Sylvania Platinum Ltd – Operating with Robust Balance Sheet with Decent Cash Flow Generation

Hamilton, Bermuda-based Sylvania Platinum Limited (LON: SLP) is a producer of platinum Group metals (PGMs), comprising palladium, platinum, and rhodium.

Recent News
On 1st June 2020,the Group repurchased 62,500 Ordinary Shares, comprising 0.02 per cent of the issued capital. Hence, it has bought back a total of 499,103 shares under the plan so far.

Third Quarter Update (for the quarter ended 31^st March 2020, as on 28^th April 2020)
During the third quarter of the financial year 2020, the SDO (Sylvania Dump Operations) reported production at 19,968 4E PGM (Platinum Group Metals) ounces as against 19,206 4E PGM ounces in Q2 FY2020. Driven by increased production and increased USD basket price, the net revenue surged by 56 per cent to USD 43.6 million in Q3 FY2020 from USD 27.9 million in Q2 FY2020. The EBITDA surged by 83 per cent from USD 17.4 million in the second quarter of the financial year 2020 to EBITDA of USD 32.0 million in the third quarter of the financial year 2020. The Company is reflecting strong revenue and EBITDA growth, the net profit increased by 123 per cent to USD 25.4 million in Q3 FY2020 versus USD 11.4 million in Q2 of the financial year 2020. The Group as per its buyback scheme bought 5,173,632 shares of $0.01 at a price (average) of 47.40 pence/share. The Company’s cash balance increased to USD 45.3 million in Q3 FY2020 versus USD 33.8 million in Q2 FY2020.

Share Price Performance
 
1-Year Chart as at June-19-2020, after the market closed (Source: Refinitiv, Thomson Reuters)

On 19^th June 2020, Sylvania Platinum Ltd’s shares closed at GBX 47.00 and were up by 3.30 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 67.00/GBX 24.00.

From the technical standpoint, its shares were trading well above its short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

*Peers: Serabi Gold Plc, China Nonferrous Gold Ltd, Hummingbird Resources Plc, and Goldplat Plc.

*1USD = 0.803949 GBP.
 
Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price to Earnings multiple of the SLP was 9.5x and the same multiple was lower as compared with the Mining industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Growth Catalysts and Key Risks
The Group has strong reserves of cash, which helps in the plant maintenance and ensure the safety of employees in uncertain times. The Group remained debt-free and generated sufficient funds to support the expansion and optimisation of projects. On the other hand, commodity prices and exchange rate fluctuations can also affect the Company since metal prices are volatile.

Conclusion
The Company has shown an improvement in its top-line and bottom-line performance in the Q3 of the financial year 2020.The Group is still independently regarded as the lowest cost PGM producer in the world and is in a great position to withstand short-term fluctuation, with an ability to generate free cash flow continuously. Moreover, the Group will be able to increase its production in the upcoming financial year.

Over the course of 3 years (FY16 - FY19), the Company's revenue surged from $39.51 million in FY16 to $70.54 million in FY19. Compounded annual growth rate (CAGR) stood at 21.31 per cent.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 47.00 (as on 19^th June 2020) with lower double-digit upside potential based 4.00x Peers NTM Average Price/Earnings (approx.) on FY20E earnings per share (approx.).

Velocys Plc – Decent Performance in the Challenging Environment
Velocys Plc (LON: VLS) is an AIM-listed oil equipment, services & distribution Company with the expertise to commercialise fuel projects. The Company also offer licenses to its technologies to other companies as well.

Trading Update
On 19^th June 2020, the Group provided the trading update for the year ended 31 December 2019. The revenue decreased to GBP 0.3 million in FY19 as compared with the previous year (2018: GBP 0.7 million), with underlying operating losses cut to GBP 9.8 million from GBP 18.6 million the year before as administrative expenses were slashed to GBP 10.0 million from GBP 19.1 million. December 2019 ended with cash of GBP 4.8 million (31 December 2018: GBP 7.0 million).

Share Price Performance
 
1-Year Chart as at June-19-2020, after the market closed (Source: Refinitiv, Thomson Reuters)

On 19^th June 2020, Velocys Plc’s shares closed at GBX 13.00 and were down by 11.26 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 16.80/GBX 0.95.

Key Risks and Growth Catalysts
The Company had managed to reduce its operating expenses, while the profitability remained in the negative zone for the period. The Company operates in a challenging environment, which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. As per this latest trading update, the Company has shown an improvement in the bottom-line performance.

Conclusion
The Group noted that its joint development contract with Shell and British Airways had been extendedand expects to accomplish manufacturing and delivery of all 4 reactors for Red Rock Biofuels by the end of 2020 June. The Group said it had received subsidised Payroll Protection loans from the US and UK governments, respectively, in recognition of the sustained commercial progress and furlough of any employees or absence of redundancies. Although the revenue has declined, the bottom-line has improved for the period. The Company remained well-positioned with strong pipeline and order-book, which will help them to improve their performance in the long run. Presently, the Company is trading near the 52-week High, raising doubts at its upside potential at the current price level.

Based on the above rationale, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 13 (as on 19^th June 2020), while we look for any upcoming catalysts.
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
* The “Speculative Buy” recommendation is valid for the current price as covered in the report as on 22^nd June 2020.

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