The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Well I just realised this has technically now become a 10 bag for me. It only took 11 years! First purchases in the 30s but have traded massively since - I would have done much better if I had held throughout as I have less shares now than my initial purchases. Unfortunately. Well done for staying the course.
So much for trading!
JL
I was a bit underwhelmed by these results to be honest. We already knew most of the figures from the last trading update. Although the EBIT and profit were higher than I expected - this is encouraging.
So why am I underwhelmed? The forecast for next year is for virtually zero actual growth. Sukari picked up speed throughout the year so their annual revenue and EBIT will be higher in 2022 because that will be online for 12 months instead of the build up. Q4 turnover was $66.5m, which equates to $266m for the year. Add in a bit for the labs and we are looking at zero organic growth in their forecast for this year.
I personally believe this forecast is pessimistic. Their pipeline is strong but they are not counting any chickens. I would expect them to beat their forecast and reach $300m and would be disappointed if they don't.
Still a buyer at this level though because they are still insanely cheap. Zero growth built into the forecast at all. And the market is using this assumption too currently.
JL
A year is a long time in the life of a prospective mine. There is still a lot of risks to overcome. Personally, I think the first price target should be 50p. That is equivalent to the price that Piedmont will pay for their stake. But they would not buy in without a decent upside. So 50p could go quickly and 60-80p is a realistic medium term goal.
Liking it so far though.
JL
Yes, lovely to see. A belated thank you for all your posts. Keep them coming as they are much appreciated.
Hopefully this is the start of a re-rating up to a more sensible level. If so, then there will need to be some decisions to make, from a nice place of course.
GLA
JL
I also liked the comment about the abandoned farm out. It was a three stage farm in, pay for the wells and earn a bit, then pay a big chunk to earn more, and then the biggest chunk. The total value of this was a 10 digit sum, presumably in $, and was worth more than the market cap. So more than $1bn! I think I caught that this would still leave PANR with a majority stake, but I could well be wrong on that. I would doubt it because with not that much more than $1bn they could buy the whole company.
A good session though, worth a listen.
JL
I was pondering why there was such a muted response to the Q4 trading statement alongside the PIworld video earlier. Clearly the institutions don't see CAPD as under valued, a mistake in my opinion and presumably most on here. Equally, the muted response presumably reflects the fact that all of the good news was already factored into the price. All recent RNSs have been overwhelmingly positive, the huge increase in revenue from the Sukari contract was already known. So in fact there was not that much new there. A few new contracts, all positive of course, but probably not enough to show where the next couple of years growth will come from.
I calculated the quarter on quarter growth over the last year and of course this is slowing down massively. Most of the increase being due solely to the Sukari contract. This year, we will certainly see huge year on year growth per quarter as there was little revenue in Q1 from Sukari and then it ramped up through the year. But what else do we have to look forward to this year...
1. More contracts - likely but rig utilisation at 79% does not leave any room for further growth. They could continue to increase the rig count but this is unlikely to lead to more than a few % QoQ growth.
2. MSALabs - again very likely to grow significantly but from such a small base as to be immaterial this year. This one is definitely more for 2023 onwards.
3. Another monster Sukari 2 contract win. I have no idea on the likelihood of this, or even if they are actively pursuing many bids of this size currently. But I don't think we can count on this to deliver much growth this year unless it arrives in H1.
4. Investment portfolio. I doubt they will repeat the recent stellar rise from 2021 this year. At best, if they hold onto and consolidate gains then that would be fine. They might even consider realising some of this instead of taking on more expensive dedbt.
So those are the rather lacklustre conclusions I came to. So why am I still confident, well the Year on Year growth should see the EV / EBIT multiple of well under 4 and a P/E of well under 8. That to me is simply too cheap. With a 3% dividend, share buybacks using up spare cash, and a little organic growth, they should be easily capable of a 10-20% return this year. That is enough for me in a year of consolidation, if the market is paying me while waiting for the next growth spurt I am fine with that. The following year, MSALabs could well start picking up, and there is also the chance of another large contract win.
There are always two sides to an investment coin so thought I would set out my ponderings for others to refute.
JL
I meant to add... If they don't need to invest too much in Capex in the next year or two then they should be chucking off c. £30m cash per year from 2023. I don't know how much each lab is costing in set up, but they should be FCF positive this year at least.
JL
I completely agree. Still significantly undervalued. Roll on £1 and more...
The discussion on the PIworld video was interesting in that they could not see what the catalyst could be for a re-rating from the current EV / EBIT of 3.5 to a more reasonable 5. They just worried that this was just a cyclical business doing well currently. Whilst certainly true, the valuation is so low that the risk is minimal at this stage of the cycle. Goldmans are predicting we are at the start of a 10 year super cycle for mining - so why would you not want to be in the picks and shovels industry!
But then they also acknowledged the MSALabs business was growing fast and on good margins. But without joining these dots. I can't wait to see the results to see the segment breakdown. MSALabs is of course tiny just now but should at least triple this year with the rollout of three more labs. That could be one possible catalyst in th enext 12 to 18 months.
Happy holder today.
JL
I agree that any bid at 34 would have been laughed at by the board. But at what price would they have to engage? 50p would be hard to resist by many on the market given the 60% premium to current prices. That would value ALL in line with their 50% of the current NPV8 of Ewoyaa, leaving all appraisal and exploration upside to the buyer. Also that is based on a lower price for Spodumene than currently traded figures. With Li and other metals critical to the coming energy transition Li prices are underpinned for years to come. An increase in the Li assumption could easily double the NPV98 overnight.
Further I am sure Piedmont would not want to let 50% go to a chinese bidder, or anyone else for that matter. So a bidding war could easily erupt. 50p in that context would be just the starting price.
I therefore continue to believe this is very undervalued. My original price target of 33p is now very much in sight. It may touch that soon at which point I will evaluate but likely hold. I may top slide a little after the strong recent run. I managed to top up at 26.3 in the recent dip so may let those go.
We also have more news to look forward to:
Next drilling results - Feb?
Update on the DFS?
Resource upgrade post final drilling results.
Further appraisal and exploration drilling announced.
Confirmation that Piedmont will continue to fund the DFS to earn the first stage of their stake.
So plenty to drive the share price and my targets forward this year.
Good luck all.
JL
More good progress in the latest trading update. Sure is quiet on this board so thought I would add something. First quarter of EBIT breakeven is good, but I assume the business is strongly seasonal so likely to slip back to negative in some quarters.
Still holding.
JL
Nothing from Halifax either. I spoke to them and they said they had received the shares and were divvying them up between the nominee holders so should be available 'soon'. That was last week so I'll give them to the end of the week.
JL
Interesting to note that the price seems to be weaker in the morning and then picks up in the afternoon. This price pattern seems to suggest a seller in UK / Europe, or a simple tree shake by MMs to build stock, before stock being actively bought in the afternoon when the US come online. That would make sense given their profile in the US / CA should be slowly increasing with the backing of Piedmont.
Just a thought.
JL
So I ran a few numbers and agree that these are cheap as chips...
NPV8 of $789m = £575m.
Half of that is retained = £287m.
EV of £287m = share price of 50p.
Now a mine is never worth the actual value of the NPV because it doesn't take account of risks. So if we discount by a third that leaves a share price of 33p. So that is my immediate target and am certainly a buyer up to that point. Although my boots are now pretty full of these already after topping up again today.
This price of course does not include anything for the rest of the assets and is based on a very conservative price of Li of only $900 when prices are currently more than double that. Of course, any further upgrade in resources from current drilling will upgrade this target price.
A nice situation to be in... A share price that is more than covered by the NPV of their assets that require zero further investment to deliver, with all further drilling in for free. And $20m in the bank to pay for the drilling. Roll on the DFS before someone buys out the other 50%. What is not to like?
2022 plan.
Initial target 33p.
In a few months we could have another lift in NPV from current drilling. 40p maybe?
Late next year we should have the DFS complete. 45p?
Upgrade to Li estimates likely at this point. 60-90p
Governmental approval should then come in early 2023 and then a move to production. £1
Production. £1.20?
In reality, I think they will be taken out in 2023 once the DFS is confirmed and the governmental approval. Only question is at what price?
JL
Having said that, I have topped up recently at these prices. But it represents well under 10% of my portfolio. My largest holding is now about 25% of my portfolio - that is my conviction stock. I watch it like a hawk. And they have a bullet proof balance sheet too but are not exposed to a single major asset like SQZ.
JL
@troubledseller. Don't top up. If SQZ is 80% of your portfolio, buy something else. It is not worth it. A black swan event could wipe you out. Say BKR going up in flames? It can happen. And think you would feel if it did and your shares were worthless.
It happened to someone I know. They invested in one stock only on the grounds that it was bulletproof over the longer term. Along came a black swan event. The share they held was RBS and he lost over 90% of his money including his pension.
No share is worth 80% of your portfolio. Just saying... Even splitting it over just 3 or 4 shares makes a huge difference to your risk profile. Especially if they are across different sectors.
JL
@highlandmatt - Not sure I agree.
Yes, they may have access to $17.5m in total but that doesn't get far for their 2022 plans. I am sure they are fine for Q4, that is not the issue. It is 2022 that concerns me. 3 exploration wells, Coho development completion, Cascadura development, Royston appraisal... there is a lot they need cash for. Hence why I think they may need one more raise.
Roll back 6-9 months and they were expecting Coho online by now with Cascadura initial production following soon. So the wall of cash that was expected in early 2022 is now not coming until the end of 2022 or more likely 2023. So they either need to scale back their plans to their reduced budget, take on more debt, or raise cash. Or a combination thereof.
They are not out of the woods cash wise until the wall of cash actually arrives.
JL
@highlandmatt, that was my point. They only have $5m left in the bank and $5m left undrawn on their lending facility. A few $m for Coho and the same for Royston leaves very little headroom. So where will they find the money to drill the exploration wells next year? If they have to delay a quarter to drill a well that is not great, they need to get cracking. They will not be able to meet their plans from their existing production pls Coho. With Cascadura pushed back to end 2022 or more likely 2023 now, they need money for exploration or they will be vulnerable from a cash flow perspective. Do you really want them to stop exploration for a quarter, or a year until Cascadura cash comes online? I don't, too much to play for next year for them to just stop. Raise another $10-20m to see them through to the wall of cash and get cracking. They can then return it the following year or two in dividends!
@Scott22, I agree. They should not raise now. Royston results first, raise in the new year to 'accelerate exploration and appraisal'. That would be a message that could sell well in the city. Even in these ESG constrained times.
But we also need to think of the downside. If Royston gas does not come in then they will get slammed. Another world class discovery that turns into a (mainly PR) disaster like Chinook. I didn't think the message sold on the Proactive interview was a good idea. Building up the promise with 'best in 35 years', 'as good as it gets' type comments just builds expectation and sets them up for a fall. If Royston doesn't flow, the sp will dive under £1 again because of this false promise. Their credibility will be shot to pieces. This business always brings disappointment alongside the wins, managing expectations is surely the better approach. I think this is also cultural - the US tend to sing out the positive news whereas us cautious Brits always look for the downside too.
JL
On reading the update this morning, cash looks a lot tighter than I had originally estimated. With the ongoing delays to the 'wall of cash' from Cascadura likely to continue throughout 2022 they don't have a lot of free cash. Net debt is growing fast (see Q2 to Q3 comparison) and Coho online in Q1 will help but not by much. So I now think there will be one more fund raise in 2022, probably earlier rather than later. They want to fund 3 exploration drills next year plus all of the costs of development for the facilities at Cascadura. They cannot do that with the cash / debt facilities that they have currently. They could raise more debt based on the reserves at Cascadura, very likely, but I think they will need to raise cash for the exploration. They may also want to appraise Royston - very likely if the gas is a success as we all hope.
Anyone else feel the same? If so, any thoughts on how much and when?
JL
csw12, I had a similar thought and I sold into the rise. Too early as it happens but I thought they would have made their decision by now. The fact they haven't to me implies they have some serious farm out interest that they are actively working on. I have held on to a chunk though just in case.
I had a look back at last year, on the chart there is the drop from 44p to 31p which is presumably the fund raise. A pretty hefty discount. Risk is lower now so I don't see the same discount as being warranted. But it may be a steeper discount than I originally posted.
Time will tell. hopefully soon now!