Premier Oil PLC

Premier Oil Plc (LON: PMO) is a London, United Kingdom-based multinational oil and gas exploration and production company. The company has oil and gas interests in Latin America, the Falkland Islands, South East Asia and the North Sea, where the group seeks to invest in high-quality opportunities.

Recent News
On 5^th March 2020, the company announced that Elisabeth Proust would be appointed as an Independent Non-Executive Director.

Increased UK Production for the year ended 31 December 2019

(Source: Full Year Results, Company Website)

Led by the increased sales revenue and the Group’s tax loss position in the UK, the profit after tax surged to US$164 million as compared with the previous year (2018: US$133 million). During 2019, the company generated positive free cash flow of US$327.4 million which was directed towards further strengthening the balance sheet and debt reduction. On 31^st December 2019, the net debt stood at US$1.99 billion. For the current period, EBITDAX from continuing operations stood at US$1,230 million, a surge of US$139 million against the previous period EBITDAX of US$1,091 million.

Share Price Performance

Daily Chart as at March-05-20, before the market closed (Source: Thomson Reuters)

Premier Oil PLC shares were trading at GBX 71.08 before the market close (at 1:33 PM GMT) on 5^th March 2020 and were down by 10.12% versus the previous day closing price. Stock 52 weeks High and Low are GBX 120.70 /GBX 64.48.  The group’s stock is reflecting the higher volatility as against the benchmark index based on the company’s beta of 3.09.

From the technical standpoint, 14 days relative strength index of the stock was favourable, and prices could rise further from the current trading level.

Premier Oil PLC V/S Industry V/S Sector – 1 Year
 
(Source: Thomson Reuters)

In the last one year, PMO share price surged by 6.51 per cent, which is significantly higher than the industry growth rate of negative 24.67 per cent and sector growth rate of negative 25.02 per cent.

Valuation Methodology
 

*Peers: Hurricane Energy PLC, Genel Energy PLC, EnQuest PLC, Kosmos Energy Ltd, and Pharos Energy PLC.

*Currency exchange rate taken for 1 USD = 0.77342 GBP.

Growth Catalyst
The group generated free cash flow, driving further debt reduction. In 2020, the company expected to deliver production of 70-75 kboepd pre-acquisitions, maintain tight cost control, and Deliver Zama sale. The robust production has continued into 2020 with Natuna Sea Block A production averaging 15.6 kboepd to the end of February 2020 with Singapore demand substantially above take or pay levels. Project sanction of Tolmount East is aimed for the H2 2020. The company also execute new partnerships for Sea Lion and Tuna. The group will deliver a pipeline of high impact exploration wells, complete and integrate UK acquisitions as well as minimise Carbon footprint.

Conclusion
Led by fear over the spread of coronavirus (COVID-19), the oil prices have fallen substantially in the first quarter of 2020. This impact might be driven globally. Presently, the company also faces volatility in the macro-environment.  The company has made substantial growth against its strategic targets during 2019. The robust operational performance resulted in reducing debt levels and record free cash flows. In UK production, the proposed acquisitions expect to add material cash generative. All operated projects would be developed by the company on a net-zero emissions basis. The company will continue to sustain its capital discipline investing selectively in new international projects and exploration to create material value for all its investors over the longer term.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 67.64 (as on 5th March 2020, before the market close at 15:58 PM GMT) with lower double-digit upside potential based 2.56x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.).
 

Spirent Communications PLC

Spirent Communications Plc (LON: SPT) is a technology solutions company, which is the provider to develop new devices and equipment and to operate networks.

Decent Growth in the year ended 31 December 2019

(Source: Full Year Results, Company Website)

Order intake for the financial year 2019 increased by 13.2%and benefited from an increased level of multi-year support contract wins, with 24% of the closing order book for delivery in over 12 months, against the 17% at the end of the last year 2018, which increases the visibility of future revenue. In the financial year 2019, the company’s revenue surged by 5.6% to $503.6 million, due to a higher win rate with US defence contractors for GNSS positioning products and demand for 400G high-speed Ethernet. The adjusted operating profit stood at $92.9 million, with an increased operating margin of 18.4%. Adjusted basic earnings per share increased by 23% to 13.40 cents in FY19. On 31st December 2019, the cash stood at $183.2 million. The full-year dividend per share was 5.39 cents.

Share Price Performance

Daily Chart as at March-05-20, before the market closed (Source: Thomson Reuters)

Spirent Communications PLC shares were trading at GBX 230.40 before the market close (at 2:44 PM GMT) on 5th March 2020 and were up by 8.42% versus the previous day closing price. Stock 52 weeks High and Low are GBX 263.50 /GBX 137.22.  The group’s stock is reflecting the lower volatility as against the benchmark index, based on the company’s beta of 0.93. At the current trading level, shares were trading below its long-term crucial support level of 20-day and 50-day Simple moving average price, and prices could fall further from the current trading level.

Risk Assessment
Failure to adopt new technologychange could affect the business performance of the company. Excessive dependence on one or two customers could affect the revenue of the company. Operational risks such as failure of internal and external processes and systems and cybersecurity attacks could hamper the operations of the company. Inability to cope up with competitive environment could affect the company’s business and its profitability.

Conclusion
In the medium-term period, the company expect to continue to deliver mid to single-digit revenue progress, whilst broadly maintaining the operating margin target of 17-19 per cent. Today’s share price surged as driven by the company’s good momentum continued into the financial year 2019. While it is too early to be precise on the impact of China coronavirus (COVID-19) on the businesses or wider economic conditions. But in the long-term scenario, the company is prone to some uncertainties which cannot be neglected. Any macro-economic and political change could affect the performance of the company. The company also operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors.

However, some stresses in the Telecommunications Equipment market started to emerge during the year, with the higher investment in the 5G network.  Although telecom companies have lost the 3G and 4G wars in terms of revenue, they will have a new playing field when 5G technology rolls out.  In rural areas, this technology will also face so much uncertainty. Moreover, the company is trading near a 52-week high, raising doubts at its upside potential at current prices.

Therefore, based on the above rationale, we have given a “Watch” recommendation at the current price of GBX 232.50 (as on 5^th March 2020, before the market closed at 11:35 AM GMT), while we look for any upcoming catalysts in the near term.

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