Calculating The Fair Value Of Star Energy Group Plc (LON:STAR)

In the ever-evolving energy sector, Star Energy Group Plc (LON:STAR) stands at a critical juncture. The British energy company, traditionally focused on oil and gas extraction, is now pivoting towards geothermal energy. This strategic shift raises intriguing questions about the company's valuation and future prospects. Let's delve into the key financial metrics and ratios that should be considered when calculating the fair value of Star Energy Group Plc, and explore the potential risks and opportunities presented by this transition.

Financial Metrics and Ratios

To assess the fair value of Star Energy Group Plc, several key financial metrics and ratios must be examined. These include the Price-to-Earnings (P/E) ratio, Earnings Per Share (EPS), Price-to-Sales (P/S) ratio, and other relevant financial indicators.

# Price-to-Earnings (P/E) Ratio

The P/E ratio is a crucial valuation metric that measures a stock's price relative to the company's earnings per share. Unfortunately, the P/E adjusted (2023) for Star Energy Group Plc is not available (n/a). This lack of data makes it challenging to directly compare the company's P/E ratio to industry benchmarks. However, a low P/E ratio generally indicates that the stock is undervalued relative to its earnings.

# Earnings Per Share (EPS)

EPS is the company's profit divided by the outstanding shares of its common stock. The EPS growth adjusted (2023) for Star Energy Group Plc is also not available (n/a). This metric is essential for understanding the company's profitability and growth potential. A higher EPS indicates greater profitability.

# Price-to-Sales (P/S) Ratio

The P/S ratio of Star Energy Group Plc is 0.2x, which is significantly lower than the industry average. In the Oil and Gas industry in the United Kingdom, around half of the companies have P/S ratios above 1.3x, and even P/S ratios above 5x are quite common. This low P/S ratio suggests that the stock might be undervalued, but it also indicates that there could be underlying issues affecting the company's performance.

# Operating Profit/Loss

The operating profit/loss for 2023 is (£m) 7.20, indicating a loss. This negative operating profit suggests that the company is not generating sufficient revenue to cover its operating expenses, which could be a concern for investors.

# Total Liabilities

Total liabilities for 2023 are (£m) 90.42. High liabilities can indicate financial risk and may affect the company's ability to meet its financial obligations.

# Cash Flow

Net cash investing activities for 2023 are (£m) (9.61), and net cash financing activities are (£m) (6.61). Negative cash flow from investing and financing activities suggests that the company is spending more than it is generating, which could be a red flag for investors.

# Revenue Growth

The company experienced a 6.8% decrease in revenue in the last year, but revenue has lifted 77% in aggregate from three years ago. This mixed performance indicates that while the company has shown growth in the past, recent performance has been disappointing.

# Analyst Forecasts

Analysts covering the company suggest that revenue should decline by 8.9% per year over the next three years, while the broader industry is forecast to moderate by 0.09% per year. This negative outlook contributes to the low P/S ratio and indicates that the company may face significant challenges in the future.



Impact of Transition to Geothermal Energy

Star Energy Group Plc's transition from oil and gas extraction to geothermal energy has several implications for the company's valuation and presents both potential risks and opportunities.

# Potential Risks

One of the primary risks associated with this pivot is the uncertainty surrounding the geothermal energy market. The company's revenue growth metrics show a 6.8% decrease in the last year, which could be a sign of the challenges the company is facing in this new sector. Additionally, the company's total liabilities for 2023 were (£m) 90.42, which could limit its ability to invest in new geothermal projects. Furthermore, the company's net cash investing activities for 2023 were (£m) (9.61), indicating that the company is spending more on investments than it is generating in cash. This could be a concern for investors, as it suggests that the company may be overleveraged and at risk of financial distress.

# Potential Opportunities

Despite these risks, the transition to geothermal energy also presents several opportunities. The company's price-to-sales (P/S) ratio of 0.2x is significantly lower than the industry average, which could be an indication that the company is undervalued. This could present an opportunity for investors to buy the company's shares at a discount. Additionally, the company's revenue has lifted 77% in aggregate from three years ago, notwithstanding the last 12 months. This suggests that the company has the potential for significant growth in the future, particularly if it can successfully transition to geothermal energy.



Conclusion

In conclusion, Star Energy Group Plc's transition from oil and gas extraction to geothermal energy presents both potential risks and opportunities. While the company's current financials and market conditions suggest that there are significant challenges ahead, the potential for long-term growth and the company's undervalued status could make it an attractive investment opportunity for some investors. However, investors should carefully consider the company's financial metrics and ratios, as well as the potential risks and opportunities presented by this transition, when calculating the fair value of Star Energy Group Plc.