Santos Limited

STO Details

Ceased to be a Substantial Holder: Santos Limited (ASX: STO) is engaged in the exploration and production of gas in Australia. The company sells Gas, ethane, liquefied natural gas (LNG), crude oil, condensate, naphtha and liquefied petroleum gas (LPG). STO has recently notified that Vanguard Investments Australia Ltd has ceased to be the Investment Manager for an institutional client mandate and as a result has ceased to hold a relevant interest in the shares held within that mandate. Vanguard Group is now holding 4.74% interest in the company. 

1QFY21 Update: STO has registered a 39% increase in its production volume to 24.8 mmboe over the corresponding quarter in 2020, mainly due to the acquisition of ConocoPhilips which completed in May 2020. During the 1QFY21, the company has posted a revenue of US$964mn and generated US$302mn of free cash flow. Net Debt stood at US$3.6bn at the end of 1QFY21. 

FY20 Financial Highlights: STO has registered a decline in its revenue to US$3,387mn in FY20 against US$4,033mn in FY19. STO has incurred a loss of US$357mn in FY20. The company has seen an increase in its cash balance to US$1,319mn as on 31 December 2020 against US$1,067mn as on 31 December 2019.

Revenue trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to foreign exchange prices. Thus, any adverse movement in foreign exchange prices may impact the financials of the company. In addition, the company is engaged in gas exploration. Therefore, any fluctuation in gas prices may affect the financials of the company. 

Outlook: STO continues to work towards becoming a net-zero emission company by 2040. STO targets its first injection in 2024 from its Moomba CCS phase1 after getting FID (Final Investment Decision) ready. 

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 STO gave a return of ~8.88% in the last one month and a return of ~5.99% in the last three months. The current market capitalisation of STO stands at ~$15.97bn as of 10 June 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$4.64~$7.81. On the technical analysis front, the stock has a support level of ~$7.213 and a resistance of ~$7.819. 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 (in % terms). We believe that the company can trade at a slight discount as compared to its peer average, considering a decline in its top line in FY20 and risk of fluctuation in the commodity prices. For this purpose, we have taken peers Senex Energy Ltd (ASX: SXY), Woodside Petroleum Ltd (ASX: WPL), Beach Energy Ltd (ASX: BPT). Considering the company has incurred a loss and witnessed a decline in top-line in FY20, associated business risks, current trading level and valuation, we suggest investors to book profits and recommend a “Sell” rating on the stock at the current market price of $7.67, (as on June 10, 2021, 10.17 AM (GMT+10), Sydney, Eastern Australia).  

STO Daily Technical Chart, Data Source: REFINITIV 

Iress Limited 

IRE Details

Clarification on Media Release: Iress Limited (ASX: IRE) provides software to the financial services industry. Its segments include APAC, UK & Europe, Mortgages, South Africa and North America. The company has provided clarification on speculative media news on 10 June 2021. As per the speculations in media, a leading is looking to buy shares in IRE for its client. In response, IRE has confirmed that they haven’t been approached directly on this matter and not able to comment further.

Operational Highlights: IRE has reported that two-thirds of services related to the Iress Cloud transition program has now moved to Cloud. IRE has successfully integrated OneVue’s corporate and functional teams. The company has finalised the acquisition payments for QuantHouse, ahead of its scheduled payment time. IRE is progressing well with executing growth strategies to scale up activities and drive operating leverage in a significant notable market. 

Financial Highlights: IRE has registered an increase in revenue to $148.1mn in 1QFY21 against $135.8mn (Constant Currency) in 1QFY20 on the back of activity in UK business and better performance from QuantHouse. The company has registered a decline in its profit to $11.8mn in 1QFY21 against $12.7mn in 1QFY20. The company has seen an increase in its cash balance to $63.14mn as on 31 December 2020 against $33.38mn as on 31 December 2019 due to strong returns on investments.

Revenue Growth (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to foreign exchange prices. Thus, any adverse movement in foreign exchange prices may impact the financials of the company. In addition, the company utilise technology to operate its business. Therefore, any obsolete technology may affect the business of the company. 

Outlook: IRE started with 2021 on a positive note. The company expects to deliver NPAT (Constant Currency) in a range of $70mn-$77mn for FY21. The company expects its revenues in a range of $164mn-$168mn for FY21. The company expects improving returns on its investments backed by 90%+ levels of recurring revenue.

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 IRE gave a return of ~26.75% in the last one month and a return of ~36.06% in the last three months. The current market capitalisation of IRE stands at ~$2.12bn as of 10 June 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$8.90~$12.85. On the technical analysis front, the stock has a support level of ~$12.15 and resistance of ~$13.32. 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 high single-digit (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in its top line in 1QFY21 and executing growth strategies to scale up operations. For this purpose, we have taken peers Tyro Payments Ltd (ASX: TYR), Bravura Solutions Ltd (ASX: BVS), Linius Technologies Ltd (ASX: LNU) to name a few. Considering the company has registered a decline in profits in 1QFY21, decline in ROIC, decent returns in the past few months, associated business risks, and valuation, we suggest investors to book profits and recommend a “Sell” rating on the stock at the current market price of $12.79, up by ~16.803% as on 10 June 2021. The stock prices moved up significantly in today’s trade due to speculative media news on third party’s interest in IRE stocks. In response, IRE has clarified that they have not been approached directly in this regard.

IRE Daily Technical Chart, Data Source: REFINITIV

Naos Small Cap Opportunities Company Limited 

NSC Details

Update on Portfolio Performance: Naos Small Cap Opportunities Company Limited (ASX: NSC) is an investment company. The company's principal activity is investing in microcap companies listed on the Australian Securities Exchange (ASX). The company focuses on achieving a long-term return over and above the benchmark ASX All Ordinaries Accumulation Index. NSC has informed on 9 June 2021 regarding its portfolio performance for the month ending May 2021. As per the report, the NSC portfolio returned 6.52% for May 2021. The portfolio has outperformed the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI), which has witnessed a growth of +0.27%. The company has been outperforming the benchmark for the past three years. 

3QFY21 Updates: NSC has registered a robust 3QFY21 with positive performance across all the Listed Investment Companies (LICs). The company continues to invest in businesses operating in industries with structural tailwinds such as EGH +50%, EGG +50% and SND +25%. With the volatility in prices, the company has found opportunities for long-term investments in 3QFY21.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is engaged in the investments business. Thus, a subdued performance of the portfolio may impact the business of the company. In addition, the company is exposed to economic risks. Therefore, the slowdown in the economy may impact the size of the company's portfolio and may affect the financials of the company. 

Outlook: NSC continues to focus on the buyback of its shares and remains active throughout FY21 to offer better returns to its shareholders. In addition, the company expects to see increased M&A activity, build new investments into sizeable core positions across all portfolios, technological change, etc.

Stock Recommendation: The stock of NSC gave a return of ~7.55% in the last one month and a return of ~14.90% in the last three months. The current market capitalisation of NSC stands at ~$141.21mn as of 10 June 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.435~$0.950. On the technical analysis front, the stock has a support level of ~$0.84 and a resistance of ~$0.972. Considering a decline in top-line and bottom-line in 1HFY21, decent stock price movement over the past few months, associated business risks, and current trading levels, we suggest investors to book profit and give a “Sell” rating on the stock at the current market price of $0.925, up by ~1.092% as on 10 June 2021.

NSC 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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