Vesuvius Group PLC

FTSE-250 listed Vesuvius PLC (LON: VSVS) provides molten metal flow engineering and technology services. It serves the steel and foundry industries.

Rationale for Valuation – HOLD at GBX 482.80

• Bright Outlook: Revenue growth to October was in line with expectations despite the weakening of auto end markets. Moreover, the demand dynamics for both steel and foundry end market remained strong.
• Growth Initiatives: It continued to launch new products since H1 FY21 to gain market share and improve margins. Moreover, the expansion of Steel Flow Control capacity is progressing well.
• Economic Recovery: Despite the shortage of micro-chips, the UK’s manufacturing output increased by 1.8% in the Q2 2021, reflecting strong demand scenario as economy reopens.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, Price/Book, and Price/Cash Flow valuation multiples of VSVS are undervalued against the median of the Industrials sector.
• Technical Indicator: From a technical standpoint, stock price is trading above the 20-day EMA (GBX 475.00), reflecting a bullish price momentum.

Key Risks

• Subdued Factory Activity: British factories are witnessing flow growth amid soaring costs as they are struggling with supply bottlenecks. Due to freight capacity problems, Companies can also face order cancellation or delays.
• Macroeconomic Risk: The slowdown in Chinese economy (China’s factory inflation topped 26-year high in October 2021), supply chain snags, acute power shortages, sluggishness in factory activity, and inflationary market conditions can impact the Company's growth prospects.

Trading Statement (for the period from 1 July to 31 October 2021, as on 11 November 2021)

• Solid Demand: The demand and production for steel across all major market remained robust, except for China. Similarly, foundry’s end-market all remained strong.
• Price Increase: In order to offset increase raw-material and freight costs, the Group increase prices.
• Financial Position: Despite interim dividend payment and short-term investments, FY21’s leverage (Net Debt / LTM EBITDA ratio) is expected be in-line with its level of 1.1x.

One Year Share Price Chart

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

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

Conclusion 

Vesuvius has reinforced its technology leadership, increased penetration of value-creating solutions, captured growth in developing markets, and improved cost margins. There was a 100% improvement in the interim dividend, reflecting confidence in the optimized manufacturing footprint, new product pipeline, and ongoing R&D investment to generate substantial value for its shareholders. The stock made a 52-week High and Low of GBX 595.00 and GBX 437.60, respectively.

Based on the strong commercial performance, end markets recovery, incremental selling prices, market share gains, upcoming growth opportunities, and favourable valuation conducted above, we have given a “HOLD” stance on Vesuvius Group PLC at the closing market price of GBX 482.80 (as on 11 November 2021).

Shanta Gold Ltd

Shanta Gold Ltd (LON: SHG) is a FTSE AIM All-Share listed Company, which is involved in gold exploration and production in Tanzania.

Investment Rationale – SPECULATIVE BUY at GBX 12.00

• Favourable Dynamics: The gold prices broke the US$1,800 level again by taking cues from US inflation data, Federal Reserve’s interest rate hike timing, persistent inflation worries, and dented investor’s appetite for riskier assets.
• Strong Drilling Update: SHG reported solid results from the Singida Project, reflecting confidence in the production profile.
• Production and Cost Guidance: FY21’s projections for production and all-in-sustaining costs have been revised to 60,000 - 65,000 oz (ounces) at US$1,325 - 1,375 /oz, respectively.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~28.66) is in the oversold zone, while the stock price is hovering near the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow metrics are quite undervalued against the median of the Basic Materials sector.

Key Risks

• Business and Macroeconomic Risks: New Luika mine is the sole source of revenue and change in mining rules can increase the State’s royalty take. The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Tanzanian Shilling, Euro and Sterling.
• Gold Price Fluctuations: The rising treasury bond yield, and US Dollar strengthening can dent the gold prices trading around two-month high level.

Recent News

Project Drilling and Construction Update: On 2 November 2021, SHG unveiled that Singida Project remained on track to give first production in early 2023, which would add a second revenue stream.

Production Update (as on 21 October 2021)

• Operational Safety: SHG recorded zero lost time injuries during Q3 FY21, while surpassing 7.5 million man-hours.
• Dividend: It showed commitment to ongoing sustainable returns with an interim dividend of 0.10 pence per share.
• Liquidity: At the end of Q3 FY21, SHG reported cash and liquidity of US$27.5 million (Q2 FY21: US$28.0 million).

One Year Share Price Chart

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

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

Conclusion

SHG has a strong balance sheet with a high-margin gold mine, which can provide substantial flexibility to act swiftly on growth opportunities and return an attractive value to the shareholders. It demonstrated exploration success in FY21 so far and discovered new high-grade resources at both New Luika and West Kenya project. The stock made a 52-week High and Low of GBX 19.50 and GBX 10.50, respectively.

Based on the ongoing exploration success, solid fundamentals, positive outlook, with support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Shanta Gold Ltd at the closing price of GBX 12.00 (as on 11 November 2021), with lower double-digit upside potential based on 19.05x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*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).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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