This report is an updated version of the report published on 18 May 2022 at 8:43 AM GMT+1.

Velocys PLC (LON: VLS)

Velocys PLC is an FTSE AIM All-Share index listed United Kingdom-based fuels technology company. The company provides decarbonisation solutions to the aviation industry. 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

• Accelerated Commercial Progress: VLS has signed an agreement with Southwest Airlines and a memorandum of understanding ("MOU") with IAG for the Sustainable Aviation Fuel.
• Collaboration with TOYO: The Company has strengthened its collaboration with TOYO as the Company’s FT technology got selected for an e-fuels project by a consortium of six leading Japanese companies.

Key Risks 

• 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.
• 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 Velocys PLC.

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

FY21 Financial Highlights (for 12 months ended 31 December 2021, as of 17 May 2022)

(Source: Company Website)

• Revenue Growth: Group revenue increased to £8.3 million in FY21, compared to revenue of £0.2 million in FY20, with decent traction in organic growth.
• Profitability: The Company had narrowed down its basic and diluted loss per share from 1.05 pence during FY20 to 0.78 pence for FY21.
• Net Cash Position: VLS had strengthened its net cash position from £13.1 million at the end of FY20 to £25.5 million at the end of FY21.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 18 May 2022 at 08:00 AM GMT+1, VLS’s shares were trading at GBX 5.31, down by around 6.43% from the previous day closing price. Stock 52-week High and Low were GBX 17.94 and GBX 3.78, respectively.

On a daily chart, the stock price is sustained between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-days RSI stood at ~44.70 levels.

Valuation Methodology: Price/Earnings Approach (FY23E) (Illustrative) 

Business Outlook

The Company had generated revenue from the sales of reactors and catalysts, and licensing fees earned from the first commercial client contract during FY21. Moreover, the Company is undergoing a transitional phase from R&D to technology delivery and commercialisation. Meanwhile, VLS has a growing pipeline of customer opportunities leading to additional technology licensing opportunities across three continents. In a nutshell, VLS remained committed to accelerating its progress on reference projects in 2022 through established strategic alliances with the technology and engineering partners.

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 significant commercial opportunities, impressive collaborations, decent FY21 results, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Velocys PLC at the current market price of GBX 5.31 (as of 18 May 2022 at 08:00 AM GMT+1), with lower-double digit upside potential based on 13.51x EV/NTM Sales (approx.) on FY23E sales (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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