Danakali Limited

DNK Details

Completion of EPCM Phase 2: Danakali Limited (ASX: DNK) is a Sulphate of Potash (SOP) focused crop-nutrient company. The company is engaged in advancing the Colluli Potash Project in Eritrea, East Africa. The company recently updated that JPMorgan Chase & Co. and its affiliates ceased to be a substantial shareholder in the company. In another recent update, the company announced the completion of engineering, procurement, and construction management (EPCM) Phase 2 deliverables, with the Colluli Potash Project now benefiting from a more defined scope and de-risked design.

Half Yearly Results (Period Ended 30^th June 2020): During the half, the company completed EPCM Phases 1 and 2 (FEED Review and Update) on budget. The Eritrean Ministry of Energy & Mines accepted DNK’s Notice of Commencement of Mine Development and granted permits for infrastructure development and quarries. Due to COVID-19 disruptions, the company reached a mutual agreement with AFC to extend the deadline for Tranche 2 equity funding. In H1 2020, the company recorded a loss of $1.677 million. At the end of the period, the company reported cash and cash equivalents of ~$15.77 million, against ~$6.28 million in pcp and zero debt.

Cash Flow Statement (Source: Company Reports)

What to Expect: For the remainder of FY2020, the company expects to finalise project funding and aims to fulfil all the conditions precedent to the receipt of AFC Tranche 2 funding of US$28.5 million. Moreover, the company will continue to design and EPCM optimisation work and plans to commence EPCM Phase 3.

Key Risks: The success of the business relies on a single asset, which threatens its performance in case of any adverse impact on the development and production of the asset. Other risks may relate to changes in laws and regulations, limited local resources, infrastructure and skills, lack of liquidity, etc.

Stock Recommendation: The stock of the company gave positive returns of 4.76% in the last 3 months. Currently, the stock is trading slightly below the average of its 52-week trading range of $0.285 - $0.700. On the technical analysis front, the stock has a resistance level of ~$0.505 and support level of ~$0.421. On a TTM basis, the stock has a Price to Book Value multiple of 2.2x, lower than the industry median (Basic Materials) of 2.4x. In FY19, the company had a current ratio of 2.89x, as compared to the industry median of 1.28x. Considering the ongoing business developments, plans in pipeline, decent cash position, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.445, up 1.136% on 9^th September 2020.

Joyce Corporation Limited

JYC Details

Significant Improvement in Earnings: Joyce Corporation Limited (ASX: JYC) is engaged in the operation of kitchen and wardrobe showrooms and bedding retail stores.

FY20 Results Highlights: During the year ended 30^th June 2020, the company reported revenue amounting to $87.59 million, up 4% on the previous year. EBIT came in at $11.99 million, up 20.3% on pcp. EPS increased by 35% on FY19 and stood at 15.8 cents. During the year, the company simplified its portfolio and delivered significant earnings growth. Profit from continuing operations amounted to $2.67 million. Over the year, the company focused on cash generation due to COVID-19 and delivered a significant boost in liquidity, with an increase of 52.6% in the cash balance on FY19. Gearing ratio was also reduced to 27%, from 39.6% in FY19. In August 2020, the company declared a fully franked final dividend of 2.7 cents per share. Notably, the company’s dividend yield is higher than the average of the ASX200 and the Consumer Discretionary sector.

Financial Highlights (Source: Company Reports)

Segment Highlights: The company reports its results under three main segments, including Bedshed Franchise, Retail Bedding Stores, and Retail Kitchen Showrooms. In FY20, revenue from Retail Kitchen Showrooms was the highest at $67.498 million, followed by Retail Bedding Stores and Bedshed Franchise at $14.26 million and $5.83 million, respectively.

What to Expect: For 1HFY21, the company may consider paying a higher interim dividend based on its capacity. The aim behind increasing the dividend is to bring overall payments up to a level experienced by shareholders immediately prior to the pandemic. JYC’s board is focused on increasing profit and market valuation and has taken several steps to progress on this strategy, including portfolio simplification, maximisation of funds, improvement in balance sheet and earnings, etc.

Key Risks: The company is mainly exposed to credit risk, cash flow interest rate risk, and liquidity risk, through its ownership of financial instruments. Other risks to the business may relate to competition risk, new market entrants, loss of market share, etc.

Stock Recommendation: The stock of the company gave positive returns of 37.50% in the last 3 months. Currently, the stock is trading close to its 52-week high of $1.670. In FY20, the company reported a gross margin of 53.5%, as compared to the industry median of 23.0%. On the technical analysis front, the stock has a resistance level of ~$1.647and support level of ~$1.404. On a TTM basis, the stock has a Price to Book Value multiple of 2.4x, higher than the industry median (Specialty Retailers) of 1.5x. The company has delivered a decent performance during FY20, despite the challenges posed by the pandemic. The improvement in earnings and significant increase in cash boosts our confidence in JYC’s capabilities. On the contrary, the current trading levels suggest that most of the positives have been factored in the market price. Hence, considering the decent fundamentals, business prospects, plans to pay a higher dividend, and current trading levels, we suggest investors to wait for better entry levels and give an “Expensive” rating on the stock at the current market price of $1.540 on 9^th September 2020.

Azure Minerals Limited

AZS Details

Acquisition to Expand Portfolio: Azure Minerals Limited (ASX: AZS) is engaged in the exploration of base and precious metals. The company recently entered into an agreement to acquire 100% of the Barton Gold Project, a single Exploration Licence Application (ELA 40/393) from 30 Well Pty Ltd. The acquisition involves a consideration in the form of 1,150,000 fully paid ordinary Azure shares and $20,000 payable on grant of the tenement. The project is close to several large and growing gold deposits / projects, with the best drill intersection on the property being 7m @ 1.26g/t Au within 18m @ 0.77g/t Au.

Commencement of Exploration: In another recent update, the company announced about the commencement of exploration on the Andover Nickel-Copper Project, with environmental approvals secured for RC and diamond drilling with initial drill sites planned. Diamond drilling is expected to begin in mid-September.

High Grade Samples Collected: On 19^th August 2020, the company released an announcement stating that three holes drilled into the Mesa de Plata silver deposit resulted in high-grade samples for gravity separation testwork. The samples collected were as under:

Samples from the Mesa de Plata Silver Deposit

June Quarter Corporate Highlights: During the quarter, the company entered an agreement to raise $4 million via a share placement to institutional and sophisticated investors, to fund exploration activities. Exploration expenditure for the quarter came in at $300,000. As on 30^th June 2020, the company reported a cash balance of $0.85 million.

Operating Cash Flow (Source: Company Reports)

Key Risks: The company is primarily exposed to market risk due to movements in commodity prices and future capital risk due to the cost and availability of funds to meet business requirements.

Stock Recommendation: Over the last 3 months, the stock has given positive returns of 87.50% and is trading above the average of its 52-week trading range of $0.048 - $0.280. In 1HFY20, the company had a current ratio of 5.12x, as compared to the industry median of 1.83x. On a TTM basis, the stock has a Price to Book Value multiple of 3.8x, lower than the industry average of 5.9x. On the technical analysis front, the stock has a resistance level of ~$0.203 and support level of ~$0.07. Considering the recently acquired gold project, progress in exploration activities, decent financial position, growth prospects, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $0.160, down 3.03% on 9^th September 2020.

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