Stocks’ Details
 

Origin Energy Limited

Record Production in Integrated Gas: Origin Energy Limited (ASX: ORG) is engaged in the exploration and production of natural gas, electricity generation, and sale of liquefied natural gas. As on 28 February 2020, market capitalisation of the company stood at ~$12.38 billion. The company has recently issued 47,090 shares under an employee incentive scheme. ORG has released its interim results for the period ending 31 December 2019, wherein it reported record production of 358 Petajoules in integrated gas with unit production costs of $3.5/gigajoule. In the same time span, the company witnessed a growth of 22% in free cash flow to $680 million and reported a statutory profit of $599 million. Owing to its decent financial and operational performance, Origin Energy Limited declared a fully franked interim dividend of 15 cents per share, up from 10 cents in HY2019.


APLNG production (Source: Company Reports)

Growth Opportunities and Future Expectations: The company is well positioned for growth and is executing its strategy to deliver value in a changing energy market. Asia Pacific LNG is targeting improved production at the upper end of the guidance range of 690-710 PJ in FY20 and is anticipating higher cash distributions ranging between $1.1 to $1.3 billion. The company has provided guidance for FY20 and expects EBITDA to be between $1,400 – $1,500 million.

Valuation Methodology: EV/EBITDA Based Valuation

EV/EBITDA Based Valuation (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of ORG is inclined towards its 52-week low of $6.8, proffering a decent opportunity for accumulation. During 1H20, net margin of the company witnessed an improvement over the previous half and stood at 8.9%, up from 5.9% in 2H19. In the same time span, ROE of the company went up to 4.5% from 3.2% in 2H19. Considering the trading levels, improvement in margins and decent growth opportunities, we have valued the stock using an EV/EBITDA based relative valuation approach and arrived at a target price of lower double-digit upside (in percentage terms). For the said purpose, we have considered AGL Energy Ltd (ASX: AGL), APA Group (ASX: APA), Santos Ltd (ASX: STO), etc., as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $6.980, down by 0.711% on 28 February 2020. 

South32 Limited

Strong Operating Performance: South32 Limited (ASX: S32) is engaged in the production of diversified metals. As on 28 February 2020, the market capitalisation of the company stood at ~$10.93 billion. During 1H20, the company reported strong operating results with record production at Brazil Alumina and higher output rates at Worsley Alumina. In the same time span, S32 reported a net cash balance of US$277 million and generated free cash flow from operations of US$284 million. During the half year, underlying EBITDA of the company stood at US$678 million and underlying earnings were US$131 million. The decent operational performance enabled the Board to declare a fully franked interim dividend of 1.1 US cents per share and a special dividend of 1.1 US cents per share.


1H20 Financial Highlights (Source: Company Reports)

Future Expectations and Guidance: The company has provided guidance for FY20 and expects group and unallocated costs of US$30 million. The company also plans to capitalise approximately US$30 million of the expenditure on information technology systems and expects greenfield exploration expenditure of US$30 million.

Valuation Methodology: Price to Cash Flow Based Valuation

Price to Cash Flow Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months, *1 USD = 1.53 AUD

Stock Recommendation: As per ASX, the stock is trading close to its 52-weeks’ low level of $2.165, offering a decent opportunity for the investors to enter the market. During 1H20, EBITDA margin of the company witnessed an improvement over the previous half and stood at 18%, up from 7.5% in 2H19. In the same time span, Asset/Equity ratio of the company was 1.46x, lower than the industry median of 1.70x. Considering the trading levels, improvement in EBITDA margin and modest outlook, we have valued the stock using Price to Cash Flow multiple approach and have arrived at a target price of lower double-digit upside (in percentage terms). For the said purpose, we have considered BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Iluka Resources Ltd (ASX: ILU) as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $2.220, down by 0.448% on 28 February 2020.

Orocobre Limited

Increase in Total Production and Sales: Orocobre Limited (ASX: ORE) is a mineral exploration and production company with a focus on developing Lithium/Potash resources in Argentina. As on 28 February 2020, the market capitalisation of the company stood at ~$743.83 million. The company has recently released its interim results for the period ending 31 December 2019, wherein it reported an increase of 10% in total production of lithium carbonate to 6,679 tonnes. In the same time span, the company reported positive results from the Olaroz Lithium Facility with a growth of 24% on sale of 6,395 tonnes of lithium carbonate. 


1H20 Operational Performance (Source: Company Reports)

What to Expect: The company has provided guidance for FY20 wherein it expects an increase of 5% in full year production at the Olaroz Lithium Facility. ORE also anticipates average sales price for the March 2020 quarter to be approximately US$5,000 per tonne. Cash corporate costs are expected to be in between US$8.5 - 9.5 million. 

Stock Recommendation: As per ASX, the stock of ORE gave a return of 18.83% in the past six months and a return of 10.51% in the last three months. The stock is also inclined towards its 52-weeks’ low level of $2.180, proffering a decent opportunity for accumulation. During 1H20, gross margin witnessed a YoY improvement and stood at 33.6%, up from 28.8% in 1H19. On TTM basis, the stock is trading at a price to book multiple of 0.8x, lower than the industry median of 1.5x. Considering the returns, trading levels, lower price to book multiple and decent operational performance, we recommend a “Buy” rating on the stock at the current market price of $2.70, down by 4.93% on 28 February 2020. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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