Velocys PLC

Velocys PLC (LON: VLS) is a FTSE AIM All-Share listed sustainable fuels technology entity that provides services related to renewable power, carbon capture and storage.

Investment Rationale – SPECULATIVE BUY at GBX 7.78

• Fundraising: The net proceeds of the recent equity placing will be used for capital investment in the current manufacturing capability, advancing two reference projects, managing working capital needs, and achieving net positive cash flow during 2024.
• Growth Prospects: Velocys has delivered significant progress with both its reference projects and future commercial opportunities. Its two reference projects - the US Bayou Mississippi Bio-refinery Project and the Altalto Immingham Project, are likely to accelerate the technology adoption further.
• Promising Outlook: The government support regarding the SAF supply is increasing, while its US Bayou Fuels project for its FEED is progressing well.
• Improved Economic Dynamics: The IHS Markit/CIPS UK Construction Purchasing Managers' Index rose from 54.6 in October 2021 to 55.5 in November 2021, as there was an easing supply chain and inflation pressure.
• Technical Indicator: From a technical standpoint, the momentum oscillator RSI (~45.33) is still close to the oversold zone, while the stock price is hovering between the lower and the middle Bollinger Bands.
  

Key Risks

• Small Market Capitalization: It is trading as a penny stock with small market capitalization, and it is exposed to market volatilities. Moreover, the Company has a history of operating losses, and thus, it can also face liquidity issues.
• Macroeconomic Uncertainties: Weak industrial date, global shortage of semiconductors, supply constraints, tightening of monetary policy can hamper the business prospects.

Recent News

Result of Placing: On 26 November 2021, Velocys placed 312,500,000 shares to raise a total of £25 million.

Interim Results (for the six months ended 30 June 2021, as on 23 September 2021)

(Source: Company Website)

• Revenue Generation: During H1 FY21, VLS generated a revenue of £8.2 million (H1 FY20: £0.2 million), mainly from its first major commercial customer contract.
• Operational Growth: Its gross profit also increased to £3.3 million in H1 FY21 from £0.1 million in H1 FY20. Subsequently, its operating losses also reduced.
• Liquidity: At the end of H1 FY21, cash balance was stood at £8.3 million (31 December 2020: £13.1 million).

One Year Share Price Chart

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

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative) 

Conclusion 

During the first interim, Velocys achieved an important milestone of improving revenue through its major commercial customer contract. It also showed an efficient operational performance. It witnessed a solid momentum across the Company's reference projects and commercial collaborations.

Notwithstanding, VLS is trading as a penny stock, and it didn’t recommend any interim dividend due to continued losses. Therefore, investors should gauge upon their risk-return profile before punting on this stock. The stock made a 52-week High and Low of GBX 17.94 and GBX 3.78, respectively.

Based on the fundraising, revenue increase, progress of two reference projects, operational achievements, and support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Velocys PLC at the current price of GBX 7.78 (as on 7 December 2021, at 8:10 AM GMT), with lower double-digit upside potential based 10.37x EV/NTM Sales (approx.) on FY21E Sales (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.

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