Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed entity engaged in mining precious and non-precious metals.

Investment Rationale – SPECULATIVE BUY at GBX 20.22

• Disposal: On 3 December 2021, POG completed the disposal of its 31.1% stake in IRC Limited for a consideration of US$10 million, which has enhanced the Company’s liquidity.
• Guidance: POG reaffirmed its full-year gold production guidance of 430 - 470koz, supported by the production from the new Pioneer flotation plant and increased 3rd-party concentrate.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, Price/Earnings, Price/Cash Flow, EV/EBITDA, and Price/Book multiples of the Petropavlovsk PLC are currently lower as compared to the corresponding multiples of the Basic Materials industry.
• Positive Technical Stance: From a technical standpoint, 14-day RSI (~41.93) is around the oversold territory, while the stock price is trading close to the lower standard deviation of the Bollinger Bands.

Risk Assessments

• Gold Price Volatility: The sluggishness in gold prices due to US dollar strengthening and uncertain demand outlook can impact the Company’s financial condition.
• Surge in UK Inflation: The UK inflation reached a 10-years high as it surged by around 4.2% for the 12 months ended October 2021. It may cause a sooner-than-expected interest hike.

Q3 2021 Production and Sales Report (for the quarter ending 30 September 2021, as on 25 October 2021)

 (Source: Company Website)

• Production: During Q3 FY21, production reduced by 2% year-on-year, due to lower gold production from 3rd party concentrates.
• Sales: The Gold sales totalled 120.1 koz (kilo-ounce) in Q3 FY21 (Q3 FY20: 121.1koz).
• Liquidity: As on 30 September 2021, POG reported US$34.5 million of cash and debt principal outstanding of US$592 million.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

Petropavlovsk has reaffirmed its FY21 gold production and total costs guidance. The Company has carried out the business responsibly as there was no fatal accident in FY21 so far. Overall, the Company has enhanced operational governance and shall capitalize on the POX hub to create sustainable value for its shareholders. The stock made a 52-week high and low of GBX 34.45 and GBX 17.76, respectively.

Based on the reiterated production guidance, robust cash position, no material Covid-19 outbreak at sides, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Petropavlovsk PLC at the closing market price of GBX 20.22 (as on 22 December 2021), with lower double-digit upside potential based on 15.96x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

AFC Energy PLC

AFC Energy PLC (LON: AFC) is a FTSE AIM UK 50 index listed provider of hydrogen power generation technologies.

Investment Rationale – SPECULATIVE BUY at GBX 48.10

• Fuel Cell Order: On 16 November 2021, AFC Energy received a contract worth £4 million from ABB B.V., regarding a fuel cell system for high power e-Mobility charging.
• Growth Drivers: The strategic partnership with ABB, successful entry into maritime sector, and first commercial S Series fuel cell and ammonia cracker order, shall drive incremental shareholder value.
• Financial Growth: AFC generated a revenue of £0.15 million in H1 FY21 (H1 FY20: £nil) from initial recognition of Extreme E commercial. At the end of H1 FY21, it held cash balance of £61.6 million (H1 FY20: £2.8 million), while the Company made significant investments in product development.
• Technical Indicator: From a technical standpoint, 14-day RSI (~43.05) indicating an oversold scenario, while the stock has gone significantly below the lower Bollinger Band.
• Outperformance Against Index: AFCs stock price has surged over 145% in the past five years, reflecting a significant outperformance against the FTSE AIM UK 50 index.

Key Risks

• Demand Uncertainty: As the global demand outlook for energy is unstable due to the Omicron variant, while there are significant operational challenges. The short-term outlook for the Company looks skeptical with the resurgence in Covid-19 cases.
• Inflation Woes: Higher input costs due to supply chain disruption and labor absenteeism can also hamper the profitability margins.

Year End Operating Statement (for the year ended 31 October 2021, as on 16 December 2021)

• Commercialization: AFC signed a commercial agreement worth £4.5 million in FY21, while it has a pipeline of system sales and lease opportunities, underpinning future revenue growth.
• Fundraising: It concluded a £36 million of oversubscribed institutional fundraise, cornerstoned by ABB.
• Investments: It invested in new engineering, manufacturing, commercial and research teams to support the Company’s prospects.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

 Conclusion 

The accelerating demand for electric vehicles would uptick the demand for additional fast charging capability. Moreover, it has delivered the first commercial fuel cell power system to Extreme E. It also invested robustly in product development and increased headcount. The stock made a 52-week High and Low of GBX 94.40 and GBX 40.05, respectively.

Nevertheless, AFC has a small market capitalization and is yet to be profitable. Therefore, investors should gauge their risk-return profile before punting on this stock.

Based on ABB's order, rising demand for electric vehicles, new product releases in the pipeline, we have given a "SPECULATIVE BUY" recommendation on AFC Energy PLC at the closing price of GBX 48.10 (as on 22 December 2021).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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