Energy Resources of Australia Limited

ERA Details

Energy Resources of Australia Ltd (ASX: ERA) was incorporated in 1980 and is involved in mining, processing, and its commercialisation of uranium oxide. It owns two undeveloped uranium resources in Ranger 3 Deeps and Jabiluka.

Recent Updates:

• On 10^th December 2021, Ms Shanelle English resigned from General Counsel and Company Secretary position.

3QFY21 & 1HFY21 Highlights:

• As per its quarterly activities report, no uranium oxide was produced during the September quarter, and the processing operations at the Ranger Mine ceased on 8^th January 2021.
• ERA sold its uranium oxide stock in the spot market, excluding 1.37 million pounds to be sold in contract sales.
• For its 1HFY21, it reported Net Losses as $5.26 million versus Net Profits of $40.22 million in 1HFY20. The Net Losses in 1HFY21 were due to lower sales and the end of long-term sales contracts in 2021.
• The revenue was down by ~66% and reported as ~$60.21 million for 1HFY21 versus ~$176.46 million in 1HFY20.
• It closed its half-year with a cash balance of ~$190.53 million for the period ending 30^th June 2021, versus ~$204.35 million at the end of 30^th December 2020.

Cash Balance Highlight (Source: Analysis by Kalkine Group)

Key Risks & Mitigations: The company is vulnerable to the risks associated with the impacts of COVID19 and the new variant Omicron, which affects its operations and thus impacts sales. Other risks are its operational dependency on labours and profitability impact due to price fluctuations in uranium oxide.

Outlook: Though the company is unable to provide any estimates on its Ranger Mine Project, it has reiterated its estimate for cost and schedule for its Ranger Rehabilitation Project and showed its intention of appointing of a global engineering company for the same during 1QFY22.

Stock Recommendation: The stock of the company has given a return of ~20.37% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $0.180 and $0.580, respectively. On a TTM basis, the stock of ERA is trading at a P/B multiple of 6.0x, lower than the industry’s mean (Uranium) of 6.1x, thus seems to be undervalued. Considering the returns that the stock has given, its updates on Ranger Mine, current trading levels, valuation on a TTM basis, nil debt levels in 1HFY21 and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $0.325, down by ~1.516%, as on 20^th December 2021.

ERA Daily Technical Chart, Data Source: REFINITIV 

Perenti Global Limited 

PRN Details

Perenti Global Limited (ASX: PRN) is involved in surface and underground mining and exploration. It has four segments: Surface Mining, Underground Mining, Investments and Group Functions and covers Australia and Africa.

FY22 Guidance & Recent News:  

• New Services at Ghanzi: As per the announcement released on the 20^thDecember 2021, African Mining Services (AMS) – PRN’s surface mining business in Africa – will join hands with Tshukudu Metals Botswana Pty Ltd for open pit mining services at Sandfire Resources Motheo Copper Project. The project is expected to commence its mining work in early 2022.
• Capital Management Policy: After the divestment of MinAnalytical and a non-core property asset for ~$43.6 million and ~$32.1 million, respectively, it has formalised its Capital Management, which states that it will prioritise ~$75.7 million to the improvement of balance sheet and to the shareholders through dividend/share buy-backs.
• FY22 Guidance: The company has released its expectations of ~$2.02- $2.2 billion as its revenue and ~$165 - $185 million as its EBIT(A).

Cash Balance Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 and Omicron: The company is vulnerable to the risks associated with the impacts of COVID19 and the new variant Omicron, which might further reduce its operations.
• Skilled Labour Constraints: The company’s business is dependent on the labours for its operations, which creates a risk of lower efficiencies and temporary halts, thereby affecting its revenue.

Outlook:  Along with its capital management policy, PRN stated that despite of skilled labour constraints and macro impacts from COVID-19, its operational performance 1HFY22 would be aligned with 2HFY21. With the expectations of ease in labour market conditions and softening of border restrictions, 2HFY22 is expected to produce a better performance as the productivity will improve and the growth projects like Motheo, Savannah and Zone 5 will contribute towards additional earnings. It expects its net leverage (net debt to underlying EBITDA) to be ~1.5x-1.6x at the end of 31^st December 2021 and with a target of lower than 1.0x for FY22.

On the other hand, the divestments mentioned above will have a slight negative impact on consolidated EBIT(A). After considering their future focus on the balance sheet, free cash flows and lowering its net leverage ratio, it does not see any dividends upcoming for the FY22. At the same time, share buybacks will be considered as a substitute of dividends considering the franking credits.

Valuation Methodology: EV/EBITDA 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:  The stock of the company has been corrected by ~21.15% in the past nine months and has given a positive return of ~26.15% in the past six months. Currently, the stock is trading above the average of its 52-week low and high levels of $0.625 and $1.555, respectively. The stock has been valued using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). After considering the expected impact on EBIT(A) due to divestments, the cyclical effects related to COVID-19, the company can trade at a slight discount to its peers. For the purpose of its valuation, peers like Macmahon Holdings Ltd (ASX: MAH), MACA Ltd (ASX: MLD), and DDH1 Ltd (ASX: DDH) have been considered. Considering the company’s focus on net leverage, FY22 guidance, current trading levels, indicative upside in the valuation, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $0.8125, 12:00 PM (GMT+10), Sydney, Eastern Australia, as on 20^th December 2021. 

PRN 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 for 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 is 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 the 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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