Velocys PLC (LON: VLS)

Velocys PLC is an FTSE AIM All-Share index listed United Kingdom-based fuels technology company. VLS is engaged in providing Fischer-Tropsch technology to generate low carbon and transport fuel from municipal solid waste & waste woody biomass for the aviation industry.

Growth Prospects

• Recent Collaborations: VLS had collaborated with Southwest Airlines Co to produce sustainable aviation fuel ("SAF") at the planned Bayou Fuels biorefinery project over the fifteen years starting from 2026. The Company had signed a Memorandum of Understanding for the offtake of 73 million gallons of Sustainable Aviation Fuel with IAG's constituent airlines.
• Other SAF Projects: VLS had collaborated with Toyo Engineering in Japan to develop commercial-scale biomass-to-jet fuel.
• Receival of Grant: The Company had obtained a grant worth approximately £2.4 million under the Green Fuels Green Skies in August 2021 by the UK Government. Moreover, it will cover 100% of the costs to advance this critical waste conversion facility for the next seven months.

Key Risks

• UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.3% during Q3 FY21, which remained merely lower-than-expected growth of around 1.50%.
• Expected Federal Reserve Tapering: The expected Federal tapering at the pace of USD 15 billion per month starting later this month may adversely impact the equity markets. Moreover, the Bank of England decided to keep interest rates unchanged in its latest meeting.
• Surge in UK Inflation: The UK inflation reached a 10-years high as it surged by around 4.2% for the 12 months ended October 2021. It may cause a sooner-than-expected interest hike
• Operational Risk: The growth trajectory can be impacted by various factors, such as increasing freight rates and operational risk regarding production stoppages or equipment failures.

Now, we will analyze the Key Fundamental Statistics & Shareholding Pattern of Velocys PLC.

Lansdowne Partners (UK) LLP is the most significant shareholder as it holds nearly 186.64 million shares as of 30 September 2021.    

H1 FY21 Financial & Operational Highlights (for the six months ended 30 June 2021, as of 23 September 2021)

 (Source: Company result)

• Significant Jump in Total Revenue: The Company had generated revenueof around £8.2 million during H1 FY21.  
• Decent Profitability: The Company had narrowed the operating loss from negative £2.6 million during H1 FY20 to a negative £0 million for H1 FY21.
• Decent Cash Balance: The Company had a decent cash balance of £8.3 million as of 30 June 2021.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Source: REFINITIV; Analysis done by Kalkine Group)

On 17 November 2021, at 08:04 AM GMT, VLS’s shares were trading at GBX 10.65, down by around 3.18% from the previous day closing price. Stock 52-week High and Low were GBX 17.94 and GBX 3.78, respectively.

From a technical perspective, the MACD line remained above the signal line, reflecting an upside momentum in the stock price. Moreover, the stock price is hovering above the 20-days exponential moving average of GBX 8.64, indicating an upside potential in the stock price.

Over the last one year, VLS’s stock price had delivered a positive return of around 110.59%, while the FTSE AIM All-Share index (benchmark index) had produced a return of about 23.01%, and FTSE All-Share Oil, Gas & Coal index (benchmark sector) had generated a return of approximately 45.72%.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Business Outlook

The Company achieved excellent revenue growth during H1 FY21, driven by a customer contract awarded in 2017. Meanwhile, VLS had entered into an agreement with Southwest Airlines regarding the 219 million gallons of SAF over a fifteen-year term starting from 2026 and a similar contract with IAG as well. Moreover, the Company maintained adequate liquidity to fund drilling & exploration activities. Considering the speculative nature of the stock, VLS may undergo sizeable corrections because of the record UK inflation during October 2021, lower-than-expected UK GDP growth during Q3 FY21, and Federal Reserve Tapering by the end of November 2021. Thus, it may depend on the risk appetite of the investors to take a reasonable position in this company having several operational growth catalysts.

Considering the recently signed contracts with the aviation companies, robust revenue jump during H1 FY21, solid liquidity profile, decent leverage position, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Velocys PLC at the current price of GBX 10.65 (as on 17 November 2021 at 08:04 AM GMT), with lower-double digit upside potential based on 15.59x EV/NTM sales (approx.) on FY21E sales (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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