- Annual net profit increases 135 per cent.
- Cash balances exceeds US$100m, or 26 per cent of market capitalisation.
- Recent pull-back in rhodium price reduces basket price in fourth quarter, but it is up 93 per cent year-on-year in US dollars.
Investors have massively overreacted to the latest quarterly results from Sylvania Platinum (SLP:100p), a cash-rich, fast-growing, low-cost South African producer and developer of platinum, palladium and rhodium, marking the share price down 14 per cent.
When I last suggested buying the shares, at 125p (‘Profit from the commodity boom’, 4 May 2021), house broker Liberum Capital was pencilling in full-year revenue of US$209m, cash profit of US$149m, net profit of US$102m for the 12 months to 30 June 2021. Although Sylvania has yet to issue its annual results, collating data from the interim results, third quarter results and today’s fourth quarter figures reveals that the company has generated total net revenue of US$207.8m, cash profit of US$145.5m and net profit of US$96.5m (35.5¢ a share) for the 2020/21 financial year. Annual net profits are still 135 per cent higher year-on-year, and a high percentage of profit has been converted to cash with net funds 80 per cent higher, too.
Moreover, cash balances of US$101m are little changed since the end of the third quarter even though Sylvania has paid out a windfall dividend of US$14.3m (3.75p a share in April 2021) and settled provisional income tax and royalty charges of US$35.3m. Liberum had been forecasting a closing cash balance of US$78m in early May.
Admittedly, the pull-back in the rhodium price in the latest quarter meant that Sylvania’s average PGM basket price of US$4,059 per ounce (oz) was well shy of the record US$4,576 per oz in the third quarter. So, with output down 6.5 per cent to 16,289 oz, albeit in line with annual guidance of 70,000 oz, this contributed to a 20 per cent decline in quarterly revenue to US$44.1m quarter-on-quarter. Revenue from by-products contributed a further US$4.1m, slightly higher than in the third quarter, but as expected there was no repeat in the windfall sales adjustment (US$15m in the third quarter). The sales adjustment accounted for half the difference in Sylvania’s cash profit between the third and fourth quarters (US$58.7m and US$28.7m), a point worth noting for investors who may have been extrapolating the third quarter figures.
It’s also worth noting that although quarterly cash costs are up 20 per cent in local currency (R10,231 per oz) and 27 per cent to US$724 per oz in US dollars, the company is still hugely profitable. Cash costs account for only 18 per cent of the average basket price. Higher power tariffs will remain an issue (15 per cent increase in April 2021, and expect a similar rise next year), but this needs to put into perspective. Sylvania’s cash cost has increased by R1,700 in the past quarter, or less than 10 per cent of the increase in the average PGM basket price year-on-year. Furthermore, as host chrome mines (that shut down last year) start to reopen in a better pricing environment, then this will enhance the quality of feedstocks for Sylvania’s plants on both a grade and recovery rate basis, thus unwinding some of the additional cost pressure the company has been facing.
With no near-term capital commitments, and over US$100m (26.6p a share) in the bank, Liberum expect the board to declare a full-year dividend of 4¢ (2.85p a share) at a cost of US$10.9m at the annual results to take the annual pay-out to 6.6p a share. It could be more, but the board have been conservative in the past. This means that the shares offer a dividend yield of 6.6 per cent and are trading on a miserly cash-adjusted price/earnings (PE) ratio of 2.5 for the year just ended.
True, Liberum’s forecasts for the 2022 financial year (revenue of US$222m, cash profit of US$164m and net profit of US$116m) are shy of the broker’s predictions three months ago, although the company could still double its cash pile to hit Liberum’s US$212m (56.5p a share) forecast by June 2022. Clearly, some perspective is needed as this is a £272m market capitalisation company that has a cash pile accounting for more than a quarter of its share price, and which could account for more than half by next June, and is being priced on three times forward post-tax earnings. The implication being that the rhodium price is set to collapse, and devastate Sylvania’s earnings, an outcome that is highly unlikely to happen for the reasons I outlined in my last article (‘Profit from the commodity boom’, 4 May 2021).
It’s worth considering, too, that Sylvania’s average basket price of US$4,059 per oz is still 43 per cent higher than in the first quarter of the 2020/21 financial year, and 22 per cent higher than in the second quarter. The latest group cash costs of US$724 per oz compare favourably, too, on both those quarters (US$701 and US$803 per oz, respectively). This augurs well for comparisons in the 2021/22 financial year.
I first suggested buying the shares, at 14.5p, in my 2018 Bargain Shares portfolio, and the recent violence in the country had been spooking investors ahead of the fourth quarter results, another reason why the share price has pulled back from this summer’s record high (150p). However, the directors point out that Sylvania’s operations have been unimpacted by the violence to date. There have been multiple repeat buying opportunities in the past three a half years and I feel that another one has presented itself. Buy.
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