AO World PLC

AO World PLC (LON: AO.) is an electrical retailer, which sells small and major domestic appliances and consumer electronics. The Company’s operations are differentiated into two segments, namely the United Kingdom and Europe.

On 23 November 2021, the Company has scheduled to release its H1 FY22 results (for the six months ended 30 September 2021).

Investment Rationale – HOLD at GBX 236.60

• During FY21, AO established a significant growth in revenue and profitability. It also gained market share, accelerated investments, made substantial investments to create incremental value for its stakeholders.
• AO looks forward to expanding into new geographies and new products to ensure continuous growth.
• Strong Balance Sheet Position: At the end of FY21, AO World reported liquidity headroom of £143 million, driven by cash generation of £60 million in FY21, which led to a reduction of net debt to £28 million from £99 million at the end of FY20.
• From a technical standpoint, the current market price sustaining above the 20-day EMA (GBX 227.60), reflecting a bullish price momentum.
• Over the past four years (FY17 to FY21), revenue has increased at a CAGR of ~24.06%.

Key Risks

• Global factory activities have lost momentum in August 2021 due to coronavirus pandemic-disrupted supply chains. Moreover, the slump in consumption, production shortages, and logistical troubles can cap the retailers’ growth.
• As Delta coronavirus variant is now present in over 90 countries, potential restrictions can impact the volume and overall demand in the short-term within the commercial and industrial sectors.
• Also, the increased cost in recycling and logistics operations can impact the profitability of the business.
  

Recent News 

Additional Listing Application: On 14 July 2021, AO World issued 132,684 ordinary shares for trading on the London Stock Exchange regarding Employee Benefit Trust.

Appointment of Joint Corporate Broker: On 22 June 2021, Goldman Sachs International was appointed as its joint Corporate Broker alongside Numis Securities Ltd and Jefferies International Ltd.

Financial Highlights for the year ended 31 March 2021 (as on 01 July 2021)

(Source: Company Website)

• During FY21, revenue surged 62% year-on-year with strong trading momentum in Q4 FY21.
• Germany gross margin improved to 9% in FY21, with an increased scale in logistics.
• The Company’s operating profit also surged to £30 million in FY21 from an operating loss of £4 million in FY20.
• The Company also added 2 million new customers, while the net promoter score remained above 80.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

AO World demonstrated significant operational, strategic, and financial progress in FY21. The Company made substantial investments in expanding capacity and enhanced digital capability. Moreover, the Company’s strong customer satisfaction rating and infrastructure developments underpin its ability to seek further growth. It has substantially improved its financial position by the end of FY21 with £67 million in cash (FY 20: £7 million) and £80 million in a re-negotiated revolving credit facility. It has delivered a strong performance across all aspects in FY21, and thus, it is well-placed to capitalise on opportunities presented by the Covid-19 pandemic. In the longer-term, AO looks forward to expanding its business model into new geographies and new products. The stock made a 52-week High and Low of GBX 444.50 and GBX 172.40, respectively.

Based on improved liquidity position, bright outlook prospects, leading scores for customer engagement, coupled with the favourable valuation conducted above, we have given a “HOLD” recommendation on AO World PLC at the closing market price of GBX 236.60 (as on 2 September 2021).

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.

Investment Rationale – SPECULATIVE BUY at GBX 22.00

• 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).
• 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.
• 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.
• 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, the MACD line has given a bullish crossover against the signal line, supporting the upside potential.

Risk Assessments

• The resurgence in Covid-19 cases due to the delta variant has significantly impacted consumer sentiments.
• The US Dollar strengthening and earlier asset tapering by Federal Government can impact the gold prices in the short-term.
• 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

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 occurred during the H1 FY21. It is prepared to launch the Pioneer flotation plant and will become a producer of refractory concentrate to feed its Pokrovskiy POX hub. 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 39.50 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 22.00 (as on 2 September 2021), with lower double-digit upside potential based on 19.99x Price/NTM Earnings (approx.) on FY21E 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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