There are certain decisions you might regret in life and even more so in finance — but would you ever regret not to have bought African Potash (LSE: AFPO), Drax (LSE: DRX) and Gulf Keystone Petroleum (LSE: GKP) at their current valuations today? Let’s give it some serious thought.
Price target 7.4p?
African Potash was up 20% today in early trade, hitting a 52-week high of 3.63p. The rise was spurred by a fresh trading update, according to which agreement was reached with third parties “to establish a sale price of $500 per metric tonne in respect of 50,000MT fertiliser product to be sold pursuant to the memorandum of understanding announced on 24 August 2015.“
Moreover, a trade finance facility of up to $50m “is currently being arranged” through its banking advisor Loita Capital Partners, which removes some uncertainty on its short-term funding requirements. If you think that it’s all too good to be true, consider that its stock could double to over 7p (based on its current price-to-tangible book value). As I noted earlier this month, though, you should hold AFPO only as part of a properly diversified portfolio.
Paying up for what exactly?
It’s easy to forget that Drax traded around 650p a share only 12 months ago, but it’s impossible to ignore that its current valuation of 244p a share — only 7p higher than its 52-week low — is simply the result of the government’s new policy that removes the climate change levy (CCL) exemption for renewable electricity.
Its funding requirements are relatively sound yet I am not convinced that its current valuation, based on trading multiples for cash flows and earnings, offers a particularly appealing entry point right now, not even following today’s trading update concerning its withdrawal from the White Rose CCS project.
There are stronger income investments in the market. However, I am not talking about Gulf Keystone Petroleum, which, though, has proven to be much more resilient than I thought in recent weeks.
The Value Of Money
Drawing a parallel between the real life and finance, GKP reminds me of a kid that will always need a helping hand to get out of his troubles. It might not be his fault, but one way or another a parent must put hand in his pocket at some point to bail him out — it could end up in a similar way for GKP shareholders.
GKP was unlucky in recent months because its debtors were not willing to pay their bills when they came due, but that is a risk that anybody runs when dealing in countries whose leaders can simply make up their minds without having to provide any proper explanation to the international community. Well, much bigger countries than Kurdistan have done so in the past, and nobody blinked.
GKP is at mercy of its debtors, and I doubt any future update will lead me to think that its stock price can double to 55p from its current level over the next 12 months. In fact, the cash that it is still owed will have to be collected instead from shareholders in a new equity funding round, in my opinion.
