Fresnillo Plc - Sustainable Improvement in the Operating Performance

Fresnillo PLC (LON: FRES) is a FTSE 100 listed Company, which is involved in the mining and beneficiation of non-ferrous minerals.

On 21 October 2020, the Company will announce the Q3 FY20 production update.

Recent News

On 11 August 2020, the Company stated that the Board had decided the exchange rate, which will be applied to the interim dividend. The exchange rate is 1.30914 US$/GB£. The sterling equivalent of the interim dividend per share of 2.3 US cents announced on 28 July 2020 will, therefore, be 1.7569 pence. The interim dividend will be paid on 16 September 2020.

Financial Highlights (H1 FY2020)


(Source: Company Website)

On 28 July 2020, the Company provided an interim result for the six months to 30 June 2020, with a strong balance sheet, high-quality assets and healthy margins (supported by a focus on cost). In the first half of 2020, the total revenue was increased by 5.2% year-on-year. The Company reported a significant rise in the underlying profitability during the H1 FY20 due to higher commodity prices and lower costs. However, the silver production in H1 FY20 decreased 2.7% year-on-year, primarily due to lower ore grade at Saucito and lower contribution from the Silverstream. Led by currency fluctuations and other factors, Net profit for the period plunged 20.30% from US$70.9 million in H1 FY19 to US$56.5 million in 20. Moreover, the production at underground mines was relatively unaffected by COVID-19 in Q2 FY20.

One Year Share Price Chart


1-Year Chart as of 21 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)
 

Key Risks

During the first half of 2020, the emergence of the Covid-19 pandemic has significantly impacted global markets and presented major challenges for the mining industry. There was a foreign exchange loss of US$41.0 million in the first half of 2020, which shows how currency fluctuation during the pandemic can impact profitability.

Recommendation: Fresnillo – WATCH at GBX 1,243.50

Led by the COVID-19 operational restrictions at the Herradura district in Q2 FY2020, the total gold production guidance was decreased to 785-815 thousand ounces (815-900 thousand ounces previously). Including Silverstream, the total silver production guidance stays within the range of 51-56 million ounces. Exploration expenses are projected to be abridged to approximately US$120 million (US$135 million previously), due to travel restrictions related to coronavirus guidelines. Similarly, capex is expected to decrease to US$525 million, mainly driven by the deferral of expenditures at the San Julián and Juanicipio project. Meanwhile, the Company reported a significant decline in net profit during the H1 FY20. As the development and availability of a vaccine remain uncertain, there is a significant risk to currency fluctuation and total production. Furthermore, the Company is trading near a 52-week high, raising doubts at the upside potential at current prices.
The stock made a 52-week low and high of GBX 456.51 and GBX 1,359.50, respectively. From the technical standpoint, shares were trading slightly below the short-term support level of 50-day simple moving average price, which reflects a downtrend trend in the stock.

Based on the above rationale, we have given a “Watch” stance on Fresnillo at the current market price of GBX 1,243.50 (as on 21 August 2020, before the market close at 9:00 AM GMT+1), while we look when commodity prices stabilize in the near term.

Johnson Matthey Plc - Saw Recovery in Customer Demand and Automotive Production

Johnson Matthey PLC (LON: JMAT) is a British multinational Speciality Chemicals Company. The Group bifurcates the operations into four segments, namely Health, Clean Air, New Markets, and Efficient Natural Resources.

On 19 November 2020, it will announce the results for the six months ending 30th September 2020.

Recent News

On 13 August 2020, the Company is delighted to again be recognised as a constituent of the FTSE4 Good Index Series.

On 5 August 2020, it has launched the first online work experience programme, which welcomed 115 students from across the UK.

On 4 August 2020, the Company announced another successful license award. It has been chosen for the largest single-train methanol plant by China’s Ningxia Baofeng Energy Group. The methanol has a planned capacity of 7200 mtpd.

Trading Update (Q1 FY2021)

On 23 July 2020, the Company provided the following trading update for the first quarter of 2021. As expected, the Company’s sales were down materially at constant currency in the first quarter of 2021, driven by the effects of the COVID-19 pandemic. The sales from Clean Air division was down by approximately 50% year-on-year in Q1 FY21, due to weaker consumer demand and temporary customer shutdowns in Europe and the Americas. However, the sales from the other sectors were broadly flat as compared with the previous year. In Clean Air, the Company witnessed an improvement, with April 2020, May 2020 and June 2020 sales across Clean Air was down by 75%, 60% and 20%, respectively. This improvement shows a strong recovery in automotive production in China and a steady ramp-up in demand in the US and Europe. Further, all of the plants are now operating. According to the financial position, it has shown a strong balance sheet and good access to the liquidity of approximately £1.3 billion.

One Year Share Price Chart


1-Year Chart as of 21 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The impact of COVID-19 has reduced customer demand and increased volatility while simultaneously impacting the entire supply chain. The Company has limited suppliers from which it sources the strategic raw materials and any breakdown in the supply, especially considering the risk from Brexit or COVID-19, would result in the Company's inability to manufacture and satisfy customer demand.

Valuation Methodology  
 


Recommendation: Johnson Matthey – BUY at GBX 2,307

Looking forward, the Company expects sales to be down by approximately 20%, with improvement through the rest of the second quarter of 2021. Platinum group metals (PGMS) is expected to be broadly flat in the first half of 2020, with the benefit from higher average precious metal prices. The Company expects the total annualised cost savings to be delivered approximately £225 million by the end of the financial year 2023. For the full year, it expects that the capex will be up to £400 million. However, the Company expect operating performance will be heavily weighted to the second half of 2021. The Company has a strong balance sheet and liquidity position to withstand the challenging market conditions. Further, fuel cells grew strongly, and it expects initial benefits of at least £30 million in FY21. The stock made a 52-week low and high of GBX 1,614.00 and GBX 3,294.00, respectively, and is currently trading close to the average of its 52-week trading range. From the technical standpoint, shares were trading slightly above the short-term support level of 50-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation on Johnson Matthey at the current market price of GBX 2,307 (as on 21 August 2020, before the market close at 12:50 PM GMT+1) with lower double digit upside potential based on 17.50x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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