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BUY: Jadestone Energy (JSE)
Jadestone’s legacy Montara oilfield off the Australian coast experienced further operational problems, writes Mark Robinson.
When we covered Jadestone Energy’s full-year figures for 2022, we ventured that “adding significant debt would be a risk given the industry’s history of running into trouble once prices dip”.
Since that April 2023 release, we have outlined the Asia-Pacific-focused driller’s investment case, which was predicated to a large extent on new production from Indonesia and Malaysia coming on stream. A cursory glance at the preliminary statement for 2023 suggests that the former statement probably carries more weight, but as ever with energy companies, it’s a question of timing.
The legacy Montara field, located in the Timor Sea, has continued to present operational challenges, as Jadestone was forced to carry out tank repairs on the floating production storage and offloading (FPSO) facility. The repairs at Montara reduced total lifted volumes by 11 per cent to 3.9mn barrels of oil equivalent (boe). This issue, along with a 16 per cent reduction in year-on-year realised prices, weighed on the top line, as did a hedging loss of $10.3mn (£8.2mn) from commodity swap contracts. All this fed through to a 44 per cent reduction in cash profits (ex-exploration costs) to $90.6mn.
Management has previously lamented Jadestone’s over-reliance on Montara for operational and financial performance, a point borne out by upstream performance in the early part of 2023. So it is not difficult to appreciate why the decision was taken to broaden the group’s production profile. Perhaps the most significant related development is that construction at the Akatara gas processing facility is nearing completion. Four out of five planned production wells have undergone successful workovers, with the initial three easily exceeding requirements under the gas sales agreement. When it’s up and running, Akatara will become the group’s prime producing asset.
The imperative to reduce reliance on the group’s legacy assets comes with a hefty price tag. Midway through May 2023, the group signed a $200mn four-year credit facility with a group of banks. It is secured against Jadestone’s main producing assets and is bound to a financial covenant for a maximum total debt of 3.5 times adjusted cash profits.
Due to the impact of an active cyclone season in Australia, management has downwardly revised full-year daily production guidance to the lower end of the 20,000-23,000 boe range. Analysts at Peel Hunt, however, point out that this still amounts to a 45 per cent year-on-year increase. The broker duly reiterated its 60p target price. Overall, a mixed showing, and although investors would be well advised to monitor the leverage ratio, the second half of 2024 will provide a clearer indication of the extent to which the new assets will affect cash flows.
HOLD: Card Factory (CARD)
The company is making headway towards reiterated medium-term goals, writes Christopher Akers.
There is life in the high street birthday cards model yet. Card Factory shares rose by 7 per cent after the greetings cards and gifts retailer resumed dividend payments on the back of annual revenue and profit progress.
The vast majority of the company’s revenue (94 per cent in the 2024 financial year) comes from physical Card Factory stores. Revenue growth was driven by an 8.7 per cent uplift in store sales, which was aided by the impact of 26 new sites opened in the year. Like-for-like growth was underpinned by price increases and “stable transaction volumes”.
On the other hand, online sales were flat after a challenging first half. But there was a vast improvement in the second six months of the year, where “ongoing investment in online capability, platform performance and customer experience” supported 11.4 per cent growth.
Elsewhere, revenue at the small online Getting Personal brand (against which the company recorded an £1.1mn impairment charge) was down 31 per cent to £5.9mn. Third-party retail revenue more than tripled to £17mn on the acquisition of SA Greetings and new and expanded partnerships.
The adjusted pre-tax profit margin was 12.2 per cent, up from 10.5 per cent in the prior year.
Current trading is in line with management’s forecasts and it pointed to “continued positive momentum”. The company enjoyed a record trading day for the Saturday before Mother’s Day, while online eponymous brand sales have now risen for five months in a row.
Management reiterated its medium-term targets of £650mn in revenue, a pre-tax profit margin of 14 per cent and 90 net new stores by 2027. This set of results demonstrates progress towards these goals. But the lowly rating of seven times forward consensus earnings prices in the opportunity.
HOLD: Capital & Regional (CAL)
Vacancies linked to the Wilko collapse were quickly filled, writes Mark Robinson.
Capital & Regional continues to trade at a sizeable discount to net assets. That’s unsurprising given the unfavourable trading backdrop. The Reit’s tenant base is largely comprised of retailers, so the fall in discretionary income in the economy has provided an ongoing challenge. There are signs that inflation is moderating, so sentiment towards the sector is likely to improve in the near term, but the group’s preliminary final statement gives some idea of the challenges faced through 2023.
Group chair David Hunter noted that “retailer failures were much reduced in 2023”, but the collapse of the Wilko chain into administration during the second half of the year highlights the dangers posed by tenant insolvency. In the event, terms with B&M were rapidly put in place for the three Capital & Regional sites affected by the collapse. Wilko can be viewed as something of an outlier in that value-focused chains have generally fared better than upscale retailers during the inflationary surge. Capital & Regional’s intensified focus on this corner of the market appears prescient on this basis and is reflected in the underlying metrics, even if the share price has faltered since the final quarter of 2023.
Valuations were up by 2.6 per cent, while net rental income increased by 5 per cent, both on a like-for-like basis. And despite wider financial pressures, rent collections remain at elevated levels. On the debit side of the ledger, net debt increased slightly as a proportion of overall property value, while the group continues to struggle with an “ongoing legacy from the pandemic”, specifically the reduced use of car parks. Work is under way to develop a range of alternative uses to support car park income.
The discount to net asset value is by no means unusual across the sector. And though market conditions should continue to improve, the impact of rising debt costs on business and consumer confidence has yet to fully play out.
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