Ferro-Alloy Resources Ltd

Ferro-Alloy Resources Ltd (LON: FAR) is a FTSE Main market listed vanadium producer with operations in Balasausqandiq vanadium deposit in Southern Kazakhstan.

Investment Rationale for Valuation – SPECULATIVE BUY at GBX 25.00

• Growth Driver: The Balasausqandiq feasibility study update revealed that is likely to capitalise on rising global demand for vanadium flow-batteries to store renewable energy since the Balasausqandiq project runs on low capital and operating costs and has access to an advantageous location and huge scale.
• First Sale of Ferromolybdenum: On 10 November 2021, FAR achieved an important milestone of first commercial sale of ferromolybdenum and also completed testing of the production of ferro-vanadium.
• Production Boost: As raw-materials supplies have returned to normal pre-covid levels, production in H2 FY21 is likely to improve. FAR is also procuring an electric arc furnace to double production capacity.
• Technical Indicator: From a technical standpoint, the MACD line has given a bullish crossover against the signal line, reflecting a positive price potential.

Key Risks

• Volatile Vanadium Prices: Some forecasters anticipates that vanadium prices are likely to be in deficit in the short to medium term, which can impact the Company’s earnings ability.
• Omicron Variant: The production was hampered during H1 FY21 due to the Covid-19 led restrictions. Thus, the rising cases of Omicron variant can impact the growth prospects.

Interim Results for the six months ended 30 June 2021 (as on 28 September 2021)

 (Source: Company Website)

• Financial Results: During H1 FY21, FAR reported an improved financial result, driven by higher realized price.
• Strong Pricing Environment: During H1 FY21, prices for Vanadium pentoxide, molybdic oxide and ferro-molybdenum surged by 63%, 109%, and 83% year-on-year, respectively.
• Financial Position: At the end of H1 FY21, it reported US$8.2 million in cash against US$0.7 million at the end of FY20.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The bright business prospects are underpinned by ramped up production, sales of new products, supporting commodity prices, and enhanced earnings and cash flow. Moreover, FAR demonstrated better cash position to support new Balasausqandiq vanadium project development.

Notwithstanding, FAR is a speculative stock with small market capitalization and history of losses, and thus, it is exposed to significant liquidity crises and market volatilities. The stock made a 52-week High and Low of GBX 47.00 and GBX 8.90, respectively.

Based on the strong pricing environment, operational development, robust balance sheet, we have given a “SPECULATIVE BUY” recommendation on Ferro-Alloy Resources Ltd at the current market price of GBX 25.00 (as on 21 December 2021, at 8:00 AM GMT), with lower double-digit upside potential based 4.92x EV/NTM Sales (approx.) on FY21E Sales (approx.).

SCS Group PLC

SCS Group PLC (LON: SCS) is a FTSE All-Small index listed retailer of upholstered furniture and floorings.

Rationale for Valuation – SPECULATIVE BUY at GBX 218.00

• Dividend Recommencement: It recommended a total dividend of 10 pence per share in FY21 against the nil dividend in FY20, reflecting confidence in the outlook
• Operational Achievement: The Group has also launched its new website and repaid the £3.0 million for Coronavirus Job Retention Scheme grants.
• Technical: From a technical standpoint, the momentum oscillator 14-day RSI (~41.73) confirms the oversold position, while the price is hovering close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales EV/EBITDA, Price/Cash Flow, and Price/Earnings valuation multiples are undervalued than the median of the Consumer Cyclicals sector.

Key Risks

• Resurgence of Coronavirus: The surging Omicron COVID-19 cases triggered tighter curbs in Europe and threatened to swamp the global economy into the New Year.
• Subdued Consumer Confidence: There is acute pressure on consumer disposable income levels amid rising fuel price concerns and inflationary pressure.

AGM Trading Update (as on 26 November 2021)

• Orders: For the 16 weeks ending 20 November 2021, two-year like-for-like orders grew 0.9%, though the order was 10.6% down on year-on-year basis due to the unprecedented pent-up demand at the beginning of last year.
• Order Book: As on 20 November 2021, the Company had an order book of £131.9 million, significantly higher than £71.5 million for the same period two years ago.
• Outlook: The Group is all set for the winter sales period and working closely with the supplier to mitigate supply chain challenges.

Financial Highlights (for the year ended 31 July 2021, as on 5 October 2021)

(Source: Company Website)

• Top-line Growth: During FY21, the Group reported a 21.6%, 21.0% and 22.9% year-on-year growth in revenue, gross sales, and gross profit, respectively.
• Bottom-line Growth: The statutory earnings per share stood at 50.4 pence (FY20: loss per share 5.8p) om FY21.
• Liquidity: At the end of FY21, SCS held a cash balance of £87.7 million (FY20: £82.3 million).

One Year Share Price Chart

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

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

Conclusion

Following the robust financial growth in FY21, the Group sustained its strong trading momentum in FY22 as well. It also has a solid closing order book to continue the growth despite the supply chain issues and a material increase in shipping costs. The stock made a 52-week High and Low of GBX 340.50 and GBX 185.50, respectively. Investors are also recommended to scan their respective risk-return profile before punting on this penny stock since it is exposed to high volatilities.

Based on the decent financial growth, dividend recommendation, operational achievements, and favourable valuation conducted above, we have given a “SPECULATIVE BUY” stance on SCS Group PLC at the current price of GBX 218.00 (as on 21 December 2021, at 8:15 AM GMT), with lower double-digit upside potential based 8.92x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (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.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

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