Capital & Regional Plc (CAL)

Capital & Regional Plc is a United Kingdom-headquartered Real Estate Investment Trust. The group has a portfolio of in-town community shopping centres, with over 50% of gross asset value in London, the group has concentrated on non-discretionary, needs-based retail and services where the nature of the goods or economics impede online penetration. Its shares got admitted as on May-25-1995 to the main market of the London Stock Exchange for trading.

Institutional Holdings
BlackRock Advisors (UK) Ltd., APG Asset Management NV, Henderson Global Investors Ltd., Legal & General Investment Management Ltd. and Morgan Stanley Investment Management, Inc. are some of the institutional shareholders in the group. Approximately 32.40% shares of the group owned by the Institutional investors.

Trading Updates (for the four months ended to the end of April 2019)
Decent leasing impetus supporting high occupancy, during the period under consideration. The REIT group completed 20 leasing transactions at an average premium to passing rent of 3.0% and 5.2% to ERV, including 12 renewals and 8 new lettings for a total annual income of £1.2 mn. Also, the group completed landmark transaction in April, comprises of the letting of the final two floors of the Arndale House Office to Tesco for 10-year lease renewal and also finalised leasing transaction with The Entertainer and Wenzels the baker and Vodafone during the period under review. As on April-30-2019, group's occupancy remained steady at 96.7%.

Robust footfall momentum is driven by community repositioning strategy, during the reported period, footfall across the group’s owned asset portfolio was substantially higher than the national index, with three centres in London witnessed a growth of 1.8%.However, footfall recorded in the reporting period was marginally below on a YoY basis (0.6%), but substantially above the national index, which contracted by 3.2% in the period under consideration.
Debenhams posing some risks to the Net Rental Income of FY2019, the Company Voluntary Arrangement (CVA), approved in May 2019 could dent net rental income of 2019 by approximately £0.7mn and £1.3mn in an annualised basis.
Snozone recorded robust performance, Snozone one imperative business for the group, both from the profitability and cash flow standpoint reported another strong performance during the period under review.

Stock Performance

Daily Price Chart (as on July 04, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 11:14 AM GMT), shares of the LSE: CAL was quoting at GBX 15.73 and added 2.44% against the previous day closing price. In the past five trading sessions, its shares have risen by approximately 10%. Also, 14-day daily RSI of the company was featured in the bullish zone and strengthening the upside movement from the current trading levels.

Valuation Methodology


Conclusion
The latest operational results clearly support the group's new strategy that they introduced over eighteen months ago that was primarily concerned about responding to structural changes underway in the retail sector. The group with their repositioning and remerchandising plans, higher footfall, lower average rent, differentiate their asset portfolio and ensure that they will remain profitable and attractive to retailers. During the first four months of 2019, the group has completed some of the marquee deals with companies like Tesco, Vodafone and The Entertainer and Wenzels, which would contribute substantially to the top line in coming years. Also, they have a strong leasing pipeline with 30 transactions agreed for new letting and renewals, which would contribute above £2mn to the annual income.

Potential risks
However, Debenhams’ CVA got approved in May 2019, and this could have some negative impact on the Net Rental Income of the group in FY19. Also, Long-term debt contribution was higher in the group's total capital, and LT Debt/Equity ratio of the group stood at 114.2% against the industry median of 40.09%, which poses some risks to the balance sheet of the company.

Therefore, based on the above-discussed rationale and valuation done by using the above methodology, we have given a "Speculative Buy" recommendation at the closing price of GBX 15.3 (as on July-03-2019), with single digit upside potential, based on the 11.6x NTM EV/EBITDA (approx.) on the FY19E EBITDA (approx.).
 

Arrow Global Group PLC (ARW)

United Kingdom-headquartered Arrow Global Group PLC is engaged in the business of providing financial services. Its areas of operation are categorised into segments like Investment businesses, and asset management and servicing business. The group is engaged in buying and managing secured and the unsecured loan from the financial institutions like Banks and NBFCS. As on October-11-2013, its shares got admitted to the main market of the London Stock Exchange for trading and is a constituent of the FTSE All Small and FTSE All-Share (ex-IT) indices.

Institutional Investors
Approximately 55.08% equity of the group is owned by the institutional investors, with Jupiter Asset Management Ltd., Schroder Investment Management Ltd., BMO Asset Managers Ltd., M&G Investment Management Ltd., and Legal & General Investment Management Ltd. are some of the major institutional investors in the company.

Financial Highlights – (Q1 FY19)
During the first quarter of FY19, the group reported decent performance over the first quarter of the FY19, with core collection during the period under review surged to £105.5 mn from £86.0 mn realised in the year-ago period and recorded a growth of 22.7% on YoY basis. Total income during the period improved by 12.3% to £86.6 mn from £77.1 mn reported in Q1 FY18. Free cash flow during the first quarter of FY19 grew by 32.0% to £57.8 mn against £43.8 mn reported in the corresponding period of last year. Pre-tax profit in the Q1 FY19 stood at £15.8 mn from a negative pre-tax profit of £7.6mn. However, underlying pre-tax profit recorded a growth of 14.1% and surged to £16.2 mn from £14.2 mn in the corresponding quarter of the previous financial year. Leverage ratio narrowed to 3.4x from 4.0x recorded in the year-ago period. Basic earnings per share for the quarter ended March 31, 2019, stood at 6.1pence from a loss per share of 3.5 pence recorded in Q1 FY18.

Stock Performance

Daily Price Chart (as on July 04, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 01:25 PM GMT), shares of the LSE: ARW was quoting at GBX 245.2 and added 1.64% against the previous day closing price. On a year-to-date basis, the stock has delivered a price return of 36.84%, and in the past one month, the stock was up by approximately 21% respectively. Also, at the current trading level, the stock was featured in a long-term uptrend, as it was quoting considerably above the 200-day Simple Moving Average Price.

Valuation Methodology


Conclusion
In the past 5-years, the group has scaled up its top-line with a compounded average growth rate (CAGR) of 26.8%, consistently maintained EBITDA margin above 30%, that is commendable and consistently recorded return on equity above 15% since last several years. Business like Arrow Global Plc are highly cash generative business and creates value for the shareholders after discharging their all liabilities. And despite a decent rally in the stock price over the past couple of weeks, the dividend yield of the company stood at 5.24%, which is again a robust parameter that proof cash generative business model of the company.

Leverage posing risks to the balance sheet, the debt-equity ratio of the company was substantially higher and stood at 6.1x in FY18, which was considerably above the industry median of 1.28x and also Long-term debt contribution in the total capital was at 67.2% at the end of FY18, against the industry median of 27.0%. However, in the latest quarterly update reported by the company, the group has reported a reduction in the leverage ratio from 4x in Q1 FY18 to 3.4x in Q1 FY19 but also mentioned that leverage could modestly surge from the current level as purchases increase.

Therefore, based on the above discussion and valuation done using the above valuation methodology, we have given a "Speculative Buy" recommendation at the closing price of GBX 242.2 (as on July-03-2019), with single digit upside potential, based on the 5.6x NTM Industry Median Price-to-cash flow per share (approx.) on the FY19E cash flow per share (approx.)
 
*The “Speculative Buy” recommendation is also valid at the current market price as on July-04-2019.

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