Petra Diamonds Ltd

Petra Diamonds Limited (LON: PDL) is an FTSE All-Share index listed independent diamond mining entity, supplying rough diamonds to the global market. The Company primarily operates in the African region, including South Africa, Botswana, and Tanzania.

Investment Rationale for Valuation – Speculative Buy at GBX 93.28

• Stronger Balance Sheet: As of 31 March 2022, PDL reported a consolidated net debt of US$107.0 million (31 December 2021: US$152.3 million) and diamond inventory of US$98.1 million (31 December 2021: US$79.6 million).
• Stable Credit Rating: On 23 March 2022, Moody’s Investor Services upgraded the Company’s Corporate Family Rating (CFR) and its second lien bond rating from Caa1 to B3. On 26 February 2022, S&P Global Ratings upgraded its outlook for the Company’s bonds to positive while maintaining its B rating. Thus, it reflects PDL’s stronger financial and business outlook.
• Decent Prospects: PDL demonstrated a solid top-line business during H1 FY22 and carried the positive momentum into Q3 FY22. Moreover, PDL is exploring a responsible exit from its investment in the Koffiefontein diamond mining operations in South Africa as the mine approaches the end of its life. Furthermore, it targets to generate USD 200 million in net free cash flow for the three years ended June 2022, supported by Project 2022, which shall enhance operating performance at Cullinan and Finsch. In a nutshell, PDL remained committed to generating FY22 production ranging from 3.3 million carats to 3.6 million carats.
• Technical Indicator: The price of the stock seems to be hovering below the lower Bollinger band level with a 14-day RSI level of ~28.96, reflecting an oversold zone.

Key Risks

• Weak Tender 5 Sales Results: The like-for-like rough diamond prices had reduced by around 23.7% for Tender 5 when compared with Tender 4.
• Economic Slowdown: British economy contracted in April 2022, facing pressure from the rising fuel prices and household energy bills. It is reflecting the intensified cost-of-living crunch. Moreover, due to the high inflation levels and energy bills, the Bank of England has increased its base rate from 1% to 1.25%.

Q3 FY22 and 9M FY22 Trading Update (for the three months and nine months ended 31 March 2022, as of 20 April 2022)

(Source: Company Website)

• Top-Line Business: The Company had shown a solid jump of around 33% in top-line revenue from USD 106.0 million during Q3 FY21 to USD 140.6 million during Q3 FY22.
• Balance Sheet: The Company’s net debt stood at USD 107.0 million as of 31 March 2022. In comparison, it was USD 152.3 million as of 31 December 2021.
• Impressive Production Volumes: The Williamson’s resumption of production led to a significant increase of around 18% in diamond production from 704,498 carats during Q3 FY21 to 830,456 carats for Q3 FY22.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Gem Diamonds Ltd, Antofagasta PLC, Rio Tinto PLC, and Tharisa PLC.

*All selected peers are LSE-Listed Companies from the Basic Materials sector.

*1 USD = ~0.82 GBP. 

Conclusion

Based on the promising market trends, expected synergy from acquisitions, strong net cash profile, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Petra Diamonds Ltd at the current market price of GBX 93.28 (as of 20 June 2022, at 8:45 AM GMT+1) with lower double-digit upside potential based on 6.09x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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