New Hope Corporation Limited

NHC Details

3QFY21 Business Activities: New Hope Corporation Limited (ASX: NHC) is engaged in coal mining, oil and gas, marketing and logistics, and investments in Australia. The company also has its business interests in port operation, agriculture, and technologies. The coal prices have been increased during 3QFY21 by 78% since September 2020. As a result, Bengalla has registered a higher price realisation of $105.41/t in 3QFY21 against $87.42/t for the previous quarter. The company has posted a decline in coal sold to 2.49mnt in 3QFY21 against 2.57mnt in 2QFY21 on the back of lower coal production. 

1HFY21 Financial Highlights: NHC has registered a decline in its revenue to $405.52mn in 1HFY21 against $618.22mn in 1HFY20 on the back of decline in saleable coal. The company has experienced shut down at the Bengalla Mine and ramping down operations at the New Acland Mine. The company has incurred a loss of $55.37mn in 1HFY21 on lower sales volume and a low pricing environment. The company has reported an increase in its cash balance to $114.81mn as on 31 January 2021 against $70.37mn as on 31 July 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is mainly engaged in coal exploration. Thus, adverse climatic conditions may impact production, resulting in a decline in revenues. In addition, the company requires regulatory approvals for the smooth functioning of the business. Therefore, any delay in regulatory approvals may impact the business of the company. 

Outlook: The company expects to complete its 2HFY21 on a solid note with improved coal prices coupled with increased demand in Asia. Bengalla project is expected to see capital investment in crucial mining equipment to increase its annual production in the future.

Valuation Methodology: EV/Sales based Relative Valuation Method (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 NHC gave a return of ~42.37% in the last one month and a return of ~31.76% in the last three months. The current market capitalisation of NHC stands at ~$1.39bn as of 4 June 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$1.05~$1.703. On the technical analysis front, the stock has a support level of ~$1.48 and a resistance of ~$1.93. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit downside (in % terms). We believe that the company can trade at a slight discount as compared to its peer average, considering a decline in revenue and losses incurred in 1HFY21. For this purpose, we have taken peers Armour Energy Ltd (ASX: AJQ), Whitehaven Coal Ltd (ASX: WHC), Karoon Energy Ltd (ASX: KAR). Considering the company has registered a decline in production and sales of coal in 3QFY21, associated business risks, current trading levels, and valuation, we suggest investors to book profits and recommend a “Sell” rating on the stock at the current market price of $1.695, up by 1.497% as on 4 June 2021.

NHC Daily Technical Chart, Data Source: REFINITIV

Red 5 Limited

RED Details

Update on KOTH Project: Red 5 Limited (ASX: RED) is a mineral resource company based in Australia. The company’s operations include Darlot Gold Mine, King of the Hills, Siana Gold Mine and Mapawa Gold Project. RED has announced regarding progressing well with King of the Hills (KOTH) gold project in Western Australia. The Department of Environment and Water Regulation (DWER) has approved the work at the KOTH power station before the construction of the power station. The project is getting well equipped with construction materials such as structural steel, steel liners, SAG mill pinions, motors, etc., for further development. 

Change of Interest of Substantial Holder: RED has informed regarding change in interest of substantial holder on 27 May 2021. Regal Funds Management Pty Ltd (RFM) has increased its interest to 6.29% from 5.27% in the company.

Quarterly Activities: The company has commenced mining at the Great Western open pit near Darlot. The company has completed 19600m of diamond core drilling during 3QFY21 to discover resources within the mining area.

1HFY21 Financial Highlights: RED has registered a decline in its revenue to $97.71mn in 1HFY21 against $105.30mn in 1HFY20 due to a lower recovery rate. The company has incurred a loss of $1.77mn in 1HFY21 against a profit of $8.24mn in 1HFY20 on the back of lower revenues and an increase in Administration cost. The company has seen a decline in its cash balance to $92.84mn as on 31 December 2020 against $116.22mn as on 30 June 2020.

H1FY21 Results (Source: Company Reports)

Key Risks: The company requires qualified professional for its business operations. Therefore, losing  qualified personnel and delay in their replacements may impact the business of the company. The company is exposed to adverse movement in foreign exchange prices, impacting the financials of the company. 

Outlook: The company has provided production guidance for FY21. The company expects 80koz-85koz of gold production for FY21 with an All-In Sustaining Cost (AISC) in a range of $2,150-$2,280 per ounce. 

Valuation Methodology: EV/Sales based Relative Valuation Method (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 RED gave a return of ~-10.25% in the last one month and a return of ~8.81% in the last three months. The current market capitalisation of RED stands at ~$398.87mn as of 4 June 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.155~$0.366. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer average, considering a decline in gold production and sales in 3QFY21. For this purpose, we have taken peers Calidus Resources Ltd (ASX: CAI), Pantoro Ltd (ASX: PNR), Regis Resources Ltd (ASX: RRL). Considering the recently received approval from DWER for work at KOTH power, robust balance sheet with an increase in net assets, associated business risks, current trading levels and valuation, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.175, up by ~2.941% as on 4 June 2021.

RED Daily Technical Chart, Data Source: REFINITIV 

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.

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.

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