Peninsula Energy Limited: Finance And Technical Analysis Of Stock Market

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Discuss About The Finance And Technical Analysis Stock Market.

Peninsula Energy Limited is an ASX listed uranium mining company which along with its subsidiaries is involved in exploring of uranium mines in the United States. It was initially established as Peninsula Minerals Limited but has modified itself as Peninsula Energy Limited in the year 2010. It has an interest of 100% in the Lance uranium projects located in Wyoming. The company was established in the year 1993 and has about 38 employees. It has a wholly-owned subsidiary of Strata Energy Inc that has  began its operations in the year 2015 in Lance Projects in Wyoming USA.

The company is carrying out its activities in the energy market of Australia and as such faces the competitive pressure from the dominant energy companies in the sector such as AGL Energy and Origin Energy Ltd. The company mining activities mainly involves the exploration and production of uranium ores.

The company and its subsidiaries commenced in-situ recovery uranium operations at Lance Projects in Wyoming, USA. In addition to this, the company also carries out its business activities in parallel in an Internal Pre-Feasibility at Karoo Uranium Projects in South Africa (Peninsula Energy Limited, 2018).

The company at present is having marketing capitalization of 607.6 m AUD in the energy industry of Australia (PEN General Information, 2018).

The company Board is composed of executive and non-executive directors who hold the responsibility of providing strategic direction to the company. Board is composed of non-executive chairman, chief executive officer, non-executive directors and Chief Financial Officer. Mr. John Harrison is the non-executive chairman possessing a rich wealth of experience and resource sector knowledge of about 45 year.  Mr. Wayne Heili is the Chief Executive Officer having about 30 year professional carrier in the uranium mining industry.  He is holding the responsibility of overseeing the designing, construction and ramping of the in-situ uranium project in the USA. Mr. Evgenij Iorich, Mr. Harrison and Mr. Mark Wheatley are the non-executive directors of the company have a vast experience in the resource sector. Mr. David Coyne is the finance director having about 20 years of experience in mining and construction industries (Peninsula Energy Limited, 2018).

Latest P/E Ratio

Latest Market Price as on 9 May, 2018 = 0.25 (As given on yahoo finance)

Earnings per Share = -0.13 (As given on yahoo finance) (Yahoo Finance, 2018)

Location of Business Activities

P/E ratio: 0.25/-0.13 = -1.923

The dividend policy is referred as standard guidelines used by a company for deciding over the matter related to earnings paid out to shareholders. The company has not disclosed its dividend policy as analyzed from its financial report and it can be stated that the company is not paying divided over the past few years (Brigham & Michael, 2013).

The company is involved in mining operating activities and as such faced high environmental risk due to nature of its operational activities. The company has to comply with all the relevant environment regulations for ensuring its sustained growth and development. The company has taken into consideration the adoption of significant procedures and reporting processes for meeting its environmental responsibilities effectively. The company prepares the Environment Impact Assessment report as per the Australia and international legislations relating to environment protection (Peninsula Energy Limited: Annual Report, 2017).

Beta determines the systematic risk associated with a company and the beta of Peninsula as stated in the literature is 1.36 (Yahoo Finance, 2018).

Standard deviation is generally used to measure the risk of stock and risk of portfolio of stocks. Standard deviation is considered to be as measurement of volatility. It means more a stock varies from the average stock return the more will be the volatility of the stock. The fact is that standard deviation only considers changes (Volatility) in the return of stock over the period of time in order to compute the risk of a particular stock (Lumby & Jones, 2007).

There are several reasons why standard deviation is not considered reliable measurement of risk because of its limitation. There are mainly two types of distributions of returns, symmetrical distribution and asymmetrical distribution. Volatility only considers the symmetrical distribution and completely ignores the asymmetrical distribution. Most of the best investment options have return distribution in asymmetrical manner. So it can be said that standard deviation does not consider the asymmetrical return distribution and it is very important for measurement of risk.  Standard deviation is based on past information that might be useful for predicting the future performance but it is certain that results changes overtime. Standard deviation itself cannot determine the riskier stock when there is comparison of the two stocks. It need some base to define the stock with highest risk. The base can be expected return or any other factor that help to provide some base for decision. Standard deviation does not consider the quantifying aspects of human behaviour while taking the investment decision. On the basis of overall discussion it can be said that standard deviation does not provide reliable measurement of risk (Reilly & Brown, 2011).

Market Share

(Yahoo Finance, 2018)

Standard deviation tells 95% certainty level that expected return of the stock or market index will deviate on either side of the average return. For example, in case of Peninsula Limited the expected return for period 1 will deviate by 24.48% on either side of average return of 4.27%. It means expected return can range between -20.21% and 28.75%. Similarly for period 2, the expected return for Peninsula will deviate by 15.48% on either side of average return of -1.47%. It means expected return can range between -16.95% and 14.01%. In case of Market Index (S& P) the expected market return will deviate by 4.43% on either side of average market return (Schlichting, 2013).

On the basis of the analysis of the risk position of the Peninsula Limited and S& P 200 through analyzing the standard deviation and average return it can be said that Peninsula is much riskier than the S&P 200. In period 2, Peninsula is more risky than the S&P 200 because Peninsula has high percentage of standard deviation and very low average return as compare to S&P 200. In period 1, it can be said S&P 200 is more risky than Peninsula because average return of Peninsula is higher than S&P that indicates that expected return of Peninsula will better as compared to S&P 200 even though standard deviation is higher in case of Peninsula (Ackert & Deaves, 2009).

1. Covariance tells how the changes in the one variable (here refers to return of Peninsula) is associated with second variable (return of S&P 200). Covariance specifically measures the degree of two variables are linearly associated with each other. In period 1 the covariance of both stock and market is 0.0043 which is greater than covariance in period 2 that indicates returns of both stock and market is closely linked in period 1 as compared to period 2 (Baker & Nofsinger, 2010).
2. Beta, if less than 1 means return of the stock is less volatile than the market and if beta is greater than 1, it indicates return of stock is more volatile than the market. For example in period 1, beta is 2.203 that show returns of Peninsula will move 2.203 basis points if market return move by 1 bases point. Similarly, in period 2 the beta is 0.887 that shows if market return moves by 1 basis point than stock return will move only by 0.887 points (Deegan, 2013).

Beta is better measurement of risk because it calculates risk of market as whole, while standard deviation measures risk of individual stock. Beta considers total volatility while standard deviation measures the total risk. Beta calculates the market risk premium while standard deviation considers only risk. Beta provides whether stock return will be more or less than the market return.

Yes, there is variation in beta as estimated in literature and as calculated above for two periods. It is because beta changes or varies according to the time period. In literature the beta has been taken for latest time period. While in above two periods the beta is calculated for prior periods (Elton, Gruber, Brown & Goetzmann, 2009).

The company carries out its operations in the highly competitive energy industry of Australia. It faces stiff competition from the dominant players in the market such as AGL Energy Limited and Origin Energy Limited.

The company has to comply with all the significant legislations in Australia such as Coal Industry Act 2001 and the health and safety laws developed by Fair Work Ombudsman in Australia. The safe work laws established in Australia has established that all mining workers should be provided healthy workplace environment to minimize the occurrence of any uncertain conditions during the mining activities.

Board of Directors

The company is facing high competition from the dominant players present in the industry such as AGL Energy and Origin Energy Limited. The increasing competition in the energy industry of Australia can impact its growth and development in the long-term period of time (Australian Energy Regulator, 2018).

The company implements international law in order to comply with the environmental regulations for meeting its environment responsibilities effectively. It also complies with the international financial reporting standards in development ad presentation of its general-purpose financial statements.

The major suppliers of the company are Lance Uranium projects in USA and Karoo uranium exploration projects in South Africa.

The company management team consists of a well0diversified team of competent executive and non-executive directors having the relevant skills and knowledge to meet the company long-term goals and objectives (Peninsula Energy Limited: Annual Report, 2017).

It can be said on the basis of overall analysis carried out in the report that Peninsula Energy Limited has not yet attained a domain position in the energy market of Australia.  Its market share is relatively less in comparison to other energy companies that have dominant position in the industry such as AGL and Origin Energy Limited. As such, the high competition in the energy sector of Australia can negatively impact its plan of long-term growth and development. The company has not clearly stated its dividend policy in the financial report and also has not pad dividend in the past few years as analyzed from its annual report for the year 2017. Thus, the investors are not recommended to invest in the company on the basis of non-financial information analysis carried out in the report.

On the basis of stock return and risk analysis as compared to risk and return of market it can be said that in period 2 (Latest period) the share price of company has not received the growth as it was expected by the Peninsula. In period 2, average return of company was showing negative growth with high standard deviation and beta of the company is also less than 1. All these factors have made to recommend the investor to sell the shares of Peninsula Limited. Investors are not advised to either invest or hold the shares of Peninsula. It is important to note that share price of the company is reducing very rapidly during the last year.

References

Yahoo Finance. 2018. Peninsula Energy Limited (PEN.AX). Retrieved May 9, 2018 from https://finance.yahoo.com/quote/PEN.AX?p=PEN.AX 

Australian Energy Regulator. (2018). Industry information. Retrieved 9 May, 2018, from https://www.aer.gov.au/industry-information

Brigham, F., & Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Lumby,S & Jones,C. 2007. Corporate finance theory & practice. Thomson.

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Reilly.F.K. & Brown.K.C. 2011. Investment analysis & portfolio management. South western Cengage learning.

Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag.

Ackert, L. & Deaves, R. 2009. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage Learning.

Baker, H.K. & Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley & Sons.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Elton, E.J., Gruber, M.J., Brown, S.J., & Goetzmann, W.N. 2009. Modern Portfolio Theory and Investment Analysis. John Wiley & Sons.

Peninsula Energy Limited. (2017). Annual Report. Retrieved 9 May, 2018, from https://www.pel.net.au/images/peninsul—thaeteyelo.pdf

PEN General Information. (2018). Retrieved 9 May, 2018, from https://www.investsmart.com.au/shares/asx-pen/peninsula-energy-limited

Peninsula Energy Limited. (2018). Retrieved 9 May, 2018, from https://www.pel.net.au/

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