Perenti Global (ASX: PRN) is emerging from 4 dark years

Behzad Golmohammadi Behzad Golmohammadi, June 14, 2022

Who is Perenti? 

Perenti Global (ASX: PRN) is a diversified global mining services group with businesses in surface mining, underground mining and mining support services. The company has operations and offices in 12 countries across four continents. Perenti Global was founded in 1987 and is headquartered in Perth, Australia. 

 

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Let’s take a look at Perenti’s price chart and see what moved the share price in the last 16 months. 

 

Perenti

Perenti Global, Daily Chart in Semi-log Scale (Source: Metastock)

 

❶ 1HY21 results show decreasing EBITDA margins due to increased costs associated with COVID-19 disruptions, such as travel restrictions and quarantine requirements. (Half Year to 31 Dec 2020 Results Presentation) 

❷ Perenti downgrades its 2HY21 earnings outlook due to the ongoing impact of COVID-19 disruptions on the company’s international projects and a tightening Australian labour market. (Perenti operational update) 

❸ 1HY22 results show decreasing EBITDA margins primarily due to labour and supply chain constraints across Australian underground projects. (Half Year to 31 Dec 2021 Results Presentation) 

❹ Announcement of a share buyback program, additional $520m of Australian revenue and the company’s 2025 strategy update. (Perenti launches on-market share buyback program)(Perenti secures circa $520m revenue with new Cowal contract)(Perenti’s 2025 Strategy Update)  

 

The dispersion of Perenti’s operations across distant geographical locations demands frequent business trips for its employees, especially at the senior management level. The worldwide COVID-19 lockdowns and quarantine requirements made these business trips extremely costly and time-consuming for PRN. 

 Additionally, the closure of Australia’s international borders created a tightening labour market as Australia’s labour supply is heavily dependent on foreign workers and immigrants. Perenti’s Australian operations were consequently faced with massive labour shortages and competition over wages, which further hammered the profitability margins of the company. The supply chain disruptions were another way that the COVID-19 disruptions hurt Perenti’s profitability margins by causing delays in the transport of materials and equipment.  

The result of these increasing operating costs is that PRN is still trading near its Corona Crash lows of about 50 cents despite a recovery in the stock market to above its pre-pandemic levels.  

 

COVID-19 disruptions are easing 

Most countries have now re-opened their international borders and minimised or removed the quarantine requirements after national vaccination roll-outs and we can now expect decreasing travel costs and easing labour shortages for Perenti in the medium term. 

China has also lifted lockdowns on its major cities since 1 June 2022 and the world’s biggest port in Shanghi is returning to normal, which increases the hopes of easing supply chain issues in the medium term.  

With the worst of the pandemic behind us, COVID-related costs to Perenti’s operations are expected to decline and we expect the company’s operating margins to revert to their pre-pandemic levels in the medium to long term. 

 

Bullish outlook for Australian and global mining industry 

The structural shift in the global energy uptake of new and low emissions technologies has created a growing demand for commodities central to these technologies, namely lithium, nickel and copper. The increasing demand for these commodities calls for long-term growth in mining output beyond near-term cyclical and one-off issues.  

According to the Department of Industry, Science, Energy and Resources’ quarterly commodity outlook, Australia’s mining exports revenue is forecast to total $379bn in 2021-22, after exceeding $300bn for the first time in 2021. 

With the long-term bullish outlook for the mining sector, we can expect an increasing demand for Perenti’s mining services in and outside of Australia. 

 

Perenti Global is attractively valued 

As of 31 December 2021, Perenti had a tangible book value per share of 93 cents, which gives it a price-to-tangible book value of 0.8x at the current share price of 73 cents. Based on analysts’ estimates, PRN trades at EV/EBITDA multiples of 2.4x and 2.3x for FY23 and FY24 respectively, which implies an expected growth of 7.7% and 4.2% for those years. Despite a slowing growth expectation, we believe that even a steady EV/EBITDA ratio of 2.4x is still attractive as it suggests a high potential for share price appreciation once the bear market is over. 

 

Additional $520m Australian revenue and a share buyback program 

On 7 June 2022 Perenti announced that it secured a $520m contract for all underground development and production works for Evolution mining’s (ASX: EVN) Cowal underground project in NSW with an initial term of four year (Point 4 on the chart). This contract represents Perenti’s first project in NSW and we think this is an important step for the company towards the expansion of its operations within Australia as a tier 1 jurisdiction with substantially fewer operational risks as compared to the company’s African projects.  

Perenti also announced launching an on-market share buyback program to buy up to 10% of shares-on-issue over the next 12 months by using a portion of the $134.7m cash generated in FY22, mainly through sales of its non-core assets. Given the current attractive valuation of PRN, we agree that a share-buyback program delivers more value to shareholders than paying dividends and also provides more stability for the share price in the current volatile market. 

 

How to play PRN 

The share price broke the medium-term downtrend (the orange line on the chart) following the company’s latest announcements (Point 4 on the chart). From a technical analysis perspective, the price action following the breakout indicates that the chances of a follow up rally are negligible. However, the breakout adds to the reliability of the support level at 63 cents (the blue line on the chart) and we think prices near this support level are attractiveWe also think the company is likely to start on-market buybacks at this level.  

We expect the share price to move back up towards the psychological $1.00 level in the next several months. 

 

Stop loss at 60 cents 

A confirmed break below 60 cents would mean that the important support level at 63 cents is broken and it would signal a substantial bearish sentiment on the stock, which can open up the way to lower price levels. 

The two biggest risks to Perenti’s share price are inflation, which can depress the company’s profit margins and operational risks.  

 

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