Petra Diamonds Limited (LON: PDL)

Petra Diamonds Limited (LON: PDL) is an FTSE All-Share index listed independent diamond mining company, supplying rough diamonds to the global market. The Company primarily operates in the African region, including South Africa, Botswana, and Tanzania.

Growth Prospects

• Upgrade in Credit Ratings: On 23 March 2022, Moody’s Investor Services upgraded the Company’s Corporate Family Rating (CFR) and its second lien bond rating from Caa1 to B3. On 26 February 2022, S&P Global Ratings upgraded its outlook for the Company’s bonds to positive while maintaining its B rating. Thus, it reflects PDL’s stronger financial and business outlook”.
• Strategic Developments: PDL has signed a Memorandum of Understanding with Caspian Limited in December 2021 to reduce its exposure in Tanzania while retaining a controlling interest in Williamson.

Key Risks 

• Weak Tender 5 Sales Results: The like-for-like rough diamond prices had reduced by around 23.7% for Tender 5 when compared with Tender 4.
• Record UK Inflation: The rise in regulated household energy bills led to UK inflation leaping to 9% in April 2022, the highest level since 1982. It may adversely impact UK equities.
• Bank of England Warning: The Bank of England had trimmed its economic growth forecast for 2023 and is expected to show a contraction of 0.25% from a previously estimated growth of 1.25%. Moreover, it had also warned of UK inflation reaching around 10% very soon.

Key Fundamental and Shareholders Statistics of Petra Diamonds Limited.

 Vontobel Asset Management AG is the most significant shareholder as it holds nearly 31.05 million shares.

Q3 FY22 and 9M FY22 Trading Update (for the three months and nine months ended 31 March 2022, as of 20 April 2022)

(Source: Company Website)

• Top-Line Business: The Company had shown a solid jump of around 33% in top-line revenue from USD 106.0 million during Q3 FY21 to USD 140.6 million during Q3 FY22.
• Balance Sheet: The Company’s net debt stood at USD 107.0 million as of 31 March 2022. In comparison, it was USD 152.3 million as of 31 December 2021.
• Impressive Production Volumes: The Williamson’s resumption of production led to a significant increase of around 18% in diamond production from 704,498 carats during Q3 FY21 to 830,456 carats for Q3 FY22. 

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 01 June 2022 at 09:34 AM GMT+1, PDL’s shares were trading at GBX 115.00, down by around 0.86% from the previous day closing price. Stock 52-week High and Low were GBX 139.00 and GBX 45.00, respectively.

On a daily chart, the stock price is hovering above the 20-days exponential moving average of GBX 114.32. Hence, there could be an uptick in the stock price in the near term. Also, the MACD line has given a bullish crossover against the signal line.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

The Company has shown solid top-line business during H1 FY22 and carried the positive momentum into Q3 FY22. Moreover, PDL is exploring a responsible exit from its investment in the Koffiefontein diamond mining operations in South Africa as the mine approaches the end of its life. Furthermore, the Company targets generating USD 200 million in net free cash flow for the three years ended June 2022, supported by Project 2022, which aims to enhance operating performance at Cullinan and Finsch. In a nutshell, PDL remained committed to generating FY22 production ranging from 3.3 million carats to 3.6 million carats.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the robust H1 FY22 financial performance, strong guidance, upgrade in credit ratings, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Petra Diamonds Limited at the current market price of GBX 115.00 (as of 01 June 2022 at 09:34 AM GMT+1), with lower-double digit upside potential based on 4.87x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice. 

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 the 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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