Stocks’ Details

Viva Energy Group Limited

A Look at Business Update: Viva Energy Group Limited (ASX: VEA) is engaged in the manufacturing, distribution and supply of petroleum products to retail and commercial customers. The market capitalisation of the company stood at $3.1 Bn as on 7^th September 2020. Recently, the company notified the market that its retail business continues to reflect resilience, despite the on-going restrictions in Victoria. VEA added that the sales volumes in the Alliance network are holding over 50 million litres per week and the retail margin environment is supportive. In addition, the commercial businesses of the company were not impacted by current restrictions. However, the refining business has been impacted by the global and local response to COVID-19 and is likely to be impacted in the future.

As a result of border closures and ‘stay at home’ restrictions, the company experienced a decline of 10.5% in fuel sales volume to 6,381 ML. During 1H FY20, the company reported underlying EBITDA (Replacement Cost Basis) in non-Refining businesses of $318.7 million, reflecting a rise of 14.2% over 1H FY19. Underlying NPAT (Replacement Cost Basis) for the period amounted to $34.3 million. The company declared a fully franked interim dividend of 0.8 cents per share, reflecting a payout ratio of 60% of Distributable NPAT (Replacement Cost Basis). The company will pay the said dividend on 16^th September 2020.

Key Financials (Source: Company Reports)

Returns to Shareholders: In the month of February 2020, the company has divested its non-core 35.5% interest in Waypoint REIT and derived after-tax proceeds of $680 million. VEA is planning to return around $530 million, at $0.2740 per share to shareholders in October 2020, which will comprise a capital return of around $415.1 million, at $0.2146 per share and an unfranked special dividend of around $114.9 million. In addition, the company is targeting an on-market buy-back programme of up to $50 million. The remaining $100 million from after-tax proceeds is to be given to shareholders under a final component of the capital management initiative.

Key Risks: As of now, a major risk for the company includes the impacts of COVID-19, which are creating extreme pressure on the refining business. In addition, the company is also exposed to operational and supply chain risks, which arise from events such as extreme weather, accidents, breakdown or failure of infrastructure, and interruption of power supply.

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

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company possesses a healthy balance sheet to navigate fluctuations and disruption from oil price environment. In addition, VEA has a strong debt capacity with current facility limits of US$700 million. The company will conduct its ordinary shareholders meeting on 29^th September 2020. The stock of VEA is trading below the average of its 52-week trading range of $1.125 - $2.330. On the technical analysis front, the stock of the company has a support level of ~A$1.515 and a resistance level of ~A$1.814. We have valued the stock using the price/cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Oil Search Ltd (ASX: OSH), Worley Ltd (ASX: WOR), and Washington H Soul Pattinson and Company Ltd (ASX: SOL). Therefore, considering the decent performance in the retail business, returns to shareholders and healthy balance sheet, we give a “Hold” recommendation on the stock at the current market price of $1.595 per share, down by 0.312% on 7^th September 2020.

Perenti Global Limited

Record Revenue in FY20: Perenti Global Limited (ASX: PRN) is a diversified mining services group having footprints in surface mining, underground mining, and mining support services. The market capitalisation of the company stood at $813.77 Mn as on 7^th September 2020. Recently, the company announced that its wholly owned subsidiary, Perenti International Pty Ltd, is planning to launch a note issue in the Australian Debt Capital markets. For the first time in its history, the company has surpassed the toll of $2 billion in revenue and posted revenue of $2.04 billion in FY20. Underlying EBITDA for the period amounted to $443.8 million, indicating a rise of 6.8% over pcp. PRN has resolved to pay a fully franked final dividend of 3.5 cents per share on 3^rd November 2020.

Financial Performance (Source: Company Reports)

Outlook: For FY21, the focus of the company revolves around maintaining operational excellence in existing work and successfully ramping up new focus projects. The company secured $1.7 billion of revenue for FY21 with 69% gold exposure. The company has scheduled to conduct the 2020 Annual General Meeting on 2^nd October 2020.

Key Risks: The company’s business is exposed to business and sustainability risks, which include mining industry risks and competition, instability and security risks, foreign exchange risk, etc.

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

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: PRN has strengthened its liquidity position to around $600 million in cash and undrawn credit facilities. This makes the company well-positioned for growth and to withstand COVID-19 uncertainty. In addition, the company has exposure to positive momentum in the gold sector. The share price of PRN has corrected by 5.69% and 17.73% in the past one and three months, respectively. On the technical analysis front, the stock of the company has a support level of ~A$1.049 and a resistance level of ~A$1.384. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as NRW Holdings Ltd (ASX: NWH), MACA Ltd (ASX: MLD), Imdex Ltd (ASX: IMD), etc. Hence, in light of the record revenue during FY20, decent liquidity position, exposure to positive momentum in the gold sector, and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.120 per share, down by 3.448% on 7^th September 2020. 

Syrah Resources Limited

A Quick Look at 1H FY20 Results: Syrah Resources Limited (ASX: SYR) is an industrial minerals and technology company based in Australia. The market capitalisation of the company stood at $159.72 Mn as on 7^th September 2020. During 1H FY20, the company reported revenue amounting to US$7.4 million. During the half-year, the Balama operations produced 12,000 tonnes of graphite. However, the production at Balama was suspended due to the impacts of COVID 19. The total comprehensive loss attributable to shareholders for the period amounted to US$28.9 million. During the half-year, the net cash used in the operating activities stood at US$19.6 million, which mainly consisted of receipts from the sale of natural graphite products, offset by payments relating to expenses from operating Balama, as well as corporate office, compliance and other employee benefits expenses.

Key Financials (Source: Company Reports)

Outlook: Going forward, cost reduction measures are likely to reduce Balama cash outflows to US$7 million per quarter. The Balama cost base would be further positioned through Q3 to best preserve cash whilst also retaining operating and marketing capability to restart production. The company is positioning the Balama operation for the return of EV sales growth.

Key Risks: The company’s business could be impacted by a number of factors, which include fluctuations in commodity prices, exploration risks, including the risks of obtaining necessary licences and diminishing quantities or grades of reserves, availability of adequate funding, impact of inflation on costs, environmental regulation risk, currency and exchange rate risk, political risk, war and terrorism and global economic conditions.

Stock Recommendation: As on 30^th June 2020, the cash balance of the company stood at ~US$53 million, which was in line with guidance. Current ratio of the company stood at 7.49x in FY19 as compared to the industry median of 1.76x. This reflects that the company is well-positioned to address its short-term obligations. Debt to equity multiple of the company stood at 0.17x in FY19 as compared to the industry median of 0.21x. On the technical analysis front, the stock of the company has a support level of ~A$0.151 and a resistance level of ~A$0.756. The stock of SYR has provided returns of 4.05% and 18.46% in the past one and three months, respectively. The stock of SYR is trading at a price to book value multiple of 0.3x against the industry average (Basic Materials) of 5.9x on TTM basis. Thus, considering the measures to preserve cash, deleveraged balance sheet, decent liquidity position, valuation on TTM basis and returns in the past few months, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.390 per share, up by 1.299% on 7^th September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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