How Should You Perceive These 3 Penny Stocks- NCZ, ALC, JHL

Stocks’ Details

New Century Resources Limited

Rise in Zinc Metal Production: New Century Resources Limited (ASX: NCZ) is engaged in mineral exploration and development. The market capitalisation of the company stood at ~$195.72 Mn as on 20^th July 2020. Recently, the company announced commercial production at the Century Zinc Mine in Queensland, Australia. This follows a record production quarter, with the June 2020 quarter delivering a growth of 22% increase in zinc metal production to around 34,500t and an estimated 17% decrease in C1 costs to circa US$0.79/lb of a payable metal on an unreconciled basis. The Company has also finished the successful transition from contractor services to full owner-operator of both hydraulic mining and processing plant operations during the quarter. The operations at Century continue to accelerate and have again delivered record production in the June quarter despite the COVID-19 pandemic. Century has achieved seven consecutive quarters of increasing production and low costs.

Despite the zinc price remaining near 4-year lows, a strong decline in spot treatment charges was experienced in the quarter, which has improved conditions for zinc miners. NCZ also sees potential for a price rebound as a result of additional metal demand from increased global infrastructure development linked to COVID-19 government stimulus. During the quarter ended March 2020, total receipts from customers went up by 14% to $47.9 million, however, it remained below its expectations due to a 21% drop in the zinc price.

Cash Flows from Operating Activities (Source: Company Reports)

Acquisition of the Goro Nickel & Cobalt Mine:  The company has recently been granted exclusivity in relation to the potential acquisition of the Goro Nickel & Cobalt Mine. In addition to this, NCZ continues to progress due diligence while completing negotiations for the provision of suitable funding from Vale and the French State for both simplification process capex and long-term working capital for the operation.

Key Risks: The company is exposed to various financial risks such as liquidity risk. credit risk, interest rate risk and foreign exchange risk. These risks arise from the use of financial instruments.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: NCZ has successfully completed the retail component of its fully underwritten 2 for 7 pro-rata accelerated non-renounceable entitlement offer. The company has ~978.6 million shares outstanding with the market capitalisation of ~$195.72 million, and a beta of ~2.74x (5-Year, Monthly basis). During the past three months, the stock has generated a positive yield of 17.65%. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of limited upside (in percentage terms). For the purpose, we have taken peers such as Nickel Mines Ltd (ASX: NIC), Western Areas Ltd (ASX: WSA), etc. Hence, considering the aforesaid facts, disruption in zinc market and market volatility, we have a wait and watch stance on the stock at the current market price of $0.185 per share, down by 7.5% on 20^th July 2020.

Alcidion Group Limited

Signing of Major Contracts: Alcidion Group Limited (ASX: ALC) provides intelligent informatics software for high-performance healthcare. The market capitalisation of the company stood at ~$153.56 Mn as on 20^th July 2020. Recently, the company has announced a renewal of its ongoing support services contract with ACT Health for two further years. The contract extension is valued at $1.3 million and will be effective from 1 January 2021. Under the contract, ALC will continue to provide ongoing technical support services to ACT Health for their integrated patient management system. On 14^th July 2020, the company notified that it has inked two contracts with Murrumbidgee Local Health District (LHD) to continue the use of its Miya Precision platform, including the MEMRe mobile application and for related professional services. These two contracts have a combined value of $686K. Previously, the company had also inked an initial 12-month contract, valued at $560k with Sydney Local Health District for the execution of the Miya Precision base platform to support the delivery of virtual care. The company closed Q3 FY20 with total contracted revenue amounting to $17.2 million to be recognised in FY2020.

Revenue (Source: Company Reports)

Focus for 2H FY20: For 2H FY20, the company is focused on the acceleration of business in the UK market. Also, the company expects expenditure to increase as further investments are made in sales and marketing, strengthening Group infrastructure in the UK and ANZ. The company believes that it is well-positioned to maintain current business operations for the duration of the COVID-19 pandemic with resilient revenue, a healthy sales pipeline and strong balance sheet.

Key Risks: The company is mainly exposed to credit risk, which is influenced by the inability of the counterparty on its contractual obligations resulting in a financial loss to the Group. To mitigate this risk, ALC has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral. ALC’s business is also sensitive to interest rate risk as it places funds at both fixed and floating interest rates. The company manages this risk by maintaining an appropriate mix between fixed and floating rate products which also facilitate access to money.

Stock Recommendation: The company’s contracted revenue out to FY25 stands at $41.6 million. As at 31^st March 2020, the company had $15.9 million in the form of cash and cash equivalents. The stock of ALC has corrected by 13.89% and 24.39% in the span of last three and six months, respectively. As a result, the stock is trading below the average of its 52-week low and high level of $0.097 and $0.305, respectively. Thus, in light of newly signed contracts, focus for 2H FY20 and key risks, we give a “Speculative buy” recommendation on the stock at the current market price of $0.155 per share with no change on 20^th July 2020.

Jayex Healthcare Limited

Resignation by MD and CEO: Jayex Healthcare Limited (ASX: JHL) provides healthcare services with a market capitalisation of ~$5.11 Mn as on 20^th July 2020. Recently, the company notified the market that Group Chief Executive Officer of Jayex and Managing Director and Director of its subsidiary Jayex Technology Limited, Mr Nick Fernando has submitted his resignation, which will be effective from 25^th July 2020. The company has executed a Software Licence Agreement with Lifespot Health Limited to market and sell its existing BodyTel software platform and integrated Bluetooth technology products and services. Under the agreement, JHL has been granted an exclusive licence for the United Kingdom and a non-exclusive licence for Australia and New Zealand. Lifespot Health and JHL will collaborate to jointly develop additional telehealth products, and Jayex has rights to sell these products under this agreement.

In response to COVID-19, JHL has made applications to programs made available to it in the UK and Australia. Due to applications made in the UK for COVID-19 assistance, the current cash and near cash position has increased to $4.3 million. This funding allows for the hire of additional development resources, to finish contracted work-on-hand, which would bring in immediate revenue. The following picture gives an idea of cash flows from operating activities for the March 2020 quarter:

Cash Flows (Source: Company Reports)

Strategy: The company is committed to progress its objective to significantly increase revenues and earnings by continuing with its growth strategy. JHL’s strategy remains resolute; to migrate from a Product company to a Software as a Service company (SaaS). The company will conduct its Annual General Meeting on 31^st July 2020.

Key Risks: The company is exposed to various financial risks such as credit risk and liquidity risk. Credit risk arises from the default by counterparties on their contractual obligations. Due to liquidity risk, the company is required to maintain adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities.

Stock Recommendation: Debt to equity multiple of the company stood at 1.10x in FY19, reflecting YoY growth of 68.5%. The stock of JHL is trading at a price to book value multiple of 1.2x as compared to the industry average (Healthcare Equipment & Supplies) of 0.9x on TTM basis. In the past three months, the stock of JHL has moved up by 31.82%. Thus, considering the low market capitalization, high leverage position along with price movements, we have a wait and watch stance on the stock at the current market price of $0.031 per share, up by 6.897% on 20^th July 2020.

Comparative Price Chart (source: Refinitiv, Thomson Reuters)

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