Update December 14, 2024
This announcement killed the upward momentum in the share price.
If it indeed is a one-off and the company can return to their longer-term trend of earnings growth, it could be argued that this sell-off has been overdone.
About the company
The Environmental Group Ltd (ASX: EGL) specializes in providing environmental solutions, focusing on air pollution control, water treatment, and waste management systems. The company designs, manufactures, and services equipment that helps industrial and commercial clients meet environmental compliance standards. EGL operates across various sectors, including mining, manufacturing, and energy, offering products and services aimed at reducing emissions, managing water resources, and enhancing overall environmental sustainability.
Company Dashboard
The initial screening shows a score of 8 ticks out of 8. As a result, EGL qualifies for a growth ranking, currently a respectable 24th in my database of 500 companies. Debt is less than cash, but it has been several years since they paid a dividend. Analysts are optimistic about the company, believing the share price is undervalued by 23% over a 12-month horizon. They predict revenues and earnings will grow steadily in the year ahead.
They do not feature on the list of ASX most shorted stocks, as they are too small.
Fundamental analysis
Since 2020, earnings have risen significantly, and analysts expect this trend to continue.
This growth has been driven by consistent increases in revenues. However, operating cash flows have yet to exhibit the same robust trends.
Quality Analysis
In 7 out of the last 10 instances, EGL has reported improvements in both revenues and earnings. EBITDA margins are healthy at 10%, with an upward trend. The same positive trend is evident in Return on Equity (ROE). With more cash than debt, EGL is in a strong financial position. Overall, it should be considered a medium-quality company with improving metrics across the board. If these trends continue, it could be regarded as a high-quality company in the near future.
Valuation
Based on the market’s valuation of EGL since 2021, the share price appears to be near fair value. However, as EGL continues to grow and deliver consistent results, it is reasonable to expect the market to gradually increase the multiple it is willing to pay for the company. As indicated in the Company Dashboard, analysts currently believe the company is undervalued.
Technical Analysis
Looking at the long-term daily chart, the period from 2005 to 2020 was challenging for EGL. From 2020 to 2022, the market grew excited about the company. Technically, EGL failed at the significant 37.5% Fibonacci level, corresponding with a previous resistance level from many years earlier. After a more steady climb, EGL is once again testing this level. However, this time the company’s fundamentals are much stronger. If the share price can break clearly above 38c, the next target would be 46c, and beyond that, a push to test old highs around 60c. A fall below 30c would be a negative signal.
News From The Company
The following information is sourced from the Environmental Group Results Presentation, August 28, 2024:
The company consists of five divisions.
It has reported a solid year with a strong outlook. Notably, the company is forecasting a 25% increase in EBITDA, while analysts are currently forecasting only 19%.
The company remains confident that it has significant organic growth opportunities to capitalize on in the year ahead.
Final thoughts on Environmental Group (ASX:EGL)
The Environmental Group Ltd has demonstrated impressive growth in recent years, with rising earnings and improving financial metrics. While operating cash flows have room to improve, the company’s strong cash position, growing revenues, and upward trends in profitability signal a promising outlook. With analysts forecasting continued growth and the potential for market revaluation, EGL stands as a medium-quality company with strong potential to achieve high-quality status in the future. Investors should watch closely as the company breaks key technical levels, which may signal further upward momentum.
Disclaimer: This information is provided purely for educational purposes. It takes no account of an individual’s personal financial circumstances and hence can in no way constitute financial advice. The above data may be subject to errors or inconsistencies for which the author takes no liability. It is imperative that all investors do their own research or if they need advice, seek it from a qualified financial adviser.
Environmental Group (ASX:EGL) Analysis