Stocks’ Details

Oil Search Limited

Fall in Oil Prices Impacted 1HFY20 Results: Oil Search Limited (ASX: OSH) is involved in the exploration, development and production of oil and gas. The market capitalisation of the company stood at $6.28 Bn as on 26^th August 2020. During 1H FY20, the company reported total production and sales of 14.66 mmboe and 13.66 mmboe, reflecting a rise of 4% and 2%, respectively over 1H FY19. Revenue for the period amounted to US$625.6 million, which declined 19% on a year over year basis. Steep fall in commodity prices and higher exploration expenses resulted in a decline of 85% in core net profit after tax to US$24.7 million. Net loss after tax for the half-year stood at US$266 million, as compared to a profit of US$161.9 million in 1H FY19, due to non-cash, after-tax impairment of US$260.2 million on exploration assets in PNG, Hides GTE Project, and leases in Alaska.

The company has decided not to pay an interim dividend for 1H FY20 considering the material decline in core net profit after tax, a commitment to preserve capital during the difficult market conditions as well as the uncertain near-term oil price outlook. 

Financial Summary (Source: Company Reports)

Guidance: For FY20, the company expects unit production cost in the range of US$9.50 – 10.50 per boe. This indicates the initial impact of long-term efficiency and cost optimisation initiatives. The company is likely to release its Q3 FY20 results on 19^th October 2020.

Key Risks: As of now, OSH’s business is battered by adverse movement in global oil prices as the company generates its major revenue from the sale of oil. In addition, the business is also exposed to legislative and regulatory risk, political, community and other stakeholders, climate change risk and Joint venture risk.

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: During the half-year, the company strengthened its balance sheet through a well-subscribed US$700 million capital raising. As on 30^th June 2020, the company had liquidity of US$1.67 billion, which includes US$831.4 million in cash and US$836 million in undrawn credit facilities. The stock of OSH has corrected 2.89% and 9.58% in the last one and three months, respectively. As a result, the stock is inclined towards its 52-week low level of $1.808, offering decent opportunities for accumulation. On the technical analysis front, the stock of the company has an immediate support level of ~A$2.835 and a resistance level of ~A$3.872. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in percentage terms). For the purpose, we have taken peers like Origin Energy Ltd (ASX: ORG), Worley Ltd (ASX: WOR), Ampol Ltd (ASX: ALD), to name few. Therefore, considering the growth in sales and production, healthy balance sheet and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.070 per share, up by 1.656% on 26^th August 2020.

Regis Resources Limited 

Decent Growth in NPAT: Regis Resources Limited (ASX: RRL) is into an exploration of gold and minerals with a market capitalisation of $2.82 Bn as on 26^th August 2020. For FY20, the company recorded revenue of $757 million from 353,182oz of gold sold at an average price of $2,200/oz. The company reported net profit after tax amounting to $200 million, reflecting a rise of 22% with net profit after tax margin of 26%. These results showcase the strength of the business. In addition, RRL made significant investments to grow its mine life through the acquisition of nearby high potential land and stepping up its greenfields exploration efforts, while also progressing the significant and valuable McPhillamys Project. 

On the back of solid performance achieved in FY20, the company has resolved to pay a fully franked final dividend of 8 cents per share on 16^th October 2020. This took the total dividend for FY20 to 16 cents per share.

Key Financials (Source: Company Reports)

Outlook:  For FY21, the company anticipates gold production in the range of 355,000 - 380,000 ounces and all-in sustaining cost of between A$1,230 - 1,300 per ounce. The company has scheduled to conduct its Annual General Meeting on 24^th November 2020.

Key Risks: The company is exposed to commodity price risk, which arises from gold price fluctuations. In addition, the business is also sensitive to liquidity risk and credit risk.

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: Cash flows from operating activities for the period stood at $343 million. As on 30^th June 2020, the cash and bullion of the company stood at $209 million after the payment of $81 million in dividends, $64 million in income tax, $37 million on exploration expenditure. The company closed the year with nil debt. On technical analysis front, the stock of the company has an immediate support level of ~A$5.318 and a resistance level of ~A$6.184. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Northern Star Resources Ltd (ASX: NST), St Barbara Ltd (ASX: SBM), and OceanaGold Corp (ASX: OGC) and arrived at a target price of high single -digit upside (in percentage terms). Therefore, considering the strength of the business, growth in NPAT, and significant investments to grow its mine life, we give a “Hold” recommendation on the stock at the current market price of $5.430 per share, down by 2.162% on 26^th August 2020.

Aurelia Metals Limited 

Decent Growth in Revenue: Aurelia Metals Limited (ASX: AMI) is involved in the exploration of gold and base metal mining. The market capitalisation of the company stood at ~$480.69 Mn as on 26^th August 2020. Recently, the company released its FY20 results, wherein, it reported revenue amounting to $331.8 million, with a rise of 12% on a year over year basis. This was underpinned by gold and silver revenue growth of 11% and base metals revenue growth of 15%. Total gold production for the period stood at 91,672 oz at an AISC/oz of $1,526/oz. The company witnessed a fall of 18% in the bottom-line (NPAT) to $29.4 million. The company declared a fully franked dividend of 1.0 cent per share for FY20, which is payable on 2^nd October 2020.

Net Profit After Tax (Source: Company Reports)

Guidance: For FY21, the company expects gold production in the range of 80-90 koz at an AISC of between 1,500-1,750 A$/oz. AMI is expecting exploration and evaluation in the ambit of A$22-$26 million. 

Key Risks: The company’s business activities are exposed to material business risks, which include fluctuations in the commodity price, mineral resources and ore reserves, production, and cost estimates.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based 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 well placed to implement its strategic ambitions to become the next mid-tier Australian Mining Company with $79.1 million cash at bank and no debt. The stock of AMI went up by 74.6% in the last three months but went down ~9.84% in the past one-month period. The stock is inclined towards its 52-week high level of $0.655. On technical analysis front, the stock of the company has an immediate support level of ~A$0.476 and a resistance level of ~A$0.654. We have valued the stock using the price to book value multiple based illustrative relative valuation method and have arrived at a target price of high single digit-upside (in percentage terms). For the purpose, we have taken peers like IGO Ltd (ASX: IGO), OceanaGold Corp (ASX: OGC), and Nickel Mines Ltd (ASX: NIC). Hence, considering the decent performance in FY20, guidance, and no debt position, we give a “Hold” recommendation on the stock at the current market price of $0.500 per share, down by 9.091% on 26^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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