Rolls-Royce PLC

Rolls-Royce PLC (RR) is a London, United Kingdom-headquartered international engineering company with operations in 50 countries, spanning across six continents. The group is one of the leading industrial technology companies in the world and is used on world-class power and propulsion systems. The group seeks to deliver clean, safe and competitive solutions to a wide range of industries, ranging from commercial airlines and leasing customers to armed forces and marine customers. The operations of the group are differentiated in four segments, namely Civil Aerospace, Power Systems, Defence and ITP Aero.

Recent Development
On 18 June 2019, the company announced that the acquisition of eAircraft business of Siemens is expected to be completed by late 2019. The acquisition will accelerate its ambitions to play a major role in the third era of aviation by adding vital skills and technology to its portfolio and will accelerate the delivery of its electrification strategy as it develops a product range of hybrid power and propulsion systems.

Key Financial Highlights (H1 FY 2019, in £m)
 
(Source: Company Filings)

Reflecting growth in both OE and services led by Civil Aerospace and Power Systems, underlying core revenue rose by 7% to GBP 7,213 million and group underlying revenue of GBP 7,353 million was up by 7%, while reported revenue rose by 5% to GBP 7,883 million. Underlying core gross profit rose by 10% to GBP 995 million with gross margin improvement of 30bps, while underlying core operating profit saw a GBP 49 million improvement on the prior year to GBP 203 million. Driven by a reduction in exceptional charges to GBP 128 million, reported operating profit of GBP 83 million was up by GBP 830 million. Reported profit before financing and taxation was reported at GBP 201 million, against a loss of GBP 389 million reported in the prior year. The reported loss for the period was GBP 907 million, which corresponded to a loss per share of 48.02p, against a loss of 51.6p per share in FY 2018. Underlying group loss per share was 1.6p, against earnings per share of 2.5p in H1 2018, while underlying core loss per share was 1.4p, against earnings per share of 3.1p in H1 2018.

Valuation Methodology
Method:  EV/EBITDA Approach (NTM)


Share Price Commentary
 
Daily Chart as at 22-August-19, before the market closed (Source: Thomson Reuters)
 
On 22 August 2019, at the time of writing (before the market closed, GMT 1:15 pm), RR shares were trading at GBX 768.40, down by 2.01 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,013.40/GBX 723.40. The company's stock beta was 1.09, reflecting slightly more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £15.11 billion.

Conclusion
The company posted negative underlying free cash flow of GBP 429 million for the period, almost six times the level of a year earlier, reflecting an increase in inventory as plane makers struggle with their highest-ever order backlogs. However, the group reported that as the inventory build-up unwinds, the company is expected to reach its full-year cash goal of GBP 700 million +/- GBP 100 million, suggesting significant improvements in the second half. It also targets a free cash flow of at least GBP 1 billion in FY 2020. The group aims to bring down commercial and administrative costs and improve its engineering efficiency through the restructuring programme undertaken by it. To compete even effectively in the attractive growth markets, the group is focused on generating strong returns and the cash flow, which would be helped by the restructuring programme of the company. This would also help to seize the opportunities across all markets, realise the growth potential of the business and help in maximising the economic value of past investments.

Based on the above rationale, and supported by valuation undertaken using the above method, we have given a "HOLD" recommendation at the current price of GBX 768.40 (as on 22 August 2019) based on 8.80x NTM EV/EBITDA(approx.) on FY19E EBITDA(approx.).
 

NMC Health PLC

NMC Health PLC (NMC) is an Abu Dhabi-based diversified health care company operating in the United Arab Emirates. The group is engaged in business sectors ranging from health care, trading, and information technology and is the largest private healthcare company in the United Arab Emirates and ranks amongst the biggest fertility service providers in the world. It was the first company from Abu Dhabi to list on the London Stock Exchange and is a constituent of FTSE 100 index. The group’s business is differentiated in two reportable segments, namely healthcare and distribution & services.

Recent Development
The shares of the company soared by as much as 42% on 22 August 2019 as a target stake worth up to $1.9 billion and jointly owned by KBBO Group, Saeed Bin Butti Al Qebaisi and Khalifa Butti Bin Omeir drew attention of two groups, including one backed by China’s Fosun, at a premium to market price.

Financial Highlights (1H FY 2019, in $m)
 
(Source: Company Filings)

The top-line performance of the company was in line with the expectations of the management, with revenue in the first half of the year increased by 32.6% to $1,236 million, against $932 million reported in the corresponding period of the last year. EBITDA of $323.5m (post-IFRS 16) and $276.3m (pre-IFRS16), represented a growth of 22.5% (for pre-IFRS 16), while the EBITDA margin declined by 180 bps, reflecting the increased contribution from several assets that are in early stages of ramp-up and contribution from the low-margin business of Aspen Healthcare. Profit from operations amounted to $228.1 million, against $179.7 million in the prior year, while profit before tax was $140.6 million versus $118.7 million last year. Adjusted net income to equity holders stood at $137.5 million, while net income to equity holders stood at $138.1 million (post-IFRS 16) and $151.0 million (pre-IFRS16).  Reflecting reduction in financial leverage and greater operational leverage, EBITDA/net income to equity holder conversion ratio was 55% vs 52% for H1 2018 (pre-IFRS16), while net debt/EBITDA remained flat at 3.4x. Free Cash Flow for the period was $77.8 million.

Share Price Commentary
 
Daily Chart as at 22-August-19, before the market closed (Source: Thomson Reuters)
 
On 22 August 2019, at the time of writing (before the market closed, GMT 11:15 am), NMC shares were trading at GBX 2,448.00, up by 26.44 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,010.00/GBX 1,773.50. The company's stock beta was 1.02, reflecting the same volatility as compared to the benchmark index. Total outstanding market capitalisation was around £4.06 billion, with a dividend yield of 0.93%.

Conclusion
The company has continued to enhance its vertical framework to cater to the local market, which is characterised with a favourability towards a demand for high-quality healthcare access. The healthcare market remains highly predictable, and the company is focused on improving utilisation and efficiencies of existing assets. As opposed to 3.1x at the end of 2018, the company recorded net debt/EBITDA (excluding the impact of IFRS 16) ratio of 2.7x in H1 2019, as the group seeks to deleverage its balance sheet. Post IFRS 16, guidance for revenue for the year was $2,500-2,540 million, while guidance for EBITDA was $665-675 million. The company, through both organic and inorganic means, can identify new potential markets and sees many more opportunities for leveraging growth.

Based on the above rationale, we have given a “HOLD" recommendation at the closing price of GBX 1,936 (as on 21 August 2019).
*All forecasted figures have been taken from Thomson Reuters.

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