Perenti Global Limited

PRN Details

Ceasing of Substantial Holder: Perenti Global Limited (ASX: PRN) is in the provisioning of surface and underground mining and mining support services. On 5^th October 2021, Mitsubishi UFJ Financial Group, Inc. has ceased to be a substantial holder in the company.

FY21 Financial Summary:

• Solid Operating Performance: During FY21, the company posted solid operating performance and growth from the Underground business and an improved second half from the Surface business. PRN recorded revenue amounting to $2.02 billion, which is in line with FY20.
• Fall in Bottom Line: NPAT(A) for the year amounted to $77 million against $110.3 million in FY20.
• New Works and Contract Extensions: Since 30^th June 2020, the company has secured new work and contract extensions of $2.8 billion, which includes two key growth contracts in North America and Botswana.
• Improvement in Net Debt: PRN witnessed an improvement of 10% in net debt to $503.3 million and, leverage stood stable at 1.3x.

Revenue and EBITDA (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Headwinds: The company may witness increased logistical complexity in its operations, especially internationally, due to the occurrence of new strains with increased transmissibility.
• Climate Change and Carbon Emissions: PRN is exposed to risk arising from climate change and carbon emissions, as regulation of greenhouse gasses is increasing globally.

Outlook:

• As on 30^th June 2021, the company had work in hand of $6.6 billion for three years and a strong, tender pipeline of $11.0 billion. PRN has already secured revenue of ~$2.0 billion for FY22.
• PRN expects to report revenues in the range of $2.0 billion- $2.2 billion and EBIT(A) of between $165 million- $185 million at an AUD: USD exchange rate of 0.75.
• The company is optimistic that underground mining is likely to be a strong contributor to FY22 earnings on improved productivity from Zone 5.
• As of now, the company is two and a half years into implementing its 2025 Strategy, and it has successfully delivered on a range of the initiatives, which include delivering value to clients, generating strong operating cash flows, evident by cash conversion of 105% in FY21.

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 company closed FY21 with $567.9 million, which is supporting its growth profile. The company declared a final dividend of 2.0 cps, which took the total dividend of 5.5 cents per share for the year. The stock of PRN is trading below its 52-week low-high average of $0.625 - $1.555, respectively. The stock of PRN has been corrected by ~15.92% in the past six months. The stock has been valued using EV/EBITDA multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average EV/EBITDA, considering COVID-19 related disruptions, negative net margin, business risks. For the purpose of valuation, peers such as NRW Holdings Ltd (ASX: NWH), MACA Ltd (ASX: MLD), Macmahon Holdings Ltd (ASX: MAH), and others have been considered. Considering the expected upside in valuation, solid operating performance, new works and contract extensions, improvement in debt levels, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.880, as on 08 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

PRN Daily Technical Chart, Data Source: REFINITIV  

Mount Gibson Iron Limited

MGX Details

Mineral Resources and Ore Reserves: Mount Gibson Iron Limited (ASX: MGX) is engaged in the mining and export of hematite iron ore. As on 30^th June 2021, total group mineral resources stood at 67.4Mt grading 61.7% Fe, which was down from 69.4Mt @ 61.7% Fe in FY20, indicating mining depletion. MGX witnessed a rise in total group ore reserves to 20.3Mt @ 64.5% Fe against 18.7Mt @ 65.2% Fe in FY20.

• On 1^st October 2021, the company has decided to execute a staged suspension of operations at the Shine mine site in order to decrease expenditure and preserve the value of the deposit, as well as to provide time to assess the outlook for the iron ore market.
• The decision was taken considering negative movements in iron ore prices, product discounting and shipping freight rates.

FY21 Financial Summary:

• Iron Ore Sales: During FY21, the company recorded total iron ore sales of 3.0 million wet metric tonnes (Mwmt), which comprised of 1.8 Mwmt of Koolan Island fines and 1.2 Mwmt of Mid-West low-grade material.
• Fall in Profit: Profit after tax for the year amounted to $64.0 million against $84.2 million in FY20.
• Increase in Operational Cashflow: Cashflow from operation year increased to $165.2 million against $160.1 million in FY20.

Cash Flow from Operations (Source: Analysis by Kalkine Group)

Key Risks:

• Price Risk: The company’s performance could be impacted by any negative movement in iron ore prices.
• Regulatory Risk: MGX is exposed to a more complex regulatory environment; any failure may impact its operational Performance.

Outlook:

• For FY22, the company expects ore sales in the range of 3.0-3.2 Mwmt at site cash operating costs of $75-80/wmt FOB before waste stripping investment and capital improvement projects.
• Koolan Island is supposed to contribute iron ore sales of 2.0-2.2 Mwmt for FY22.
• Looking forward, the company is seeking acquisition opportunities in the resources sector.

Valuation Methodology: P/E 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: MGX declared a fully franked final dividend of 2.0 cents per share, which took the total shareholder distributions to over $332 million since its first dividend in late 2011. The stock of MGX is trading below its 52-week average price level of $0.395-$1.010. The stock of MGX has been corrected by ~8.82% and ~49.99% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering lower gross margin, low ROE, fall in profits and business risks. For the purpose of valuation, peers such as Lynas Rare Earths Ltd (ASX: LYC), BlueScope Steel Ltd (ASX: BSL), BCI Minerals Ltd (ASX: BCI), and others have been considered. Considering the expected upside in valuation, rising cash flow from operations, decent liquidity position, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.445, as on 08 October 2021, 01:01 PM (GMT+10), Sydney, Eastern Australia.

MGX 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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