BUY: Pan African Resources (PAF)
South African gold miner has reported a 46 per cent uptick in interim earnings, writes Alex Hamer.
Pan African Resources is balancing declining operations and new build options, with its Evander and Barberton operations combining for a 7 per cent increase in production in the first half of its 2024 financial year.
The company’s guidance of 180,000-190,000 ounces (oz) of gold for the full year to June 30 is down on the 200,000-plus oz seen in 2021 and 2022, although the company has flagged this could increase depending on output in the coming months. Pan African produces gold through mines and tailings treatment facilities, with the latter contributing to lower operating costs. Its all-in sustaining cost for the first half was $1,287 (£1,025.03) an oz, flat compared with the year before.
Guidance for the full year has been tightened to $1,325-$1,350 an oz from just $1,350.
That lower cost and higher output combination served to send Pan African’s adjusted cash profits up 41 per cent in the first half, to $75mn. Broker Peel Hunt forecasts $130mn for the full year, up 13 per cent on last year but down 6 per cent on 2022.
Production is set to increase through the commissioning of a new tailings treatment site, Mogale, which will eventually add up to 50,000oz a year of gold production. Peel Hunt sees production climbing 28 per cent by 2026 with this addition. Capital spending for Mogale was $21.6mn in the first half, which contributed to net debt climbing from $22mn as of June 30 to $64mn on December 31. The company’s margin in this high gold price environment is enough for us to stay interested.
BUY: Centrica (CNA)
Adjustments abound, but the underlying view is of peak conditions for the British Gas owner, writes Alex Hamer.
However you square it, British Gas owner Centrica had a highly successful 2023. On a reported basis, its profits soared due to the unwinding of paper losses from the previous year. The £3.5bn remeasurement gains, some of which are related to hedge purchases, took pre-tax profit up to £6.5bn from a £383mn loss in 2022.
British Gas Energy itself reported a tenfold profit increase to £751mn, due to “an industry-wide one-off recovery of around £500mn of prior period costs”. Shareholders will see this flow through with a one-third increase in the full-year dividend, to 4p a share.
The drop in volatility compared with 2022 also played out in the trading unit, which saw its adjusted operating profit fall by almost half to £774mn. This is still leagues ahead of the £70mn seen in 2021.
Centrica boss Chris O’Shea said the current year would likely see a drop in earnings if energy markets stay subdued. “As you would expect, sharply lower commodity prices and reduced volatility will naturally lower earnings in comparison with 2023 as we return to a more normalised environment,” he said.
The company’s divisions cover renewable and thermal power generation, energy retail through British Gas, energy trading as well as storage. The distinct drivers of each area mean they are unlikely all to be firing at once. O’Shea called it “a lot of compensation in the portfolio”. The past two years look pretty close to perfect for Centrica, however, with high energy prices, high bills supported by government payments, big trading profits and good payments coming through for its gas storage facility Rough, which reopened at the end of 2022 and saw its capacity increase in June.
For 2023, the biggest single contributor to operating profit was the infrastructure business, with £1.1bn. Within that unit, nuclear generation provided half of the total, even with the electricity generator levy in place. Two of Centrica’s nuclear power stations, Heysham 1 and Hartlepool, could have their lives extended beyond 2026 (itself an extension from the previous closure date of this year), keeping earnings higher.
There are long-term questions about the company given the slow shift from gas boilers, but a heat pump dominated Britain looks some time away. The company also installs these, but is not diving into this new technology in any major hurry.
In past years we’ve raised Centrica’s poor dividend cover as a reason to stay away, but this is now close to two times, including the ongoing £1bn buyback programme. Net income is set to fall to below £1bn for this year, however, so it is unlikely returns will continue at this pace.
HOLD: Dunelm (DNLM)
The retailer’s results were not bad, but not great either, writes Mitchell Labiak.
The market evidently expected more of Dunelm, as its share price dipped slightly in early trading despite the homeware retailer posting a bump in revenue and pre-tax profit for the last six months of 2023.
A drop in reported earnings per share (EPS) was largely triggered by a change in corporation tax, and management would probably point to a 4.2 per cent hike in the number of active customers as a more telling metric, together with the overall rise in volumes.
There was also a 160 basis point increase in the gross margin — a solid outcome given the challenge of efficient cost pass-through, and ongoing supply chain challenges. The company put the improved trading partly down to a good Christmas, and said it is on track to hit the market consensus of full-year pre-tax profit of around £202mn.
The dividend increase might tempt some investors. If you include the newly announced special dividend alongside regular payouts, the income yield touches 6 per cent. Considering the level of debt, such generosity can be questioned, even if the bulk of those borrowings constitute IFRS16 leases. That lease burden could fall over time, assuming digital channels — which now account for 36 per cent of total sales — continue to ratchet up, but the homewares group does still intend to deepen its London footprint.
Management admits that trading conditions are precarious and believes the UK’s growth prospects are poor. So, on balance, we think this company is priced about right. The shares trade at 14.5 times consensus earnings for the year to June 2024, in line with industry peer Next. However, unlike Next, which has been soaring past market forecasts, Dunelm’s as-anticipated performance means there’s not much value hidden away.
