Velocys PLC (LON: VLS)

Velocys PLC is an FTSE AIM All-Share index listed United Kingdom-based fuels technology company. VLS is engaged in providing Fischer-Tropsch technology to generate low carbon and transport fuel from municipal solid waste & waste woody biomass for the aviation industry.

Growth Prospects

• Contract Wins: VLS had collaborated with Southwest Airlines Co to produce sustainable aviation fuel ("SAF") at the planned Bayou Fuels biorefinery project over the fifteen years starting from 2026. The Company had signed a Memorandum of Understanding for the offtake of 73 million gallons of Sustainable Aviation Fuel with IAG's constituent airlines. VLS had collaborated with Toyo Engineering in Japan to develop commercial-scale biomass-to-jet fuel.
• Funding: The Company would seek raising £25 million from institutional investors to accelerate the progress of the two reference projects. Moreover, the proceeds would be utilized in achieving the target of net positive cash flow during 2024.

Key Risks

• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
• Federal Reserve Meeting: The Federal Open Market Committee meeting lined up this week may create pressure on global Equities.
• Operational Risk: The growth trajectory can be impacted by various factors, such as increasing freight rates and operational risk regarding production stoppages or equipment failures.

Key Fundamental Statistics & Shareholding Pattern of Velocys PLC.

Lansdowne Partners (UK) LLP is the most significant shareholder as it holds nearly 255.16 million shares as of 31 December 2021. 

H1 FY21 Financial & Operational Highlights (for the six months ended 30 June 2021, as of 23 September 2021)

 (Source: Company filings)

• Top-Line Business: VLS had generated revenueof around £8.2 million during H1 FY21.  
• Decent Profitability: The Company had narrowed the operating loss from negative £2.6 million during H1 FY20 to a negative £0 million for H1 FY21.
• Balance Sheet: The Company had a decent cash balance of £8.3 million as of 30 June 2021.

Financial Ratios (H1 FY21) 

Share Price Performance Analysis

 (Source: REFINITIV; Analysis done by Kalkine Group)

On 26 January 2022, at 08:47 AM GMT, VLS’ shares were trading at GBX 6.24, down by around 0.95% from the previous day closing price. Stock 52-week High and Low were GBX 17.94 and GBX 3.78, respectively.

From a technical perspective, the stock price is hovering around the lower Bollinger band, reflecting an upside momentum in the stock price. Moreover, the 14-days RSI of ~32.40 suggests a bullish price momentum.

Over the last two years, VLS’ stock price had delivered a positive return of around 131.72%, while the FTSE AIM All-Share index (benchmark index) had produced a return of about 13.77%, and FTSE All-Share Oil, Gas & Coal index (benchmark sector) had generated a return of negative 17.47%.

Valuation Methodology: EV/Sales Approach (FY21E) (Illustrative)

Business Outlook

The Company achieved excellent revenue growth during H1 FY21, driven by a customer contract awarded in 2017. Meanwhile, VLS had entered into an agreement with Southwest Airlines regarding the 219 million gallons of SAF over a fifteen-year term starting from 2026 and a similar contract with IAG as well. Moreover, the Company recently seek for additional funding to enhance the current manufacturing capabilities. Considering the penny nature of the stock, VLS may undergo sizeable corrections because of the record UK inflation during December 2021 and sluggish UK macroeconomic indicators. Thus, it may depend on the risk appetite of the investors to take a reasonable position in this company having decent revenue visibility for the long term.

Considering the robust revenue jump during H1 FY21, recently awarded contracts, decent leverage position, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Velocys PLC at the current price of GBX 6.24 (as on 26 January 2022 at 08:47 AM GMT), with lower-double digit upside potential based on 10.15x EV/NTM sales (approx.) on FY21E sales (approx.).

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.

Note 3: Target Price refers to a price level which 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.

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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