Company Overview: Syrah Resources Limited (ASX: SYR) is a supplier of superior quality graphite and battery anode products. The company is mainly involved in the production of natural graphite products from the Balama Graphite Operation in Mozambique. The company is focused on becoming a commercial vertically integrated producer of natural graphite Active Anode Material (AAM) outside of China, with plans to serve the growing US and European markets. The company was listed on 11 September 2007.

SYR Details

Q3FY21 Performance Highlights: During the September 2021 quarter (Q3FY21), Syrah Resources Limited (ASX: SYR) was focused on increasing fines shipments to the battery supply chain in China and expansion of production capacity at Vidalia. Some of the key highlights of Q3FY21 are as follows:

• Decent Performance at Balama: For Q3FY21, SYR reported decent operational performance from its Balama Graphite Operation, with 15kt of natural graphite produced at 85% recovery and C1 cash costs (FOB Nacala) of US$430 per tonne.  
• Sales Delayed Due to Market Disruption: Due to container shipping market disruption, around 12kt of sales planned to ship from Nacala in late September 2021 was delayed to the December 2021 quarter. The company’s natural graphite sales for the quarter stood at 18kt with all 25kt of finished product inventory contracted to customers.
• Growth in Sales Order Book: As a result of the robust underlying demand conditions and forward contracting, the company witnessed strong growth in its sales order book with more than 50kt of natural graphite sales orders in the December 2021 quarter.

H1FY21 Result Highlights:

• Restart of Production at Balama: One of the important highlights of H1FY21 was the company’s decision of restarting the production at Balama, supported by the strong improvement in market conditions, and a restructured operating base.
• Operational Progress at Vidalia: During H1FY21, the company achieved the first fully integrated production of battery specification AAM from the carbonisation furnace at Vidalia, using natural graphite from Balama.
• Improved Revenue: For H1FY21, the company reported revenue of US$8.93 million, up from US$7.43 million in H1FY20. Net loss for H1FY21 stood at US$24.95 million, an improvement from the loss of US$28.7 million in H1FY20.
• Improving Cash Balance: As at 30 June 2021, the company had cash and cash equivalent of US$85.27 million, up from US$74.99 million as at 31 December 2020.

Cash and Cash Equivalent Trend (Source: Analysis by Kalkine Group)

Key Metrics: Current ratio for H1FY21 stood at 6.14x, down from 7.39x in H1FY20, but significantly higher than the industry median of 2.03x. Account receivable turnover stood at 2.7x in H1FY21, up from 2.5x in H1FY20. Further, the average account receivable days have reduced to 66.6 days in H1FY21, as compared to 73.9 days in H1FY20.

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 37.88% of the total shareholding while the top four constitute the maximum holding. AustralianSuper and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 13.69%, and 9.00%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Positive Market Outlook: During Q3FY21, the sales of Electric Vehicles grew by 111% on the previous corresponding period (pcp), demonstrating decent demand growth for natural graphite. It is expected that the global EV sales will be around 5.6 million units in 2021, reflecting a 96% YoY growth on FY20. Further, the heightened industrial electricity usage and reduced coal-fired power generation output, are contributing to the increased demand and strong price support for imported natural graphite into China in the December 2021 quarter and into 2022.

Key Risks:

• Shipping Market Disruption: The company is exposed to the risks related to shipping market disruptions that could impact its sales.
• Fluctuations in the Price of Graphite: The company is also exposed to the risks related to the fluctuations in the prices of graphite and battery anode products, as it could impact the company’s financials.

Outlook: The optimistic electric vehicle outlook, and positive anode material and natural graphite market conditions are supporting the ramp-up of production at Balama beyond SYR target of 15kt per month. Due to the strong demand for Balama’s high quality products and robust forward contracting, the company expects more than 50kt of natural graphite sales orders in the December 2021 quarter, with additional spot sales demand expected. The company expects the global container shipping market disruption expected to moderate through December 2021 and March 2022 quarters. The company is focused on closely working with its shipping service providers to urgently secure increased container shipping capacity and meet customer orders for the December 2021 quarter. The company is advancing to a final investment decision for Vidalia’s expansion to 10kt per annum AAM capacity in the December 2021 quarter.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three month, the stock has been corrected by ~16.72%. The stock has a 52-week high and low of $1.610 and $0.445, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers, considering the optimistic electric vehicle outlook, and positive anode material and natural graphite market conditions.  For the purpose of valuation, peers such as Orocobre Ltd (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS), Western Areas Ltd (ASX: WSA), etc., have been considered. Considering the company’s decent September quarter performance, growing sales order book, modest outlook, valuation and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.270 as on 3 November 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia.

SYR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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