Resource Development Group Limited

Company Overview:  Resource Development Group Limited (ASX: RDG) is engaged in the provision of contracting and construction services to the mining, oil and gas sectors. It operates primarily in the geography of Australia and is focused primarily to expand the business of Central Systems Pty Ltd and continue with the development of the Sunday Hill manganese project. The company is also looking for the advancement of the Lucky Bay Garnet project, which it acquired in January 2021.

RDG Details

Substantial Increase in Mineral Resource to Aid in Growth: The company has provided an update on its 100% owned Lucky Bay Garnet Project, which is located in the Mid-West region of Western Australia. The Group has approved the development of the site as per an announcement on 10 June 2021, with funding being secured for initial production through a ~$60 million loan.

• RDG reported an increase of 1,520% in total mineral resources from 1Mt to 16.2Mt. It has also witnessed an increase of 1,808% in the total mineral resource tonnage from 23Mt to 438.8Mt, where 86% of the Mineral Resource tonnage has been classified as measured or indicated.
• The latest developments will help to fast-track the management’s plan for initial production from the project in early 2022.

Key Takeaway from FY21 Results Highlights:

The Group reported impressive performance during the FY21 period with a significant uptick in revenue from continuing operations.

• Revenue from continuing operations grew by ~220.6% to $67.12 million in FY21, compared to $20.93 million in the prior financial year. The growth has been aided by the completion of projects by the Group's wholly owned subsidiary, Centrals, for the clients of Fortescue Metals Group Ltd (FMG) and Mineral Resources Ltd (MRL).
• NPAT from continuing operations increased to $382,694, reflecting a growth of ~22.2% over FY20. The total profit during the year stood at $1.18 million, which is inclusive of after-tax profit from discontinued operations.
• There has been a substantial improvement in the cash position of the Group to ~$23.9 million as of 30 June 2021, compared to ~$10.7 million as of 30 June 2020. The increase was on the back of an increase in the operating cash flow to $16.6 million in FY21, compared to $135,705 in FY20.

5-Year Topline Performance (Source: Analysis by Kalkine Group)

Discontinued Operations:

During FY21, RDG has discontinued its crushing and screening business, which was a part of Mineral Solutions Australia Pty Ltd. It was facing challenges in the business due to its inability to make an operating profit. The MSA group reported revenues of $2.59 million in FY21, compared to revenue of $9.45 million in FY20.

Top 10 Shareholders: The top 10 shareholders together form around 84.19% of the total shareholding, while the top 4 constitute the maximum holding. Mineral Resources Ltd and Ellison (Andrew Blair) are holding a maximum stake in the company at 67.53% and 4.95%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported a gross margin of 41.3% in FY21, compared to an industry median of 13.5%. ROE of the company improved to 0.4% in FY21, compared to 0.1% in FY20. There has also been significant improvement in the fixed asset turnover ratio to 7.26x in FY21, from a level of 1.83x in FY20.

Profitability Metrics and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Market Risk: The Group is prone to the risks of changes in foreign currency exchange rates and commodity prices which can impact the demand for its services.
• Financial Risk: It is also exposed to credit risk, interest rate risk, credit risk and liquidity risk.
• Client Risk: RDG is dependent on its select range of clients for its revenue and any adverse impact on them might also pose a threat to its profitability.

Outlook: The company is focused on identifying suitable investment opportunities, that is aligned with its long-term objective of driving sustainable revenues and also provide a decent return on capital. It is optimistic on the acquired projects of Ant Hill/Sunday Hill manganese project and Lucky Bay Garnet project and is on the lookout for a third project that satisfies its ROI requirements.

Stock Recommendation: As per ASX, the stock of RDG is trading below its average 52-weeks’ levels of $0.035-$0.074. The stock of RDG gave a positive return of ~6.66% in the past three months and a negative return of ~12.72% in the past one month. On a TTM basis, the stock of RDG is trading at an EV/Sales multiple of 1.7x, lower than the industry average (Construction & Engineering) of 4.6x. Considering the current trading levels, valuation on TTM basis, robust growth in revenues, significant increase in mineral resources in Lucky Bay Garnet Project, decent balance sheet and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.046, (as on 17 September 2021, 11:37 AM (GMT+10), Sydney, Eastern Australia).

Technical Insights:

RDG prices broke the long term downward sloping trend line by upside in the month of August 2021 at $0.046 and prices are sustaining above the same since the breakout point. Recently, the prices took the support of the same downward sloping trendline and sustaining above the same, further indicating positive price movement. RSI (14-period) is hovering at ~55 levels, indicating positive momentum for the stock prices, based on the analysis on monthly chart. Now the immediate support levels are $0.043 and $0.040, while immediate resistance levels are $0.059 and $0.065.

RDG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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