Company Overview: Syrah Resources Limited (ASX: SYR) is an industrial minerals and technology company that supplies superior quality graphite and battery anode products to its customers. The company runs its flagship Balama Graphite Operation in Mozambique and operates a downstream Battery Anode Material Project in the United States. The company is focused on becoming a leading supplier of value-added anode products for the rapidly growing global battery supply chain.

SYR Details

Key Takeaways from H1FY21 Results: During the half-year ended 30 June 2021 (H1FY21), the company restarted production at Balama based on strong improvement in market conditions, and a restructured operating base. The company also achieved first fully integrated production of battery specification AAM from the carbonisation furnace at Vidalia. Some of the key financial highlights of H1FY21 are as follows:

• Rise in Revenue: For H1FY21, the company reported revenue of US$8.93 million, up from US$7.43 million in H1FY20.
• Decline in Net Loss: Net loss for H1FY21 stood at US$24.95 million, an improvement from the loss of US$28.7 million in H1FY20.
• Improving Cash Balance: As at 30 June 2021, the company had cash and cash equivalent of US$85.27 million, up from US$74.99 million as at 31 December 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Decent Operational Performance in Q3FY21: During the quarter ending 30 September 2021, the company made strong progress towards becoming a large scale vertically integrated producer of natural graphite Active Anode Material (AAM) to service ex-Asia markets. Some of the key highlights of the quarter are as follows:

• Production Update: Despite the impact of container shipping market disruption, SYR produced 25kt natural graphite from Balama Operations over the quarter. Notably, SYR achieved 15kt production at 85% recovery and C1 cash costs (FOB Nacala) at US$430 per tonne, which is at the low end of the target range for Balama’s restructured cost base.
• Rise in Sale Price: Over the quarter, the weighted average sales price increased to US$490 per tonne (CIF), up from US$474 per tonne (CIF) in June 2021 quarter.
• Sales Delayed Due to Market Disruption: Due to container shipping market disruption, around 12kt of sales planned to ship from Nacala in late September 2021 was delayed to the December quarter.
• Rise in EV Sales: During Q3FY21, the sales of Electric Vehicles grew by 111% on the previous corresponding period (pcp), demonstrating decent demand growth for natural graphite.

Key Metrics: Account receivable turnover ratio stood at 2.7x in H1FY21, up from 2.5x in H1FY20. Further, the average account receivable days have reduced to 66.6 days in H1FY21, as compared to 73.9 days in H1FY20. Current ratio for H1FY21 stood at 6.14x, down from 7.39x in H1FY20, but significantly higher than the industry median of 2.07x.

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 36.94% of the total shareholding while the top four constitute the maximum holding. AustralianSuper and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 13.69% and 9.00%, respectively, as also highlighted in the chart below:            

(Source: Analysis by Kalkine Group)

Key Risks:

• Volatility in the Price of Graphite: SYR is exposed to the risks related to the fluctuations in the prices of graphite and battery anode products, as it could impact the company’s top line.
• Shipping Market Disruption: SYR is exposed to the risks related to shipping market disruptions as it could impact its sales.

Outlook: Looking ahead, the company is focused on maintaining liquidity for Balama operations and securing new funding to advance Vidalia beyond FID. SYR currently has a decent sales order book with more than 50kt of natural graphite sales orders for the December 2021 quarter, demonstrating robust underlying demand conditions and forward contracting. Further, the global container shipping market disruption is expected to moderate through December 2021 and March 2022 quarters. The company intends to increase Balama production beyond 15kt per month with consideration of market demand and forward customer contracting.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

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

Stock Recommendation: Over the last three months, the stock has been corrected by ~12.26%. The stock is currently trading lower than the average 52-week price level band of $0.815 -$1.610, offering a decent opportunity for accumulation. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers, considering the positive anode material and natural graphite market conditions and optimistic outlook. For the purpose of valuation, peers such as BHP Group Ltd (ASX: BHP), Fortescue Metals Group Ltd (ASX: FMG), Rio Tinto Ltd (ASX: RIO), etc., have been considered. Considering the company’s decent operational performance in September 2021 quarter, growing sales order book, positive market outlook, indicative upside in valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.14 as on 8 December 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia.

SYR 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.

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