Vivo Energy Plc

Vivo Energy Plc (LON: VVO) is a FTSE 250 listed Company, which is engaged in the business of oil refining and markets under the brand of Shell to retail and commercial customers.

On 3 March 2021, the Company will release its 2020 full-year results.

Rationale for Valuation – Speculative Buy at GBX 78.30

• In Q3, the Company is encouraged by the resilient performance, with a strong gross cash profit improvement.
• In September 2020, the Company successfully accomplished the debut bond offering, raising US$350 million to refinance the existing amortising long-term debt.
• As per valuation metrics, EV/Sales and EV/EBITDA multiples of the VVO are currently lower as compared to the corresponding multiples of the Oil & Gas industry.
• On the liquidity front, the current ratio stood in line as compared to the industry median, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging market dynamics.
• The Company recorded a lower debt-equity ratio of 1.25x (H1 FY20) against the industry median, reflecting that VVO is less leveraged than the industry.
• From the technical standpoint, 14-day RSI stood at 41.41, which is supporting the upside movement.

Key Risks

• The Company is exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change.
• The Company’s business is also exposed to risks such as compliance risk, fraud, criminal activity and bribery, which could result in reputational damage.
• It may experience an increase in operating expenses due to disruptions in the supply chain.

Q3 FY20 Trading Update (for the quarter ended 30 September 2020 (Q3 FY20), as on 30 October 2020)

(Source: Company Website)

• During the quarter, the gross cash unit margins were higher at $75 per thousand litres as compared with the corresponding period of the last year.
• Led by the easing of COVID-19 related mobility restrictions in the markets, the volumes for Q3 FY20 has significantly improved from the previous quarter (Q2 FY20). However, it remained 7% lower year-on-year.
• Unit margins benefitted by US$1 per thousand litres, driven by the accounting treatment of hyperinflation in Zimbabwe and positive forex impact.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The debut bond offering will provide additional balance sheet flexibility and enhances the Company's presence in the capital markets. However, it is cautiously optimistic for the rest of the year and into 2021. Although, the Company had paid an interim dividend per share of 2.65000 US cents (1.94019 pence) to the shareholders. The Board has restarted dividend payments, which will strengthen the Company’s balance sheet. Therefore, the Company is encouraged by the resilient performance and seems to be well-positioned for the future, with attractive long-term growth opportunities across Africa. The stock made a 52-week low and high of GBX 59.80 and GBX 119.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Vivo Energy at the current market price of GBX 78.30 (as on 2 February 2021, before the market close at 9:24 AM GMT), with lower double-digit upside potential based on 12.34x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Severfield Plc

FTSE All-Share listed Severfield Plc (LON: SFR) is an industrial engineering Company, which is engaged in the business of structural steel.

Rationale for Valuation – Speculative Buy at GBX 70.06

• As per valuation metrics, Price/Earnings, EV/Sales and EV/EBITDA multiples are currently lower than the Construction & Engineering industry.
• In the last three months, the Company has delivered a decent return of ~27%, which was higher as compared to the FTSE All-Share Index.
• The company's debt/equity ratio in the past two years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.12x.
• The Company has a robust balance sheet and a strong reputation for delivery of complex projects, with good visibility of future earnings from the order books.
• From the technical standpoint, shares were trading well above the short-term support level of 100-day (around GBX 63.5) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• SFR operates in multiple locations, and any change in the economic and political policy could hamper the Company’s operating performance.
• The Company works on complex and potentially hazardous projects, which require continuous monitoring of health and safety risks.

Recent News

On 19 January 2021, the Company stated that the total number of ordinary shares in issue and the total number of voting rights in the Company is 308 million, with no treasury shares.

Financial Highlights (for the period ended 30 September 2020 (H1 FY21), as on 24 November 2020)

(Source: Company Website)

• Led by an increase in order flow and production activity as well as generated additional revenue from Harry Peers (acquired in October 2019), the revenue for H1 FY21 increased by 40% year-on-year.
• It has shown good cash generation and strong balance sheet, with UK and Europe order book of £287 million at 1 November 2020.
• The Company has declared an interim dividend per share of 1.1 pence, which will be paid on 8 January 2021.
• During the period, the Company has undertaken more than 80 projects in the UK, Ireland and continental Europe, with the UK and Europe order book of £287 million.

One Year Share Price Chart

  (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company expects to improve profitability in H2 FY21 as compared with H1 FY21. Moreover, SFR has a strong order book, with an encouraging pipeline of opportunities, a strong balance sheet position and good long-standing client relationships. It has declared an interim dividend, which shows financial growth and operational improvements. Overall, it delivered a strong performance in the period, with increased revenues, good cash generation and the increased UK and Europe order book. The stock made a 52-week low and high of GBX 51.20 and GBX 96.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Severfield at the current market price of GBX 70.06 (as on 2 February 2021, before the market close at 8:14 AM GMT), with lower double-digit upside potential based on 14.59x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peers information have been taken from Refinitiv, Thomson Reuters.

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

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