Petrofac Ltd – Operating with Capital Light Business Model and Diversified business to Tackle Short-term headwinds

Petrofac Ltd (LON: PFC) is a FTSE 250 listed company, which is engaged in production and processing of oil and gas. It assists companies in transforming the value of their assets across the oil and gas life cycle. The Group operates through 24 offices and 7 operational centres worldwide.

The Group will hold its annual general meeting on 15^th May 2020 and will announce its half-yearly results for FY20 on 30^th June 2020.

Recent News
16^th April 2020:The Group announced the termination of its Dalma Gas project by Abu Dhabi National Oil Company (ADNOC).

Covid-19 Update
On 6^th April 2020, The Group announced the several actions taken in response to the unprecedented market conditions during coronavirus outbreak. The Company is currently focussing over the health and wellbeing of all its stakeholders. Further, it is planning to reduce its overheads by at least USD 100 million in 2020 and by USD 200 million in 2021. It has also suspended the final dividend for the financial year 2019 while planning to slash capital expenditures by 40% in 2020. As at 2^nd April 2020, the Company reported a strong balance sheet with USD 1.1 billion of liquidity, following the repayment if USD 75 million in February 2020. It has further reduced the debt maturity of USD 275 million in the next 12 months by loan extension.  

Share Price Performance

Daily Chart as on 30^th April 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

PFC’s shares were trading at GBX 197.45 on 30^th April 2020 (before the market close at 2.33 PM GMT+1), up by 4.72% per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 475.34/GBX 146.65.

Valuation Methodology
         

 *1 USD = 0.800706 GBP

Valuation Metrics

(Source: LSE)

As on 31^st March 2020, the Price/Earnings and EV/EBITDA multiples of the Petrofac Ltd.’s were 11.9x and 2.1x, which were lower as compared with the Oil Equipment Services & Distribution industry of 20.5x and 3.4x, reflecting that the company is trading at a lower multiple as compared to its peers.

Conclusion
Duringthe financial year 2019, the Group reported a slight decline in revenue due to lower revenue generated from engineering & construction and integrated energy services business.

However, the Group has a diversified business with a strong balance sheet position. It has taken immediate action to mitigate the risk arising from the prevailing economic disruption.  In the first quarter of 2020, the Group reported an increase in the order book which has brought its backlog to USD 8.2 million. It has a solid position in the Middle East and operating with a capital-light business model, which would protect them against short term headwinds. Having said that, the Group has withdrawn its previous revenue and margin guidance as it is not able to ascertain the impact of falling oil prices and Cocid-19 over the business performance currently.

Based on the decent prospects and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 188.55 (as on 29^th April 2020), with a low double-digit-upside potential based on 6.92x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).

International Personal Finance PLC – Long track record of generating decent returns with millions of customers for over 20 years

International Personal Finance PLC (LON: IPF) is a FTSE All-Share listed financial services company, which provides consumer finance and home credit. It has over 2 million customers and 19,600 agents.

The Group will announce its half-yearly results for FY20 on 29^th July 2020.

Recent News
26^th February 2020:Stuart Sinclair and Richard Holmes were appointed as independent non-executive directors in the board of IPF from 16^th March 2020.

Trading Update – Q1 FY2020
The IPF group released an update on the developments regarding the Covid-19 pandemic. The Group reported that credit issued contracted by 15% in the first quarter (year-on-year) of 2020. However, the net cash flow was reported positive in April to date. Considering the unprecedented challenges presented by Covid-19 infection, the group has planned to save GBP 52 million through cost reduction in 2020. It has decided to suspend the final dividend for 2019, which would generate a saving of GBP 17 million. Despite the uncertainty, the company has delivered a strong balance sheet. As at 31^st March 2020, the company had headroom on undrawn debt facilities of £217 million and 47.6% of equity to receivables capital ratio.

Share Price Performance

Daily Chart as on 30^th April 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

IPF’s shares were trading at GBX 54.90 on 30^th April 2020 (before the market close at 2.11 PM GMT+1), up by 18.45% per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 189.50/GBX 32.55

Valuation Metrics

(Source: LSE)

As on 31^st March 2020, the Price/Earnings and EV/EBITDA multiples of the International Personal Finance PLC’s were 2.4x and 5.7x, which were lower as compared with the financial services industry of 13.1x and 7.2x, reflecting that the company is trading at a lower multiple as compared to its peers.

Conclusion
The Group reported a solid performance during the first 10 weeks of 2020, and performance was in line with the management’s expectation. Currently, the group operations are impacted by the outbreak of coronavirus, and the group witnessed a decline in the number of customers. As there is no clarity and certainty over timing regarding the complete revival of business activities, the group was not able to provide 2020 guidance.  Despite the uncertain environment, the company is confident towards its strategy as it supports growth and addressing the demands of its customers and shareholders. The group is investing in European home credit businesses to improve its offering to retain and attract customers with enhanced efficiency. IPF is focused on improving its operational performance from Mexico home credit business, which will deliver higher growth and profitability in the financial year 2020. The group is taking the required steps to make its Digital business a profitable fintech company with a focus on improved credit quality and portfolio growth balanced.

Moreover, the group is operating at a strong balance sheet and funding position which will help them to recommence growth when the short-term disruption subsides. However, the Group has a solid track record of generating modest returns and it is well-positioned in the market with millions of customers, which reflects its potential to resume growth rapidly once the impact of Coronavirus fades away.

Over the past four years (FY15 - FY19), the company’s net income surged from GBP 735 million in FY15 to GBP 889 million in FY19. Compounded annual growth rate (CAGR) stood at 4.87 per cent.

Based on the decent growth prospects, we have given a “Hold” recommendation at the closing price of GBX 46.35 (as on 29th April 2020).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 30^th April 2020).

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