Value investors often look for beaten-down stocks that have sold off on temporary news or set-back that leaves their long-term value intact. The two companies below show a different kind of deep value scenario.
The companies are cheap, but not because they have been sold off under a dark cloud of disappointment, rather their fundamentals improved much faster than their share prices appreciated.
Cooper Energy’s earnings set to explode
Cooper Energy (ASX:COE) is a local gas producer in the final stages of the development of ‘Sole’, a gas field 65km off the Victorian coast. Sole is about 86% complete and on budget, and is forecast to lift EBITDA from $33 million in 2018 to over $200 million by June 2020. Not bad at all for a company with an enterprise value of $580 million.
About 75% of their gas has been pre-sold to blue chip clients like Alinta, AGL and Energy Australia. Government policies restricting exploration and outwards-facing export terminals have led to something of a gas shortage in Australia and steadily higher prices. Sole will be the first new East coast gas supply in over three years, so the prospects for their uncontracted gas appear strong.
Further long-term upside would come with the approval of the firm’s ‘Manta’ project, which would increase production in 2024 by an additional ~30%. Already profitable on existing production, the completion of Sole would give Cooper Energy the cash flow and balance sheet to pursue further transformational opportunities.
This is what we look for in our commodity investments: profitable production that can be used to finance larger, high quality projects with the potential to dramatically increase value.
Timing is propitious, as the firm exits a period of intense investment. By 2020 the firm will have invested over $600 million in the Sole project and associated production facilities, and provided there’s no last minute execution mishap, shareholders will soon reap the rewards.
An extraordinary valuation for Stanmore Coal
Stanmore Coal (ASX:SMR) is a Queensland producer of predominantly semi-soft coking coal. The firm recently fought off a takeover offer by an Indonesian firm that valued the firm at $240 million. Given they made $45.6 million of EBITDA in FY18, and forecast EBITDA of $140-150 million for FY19 this would have been an absolute steal, and for once we were pleased to see a takeover attempt on one of our portfolio companies fail.
As part of their takeover defence, the firm announced a $7.6 million dividend and a buy-back of 10% of their shares. This is a highly credible management team, that famously bought their core Isaac Plains asset from Vale for $1 in 2015 after coal prices had cratered.
Management is focused on expanding their resource base through the acquisition of adjacent assets that can make common use of Stanmore’s infrastructure, and the firm has the balance sheet power to do so.
As always there are risks to execution and the price of Stanmore’s coal product. But companies this cheap tend not to stay so for very long, and with net cash on the balance sheet, Stanmore Coal has the resources to fund growth for years to come.
While investors often complain about the lack of value available in the market, the two resource juniors we describe above show there are deep value and growth opportunities on sale in the market today.
Hi Michael - a penny for your thoughts on Senex (SXY)? I put it in a similar category to COE, moving from developer to producer. Regards, Another Michael
both good companies, doing well (and - disclaimer - i cant say a bad word about either cos we own them!). BUT for stanmore - it's not THAT cheap (eg cf CRN), and from memory - although it has no debt, it's position on the cost curve isn't amazing if coal prices really come off (one wonders if this is the primary reason why the mine was sold in the first place, and no competing acquisition bids came out recently?)
(also welcome to livewire and great article!)
I'm not quite sure how the EV of $580m quoted is derived, based on the latest 31/12/18 accounts I can find; Market cap; 1.621.b shares @ 44.5c = $721.3m Total Debt; $179.7m Total cash & eqvs.; $193.9m EV = $721.3m + $179.7m, - $193.9m = $707.1m