Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed company engaged in mining precious and non-precious metals. It has been operating continuously in the Far East of Russia for over 25 years.

On 20 October 2021, POG expects to release Q3 FY21 trading update.

Investment Rationale – SPECULATIVE BUY at GBX 20.00

• The first half of FY21 was a transition period for POG, where the Company shifted to processing more refractory ore to supply its state-of-the-art POX plant with more of its own-mined reserves.
• POG reported stronger liquidity at the end of H1 FY21 with cash balance of US$36.5 million (31 March 2021: US$7.5 million).
• 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 occurred during the H1 FY21.
• On 1 June 2021, POG announced the launch of the Pioneer flotation plant, which shall provide the full advantage of substantial refractory ore reserves for the POX (Pressure Oxidation) Hub. The plant is expected to produce around 60 kilo tonnes of concentrate in FY21.
• As per valuation metrics, 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.
• From a technical standpoint, 14-day RSI (~42.28) is around the oversold territory, while the stock price is trading close to the lower standard deviation of the Bollinger Bands.

Risk Assessments

• The increase in the US treasury bond yields has led to the massive plunge in gold prices. The US Dollar strengthening and earlier asset tapering by Federal Government can impact the gold prices in the short-term.
• The resurgence in Covid-19 cases due to the delta variant has significantly impacted consumer sentiments.
• Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as inflation cost associated with the ramping up of POX Hub, operational risk arising from the potential supply chain disruption due to Covid-19, and lack of funding to pursue the growth opportunities.

Recent News

Tender Offer: On 13 July 2021, POG launched 8.125% Guaranteed Notes due 2022 for an aggregate principal amount of up to US$200 million.

Interim Results (for the period ending 30 June 2021, as on 01 September 2021)

 (Source: Company Website)

• POG turned into profitability as it reported US$48.9 million as profit for H1 FY21, compared to a loss of US$22m in the H1 FY20.
• During H1 FY21, gold production stood at 195.0koz (kilo-ounces), reflecting a 39% decrease on H1 FY20.
• The gold sales aggregated 187.1koz in H1 FY21 (H1 FY20: 312.4koz).
• The average realized gold prices was 9% higher in H1 FY21 at US$1,795/oz (H1 FY20: US$1,640/oz).

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

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. It is prepared to launch the Pioneer flotation plant and will become a producer of refractory concentrate to feed its Pokrovskiy POX hub.  POG has a long-life mineral resource base with high expansion potential. Moreover, it is an established explorer, developer, and miner of Gold, with distinctive technological expertise and R&D capabilities over peers. The Company has world-class asset with the scalable capacity to deliver incremental value. 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 high average realized gold price, 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 20.00 (as on 1 October 2021), with lower double-digit upside potential based on 16.09x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Studio Retail Group PLC

Studio Retail Group PLC (LON: STU) is a FTSE All-Share listed Company that is involved in the retailing and distribution of home shopping and education products. It operates through two digital-first value retailers, namely Studio and Findel Education.

Investment Rationale – SPECULATIVE BUY at GBX 262.00

• The UK shopper footfall has improved as shoppers returned to high street with office reopening. Moreover, Britain’s economy reported 5.5% increase in gross domestic product in the second quarter, which shall boost the consumer confidence.
• In FY21 vs FY20, the product revenue and financials revenue increased by 35% and 8.2%, respectively.
• In FY22, STU's improved focus and strength coupled with a significantly higher customer base are likely to deliver strong trading performance for online value retail and integrated financial services.
• The active customer base also grew 35% year-on-year to 2.5 million at March 2021.
• It is progressing well to achieve its medium-term goal of £1 billion in revenue.
• The ongoing data analytics programme and digital transformation shall drive the growth strategy.
• From a technical standpoint, 14-day RSI (~41.58) is in the oversold territory, supporting the upside potential.
• On a trailing 12-month basis –Price/Earnings and Price/Book valuation multiples are quite undervalued against the median of Diversified Retail sector.

Risk Assessments

• Due to supply chain problems and labor shortages, UK Manufacturing Purchasing Managers' Index fell in September. Moreover, there is acute pressure on consumer disposable income levels amid inflationary market conditions.
• STU has recently appointed a new CEO, Phil Maudsley was replaced by Paul Kendrick thereafter. It has also disposed of its Findel Education business, which could have an impact over the Group revenue. Therefore, such top-level management change and business restructuring could act as a double-edged sword, and thus, risking the Company’s medium-term goals.

Recent News

Directorate changes: On 15 September 2021, Studio Retail appointed Caroline Ross as a non-executive director. She also joined the Company's Remuneration and Nomination Committees.

Financial Highlights (for the 52 weeks ended 26 March 2021, as on 30 June 2021)

 (Source: Company Website)

• During FY21, STU reported £578.6 million of revenue from continuing operations, reflecting a 33% year-on-year jump.
• Similarly, adjusted profit before tax from continuing operations surged 79% year-on-year in FY21.
• The core net debt was reduced to £27.6 million by the end of FY21, following the disposal of Findel Education for £30 million in April 2021.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

Although the overall retail sales experienced a slowdown in September 2021, shops expect a rebound in October 2021 despite supply chain difficulties. Notwithstanding, Studio Retail has a clear growth strategy, fueled by its service enhancements, digital capabilities, and utilizing data to match consumer needs. It plans to increase the Studio's VALUE proposition to attract more customers, offers a personalised financial service proposition, and seek flexible payment options.  In addition, STU can also pursue a greater range of growth opportunities with reduced net debt on the balance sheet. In a nutshell, STU has resiliently managed the operational challenges presented by the Covid-19 pandemic. Moreover, the sale of Findel Education shall emerge the business with a stronger financial position. The stock made a 52-week high and low of GBX 319.00 and GBX 233.00, respectively.

Based on the revenue growth, reduced core net debt, current trading, and bright outlook, we have given a “SPECULATIVE BUY” recommendation on Studio Retail Group PLC at the closing market price of GBX 262.00 (as on 1 October 2021), with lower double-digit upside potential based on 8.70x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

*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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