Stocks’ Details

Beach Energy Limited

A Look at FY20 Results: Beach Energy Limited (ASX: BPT) is engaged in the exploration, development and production of oil and gas. The market capitalisation of the company stood at $3.36 billion as on 17^th August 2020. Recently, the company released its FY20 results, which indicated the resilience of its business. During the year, the company drilled 178 wells with the overall success rate of 81% and reported total production of 26.7 MMboe, which was within the 1% of guidance. BPT recorded a net profit after tax of $501 million in FY20, down by 13% on the previous year. Return of Capital Employed for the period stood at 19% due to high margins from onshore oil and diversified pipeline gas business. During the year, the company witnessed a decline of 16% in operating cash flow due to a fall of 14% in sales revenue and a $134 million increase in cash tax payment. The company resolved to pay a fully franked final dividend of 1.0 cent per share from the profit distribution reserve.

Key Financials (Source: Company Reports)

Guidance: The company is committed to reach an emissions reduction target of 25% by FY25. For FY21, the company expects production in the range of 26.0 MMboe – 28.5 MMboe and underlying EBITDA in the ambit of $900 – 1,000 million. The company is scheduled to release its Q1 FY21 results on 23^rd October 2020.

Key Risks:  The company’s business is sensitive to the prices of oil and gas, as it generates revenues from the sale of these commodities. This may materially impact the financial performance of the company. In addition, the business is also exposed to other material business risks, which include economic risks, health, safety and environmental risks, community and social licence risks and legal risks.

Valuation Methodology: P/Sales Multiple Based Relative Valuation (Illustrative)

P/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: On the technical analysis front, the stock of the company has a support level of ~A$1.16 and a resistance level at ~A$1.823. The company is likely to make investments in its high-margin and diverse portfolio and aims to create more than $2 billion of free cash flow over the next 5 years. At the end of FY20, the company had a net cash of $50 million and $500 million liquidity. With its robust balance sheet, the company seems well-positioned to navigate the business through the lower oil price environment. We have valued the stock using Price to Sales multiple based valuation method and arrived at a target price of high single-digit (in percentage terms). For the purpose, we have taken peers such as Woodside Petroleum Ltd (ASX: WPL), Santos Ltd (ASX: STO) and Oil Search Ltd (ASX: OSH). Thus, considering the resilience of the business, successful drilling, high margins from onshore oil and diversified pipeline gas business, we give a “Hold” recommendation on the stock at the current market price of $1.580 per share, up by 7.119% owing to the release of FY20 results.

Viva Energy Group Limited

Growth in Underlying EBITDA of Non-Refining Businesses: Viva Energy Group Limited (ASX: VEA) is involved in the manufacturing, distribution, and supply of petroleum products to retail and commercial customers. The market capitalisation of the company stood at $3.5 billion as on 17^th August 2020. Recently, the company released its 1H FY20 results, wherein, it reported total underlying EBITDA (RC) of $269.3 million, down by 9.4% on the previous corresponding period. The retail underlying EBITDA (RC), stood at $332.9 million in H1FY20, up 17.5% on pcp. During the period, the company’s fuel sales volumes were impacted by border closures and ‘stay at home’ restrictions.

Key Financials (Source: Company Reports)

Divestment of VVR: In the month of February 2020, the company divested its non-core 35.5% interest in Waypoint REIT (formerly Viva Energy REIT). This generated after-tax proceeds of $680 million. VEA intends to return all the proceeds via a combination of a capital return, a special dividend as well as an on-market buyback.

Priorities for 2H FY20: The strategic priorities of 2H FY20 revolves around the continued recovery of retail sales volumes, margin management to offset impacts of any sustained lower sales volume environment. Also, the company continues to closely monitor credit exposure and working capital. The company will conduct its Annual General Meeting on 30^th September 2020.

Key Risks: The company is exposed to numerous strategic risks, which include operational and supply chain risks, compliance and regulatory risk and Commodity price 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: On the technical analysis front, the stock of the company has a support level of ~A$1.589 and a resistance level at ~A$1.908. The company declared an interim dividend of 0.8 cents per share, which reflects a payout ratio of 60% of Distributable NPAT (RC). For FY20, the company is expecting total capital expenditure in the range of $145 million – 180 million. The company possesses a strong balance sheet to manage fluctuations and disruption from the oil price environment. We have valued the stock using the price/cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Oil Search Ltd (ASX: OSH), Worley Ltd (ASX: WOR), Woodside Petroleum Ltd (ASX: WPL), etc. Hence, in light of the strong balance sheet, growth in non-refining business, returns to shareholders, we give a “Hold” recommendation on the stock at the current market price of $1.805 per share, down by 0.276% on 17^th August 2020.

Stanmore Coal Limited

A Look at June 2020 Production: Stanmore Coal Limited (ASX: SMR) is in the production of metallurgical and thermal coal. The market capitalisation of the company stood at $154.13 million as on 17^th August 2020. Recently, the company released its activities for the quarter ended June 2020, wherein, it reported total saleable coal production of 496Kt, taking the full-year production to 2.39Mt, higher than the guidance of 2.35Mt. Coal mining and production for the quarter was low as compared to prior quarters as SMR managed the impacts of reduced sales from COVID-19 by investing in overburden in advance to balance coal stockpile levels.

Key Metrics (Source: Company Reports)

Signing of Non-Binding Term Sheet: SMR inked a non-binding term sheet with its parent entity, Golden Energy and Resources Limited for a replacement US$40 million term loan facility. The key terms of the facility comprise of an upfront fee of 2.0%, interest rate on drawn funds of 8.0% per annum and the interest rate on undrawn funds 2.0% per annum.

Revised Guidance: Previously, the company reduced its underlying EBITDA guidance for FY20 from $92-100 million to $80-85 million due to the unfolding impacts of COVID-19.

Key Risks: SMR’s business is exposed to a variety of market risks, such as commodity prices and foreign currency. These could materially impact the financial performance of the business. In addition, the business is also sensitive to geological risk and operational risk.

Valuation Methodology: P/Sales Multiple Based Relative Valuation (Illustrative)

P/ Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: On technical analysis front, the stock of the company has a support level of ~A$0.501 and a resistance level at ~A$1.092. The company has paid an interim fully franked dividend of 3 cents per share on 30^th April 2020, which amounted to a cash payment of $3.6 million. Also, the company has changed its financial year to 31 December from 30 June. The stock of SMR has corrected 13.64% and 43.00% in the past one and three months, respectively. As a result, the stock is inclined towards its 52-weel low level of $0.500, offering decent opportunities for accumulation. We have valued the stock using the price to sales multiple based valuation method and arrived at a target price of low double-digit (in percentage terms). For the purpose, we have taken peers such as New Hope Corporation Ltd (ASX: NHC), Metro Mining Ltd (ASX: MMI) and Whitehaven Coal Ltd (ASX: WHC), to name few. Thus, considering the new term loan facility, returns to shareholders, current trading levels and key risks associated with business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.625 per share, up by 9.649% on 17^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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