HSBC Holdings Plc

FTSE 100-listed HSBC Holdings Plc (LON: HSBA) is a London, United Kingdom-based Banking Company. On 23 February 2021, the Company will announce the annual results.

Rationale for Valuation – Buy at GBX 372.95

• In Asia, the Company intends to increase the rate of investment, particularly in wealth, the Greater Bay Area, south Asia, trade finance and sustainable finance.
• In the last three months, the Company has delivered a decent return of ~29.44%, which is higher as compared to the FTSE 100 Index.
• Price/Book Value multiple of the HSBA is currently lower than the Banking Services industry, which shows that shares are undervalued against the industry.
• According to the S&P Long-term Issuer Rating (May 2020), the Company’s debt rating was A-, with a stable outlook.
• From the technical standpoint, shares are trading well above the short-term support level of 50-day (approximately GBX 365.69) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• There are several macroeconomic factors including Brexit that could have an impact on the state of economic recovery in the UK over the next two quarters and for the next year.
• The first half of 2020 has been marked by unprecedented global economic events, leading to banks playing an expanded role to support society and customers.
• Moreover, the Covid-19 outbreak has impacted many of the customers’ business models and income.

Recent News

On 17 December 2020, the Company announced that all of the conditions precedent under the terms agreement in relation to the Securities had been satisfied and the securities were issued.

On 10 December 2020, the Company announced a proposed offering of a series of US dollar-denominated perpetual subordinated contingent convertible securities.

Q3 FY20 Trading Update (as on 27 October 2020)

(Source: Company Website)

• The Company has shown a significantly lower credit losses in the quarter and adapts the business model, which protracted the low-interest rate environment.
• Common equity tier 1 capital (CET1) ratio increased by 0.6% to 15.6% against the previous quarter (Q2 FY20: 15.0%), reflecting a decrease in RWAs (on a constant currency basis), foreign currency translation differences and capital generation through profits.
• Net interest margin (NIM) was down by 36 basis points ('bps') year-on-year. While NIM was also down by 13bps from 2Q20.
• Led by lower revenue, the reported profit after tax was down by 46% year-on-year and reported profit before tax decreased by 36% year-on-year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

HSBC has shown decent growth in the last four years, which indicates the financial resilience and sound business model of the Group. For 2020, the ECL charge is trending towards the lower end of the US$8 billion to US$13 billion range. It expects to exceed the US$100 billion gross risk-weighted assets (RWA) reduction target by the end of 2022. Further, the Company expects lower global interest rates, with some stabilisation as HSBC move into 2021. It will also seek to pay a conservative dividend if circumstances allow. Despite the challenging economic conditions, the Company's liquidity and capital ratios strengthened further in the quarter. The stock made a 52-week low and high of GBX 281.50 and GBX 602.90, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on HSBC Holdings at the current market price of GBX 372.95 (as on 21 December 2020, before the market close at 11:00 AM GMT), with lower double-digit upside potential based on 0.72x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Phoenix Group Holdings Plc

Phoenix Group Holdings Plc (LON: PHNX) is a FTSE 100 listed Company, which is the largest life and pensions consolidator in Europe.

Rationale for Valuation – Buy at GBX 679.60

• Phoenix has continued to perform strongly, with exceeding the top end of the target range and the shareholder capital coverage ratio of 159% remains robust.
• As per valuation metrics, Price/Earnings, Price/Book Value, EV/Sales and Price/Cash Flow Value multiples are currently lower than the Insurance industry.
• The shares are offering a lucrative dividend yield of 6.60%, with a minimum 10-years track record of consistent dividend payment.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (around GBX 661.2) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.
• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.

Trading Update (as on 3 December 2020)

• The Company has shown a strong trading update, with a huge increase in cash generation of 142%.
• On 30 September 2020, the solvency II surplus increased by £0.6 billion to £5.0 billion from £4.4 billion, on a pro-forma basis, due to the successful delivery of management actions.
• On 30 September 2020, the shareholder capital coverage ratio stood at 159% and was at the midpoint of the Group's target range of 140%-180%.
• The Company witnessed a high-quality credit portfolio, with 98% of £35 billion shareholder debt portfolio.
• In the nine months ended 30 September 2020, the Company has £472 million incremental long-term cash generation from new business, with £300 million from BPA, £94 million from Workplace and £42 million from Customer Savings and Investments.
• It has also committed to becoming net-zero carbon by 2050.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

Overall, it will deliver the sustainable cash generation for investors, supported by strong shareholder capital coverage ratio. Also, Cash generation was £1.7 billion, which is exceeding the upper end of the 2020 cash generation target range of £1.5 billion - £1.6 billion. The Company has committed for the operations to become net-zero carbon by 2025. It is also setting a net-zero by 2050 target for the investment portfolio. Moreover, the balance sheet stays resilient, underpinned by a unique approach to risk management and the high-quality portfolio of assets. The stock made a 52-week low and high of GBX 459.05 and GBX 824.40, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Phoenix Group Holdings at the current market price of GBX 679.60 (as on 21 December 2020, before the market close at 11:00 AM GMT), with lower double-digit upside potential based on 1.22x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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