Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is an FTSE 250 listed entity engaged in mining precious and non-precious metals.

Investment Rationale for Valuation – SELL at GBX 15.47

• Fall in Production: During Q3 FY22, POG reported a decline in production. Moreover, the geopolitical tension in Russia can further impact production.
• Weak Fundamentals: In H1 FY21, POG reported a decline in revenue and underlying EBITDA. Moreover, its debt increased from US$573 million on 30 June 2021 to US$592 million on 30 September 2021.
• Technical Indicators: From a technical standpoint, the MACD line is trading below the signal line and the centreline, reflecting a bearish price pattern.
• Underperformance Against Index: POG has fallen ~29% in the past six months, showing significant underperformance against the FTSE 250 benchmark index.

Recent News

• Appointment of Chief Financial Officer: On 24 January 2021, POG appointed Mr. Stanislav Ploshchenko as the Group's Chief Financial Officer with immediate effect.
• Disposal: On 3 December 2021, POG completed the disposal of its 31.1% stake in IRC Limited for a consideration of US$10 million.

Risk Assessments

• Gold Price Volatility: The interest rate hikes, and rising US Treasury Yield can cap the gains of gold prices.
• Subdued UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.

Q3 2021 Production and Sales Report (for the quarter ending 30 September 2021, as on 25 October 2021)

 (Source: Company Website)

• Production: During Q3 FY21, production reduced by 2% year-on-year, due to lower gold production from 3rd party concentrates.
• Sales: The Gold sales totalled 120.1 koz (kilo-ounce) in Q3 FY21 (Q3 FY20: 121.1koz).
• Liquidity: As on 30 September 2021, POG reported US$34.5 million of cash and debt principal outstanding of US$592 million.

One Year Share Price Chart

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

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

The ongoing geopolitical issue can create operational challenges for the Company, while its financials were already impacted in FY21 so far. The significant downtrend in price is also giving an alarming signal. Therefore, it is prudent to liquidate the position at the current levels. The stock made a 52-week High and Low of GBX 31.75 and GBX 13.92, respectively.

Based on the production impact, higher costs, and unfavorable valuation as done using the above method, we have given a “SELL” recommendation on Petropavlovsk PLC at the closing price of GBX 15.47 (as of 21 January 2022).

AFC Energy PLC

AFC Energy PLC (LON: AFC) is an FTSE AIM UK 50 index listed provider of hydrogen power generation technologies.

Investment Rationale – SELL at GBX 36.90

• Weak Fundamentals: AFC is still not a stable commercial entity and doesn’t report significant revenue. Therefore, it might continue to report operational losses in FY22.
• Macroeconomic Concerns: The rising cost pressure, Ukraine war fears, and global sell equity off can further impact this loss-making entity.
• Technical Indicators: From a technical standpoint, the MACD line has given a bearish crossover against the signal line and hovering below the centreline.
• Underperformance Against Index: AFC’s stock price has fallen around 40% in the past six months and showing significant underperformance against the FTSE AIM UK 50 index.

Key Risks

• Demand Uncertainty: As the global demand outlook for energy is unstable due to the Omicron variant, while there are significant operational challenges. The short-term outlook for the Company looks sceptical with the resurgence in Covid-19 cases.
• Inflation Woes: Higher input costs due to supply chain disruption and labor absenteeism can also hamper the profitability margins.

Year End Operating Statement (for the year ended 31 October 2021, as on 16 December 2021)

• Fundraising: It concluded a £36 million of oversubscribed institutional fundraise, cornerstoned by ABB.
• Investments: It invested in new engineering, manufacturing, commercial and research teams to support the Company’s prospects.
• Commercialization: AFC signed a commercial agreement worth £4.5 million in FY21, while it has a pipeline of system sales and lease opportunities, underpinning future revenue growth.

Share Price Chart

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

Conclusion

AFC is trading as a penny stock with a history of operating losses. Moreover, the rising tensions from Eastern Europe amid Omicron-led operational disruption can further batter the stock price.  Therefore, it is prudent to liquidate the position as per the risk-return profile of investors. The stock made a 52-week high and low of GBX 83.00 and GBX 32.00, respectively.

Based on the weak fundamentals, continued losses, significant downtrend, and unfavorable valuation conducted above, we have given a “SELL” recommendation on AFC Energy PLC at the closing market price of GBX 36.90 (as of 21 January 2022).  

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

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

Note 3: Target Price refers to a price level which 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.

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