Stocks’ Details
 

Worley Limited

Recent Contracts Awarded:Worley Limited (ASX: WOR) is a professional services company that provides engineering, procurement and construction expertise to the upstream, midstream, chemicals, power, and mining and minerals sectors. Worley Limited was recently awarded a significant contract by Siemens Gamesa Renewable Energy, as per which, the company’s Yarmouth team in the United Kingdom will perform statutory inspections and general maintenance of wind-turbine-generator cranes and lifts across all turbines on the London Array offshore wind farm. Besides this, the company has also been awarded a three-year services contract with Alcoa of Australia Ltd (Alcoa) for Alcoa’s integrated mining, refining and smelting operations, establishing Worley as the preferred engineering services provider in Western Australia.

H1FY20 Performance Highlights:For H1FY20, the company reported improved financial performance with EBITA and NPATA growth achieved over the period. The company reported an aggregated revenue of $5,998 million in H1FY20, up 134% from the pcp. Further, the company reported Underlying EBITA of $366 million, up 126% on the pcp. For the half-year period, the company declared an interim dividend of 25.0 cents per share, up 100% on pcp.


H1FY20 Results (Source: Company Reports)

Material Risks:The company is currently exposed to the risks of Covid-19 and a decline in oil prices as these factors could significantly impact Worley’s business environment. The impact of COVID-19 has created acute supply chain issues that have slowed some projects. In order to place itself better for the future, Worley is actively taking measures to align the cost base and deliver savings. 

What to expect:Amid Covid-19 situation, the company’s balance sheet has remained stable with an improved liquidity position. With a strengthened balance sheet and diversified business, the company seems to be well-positioned for future global energy requirements. Moving forward, the company expects energy efficiency and decarbonization of assets to drive its operating expenditure. 

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:Over the past six months, the stock of WOR has corrected by 40.74% on ASX and is inclined towards its 52 weeks low price of $4.630, offering investors an opportunity for accumulation. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and arrived at a target upside of lower double-digit (in percentage terms). Considering the company’s decent position amid Covid-19 pandemic, its improved performance in H1FY20 period, strengthened balance sheet and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $8.6, down by 4.656% on 15 June 2020. 

Santos Limited

Completion of ConocoPhillips Acquisition:Santos Limited (ASX: STO) is an Australian natural gas company involved in Gas and petroleum exploration and production, treatment and marketing of natural gas, crude oil, condensate, naphtha and liquid petroleum gas. The company recently completed the acquisition of ConocoPhillips’ northern Australia and Timor-Leste assets for a reduced purchase price of US$1.265 billion plus an increased contingent payment of US$200 million subject to a final investment decision on Barossa. With the completion of this acquisition, the company’s interest in Bayu-Undan and Darwin LNG increased to 68.4%, providing a significant boost to 2020 production and cash flows.

March 2020 Quarter Update:During the March 2020 quarter, the company delivered US$265 million of free cash flow, underpinned by strong operational performance. Over the quarter, the company’s oil assets performed well with strong realised prices in the quarter, while its onshore assets performed particularly strongly including the highest quarterly Cooper Basin gas production in nine years and GLNG operating above guidance at 6.4 mtpa. For the quarter, the company reported total production of 17.9 mmboe and sales volume of 22.3mmboe. 


March Operational Performance (Source: Company Reports)

What to Expect:For FY20, the company expects its production to be in the range of 73-80 mmboe. The company’s sales volumes are expected to be at the lower end of the guidance range of 101-109 mmboe, subject to the risk of COVID-19 led disruptions. 

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:In response to Covid-19, the company has recently taken several strong financial measures which include reduction of 2020 capital expenditure by US$550 million and 2020 Cash Production Costs by US$50 million. Over the past six months, the stock of STO has corrected by 34.15% on ASX and is inclined towards its 52 weeks low price, offering an opportunity for accumulation. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers like Woodside Petroleum Ltd (ASX: WPL), Origin Energy Ltd (ASX: ORG), Oil Search Ltd (ASX: OSH), etc. Considering the aforesaid facts, recently financial measures to improve its financial position, decent march quarter performance, acquisition of ConocoPhillips’ northern Australia and Timor-Leste assets, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $5.190, down by 3.889% on 15 June 2020. 

New Hope Corporation Limited

Colton Project Update:New Hope Corporation Limited (ASX: NHC) is a diversified energy company with interests and operations spanning coal mining, exploration, port operation, conventional oil, agriculture, innovative technologies and investment. On 12 June 2020, the company announced that Australia’s High Court has dismissed the applications for special leave to appeal by Wiggins Island Coal Export Terminal Pty Ltd (WICET), and by Northern Energy Corporation Limited and Colton Coal Pty Ltd in relation to the New South Wales Court of Appeal decision.

April Quarter Update:For the quarter ended 30 April 2020, the company reported total saleable coal production of 2,282kt, taking the total nine months production to 8,493kt. During the quarter, the company sold 2,804kt of coal, down 8.5% on pcp. Over the quarter, the company implemented various measures to protect the ongoing health and wellbeing of team members and to help minimise the threat of COVID-19 entering a New Hope site. In the first half of FY20, the company saw decent results, underpinned by increased production. 


April Quarter Update (Source: Company Reports)

What to Expect:The company is exposed to the risks of variation in the price and demand for Coal.Amid Covid-19 pandemic, the reduced electricity demand across most markets has impacted the global power demand. Hence, the company expects its financial results to be negatively impacted in the second half of FY2020. In the past one month, things have improved as many countries have started to lift restrictions and the demand in countries like Vietnam and Taiwan is strong. Demand in Korea remains firm and China is recovering quickly. 

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:Over the last six months, the stock of NHC has declined by 33.91% on ASX and is trading near its 52 weeks low price of $1.015, offering a decent opportunity for accumulation. For H1FY20, the company’s net margin stood at 11.3%, higher than the industry median of 8%. The company’s current ratio stood at 1.67x, higher than the industry median of 1.06x, demonstrating that the company is well equipped to pay it short-term obligations. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the company’s decent production performance, its trading level, energy demand recovery in various countries, and current trading level, we give a “Buy” recommendation on the stock at the current market price of $1.350, up by 1.124% on 15 June 2020.


Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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