Stocks’ Details
 

Macmahon Holdings Limited

Expansion and Extension of Byerwen Contract: Macmahon Holdings Limited (ASX: MAH) is engaged in contract mining, civil engineering, and quarrying activities. The market capitalisation of the company stood at $571.07 Mn as on 4^th June 2020. Recently, the company has announced that it has secured expansion and a three-year extension of the Byerwen contract. The company has been providing open cut mining services at Byerwen since the establishment of the mine in November 2017. The company added that the new contract applies from 1 June 2020 until 1 November 2023 and expands the production to 10 million tonnes of hard coking coal per annum. MAH anticipates revenue of $700 million over the contract period, with full capacity expected from July 2020. The expansion would also involve a capital expenditure of $16 million on ancillary equipment. Byerwen expansion and extension increase MAH’s work in hand by around $115 million to over $1.2 billion for FY21.

As of now, the company has experienced a minimal impact from COVID-19. However, it is continuing with a range of operational measures to protect the health of its people and minimise the risk of transmission. The below picture gives an overview of the financial performance for 1H FY20:


Financial Performance 1H FY20 (Source: Company Reports)

Guidance for FY20: The company is on track to achieve the revenue guidance of $1.3 billion - $1.4 billion at the end of FY20. For the same period, it expects EBIT(A) in the range of $85 million - $95 million.

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: The company is optimistic to deliver decent performance in FY21 on the back of a strong balance sheet, significant tender pipeline and Byerwen expansion and extension. Gross margin of the company stood at 56.8% in 1H FY20 as compared to the industry median of 47.1%. The stock of Macmahon has provided returns of 23.26% and 10.42% over a period of one month and six months, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as NRW Holdings Ltd (ASX: NWH), Perenti Global Ltd (ASX: PRN), GR Engineering Services Ltd (ASX: GNG) etc. Thus, considering the increase of around $115 millionin work in hand due to the Byerwen contract update, strong balance sheet and minimal impact of COVID-19, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.265 on 4^th June 2020.

Buru Energy Limited

A Quick Look at Operational Update:Buru Energy Limited (ASX: BRU) is engaged in the exploration, development and production of petroleum. The market capitalisation of the company stood at ~$43.21 Mn as on 4^th June 2020. The company has recently updated the market with the operational update, wherein it stated that the recent May lifting of Ungani crude from the Port of Wyndham was the final lifting under the previous Petro-Diamond Singapore Pte Ltd offtake contract. BRU added that the Ungani Joint Venture has now sold the next lifting, which is expected to be in mid-July, on a spot basis.In addition, the July lifting has been sold two months ahead of delivery ‘Free On Board’ (FOB) at Wyndham. BRU also stated that the current farmout process is experiencing decent progress with various parties accessing the virtual data room.

During the quarter ended 31^st March 2020, the company reported production from the Ungani Oilfield of around 88,000 bbls at an average daily rate over the period of ~970bopd. Ungani crude sales for the quarter stood around 142,000 bbls from two liftings by Petro-Diamond Singapore Pte Ltd. As at 31^st March 2020, cash balance of the company stood at $30.1 million.


Key Metrics (Source: Company Reports)

Focus for Future: The company is focused on preserving a strong balance sheet. BRU is well-placed to drive value with proven resources and large-scale exploration.

Stock Recommendation: The strong cash position and its high-quality exploration portfolio places BRU in a decent position to navigate the current crisis caused by COVID-19. BRU has an EV/Sales multiple of 0.8x as compared to the industry median (Oil & Gas) of 9.6x on TTM basis. The stock of Buru is trading at a price to book multiple of 0.6x against the industry median (Oil & Gas) of 1.2x on TTM basis. Debt to equity multiple of the company stood at 0.06x in FY19 as compared to the industry median of 0.44x. Hence, considering the deleveraged balance sheet, strong cash position and current uncertainty due to COVID-19, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.105 per share, up by 5% on 4^th June 2020.

Oil Search Limited

Suspension of Trading PNG National Stock Exchange: Oil Search Limited (ASX: OSH) is involved in the exploration, development and production of oil and gas resources. 98% of the company’s assets are located in Papua New Guinea (Or PNG). The market capitalisation of the company stood at $7.52 Bn as on 4^th June 2020. The company recently advised the market that it sought and obtained valid approvals from the Executive Chairman of the Securities Commission of Papua New Guinea for its recent capital raising of US$700 million, which was completed on 28 May 2020. However, the acting Chairman of the Securities Commission of PNG has issued orders for the suspension of trading of OSH securities on PNG’s National Stock Exchange from 2 June 2020. The order stated an alleged breaching of PNG Capital Market Act by OSH, as it failed to obtain approval from the Securities Commission for the PNG Retail component of its recent capital raising.

The company stated that it has acted properly and complied with all its legal obligations. The company would vigorously defend its position by challenging the lawfulness of the orders in the National Court of Papua New Guinea. For the March 2020 quarter, the company reported total production of 7.37mmboe, reflecting a rise of 5% on the previous quarter. This was supported by a continued strong performance from PNG LNG, which produced at an annualised rate of 8.7 MTPA. Revenue for the period stood at US$359.4 million, down 20% qoq due to a decline of 13% in sales, driven by the timing of shipments and 20% lower oil prices.


Key Metrics (Source: Company Reports)

Decent Position to Weather Current Challenges: The company is well placed to weather a prolonged period of oil price weakness and advance its growth projects.

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: As at 31^st March 2020, the liquidity position of the company stood at US$1.15 billion, comprising US$670.6 million in cash and US$480.6 million in undrawn corporate credit facilities. Net margin of the company stood at 19.7% in FY19 as compared to the industry median of 12.1%. This reflects that OSH possesses decent capabilities to convert its top line into the bottom line against the broader industry. We have valued the stock using P/CF multiple based illustrative relative valuation methodand arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers like Origin Energy Ltd (ASX: ORG), Worley Ltd (ASX: WOR) and Ampol Ltd (ASX: ALD). Therefore, in light of a decent position to navigate current challenges, rise in total production during March quarter, and decent capabilities to convert its top-line into the bottom-line, we give a “Buy” recommendation on the stock at the current market price of $3.500 per share, down by 3.315% on 4^th June 2020.

Leigh Creek Energy Limited

Opening of Share Purchase Plan: Leigh Creek Energy Limited (ASX: LCK) is engaged in the development and exploration of energy and minerals. The market capitalisation of the company stood at $52.26 Mn as on 4^th June 2020. In a recent media interview, Justyn Peters, Executive Chairman of the company, stated that over the last four years, the company has been working with the South Australian Government and the regulator obtaining its licences. The company conducted a pre-commercial demonstration (PCD) plant last year, where it produces syngas. The company’s projects at Leigh Creek are progressing well, and the company has achieved some major milestones in the past, such as the PCD.

In another update, the company announced that it has opened its share purchase plan to raise a minimum of $1,000,000. Under the SPP, eligible shareholders can acquire up to A$30,000 worth of new fully paid ordinary shares in LCK without paying any brokerage or other charges. LCK would utilise the funds from the SPP to progress the development of its flagship Leigh Creek Energy Project through the next phases of the commercial pathway, including geotechnical evaluation and exploration and monitoring drilling of PEL 650. It will also use the funds to undertake business development activities, along with general corporate activities and for general working capital.


Key Dates for SPP (Source: Company Reports)

Carbon Neutral Strategy: With respect to the Carbon Neutral 2030 Strategy, the company recognises the importance of managing emissions and adopts a structured approach to guide its efforts to become carbon neutral by 2030.  The company is in a discussion with several strategic partners for funding its projects.

Stock Recommendation: As of 31 March 2020, total cash balance of the company stood at A$3.842 million. As a response to COVID-19, the company has thoroughly reviewed and restricted all expenditure in order to preserve cash and maintain a strong financial position. The stock of LCK is trading at a price to book multiple of 1.7x as compared to the industry average (Coal) of 2.4x on TTM basis. The stock of LCK has corrected by 21.74% and 41.94% in the three months and six months, respectively and is inclined towards its 52-week low level of $0.079. Thus, it can be said that the stock of LCK is undervalued at current trading levels. Thus, considering the strong financial position, milestones achieved in the past, and discussion with strategic partners, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.092 per share, up by 2.222% on 4^th June 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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