Transportation, providing advanced signaling control and Supervisory Control and Data Acquisition (SCADA) systems for high-speed rail and urban rail. As of June 03, 2021, the company’s market capitalization stood at USD 799.64 million.

Unsolicited Acquisition Proposal by Mr. Shao: On February 01, 2021, the company received a revised unsolicited consortium proposal from Mr. Shao Baiqing, Ace Lead Profits Ltd., and CPE Funds Management Ltd., to acquire all the outstanding shares of HOLI at USD 17.01 per share (increased from the original offer of USD 15.47 per share). On March 09, 2021, Hollysys Committee on Trust Interests commenced legal action in the Hong Kong High Court against Mr. Shao and Ace Lead. The legal action claims that the entire issued shares of Ace Lead held by Mr. Shao are on trust for Dr. Changli Wang (ex-CEO of HOLI) and that the shares of HOLI held by Ace Lead are on trust for the eligible employees of the Chinese subsidiaries.

Q3FY21 Results: The company reported a sharp uptick of 36.08% in total revenue to USD 109.91 million in Q3FY21 (ending March 31, 2021) compared to USD 80.77 million in Q3FY20, driven primarily by a 97.07% increase in revenue from the Industrial Automation segment to USD 67.45 million in Q3FY21. Net income for Q3FY21 was USD 18.68 million, more than USD 13.94 million reported in Q3FY20.

Key Risks: The company’s business performance is susceptible to changes in the Chinese government policies relating to the promotion of infrastructural development, such as high-speed rail and urban mass transit. Any decrease in the public expenditures or any change in the public procurement policies relating to the industry may adversely affect HOLI’s business. Further, prolonged frictions between the US and China, and the recent passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years) expose the stock to significant political and regulatory risks. Though a solution to the standoff could be negotiated in the medium term (before the earliest possible delistings begin in 2024), the companies that might not be able to fulfill the revised standards are at risk.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

HOLI Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: HOLI has declined by 13.66% in the past 3 months and is currently close to the mid-point of the 52-week range of USD 9.83 to USD 16.31. On the technical chart, the next support level is USD 11.56. We have valued the stock using the Price/Sales-based relative valuation methodology and arrived at a target price of USD 15.42. Considering the correction in the stock price in the past 3 months, the looming threat of hostile takeover, strong financial performance, and positive cash generation, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 13.15, up by 0.77% as of June 03, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Village Super Market, Inc.

VLGEA Details

Village Super Market, Inc. (NASDAQ: VLGEA) operates a grocery chain of 34 supermarket stores under ShopRite and Fairway brands in the eastern states of New Jersey, Maryland, New York, and Pennsylvania. VLGEA also operates three specialty markets under the Gourmet Garage brand name in New York City. The company is the second-largest member of Wakefern Food Corporation, the nation’s largest retailer-owned food co-operative and the proprietor of ShopRite, Fairway, and Gourmet Garage brands. The company segregates its revenues according to various product categories viz. 1) Centre Store, which consists of grocery, dairy, frozen, health and beauty care, liquor, and general merchandise. 2) Fresh, consists of meat, deli, seafood, bakery, prepared foods, and floral. 3) Pharmacy consists of medicines, medical devices, and other human health therapies. 4) Others consist of ShopRite revenues from home service fees, gift cards, and lottery commissions. As of June 03, 2021, the company’s market capitalization stood at USD 353.92 million.

Q3FY21 Results: The company reported a 5.0% YoY increase in total sales to USD 481.09 million in Q3FY21 (ending April 24, 2021), primarily due to the Fairway acquisition completed on May 14, 2020, partly offset by a same-store sales decline of 5.5%. The high base effect due to exceptional sales levels at the start of the COVID-19 outbreak in the US in March 2020 was the primary reason for the decline in same-store sales. Partly due to the same reason, net income declined to USD 2.57 million from USD 11.15 million in the year-ago period.

Key Risks: The company’s stores are concentrated in the aforementioned eastern states, making it vulnerable to economic downturns in the region. Any change in the economic conditions in the area such as movement in energy costs, minimum wage legislation, and unemployment rates, could affect the company’s operations and financial conditions. Additionally, the supermarket business is highly competitive with narrow profit margins. The company’s financial health could be materially impacted by competitive pricing, promotional programs, or competitor store openings.

Outlook: The company is expecting its same-store sales to increase by 1% to 2% in FY21. The company changed its budget for capital expenditure to USD 25,000 in FY21 due to a change in timings of planned store remodels. The capital expenditure will be utilized to expand ShopRite from home and various technology and facility upgrades.

VLGEA Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: VLGEA’S stock price has decreased by 5.80% in the past nine months and is currently trading in the mid-band of the 52-week range of USD 21.00 to USD 27.88. The stock is currently trading around its 200 DMA levels. On the technical chart, the next support level is USD 22.17. Considering the decline in the stock price in the past nine months, management focus to improve margins via private labels, recent accretive acquisition, healthy dividend yield, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 24.03, down by 1.19% as of June 03, 2021. The target price of USD 27.50 indicates a P/E ratio of 14.2x on LTM EPS of USD 1.94.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Five Star Senior Living Inc.

FVE Details

Five Star Senior Living Inc. (NASDAQ: FVE) provides senior living facilities and rehabilitation and wellness services to approximately 21,000 older adult residents. As of March 31, 2021, the company operated 252 senior living communities across 31 states with 29,265 living units. The company operates in two segments, namely 1) Senior Living, which includes independent living communities (ILs), assisted living communities (ALs), Continued Care Retirement Community (CCRCs) that are required to be looked upon regularly, and 2) Rehabilitation and Wellness (R&W) services, which provide a complete suite of R&W services, including physical, occupational, inpatient and outpatient clinics as well as fitness services. As of March 31, 2021, FVE operates 37 inpatient and 215 outpatient R&W clinics owned by Diversified Healthcare Trust (DHC). As of June 03, 2021, the company’s market capitalization stood at USD 194.81 million.

Strategic Repositioning Plan: On April 09, 2021, the company announced a new strategic plan to reposition its Senior Living management business by focusing on larger IL, AL, stand-alone active adult and independent living communities. As per the plan, the company will be changing its management arrangements with DHC to shift 108 senior living communities with approximately 7,500 living units to new operators. The plan also entails the closure of 27 Skilled Nursing Units in the CCRCs and 37 Ageility inpatient rehabilitation clinics. The portfolio FVE will continue to manage for DHC represents 66% of the existing managed portfolio units and approximately 60% of FVE’s management fee revenues for FY20. It expects to partially offset the resulting revenue loss with expense reductions to optimize operations. The strategic move is estimated to be completed by the end of 2021.

Senior Living Portfolio Transition (Source: Investor Presentation, May 2021)

Q1FY21 Results: The company reported a 15.09% decline in total management and operating revenues to USD 50.46 million in Q1FY21 (ending March 31, 2021) compared to USD 59.43 million in Q1FY20 (ending March 31, 2020). However, the company reported a steep increase in net income to USD 3.31 million in Q1FY21 compared to the loss incurred of USD 17.20 million in Q1FY20, primarily due to the addition of other operating income of USD 7.79 million as the Coronavirus Aid under the CARES Act provided by the U.S. Department of Health and Human Services.

Key Risks: The company is operating in many senior living communities concentrating in certain areas like Florida, North and South Carolina, Georgia, Texas, and Indiana. Overdependence on certain geographies could adversely affect the financial health of the company at some point in time. In addition, the company is significantly dependent upon its relationship with DHC as the latter owns 228 of the 252 senior living communities that FVE operates.

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

FVE Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: FVE’s share price has declined by 9.05% in the past six months and is currently trading at around the mid-point of the 52-week range of USD 3.37 to USD 9.25. We have valued the stock using the Price/Earnings based relative valuation methodology and arrived at a target price of USD 6.86. On the technical chart, the next support level is USD 5.50. Considering the decline in the stock price in the past six months, strategic arrangements for expansion, decent financials, and associated risks, we recommend a "Speculative Buy” rating on the stock at the closing price of USD 6.13, down by 0.33% as of June 03, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.