Senex Energy: POSCO approach

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
19 October 2021, 10:00 AM
Sectors Covered:
Mining, Energy

  • SXY has received an approach from a subsidiary of Korean steelmaking giant POSCO regarding a possible change of ownership transaction.
  • POSCO has revised its proposal twice so far to A$4.40ps, with SXY granting POSCO an exclusivity period to 5 November to conduct due diligence and consider raising its non-binding offer.
  • At this stage it is not certain that a formal offer for SXY will result from the talks, but we are encouraged by the process and apparent interest.
  • SXY has once again demonstrated it has shareholders’ best interests in mind, by engaging POSCO and seeking to maximise the value of any offer.
  • Trading near our target price we reduce our investment rating to Hold (from Add), while still seeing further upside potential from a higher or competing offer.

Event

POSCO International, a subsidiary of Korean steelmaking giant POSCO, has been engaged with SXY in recent months regarding a change of ownership transaction. 

The non-binding offer currently sits at A$4.40ps, which has already been increased twice since POSCO’s initial approach in late July.

We are encouraged by the strength of POSCO’s apparent interest in SXY, and the level of board and management discussions. This confirms our long-held belief that SXY has a culture of prioritising shareholder value.

It is clear from the release that SXY expects a higher proposal could result from the due diligence period.

Analysis

It is unlikely this is an isolated investment for POSCO, and could therefore form part of a larger energy plan. This supports what appears to be strong interest from the group in acquiring SXY.

The current proposal, which values SXY close to our base case valuation, has seen SXY move up to trade on 9.2x EBITDA FY22F. Although this is still inexpensive in reserve terms, with the A$4.40ps proposal equivalent to A$1/GJe EV/2P. This compares to a sector average of $4.1/GJe.

The approach supports the view that large uncontracted gas reserve bases connected to the east coast gas market would start to move to a premium as structural tightness becomes apparent.

A binding offer from POSCO could shake out more interest in SXY. We see a wide range of parties as potential candidates, not the least of which being GLNG (STO) which will increasingly need to appraise ‘on the fly’ as its upstream operations age. This could be complicated by STO’s current proposal to merge with OSH.

Forecast and valuation update

Now trading in line with our target price of (login to view), we see SXY trading close to fair value. As a result we have lowered our recommendation to Hold (from Add).

Investment view

While trading near fair value, we still see plenty of reasons to own SXY, not the least of which being the potential for a higher or competing offer for the company. 

On its own, SXY still presents a compelling long-term investment. Supported by a high-value organic growth profile, a strong balance sheet and sustainable dividend. We have a Hold rating on SXY.

Price catalysts

The due diligence process with POSCO, and any formal offer resulting.

September quarter operational result on 19 October.

Risks

The key risk to our call is the risk for unexpected energy market volatility.

If a change of ownership transaction does not result from the current discussions.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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