Stocks’ Details
 

Iluka Resources Limited

 
Precautionary Measures Taken to Manage Covid-19 Impact: Iluka Resources Limited (ASX: ILU) is primarily involved in the exploration, project development, mining operations, processing and marketing of mineral sands and rehabilitation. On 9^th April 2020, the company held its Annual General Meeting (AGM), wherein it announced that it has initiated a range of precautionary and scalable measures to manage the impact of Coronavirus. Due to the potential impacts of COVID-19 on global demand and its markets and continued uncertainty surrounding the impacts, the company has withdrawn its 2020 guidance.

FY19 Results Highlights:In FY19, the company reported strong underlying earnings with EBITDA of $616 million, reflecting Iluka’s commitment to sustainable prices for mineral sands and delivering projects to support production levels in the years ahead. Last year, the company took two significant decisions– the write down of Sierra Rutile and the proposed demerger of the Mining Area C royalty business.


(Source: Company Reports)

What to expect:The outlook for 2020 and the specific impacts of the pandemic on the company’s business is currently uncertain. Work on the company’s project development portfolio has been curtailed in the short-term by restrictions on the movement of people as a result of COVID-19. The commissioning of Phase 1 of the company’s Eneabba mineral sands recovery project in Western Australia is currently underway, with first sales expected in the third quarter. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Based Relative Valuation Approach (Source: Thomson Reuters)

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

Stock recommendation: The company has a track record of resilient business performance, which is underpinned by strong financial, operational and market fundamentals. The company currently has zero debt and undrawn facilities of $519 million. The stock of ILU is currently trading near to its 52-week low price of $5.720, providing investors an opportunity for accumulation. We have valued the stock using price to earnings multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in percentage terms). For the purpose, we have taken peers like Whitehaven Coal Ltd (ASX: WHC), Regis Resources Ltd (ASX: RRL), Mineral Resources Ltd (ASX: MIN) etc. Considering the aforesaid facts, the company’s track record of resilient business performance, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $7.740, up by 6.173% on 14 April 2020.

Woodside Petroleum Ltd

 
Taking Proactive measures to manage the impacts of Covid-19: Woodside Petroleum Ltd (ASX: WPL) is an energy company primarily involved in the development and exploration of gas, oil and condensate reserves. In an update provided on 27 March 2020, the company informed that it is implementing to reduce the risk of transmission of COVID-19 to Woodside’s people, contractors and communities and its potential impact on Woodside’s business. The company is focused on supplying energy to domestic and export markets without any interruptions.
 
What to expect: The company expects to reduce its total expenditure in 2020 by around 50% to approximately $2.4 billion.However, the company’s 2020 production guidance is unchanged at 97 – 103 MMboe. As a result of the proactive measures taken by the company to manage the emerging impacts of COVID-19, its investment expenditure guidance for 2020 is now US$1.7 – US1.9 billion.
 

Adjusted 2020 investment expenditure guidance (Source: Company Reports)
 
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

EV/EBITDA Based Relative Valuation Approach (Source: Thomson Reuters), *1USD=1.57 AUD

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

Stock Recommendation: The company is in a strong financial position and is prepared for a period of higher capital expenditure. As at 29 February 2020, the company had cash in hand of US$4.9 billion, total liquidity of US$7.9 billion and low gearing of 13.8%. The stock of WPL is currently trading near its 52-week low price of A$14.930, offering investors a decent opportunity for accumulation. We have valued the stock using EV/EBITDA based illustrative relative valuation method and have arrived at a target price with an upside of lower double-digit (in percentage terms). For the said purpose, we have considered Origin Energy (ASX:ORG) Caltex Australia Ltd (ASX: CTX), and AGL Energy Limited (ASX: AGL) as peers. Considering the company’s strong financial position and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $22.0, up by 0.733% on 14 April 2020.

Kirkland Lake Gold Ltd

Decent Track Record of Dividend Payments Kirkland Lake Gold Ltd (ASX: KLA) is a gold exploration company with a market cap of around ~$11.33 billion as at 10 April 2020. For the first quarter of 2020, the company declared a dividend of US$0.125 per common share, representing the 12th quarterly dividend payment made to shareholders following the Company’s adoption of a dividend policy in March 2017. In the fourth quarter of 2019, the company paid a dividend of US$0.06 per common share, up 50% on previous quarterly dividend payment. The results for Q4 2019 are depicted in the below image.


Q4FY19 & FY19 Key Metrics (Source: Company Reports)

High-Grade Mineralization at Robbin’s Hill and Macassa Mine: In December 2019, the company announced high-grade results from the ongoing surface drilling at the Fosterville Mine, confirming mineralization down-plunge of the existing Mineral Resource at Robbin’s Hill. The company also revealed drill results from underground exploration drilling at the Macassa Mine in Kirkland Lake, which confirmed the continuity of known mineralization outside of existing Mineral Resources.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation

Price to Book Value Based Relative Valuation Approach (Source: Thomson Reuters), *1USD=1.57 AUD

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

Stock Recommendation:In the past one month, the stock of KLA has provided a return of 6.34%. Considering the company’s decent track record of dividend payments, its recent exploration success, and current trading levels, we have valued the stock using Price to Book Value based relative valuation method and arrived at a target price of lower double-digit growth (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $60.50, up 8.036% on 14 April 2020. 

Oil Search Limited

Raising Capital to Reduce Cost and Manage Covid-19 Impacts:Oil Search Limited (ASX: OSH) is primarily involved in the exploration, development and production of oil and gas resources. The company recently completed its placement to institutional investors and the institutional component of its 1 for 8 accelerated pro-rata non-renounceable entitlement offer of new ordinary shares in Oil Search, raising approximately A$1,080 million. These proceeds will be used to reduce costs and manage the potential impacts of COVID-19. In addition to this, the proceeds will also help the company in withstanding a prolonged period of low oil prices.

Normal production level maintained in Q1 FY20:In a business update released on 7 April 2020, the company confirmed that it has maintained its normal production level during the first quarter of 2020,with production of 7.3 mmboe, comprising 6.3 mmboe for PNG LNG, produced at an annualised rate of 8.7 MTPA, and 1.0 mmboe for Oil Search operated assets. During the quarter, the company’s EBITDAX benefitted from strong realised pricing given the approximately two-month lag between contracted LNG prices and benchmark Brent oil prices.The company’s financial performance for FY19 is depicted in the below image.


FY19 Financial Summary (Source: Company Reports)

What to expect: The company expects its FY20 full year production to be in between 27.5 – 29.5 mmboe, assuming no business interruption from COVID-19. Further, the company is targeting at least a US$1-2/boe reduction in production costs through the review, prior to implementation costs.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation 

EV/EBITDA Based Relative Valuation Approach (Source: Thomson Reuters), *1USD=~1.57 AUD

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

Stock Recommendation: The stock of OSH is currently trading near its 52-week low price of A$1.808, providing investors a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit (in percentage terms). For the purpose, we have taken peers like Caltex Australia Ltd (ASX: CTX), Worley Ltd (ASX: WOR) and Viva Energy Group Ltd (ASX: VEA) etc. Considering the aforesaid facts, recently completed capital raising, decent outlook and current trading levels, we give a “buy” recommendation on the stock at the current market price of $2.750, up by 1.852% on 14 April 2020. 


Comparative Price Chart (Source: Thomson Reuters)

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