Broker tips: Sirius Minerals, Alfa Financial Software
Shares in Sirius Minerals were temporarily suspended after falling more than 27% in early trading on Thursday but several brokers remained optimistic about the company's prospects as it looks to develop a polyhalite mine under the North Yorkshire moors.
The FTSE 250 firm revealed on Thursday that higher than expected costs of the contracts to develop the mine's mineral transport system would lead to the project's stage two capital requirement estimate increasing $570m to almost $4.2bn, meaning the Stage 2 funding requirement is now expected to be $400-600m higher at $3.4-3.6bn and come in the first quarter of next year rather than the end of this year.
Broker Peel Hunt noted that the majority of the increase is the MTS contract which has blown out 70% from the initial estimate of $858m to $1,461m.
"Investor's concerns from this point should focus around the issue that there is still some major procurement ahead. Management has guided that it expects the remaining items will be in line with previous estimates, but after today's news this will be viewed with scepticism and an equity issue is listed as a potential route to cover the budget shortfall."
However, part of the increased cost of the MTS contract was a "significantly improved" commercial risk allocation which transfers construction and delivery risk to contractor Strabag, who now take on construction risk provided ground conditions sit within an agreed geotechnical baseline.
On a call with analysts, Sirius chief executive Chris Fraser said “we'll be looking to strategic partners” and mentioned the possibility of “bringing in a partner with a bigger balance sheet”.
Depending on the ultimate financing solution agreed, Liberum, one of several house brokers, said its conservative pricing and cost profile led to a new base-case scenario involving a further $400m of equity being raised, via either a strategic, equity or convertible at 30p, which reduces its NPV per share estimate from £1.08 to between £0.75 and £1.00, and reduces its diluted NPV/share estimate to 84p.
Liberum cut its target price to 50p from 60p based on 0.6x ratio of price to net present value, but keeping it 'buy' rating with the shares trading at a major discount to its NPV range.
House broker Shore Capital noted that Sirius now only plans to achieve 13Mtpa by 2026 and 20Mtpa in 2029 rather than 2025 and 2028 respectively expected due to the expectation that senior debt facility terms will restrict the use of operational cashflows in funding said capacity expansions.
But analyst Yuen Low was, on balance, "quite encouraged" by the update, saying if the Brazil/European offtakes come through they "could see shorts & doubters roasted, we believe".
Analysts at Berenberg downgraded Alfa Financial Software to 'sell' on Thursday, highlighting several risks to the firm's guidance following its first-half results.
Berenberg said Alfa, which floated in London last year, had "disappointed the market for the third time in 2018", noting that smaller average revenues for its implementation projects next year, in addition to a loss of customers in its "supposedly recurring" maintenance business had led it to reduce its estimates by roughly 14%.
However, Berenberg went as far as to say that with the possible re-start of a large contract unlikely to have any material impact next year, the broker said its estimates could be at risk by "at least" 25%.
The analysts said the correction of Alfa's core issue, the pausing of a particularly large software implementation project, could provide a catalyst for future estimates and restore confidence.
However, while this was cited as a possibility by Alfa, management indicated to the broker in its conference call that if it did re-start, revenues would build at a "much slower pace than originally estimated".
Alfa, which supplies software to banks and companies that provide asset finance, floated at 325p in a June 2017 IPO that was 10 times oversubscribed and made £254m for its controlling shareholders, CEO Andrew Denton and executive chairman and co-founder Andrew Page, who together still hold a 68.4% stake in the company. The tightly held shares topped 530p in January before losing more than two thirds of that value since, with a fall to below 140p on the back of results.
In addition to the switch from 'hold' to 'sell' Berenberg, which forecasts £72m of revenue for Alfa next year, lowered its target price on the group from 170p to 115p.