Senex Energy: Room to move

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
21 October 2021, 7:30 AM
Sectors Covered:
Mining, Energy

  • SXY reported a steady 1Q22 result, broadly close to our estimates.
  • Sales gas volumes of 4.8PJ, vs MorgE 4.7PJ (+2% qoq).
  • Atlas Stage 2 expansion underway, commissioning 1Q23.
  • Net cash A$5m at quarter end.
  • POSCO offer is close to our valuation, but SXY’s large 2P reserve base could justify a higher offer price.
  • We maintain our Hold rating, with SXY trading around fair value.

Steady 1Q22

A solid quarterly performance from SXY, with group gas production of 5.0PJ (+6% qoq) and sales volumes of 4.7PJ (vs MorgE 4.8PJ) +2% qoq. Supported by Roma North 1b incremental expansion.

1Q22 sales revenue A$35.4m (vs MorgE A$34.1m) came in ahead of our estimate on average realised gas price growth (+2% qoq to A$7.40/GJ).

Roma North Stage 2 remains ready for FID (final investment decision) with customer support for the development to drive sanctioning.

Net cash of A$5m, after the recent dividend payment and $9m capex with expansion drilling during the quarter.

Takeover proposal

This week it was announced that Korean steelmaker POSCO had approached SXY regarding a possible change of ownership transaction, with the current discussed non-binding offer at A$4.40ps.

SXY has granted an exclusivity period to POSCO giving the latter a chance to increase its offer post due diligence and possibly secure a recommendation for any offer from the SXY board.

While POSCO appears motivated to complete a transaction and secure at least 50.1% of SXY, at this stage there is no formal offer active.

The current non-binding proposal of A$4.40ps, is close to our A$4.30 valuation and prices SXY on an EBITDA multiple of 9.6x (vs peer average 6x). While SXY remains at a significant discount on an EV/2P reserve basis at A$1.04/GJe (vs peer average A$2.60/GJe).

Even adjusting for the higher capex requirement to fully develop CSG reserves vs conventional, we estimate an acquirer could pay an equivalent of A$1.50/GJe to acquire SXY and still keep its all-in cost of supply around A$5/GJe.

This in our view leaves the door open for a higher offer emerging from POSCO or potentially another interested party.

Forecast and valuation update

We have made small adjustments for the 1Q22 result.

No change in our valuation-based target price of (login to view).

Investment view

With SXY trading in line with our target price we maintain our Hold rating.

Price catalysts

POSCO discussions around change of ownership transaction.

Roma North Stage 2 FID.

Atlas expansion execution and ramp up.

Risks

POSCO discussions failing to yield a formal offer.

Execution risk around growth projects.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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