Stocks’ Details
 

Santos Limited

Santos Completes Conocophillips Acquisition: Santos Limited (ASX: STO) is engaged in the exploration, production, treatment and marketing of natural gas, crude oil, condensate, naphtha, and liquid petroleum gas. As on 28 May 2020, the market capitalization of the company stood at $11.71 billion. The company has recently completed the acquisition of northern Australia and Timor-Leste assets of ConocoPhillips for a purchase price of US$1.265 billion plus a contingent payment of US$200 million. This will result in operatorship and control of a high quality portfolio of long-life natural gas assets and strategic LNG infrastructure.

Strong Free Cash Flow and Liquidity: During the quarter ended 31 March 2020, the company delivered strong operational performance with production of 17.9 mmboe and delivered US$265 million of free cash flow. In the same time span, the company had a liquidity of over US$3 billion and net debt of US$3.1 billion.


Quarterly Operational Highlights (Source: Company Reports)

Outlook: Based on the current business conditions and the projected impact of COVID-19, the company is expecting to produce 81-89 mmboe and is anticipating base business sales volume at the lower end of 93-100 mmboe.  The company’s debt covenants have sufficient headroom and are not under threat at current oil prices for several years. S&P Global Ratings has reaffirmed the investment grade credit rating of the company with stable outlook.

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

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of STO gave a return of 29.79% in the past one month. During FY19, EBITDA margin of the company stood at 55%, higher than the industry median of 32.4%. In the same time span, net margin of the company stood at 16.1% as compared to the industry median of 12.1%. Considering the decent returns in the past one month, strong free cash flow and liquidity and decent outlook, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price with an upside of higher single-digit (in percentage terms). For the said purpose, we have considered Origin Energy Ltd (ASX: ORG), Beach Energy Ltd (ASX: BPT), Oil Search Ltd (ASX: OSH) etc. as peers. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $5.440, down by 3.203% on 28 May 2020. 

New Hope Corporation Limited

Quarterly 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. As on 28 May 2020, the market capitalization of the company stood at $1.16 billion. The company has recently released its quarterly activities report and reported that it has drilled 29 holes for a total of 6,475 metres. During the quarter, the company produced 2.28mt of coal and sold 2.8mt of coal.


Quarterly Operational Highlights (Source: Company Reports)

Impact of COVID-19: Despite the COVID-19 pandemic and travel restrictions, the company has not been adversely affected. Thermal coal prices were resilient until the end of March however fell quickly due to reduced electricity demand across most markets. 

What to Expect: New Hope is well positioned to meet the growing energy demands of its Asian customers. The company is managing the costs and risks across the business. NHC is flexible to respond to dynamic thermal coal markets and is carefully budgeting resources to future projects with a risk managed approach.

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

EV/ Sales Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of NHC is trading close to its 52-week low of $1.015, proffering a decent opportunity for accumulation. During 1H20, net margin of the company stood at 11.3%, higher than the industry median of 8%. In the same time span, Assets/Equity ratio of the company was 1.47x, lower than the industry median of 2.14x. Considering the current trading levels, positive outlook, negligible impact of COVID-19 and decent financial performance, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price with an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Viva Energy Group Ltd (ASX: VEA), Beach Energy Ltd (ASX: BPT), Whitehaven Coal Ltd (ASX: WHC) etc. as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $1.47, up by 5% on 28 May 2020. 

Alkane Resources Limited

ALK and Aust. Strategic Materials progress towards Demerger: Alkane Resources Limited (ASX: ALK) is engaged in the exploration, mining, and production of gold and other minerals. As on 28 May 2020, the market capitalization of the company stood at $504.63 million. The company has progressed the demerger of Australian Strategic Materials Limited. This is, however, subject to finalization of outstanding regulatory matters and shareholder approval. 

Quarterly Highlights: During the quarter ended 31 March 2020, the company sold 3,864 ounces of gold for revenue of $8.2 million at an average price of $2,126/ounce. In the same time span, the company produced 5,723 ounces of gold at an all-in sustaining cost of $1,346/oz and cash costs of $995/oz. During the quarter, the company reported a cash, bullion and listed investments balance of $81.9 million and operating cash flow of $1.8 million. 


Cash, Bullion and Listed Investments (Source: Company Reports)
 
Guidance: In FY20, the company expects to produce gold in the range of 30,000 to 35,000 ounces at an AISC of $1,250 - $1,400 per ounce.

Stock Recommendation: The unfortunate spread of the virus has highlighted weaknesses in supply chains and has delayed the restart of operations. As per ASX, the stock of ALK gave a return of 48.72% on YTD basis and a return of 16% in the past one month. The stock is inclined towards its 52-weeks’ high level of $1.160. During 1H20, net margin of the company stood at 22%, higher than the industry median of 14.3%. In the same time span, ROE of the company was 3.2% as compared to the industry median of 5.3%. On TTM basis, the stock is trading at a price to book value multiple of 2x, higher than the industry median (Basic Materials) of 1.6x. Considering the attractive returns in the past one month, trading levels, higher price to book value multiple, and uncertain market trends, we recommend our investors to wait for the price correction and have a watch stance on the stock at the current market price of $0.890, up by 2.299% on 28 May 2020. 

 
Daily Comparative Technical Chart (Source: Refinitiv, Thomson Reuters)

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