Buy or Profit Booking Scenario in these Energy and Gold Stocks- ORG, RRL

Origin Energy Limited

ORG Details

Recent Updates: Origin Energy Limited (ASX: ORG) is involved in the exploration and sale of natural gas, electricity, LPG, and green power products in Australia.

• The company issued ~8,795 shares on 31 December 2021 due to the conversion of options under an employee incentive scheme.
• On 31 December 2021, ORG ceased ~32,235 performance share rights, ~5,693 share rights, and ~14,508 restricted share rights due to the lapse of conditional right to securities.

Acquisition of WINconnect:

• On 20 December 2021, ORG declared that one of its subsidiaries signed a contract to acquire WINconnect Pty Ltd to target expansion in its CES (community energy services) business. Currently, PEP (Pacific Equity Partners) has a majority ownership in WINconnect. Hence, the purchase of WINconnect is subject to the inter-conditionality of certain transactions between ORG and Intellihub (also owned by PEP) as agreed under the Master Services Agreement (MSA). Intellihub will provide metering services to ORG and purchase the electricity embedded network meters of ORG & WINconnect. Hence, Intellihub is currently seeking approvals for equity refinancing for the said deal with ORG.
• ORG is expected to pay ~$42.4 million after tax and post payment of consideration for the inter-conditional deals.
• ORG will add ~87K embedded electricity network and serviced hot water customers plus a pipeline of ~36,000 contracted apartments from the completed acquisition. It will then have ~367,000 CES customers across all mainland territories and states.

Sale of 10% Shareholding in APLNG: On 9 December 2021, ORG declared that ConocoPhillips, one of the JV partners in Australia Pacific LNG (APLNG) has executed its pre-emption rights regarding ORG’s previous announcement to sell off a ~10% interest in APLNG to EIG for ~$2.12 billion.

September 2021 Quarterly (Q1FY22) Results:

• The gas production from APLNG went up by ~1% YoY to 65.1 PJ whereas the commodity revenue rose by ~25% QoQ due to higher realised oil prices in Q1FY22. The recovery in the global commodity prices primarily accounted for higher revenue at the APLNG.
• The electricity sales volumes increased by ~3% YoY during the quarter driven by an increase in business volumes (~6%) due to the net customer wins. However, the retail volumes were reported to be flat due to COVID-19 impact and lower energy & solar efficiency.
• The gas volumes reduced by ~7% YoY due to lower business volumes (down ~14% on pcp), and flat retail volumes.

Key Metrics, Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces oil and gas price changes, demand fluctuations, difficult market conditions, continued COVID-19 threat, and supply chain issues.

Outlook:

• ORG expects the underlying EBITDA between $1,850–$2,150 million in FY22 versus ~$2,048 million in FY21. The market conditions are expected to remain challenging for the Energy Markets business in FY22. The capex for FY22 is expected in the range of ~$370 - ~$410 million compared to ~$339 million in FY21.
• The FY22 production from the APLNG is expected between 685 – 710 PJ and is anticipated to achieve a distribution breakeven in the ambit of ~US$20–US$25 per barrel. Due to an expected improvement in the realised oil prices in FY22, the forecasted net cash flows from APLNG would be over ~$1 billion in FY22.
• ORG expects to complete the ongoing acquisition deal of WINconnect in 1HCY22.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ORG gave a positive return of ~33.63% in the past six months and a positive return of ~44.19% in the past six months. The stock is currently trading at par to its 52-weeks’ high level of $5.840. The stock has been valued using the Enterprise Value to EBITDA based illustrative relative valuation method and arrived at a target price with a correction of a high-single-digit (in % terms). The company might trade at a slight discount than its peers’ mean EV/Sales multiple, considering the difficult market conditions in the near term for the energy markets business, the COVID-19 impact, and an estimated increase in the capex. For this purpose of valuation, a few peers like Beach Energy Limited (ASX: BPT), Woodside Petroleum Limited (ASX: WPL), Santos Limited (ASX: STO), and others have been considered. Considering the current trading levels, an indicative downside in valuation, and decent returns in the past we suggest investors book profit and give a ‘Sell’ rating on the stock at the current market price of $5.840, as of 19 January 2022, 1:53 PM (GMT+10), Sydney, Eastern Australia.

ORG Daily Technical Chart, Data Source: REFINITIV  

Regis Resources Limited

RRL Details

Director’s Resignation: Regis Resources Limited (ASX: RRL) is a gold production company with projects in Western Australia and New South Wales. RRL operates segments of Duketon North operations, Duketon South Operations, and Tropicana (30% interest). On 14 January 2022, RRL announced that Mr. Russell Barwick resigned as a Non-Executive Director with immediate effect due to personal reasons.

Highlights from Macquarie Western Australia Forum Presentation:

• In FY21, RRL reported a ~35% rise in its mineral resources and ~33% in the ore reserves amounting to 10.4Moz of total resources and total reserves of 4. 8Moz.
• It expects a step-change in the gold production during FY22 led by its JV interest in the Tropicana gold mine. The production outlook for Duketon is anticipated to witness a robust lift in 2HFY22.
• RRL has a growing pipeline with multiple avenues to pursue on operating projects and projects under development/ for exploration.

Digging into Q1FY22 (ended 30 September 2021) Results:

• RRL generated lower operating cashflows of ~$92.5 million in Q1FY22 versus ~$108.5 million in Q4FY21 (June quarter) from its Duketon and Tropicana operations due to lower quarterly production.
• The C1 cash cost before royalties (including Tropicana) for Q1FY22 amounted to ~$1,072/oz.
• For the McPhillamys gold project in NSW, RRL continues to engage with the regulatory authorities (DPIE- Department of Planning, Industry, and Environment) to seek regulatory approval. Meanwhile, it is advancing on the project Definitive Feasibility Study (DFS).
• In Q1FY22, RRL progressed on the development of the Garden Well South underground mine and expects the first ore in the next quarter (Q2FY22).

The Growth in Sales Revenue; (Analysis by Kalkine Group)

Key Risks: RRL is witnessing the COVID-19 impacts on the supply chains and high labour turnover. In NSW, with the recent outbreak of COVID, RRL is experiencing delays in seeking permits for the project and coordinating with the regulators.

Outlook:

• The contribution from the Garden Well South underground mine is expected to be a considerable addition to RRL’s production profile and is anticipated to potentially expand mine life further via exploration.
• The company expects to produce ~460–515 Koz at an AISC range of $1,290-1,365/oz in FY22.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of RRL gave a positive return of ~7.02% in the past month and a negative return of ~11.21% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $1.665 - $3.672.  The stock has been valued using the Price to Earnings-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ mean P/E multiple, considering lower production, higher AISC (all-in sustaining costs) in Q1FY22, and the COVID-19 impact on labour turnover and availability. For this purpose of valuation, a few peers like Ramelius Resources Limited (ASX: RMS), Gold Road Resources Limited (ASX: GOR), Westgold Resources Limited (ASX: WGX), and others have been considered. Considering the current trading levels, increased mineral reserves & resources, expanded portfolio (acquired Ben Hur gold deposit in FY21), stronger production outlook from Duketon operations in 2HFY22, an indicative upside in valuation, we give a ‘Buy’ rating on the stock at the closing market price of $1.980, down by ~1.493%, as of 19 January 2022

RRL Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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