Velocys PLC – Loss-making entity with an uncertain outlook.

Velocys PLC (LON: VLS) is a FTSE AIM All-Share index listed company, which provides sustainable fuels technology.

Investment Rationale – Avoid at GBX 6.14

• All major profitability margins, including EBITDA margin, operating margin, and net margin, are in negative territory, whereas the industry median is positive.
• The key trading multiples - EV/EBITDA, Price/Earnings, and Price/Cash Flow, are in the negative domain. Moreover, EV/Sales multiple is overvalued as compared to the industry median.
• From a technical standpoint, 14-Day RSI (81.72) is not supporting the upside potential.
• The growth trajectory is dependent upon external funding and grants.
• In H1 FY20, there was a cash outflow of £3.2 million, while the Company reported an operating loss of £2.6 million.

Risk Assessments

• Covid-19 pandemic can create material operational challenges.
• VLS is still facing operating losses, and it can face a liquidity crunch since cash at the end of H1 FY20 fell from the level seen at the end of FY19.
• Macroeconomic uncertainties can put existing contracts and potential clients at risk.

Interim results for the six months ended 30 June 2020 (as on 17 September 2020)

(Source: Company Website)

• Despite Covid-19 disruption, VLS has achieved the commercial delivery of two reference projects in Immingham, UK and Mississippi, USA, and serving technology to its client Red Rock Biofuels, in Oregon.
• In July 2020, the Company completed the fundraise of £21 million before expenses, which strengthened the balance sheet.
• The demand for sustainable fuel has gained momentum in FY20, and the Company is set to scale the Sustainable Aviation Fuel production.
• During H1 FY20, revenue increased to £180,000 (H1 2019: £22,000), while operating loss reduced to £2.6 million (H1 FY19: £5.1 million loss before exceptional items of £0.5m).
• At the end of H1 FY20, cash stood at £816 thousand (31 December 2019: £4.8 million).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

During the Covid-19 crisis, the Company witnessed additional demand for its technology and engineering services since a positive environment for developers of third-party sustainable fuels projects has become apparent. Moreover, advancing the Immingham UK project into Front End Engineering Design is a key objective for this waste to sustainable fuels project. However, the Covid-19 restrictions and disruption can still impact the financials in H2 FY20. The Group is still not able to report profit operationally and dependent upon external funding, which raises doubts over the upside potential amid macroeconomic uncertainties. The stock has fallen nearly 84.50% over the past five years. Stock 52 week High and Low were GBX 16.64 and GBX 1.18, respectively.

Given the level of uncertainties, we have given an “Avoid” recommendation on Velocys PLC at the closing market price of GBX 6.14 (as on 20 November 2020), while we look forward to reviewing the upcoming catalysts.

President Energy PLC – Suppressed by lower demand and nosedived prices.

President Energy PLC (LON: PPC) is a FTSE AIM All-Share listed Company, which is engaged in the exploration and production of oil & gas. It is also involved in the sale of hydrocarbons and related activities. It caters to two geographical markets – the US and Argentina.

Investment Rationale – Avoid at GBX 1.55

• From a technical standpoint, 200-day SMA (1.85) is not supporting the upside potential.
• The operating margin and net margin are in negative territory, whereas the industry median is positive.
• The key trading multiples - Price/Earnings, and Price/Cash Flow, are in negative territory. Moreover, EV/Sales multiple is overvalued as compared to the industry average.
• Over the past 1-year, the stock has underperformed against the benchmark index since FTSE AIM All-Share has gained around 13.70% in last 1-year, whereas PPC has fallen nearly 62.14%.
• During H1 FY20, the average realised prices, adjusted EBITDA, and free cash flows have significantly declined against H1 FY19.

Risk Assessments

• Covid-19 pandemic impacted the realised prices in H1 FY20 and it can affect the turnover in the near future as well.
• Macroeconomic uncertainties can affect demand patterns as well.
• The Company has a significant debt level as compared to its EBITDA level, and thus, it can face liquidity issues.

Recent News

16 November 2020: The preliminary testing of the exploration well EVN-x1 near the main Estancia Vieja field in Argentina, has now completed. The oil and gas successfully flowed to the surface without pumping and swabbing. The EVN-x1 will be placed into production in the next 14 days from the date of the announcement.

Unaudited Interim Results for the six months ended 30 June 2020 (as on 26 October 2020)

(Source: Company Website)

• Trafigura (one of the largest commodity traders and logistic companies in the world) became a significant shareholder in PPC by holding over 16%.
• The turnover in H1 FY20 decreased due to the 43% fall in realised prices.
• The net debt was down nearly 60% over the same period last year and 48% from the start of the FY20.
• Despite severe turbulent times, adjusted EBITDA remained positive.
• The administrative expenses were down by 31% year-on-year with cost-cutting measures.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

PPC is drilling as per agenda for FY21 and expects concrete plans to be available by the end of January 2021. However, Covid-19 pandemic continued to disrupt the trading environment, and the recovery is dependent upon commodity prices. The stock has already fallen over 62%, while the Company can face liquidity issues, and it is still reporting the net profit. Stock 52 week High and Low were GBX 4.59 and GBX 1.20, respectively.

Based on the factors discussed above, we have given an “Avoid” recommendation on President Energy PLC at the closing market price of GBX 1.55 (as on 20 November 2020), while we look forward to reviewing the upcoming catalysts in the near term. 

*All forecasted figures and Peer/IndustryInformation have been taken from Refinitiv, Thomson Reuters.

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