The New Criterion

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Universal Coal (UNV) 22c

With a powerful September quarter performance, the ASX-listed South African coal miner is defying both the investor gloom pervading the sector and fears that its home country is too risky a place to do business.

With its two mines now running sweetly, Universal has achieved unicorn status as a pure-play small cap coal miner paying a dividend.

“We are in the best position than we have ever been,” says CEO Tony Weber.

Universal owns 70 per cent of the greenfields open pit Kangala mine and 49 per cent the recently restarted New Clydesdale Colliery. It operates both.

Both pits are underpinned by a long-term take or pay contract with the state-owned electricity generator Eskom.

In the quarter the mines churned out 1.25 million tonnes of saleable coal (782,400 tonnes attributable to Universal).

The company recorded attributable EBITDA of $8.8 million and has guided to $28 million for the full year.

While off-take contracts (mainly Eskom’s) accounts for 4 million tonnes of output a year, Universal ships about 20 per cent of its output and thus benefits from recovering export prices.

In late September the board declared a maiden one cent a share dividend. In a report commissioned by the company, APP Securities Analyst Mike Harrowell says that Universal could comfortably manage a full-year payout of at least 2c a share.

He forecasts Universal’s current year EBITDA at $41.4 million – much higher than the company’s formal guidance. The latter is deemed as overly conservative because management assumes an export coal price of US$65 a tonne, compared with the healthy prevailing spot rate of US$90 a tonne.

Universal has other growth gambits, too. It plans to double the size of Kangala (having acquired adjacent ground) and has a third project called Brakfontein that is approved but is awaiting the signing of off take agreements.

After years of being studiously ignored by local investors, the low-liquidity Universal stock has surged 150 per cent over the last six months.

But Universal’s $100 million market valuation still looks light-on given it has close to $20 million of cash and net debt of only $6.5 million.

It’s now trading a shade higher than the levels of late 2015, when the company was subject to an agreed 16 cents a share offer from 30 per cent Ichor Coal (and then a 25 cent share scrip offer from Coal of Africa).

Both offers were abortive, which is probably just as well given current analyst valuations north of 30 crnts per share.

However Universal remains light-on for institutional support, which probably reflects fears the country’s old political and racial problems may re-emerge.

“Now that we are paying dividends we expect to attract a different sort of shareholder,” Weber says. That, presumably, refers to those yield chasing retirees who normally would not touch a dirty coal stock.

An imploding South Africa aside, a key risk is for Universal is whether the recent coal price improvement is sustainable or whether Old King Coal indeed is in structural decline.

OBJ (OBJ) 3c

While dirty coal enjoys a rehabilitation of sorts, here’s one for the body beautiful brigade that could do with a valuation boost.

The biotech outfit has developed the world’s first transdermal delivery system that improves the performance of products (such as cosmetics) delivered through the skin.

The key to OBJ’s know-how is the use of physical science (magnetics) rather than chemistry to achieve this aim.

The science – “complex 3D magnetic fields produced by low-cost microarrays or powered magnetic inductors” – baffles your columnist and, we suspect, most investors.

But all punters really need to know is that Procter & Gamble, the world’s biggest maker of skin cosmetics, already uses OBJ’s technology in its Olay and SK-II brands.

P&G launched a magnetic eye wand in Japan, China and other South East Asian markets in March. The key claim that the wand will deliver “younger more beautiful” is a tad difficult to prove clinically, even by the Ponds Institute.

But we guess it can’t be disproved either and the real point is the wands walked off the shelves.

P&G has since launched a whole-of-face variant called the SK-II Magnetic Booster and an overnight face cream called Magnemask.

While anything to do with maintaining ageless beauty implies chirping cash registers, OBJ’s greater fortunes could lie with a product called Bodyguard that is in clinical programs.

A wearable patch delivering non-drug pain relief directly to an injury, Bodyguard is touted as being more effective than orally delivered drugs.

Meanwhile, OBJ shares languish at close to four-year lows. The company earned royalties of $2 million but lost $5.5 million, so no doubt investors are looking for evidence of a prettier bottom line.


Tim Boreham edits The New Criterion



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