Stocks’ Details

Oil Search Limited

Marginal Rise in Total Production: Oil Search Limited (ASX: OSH) is engaged in the exploration, development and production of oil and gas resources. The market capitalisation of the company stood at ~$5.34 billion as on 2^nd November 2020. For the quarter ended 30^th September 2020 (Q3 FY20), the company reported marginal improvement in total production to 7.30 million barrels of oil equivalent (mmboe) as compared to 7.29 mmboe in Q2 FY20. During the same period, the company recorded total hydrocarbon sales of 7.55 mmboe, reflecting a rise of 11% over Q2 FY20. OSH witnessed a drop of 29% in revenue from hydrocarbons to US$189.0 million. The fall in revenue was mainly led by a reduction in the average realised LNG and gas price, which was largely impacted by the two-to-three month oil price lag on LNG contract prices, a higher proportion of LNG sold on the spot market.

Key Metrics (Source: Company Reports)

Guidance: During Q3 FY20, the company maintained its focus on finalising the longer-term strategy for its business.  For FY20, the company has decreased its investment expenditure guidance to US$390 - 460 million from US$440 – 530 million mainly due to lower capital expenditure in Alaska after the rephasing of FEED entry for the Pikka Development early works cost savings.

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

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company seems to be well-placed to take benefits of its world-class assets and deliver full value as well as to combat with lower oil price environment. As on 30^th September 2020, the liquidity position of the company stood at US$1.65 billion, comprising a cash balance of US$752.7 million and undrawn credit facilities of US$895.6 million. On a technical front, the stock of OSH has a support level of ~$2.498 and a resistance level of ~$3.311. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Origin Energy Ltd (ASX: ORG), Worley Ltd (ASX: WOR) and Ampol Ltd (ASX: ALD), to name few. Thus, considering the growth in production, focus on long-term strategy and decent liquidity, we give a “Buy” recommendation on the stock at the current market price of $2.540 per share, down by 1.168% on 2^nd November 2020.

Alumina Limited

Highlights of Q3 FY20 Earnings of Alcoa Corp: Alumina Limited (ASX: AWC) is leading global bauxite and alumina company, which is 40% interest in the Alcoa World Alumina & Chemicals (AWAC). The market capitalisation of the company stood at ~$4.16 billion as on 2^nd November 2020. On 15^th October, AWC noted Q3 FY20 earnings of Alcoa Corp, wherein adjusted EBITDA of Alcoa Alumina stood at US$119 million against US$88 million in Q2 FY20. In addition, the appreciation of the Australian dollar resulted into Adjusted EBITDA for Alcoa Bauxite Segment to US$124 million as compared to US$131 million in Q2 FY20. With respect to AWAC, the company noted production of 3.3 mt from refining business against 3.2 mt in Q2 FY20.

Half-Year Financial Highlights: During 1H FY20, Alumina Limited recorded alumina production of 6.4Mt against 6.2Mt in 1H FY19. During the same period, AWC noted a statutory net profit after tax of US$90.5 million as compared to US$210.9 million reported in the year-ago period. This was mainly because of a decline in the profit of AWAC, which stood at US$507 million against US$950 million in 1H FY19.

Key Financials (Source: Company Reports)

Guidance: For FY20, AWAC is likely to report alumina production of around 12.8 million tonnes and aluminium production of around 160,000 tonnes.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: AWC ended 1H FY20 with a healthy balance sheet comprising increased cash and cash equivalents of US$32.6 million as compared to US$15.2 million in 1H FY20 as well as low gearing of 4.5%. The stock is currently inclined towards its 52-weeks low price of $1.295, offering a decent opportunity for accumulation. On a technical front, the stock of AWC has a support level of ~$1.349 and a resistance level of ~$1.520. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as South32 Ltd (ASX: S32), BlueScope Steel Ltd (ASX: BSL) and Lynas Corporation Ltd (ASX: LYC), to name few.  Hence, in light of the low gearing, increased cash balance and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.425 per share, down by 0.697% on 2^nd November 2020.

Western Areas Limited

Strong Nickel Prices Supported Growth in EBITDA and NPAT: Western Areas Limited (ASX: WSA) is involved in the mining, processing, and sale of nickel sulphide concentrate. For the quarter ended September 2020 (Q1 FY21), the company reported mine production of 4,147 nickel tonnes, which was affected by re-sequencing of the Flying Fox mine schedule into lower-grade zones and lower grade at Spotted Quoll. Nickel sales for the period stood at 4,064 nickel tonnes in concentrate. During the quarter, the cash flow from operating activities stood at $10.0 million. For the year ended 30 June 2020, the company reported sales revenue of $308.4 million as compared to $268.7 million in FY19. In addition, the company recorded a growth of 51% and 125% in EBITDA and NPAT during FY20, underpinned by stronger nickel price and reliable performance from the Forrestania operations. WSA declared a fully franked final dividend of 1.0 cents per share which was paid 9^th October 2020.

Production Overview (Source: Company Reports)

Outlook: Recently, the company has revised its guidance for nickel tonnes in concentrate production in the range of 17,000 to 19,000 as compared to the previous guidance of 19,000 to 21,000. The company lowered its guidance due to the inclusion of increased lower grade ore in FY21. However, the company has not changed its exploration and mine development guidance, which remained at A$14 million to A$17 million and A$25 million to A$30 million, respectively. The company is likely to conduct its Annual Shareholders Meeting on 18^th November 2020.

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: The company ended Q1 FY21 with a cash balance of $120.3 million and nil debt. At the end of the quarter, the cash plus nickel sales receivables and liquid assets stood at $180.3 million. In the past one and three months, the stock of WSA has corrected 7.35% and 20.92%, respectively. As a result, the stock is inclined towards its 52-week low level of $1.625, offering decent opportunities for accumulation. On a technical analysis front, the stock of WSA has a support level of ~$1.724 and a resistance level of ~$2.485. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Lynas Corporation Ltd (ASX: LYC), Iluka Resources Ltd (ASX: ILU), Nickel Mines Ltd (ASX: NIC) to name few. Thus, considering the growth in earnings in FY20, debt-free balance sheet, current trading levels and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.890 per share, down by 1.819% on 2^nd November 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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