This report is an updated version of the report published on 27^th April 2022 at 09:19 AM GMT+1

Industrial Sector: Scope of Growth in Exports Over the Long Run

1. UK Industrial Sector Landscape

The UK industrial sector is comprised of manufacturing, services, construction, tourism, mining and quarrying, energy supply, and water and waste management. Manufacturing comprises the bulk of the production in the Industrial sector and consists of sub-segments like food & beverages, transport equipment, basic metals, products, etc. Some of the prominent names in the Industrial space include Unilever, Imperial Brands, BAE Systems, to name a few.

According to the recently available data from the Office for National Statistics, the production output showed signs of revival with an increase of 1% during three months to February 2022, compared with the three months to November 2021. During the same period, manufacturing output rose by 1.7%, water supply and sewerage by 1.7% and electricity by 0.1%. The growth in output in allied sectors has been offset by a decline of 6.6% in mining and quarrying. A notable increase was also observed in the manufacture of basic metals and metal products, which grew by 4.7% on account of the strength of the fabricated metal products industry.

Key Trends in the Industrial Sector

Risk Exposures to Industrial Sector 

• Looming Inflation: The sector is prone to the threats of high inflation as it may have a direct impact to the input costs and margin performance.
• Capital Intensive: The Industrial sector is capital intensive in nature and firms require access to favorable funding sources. The absence of the same poses a challenge to the operations and manufacturing capability.
• Macro Concerns: The current geopolitical tension coupled with rising interest rates poses a challenge to the demand for the produced goods.
• Borrowings: The sector is generally dependent on a high degree of borrowings for functioning and thus is exposed to high finance charges.
  

SWOT Analysis

Industrial Sector Outlook

Manufacturing output has been impacted in recent months owing to the outbreak of war in Ukraine, which has upset supply chains and drove up costs. However, output across the whole of the economy was broadly steady in March 2022, as S&P’s composite index reflected at 59.7 in March 2022, compared to 59.9 in February 2022. The Industrial sector needs to invest in enhancing its productivity, driven by technology upgrades to thrive in the post-pandemic economy. Overall, keeping inflation and supply-side challenges aside, the underlying demand for goods is likely expected to remain strong.

2. Investment analysis and stocks under discussion (RMG and WIZZ)

After gaining insights into the Industrial sector, we would look at the business model of two players listed on the London Stock Exchange.

A. Royal Mail PLC (LON: RMG)

(Recommendation: Buy, Potential Upside: 16.36%, Market Capitalization: GBP 3.25 billion)

Royal Mail PLC is an FTSE 100 listed Courier Company that provides postal services. The Group expects to release its FY22 results on 19 May 2022.

 One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                       

From a technical standpoint, the stock is hovering near the middle Bollinger band with low 14-day RSI levels of ~41.21.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.36% over the current price of GBX 333.90 (as of 27 April 2022, 08:01 AM GMT +1).

B. Wizz Air Holdings PLC (LON: WIZZ)

(Recommendation: Speculative Buy, Potential Upside: 19.18%, Market Capitalization: GBP 3.25 billion)

Wizz Air Holdings PLC is an FTSE 250 listed low-cost European airline.

The company is expected to release its audited FY22 results on 08 June 2022.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                      

From a technical standpoint, the 20-day moving average of the stock has stabilized after a recent downtrend.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.18% over the current price of GBX 3,071.00 (as of April 27, 2022, 08:06 AM GMT+1).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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