March 16th, 2023 | 11:57 CET
Interest roller coaster! This is how you profit! K+S, Saturn Oil + Gas, Deutsche Telekom
Table of contents:
"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
At home in Southern Germany, the passionate stock exchange expert has been accompanying the capital markets for about twenty years. With a soft spot for smaller companies, he is constantly on the lookout for exciting investment stories.
K+S: Where is the journey heading?
Key interest rates strongly influence the economy's development; after all, key interest rates set the price of capital. Companies that need to refinance debt or make investments naturally prefer low-interest rates. Companies with strong cash flows also do well in high-interest phases. The shocks in the US banking system have recently completely turned around the market's expectations of further interest rate steps by the US Federal Reserve: Instead of rising interest rates into the fourth quarter, the markets are now pricing in an abrupt turnaround in interest rates. But will it happen? The US economy is proving extremely robust, with the labour market leading the way. That would be a strong signal if it were not for inflation. Inflation thrives particularly well in a robust economy and is the most important construction site for the monetary guardians. If it were only a matter of currency stability, interest rates would have to continue to rise. But for many companies, conditions would worsen if interest rates continued to rise - and for some, the lights would even go out. So what does this mean for investors?
Shares such as fertilizer producer K+S are traditionally considered good inflation investments. The more commodity prices rise, the more K+S's business hums. But despite the high demand for potash worldwide, even K+S cannot pass on prices to customers indefinitely. K+S has also traditionally always been suspected of having too much debt. But the Company has brought the latter shortcoming under control in the course of divestments of business segments and the recent bubbling profits. Today, K+S is no longer so sensitive to the threat of rising interest rates. Conversely, there is also less relief when, as recently, interest rate cuts become more likely. K+S is an inflation play largely independent of the interest rate level. However, the business is not expected to grow endlessly over the next few years. The share price potential remains limited.
Saturn Oil & Gas: Valuation cracker with strong key data
Canadian oil producer Saturn Oil & Gas is also comparatively relaxed about the actions of the central banks. According to the latest figures, the Company currently generates a cash flow of around CAD 232 million annually. 60% of this is used to service debt, while the Company intends to invest 40% in growth. What is unique about Saturn Oil & Gas is that just a few years ago, the producer was a designated micro-cap: back then, every well was like a hit-or-miss bet. Today, several multi-million-dollar acquisitions later, Saturn Oil & Gas expects to produce more than 30,000 BOE per day in the second half of 2023 and is much better able to manage production volumes and organic growth thanks to multiple projects and large volumes. Nevertheless, Saturn Oil & Gas' valuation still lags behind this operational performance: fully diluted, the current market capitalization is around CAD 470 million. It remains uncertain whether some subscription rights will expire in July 2023. When measured against the current cash flow, the share is extremely favourable.
The research portal researchanalyst.com agrees. The authors write about Saturn Oil & Gas: "Saturn is currently trading fundamentally at an EV/adj EBITDA ratio of about 1.3. If the factor is set to the industry average of 5, then a fair value per share of about CAD 10.00 would be appropriate from today's perspective. Prior to the Ridgeback transaction, research house Velocity had already rated the stock a "buy" with a 12-month target of CAD 8.00." Moreover, with the Company recently reporting a net asset value of just under CAD 7, Saturn should become more of an option for value investors. Given the Company's size, the key for Saturn now is to appeal to new groups of investors. The conditions are good for this to succeed in the medium term.
Deutsche Telekom: Solid, but hardly any esprit
The Deutsche Telekom share is also considered solid in times of high inflation. The telecommunications group is benefiting from the fact that mobile communications and Internet connections are now basic amenities for almost everyone. As a result, monthly charges to mobile operators are also reliable. In Germany, the network could be better, especially in rural areas. Many customers have no choice but to be customers of the market leader Telekom. Business in the United States has been particularly positive for Telekom shareholders recently. More and more customers there are signing contracts with Deutsche Telekom. In Germany, business could have been more dynamic. The share remains a solid value for conservative investors - but highs are virtually out of the question. On the other hand, the Deutsche Telekom share offers a solid dividend yield of more than 3%.
Inflation, rising interest rates, or interest rate cuts in the wake of a burgeoning market panic? To cope with all possible scenarios, investors should focus on solid companies. K+S has become increasingly stable in recent quarters. However, the share price is already at a high level. At Deutsche Telekom, too, the potential seems limited. Saturn Oil & Gas currently offers the right mix of growth prospects and solid key data. The Company has entered new spheres and grown strongly in recent years. Due to the lack of a listing in major indices, professional value investors are still left out due to formal investment requirements. For private investors with staying power, this can be an opportunity.
Conflict of interest
Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") currently hold or hold shares or other financial instruments of the aforementioned companies and speculate on their price developments. In this respect, they intend to sell or acquire shares or other financial instruments of the companies (hereinafter each referred to as a "Transaction"). Transactions may thereby influence the respective price of the shares or other financial instruments of the Company.
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