South32 Ltd – Maintained FY21 production guidance for all operations.

South32 Ltd (LON: S32) is a Perth, Australia-based globally variegate Metal and Mining Company, which is engaged in the exploration, refining, transport, and marketing of a series of products.

Investment Rationale – Speculative Buy at GBX 137.96

• The Company has lifted the suspension of on-market share buy-back, after delivering a US$70 million increase in the net cash position to US$368 million (as of 30 September 2020).
• From a technical standpoint, 100-day SMA (125.21) is supporting the upside potential.
• As per the valuation metrics, EV/Sales, Price/Cash Flow and Price/book multiples of the S32 are currently lower as compared to the corresponding multiples of the Basic Materials industry.
• In FY20, gross margin was 61.20%, whereas the industry median was 39.20%. S32’s gross margin has remained above the industry level for the past five years.
• Despite the health crisis, it has maintained annual production guidance at all operations.

Risk Assessments

• The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations.
• The performance of the Company is exposed to certain risks and uncertainties, such as interruption in production due to Covid-19, change in regulations regarding environmental safety, reputational damage with operational accidents and injuries, geopolitical uncertainties hampering the ability to obtain licenses, and loss of business opportunity due to liquidity risk.
• The Company is cautious about the outlook for key commodities in the short term but expects positive demand in the long-term.

Recent News

23 December 2020: The Competition Tribunal of South Africa has approved the sale of South32’s shareholding in South Africa Energy Coal to Seriti Resources Holdings Proprietary Limited.

Quarterly Report (as on 19 October 2020)

 (Source: Company Website)

• It has lifted the suspension on market share buy-back as capital management program has US$121 million remaining. It will add immediate value to shareholders.
• In Q1 FY21, S32 continued strong operating performance and delivered a US$70 million increase in its net cash position to US$368 million.
• The Company also increased metallurgical coal production by 22%, benefitted from the successful return to a three longwall configuration during the prior quarter.
• It also delivered a 19% increase in manganese ore production as South Africa Manganese returned to full production.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The US$1.43B capital management program is 92% complete, and it still has US$121M remaining to be returned to shareholders. Meanwhile, the Company expects increased production in the financial year 2021. The Company has a robust liquidity profile to meet the short-term obligations in the near term. Moreover, the suspension of buyback following the strong quarterly performance, will add immediate value to shareholders. It is also progressing well with the divestment of South Africa Energy Coal and achieved record hydrate production at Worsley Alumina. Stock 52 week High and Low were GBX 159.00 and GBX 103.00, respectively.

Based on the robust liquidity profile, decent production outlook, bright growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation on South32 Ltd at the current market price of GBX 137.96 (as on 5 January 2021, before the market close at 8.05 AM GMT) with lower double-digit upside potential based on 9.62x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

XPS Pensions Group PLC – Delivered resilient performance with results in line with expectations.

FTSE All-Share listed XPS Pensions Group PLC is a United Kingdom-based holding Company, which is involved in pensions actuarial, consulting, and administration business.

On 4 February 2021, XPS expects to make the payment of interim dividend.

Investment Rationale – Speculative Buy at GBX 131.00

• Despite the challenging trading conditions, XPS has maintained the interim dividend post reporting the significant growth in revenues and EBITDA.
• From a technical perspective, 20-day SMA (126.20) is indicating an upward trend in the stock.
• Over the past four years (FY16 – FY20), the Company’s revenue surged from GBP 51.77 million in FY16 to GBP 119.80 million in FY20. Compounded annual growth rate (CAGR) stood at 23.34 percent.
• As per the valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Book multiples of XPS are currently lower as compared to Investment Banking & Investment Services industry.
• It has reduced the leverage after the strong operating cash-flow conversion, which resulted in net debt/adjusted EBITDA of 1.78x (30 September 2019: 2.34x).

Risk Assessment

• The Company could face aggressive competitor pricing, major technological innovation, and change in consumer demand.
• The economic downturn can impact operational and financial performance as it leads to significant market volatility, currency changes, and interest rates.
• Moreover, increasing remote operations during the pandemic can expose information security at risk from cyber-attacks.

Interim results for the half year ended 30 September 2020 (as on 26 November 2020)

(Source: Company Website)

• During H1 FY21, revenue surged by 9% year-on-year, as the Pensions Actuarial and Consulting revenues grew for a consecutive second half.
• The adjusted EBITDA increased by 11% year-on-year, while adjusted operating profit surged 8%.
• The Company maintained the interim dividend of 2.3 pence (H1 FY20: 2.3 pence) per share.
• It has maintained a strong cash generation with operating cash-flow conversion of 134%, resulting in net debt/adjusted EBITDA of 1.78x as of 30 September 2020 (H1 FY20: 2.34x).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Conclusion

XPS has been performing resiliently despite the Covid-19 pandemic with a high degree of visibility on revenues as it expects demand for additional services to continue as pension trustees have been seeking advice and support throughout the pandemic. Further, XPS is also expecting to gain further market share with new opportunities lying in Pensions Actuarial & Consulting domain. The Board is encouraged by the performance of H1 FY21 and anticipating that the full-year results will be in line with management expectations. Overall, it is well-placed emerge strongly from the crisis and take advantage of the favourable end-market dynamics. Stock 52 week High and Low were GBX 159.00 and GBX 103.00, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on XPS Pensions Group PLC at the current market price of GBX 131.00 (as on 5 January 2021, before the market close at 9.25 AM GMT) with lower double-digit upside potential based 2.19 Price/NTM Book (approx.) on FY21E Book Value Per Share (approx.).

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

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

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