Croda International Plc

Croda International Plc (LON: CRDA) is a FTSE 100 listed diversified chemicals Company. The Company’s operations are differentiated in four segments: Performance Technologies, Personal Care, Industrial Chemicals, and Life Sciences.

On 23 February 2020, the Company will announce the preliminary results for the year ending 2020.

Rationale for Valuation – Expensive at GBX 6,030.00

• The Company’s Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiple are significantly higher as compared to the Chemicals industry multiple, reflecting overstretched valuations.
• The Company has shown a decent financial performance in H1 FY20, while the operating expenses are increasing, which could hamper the profitability margins in the near future.
• From the technical standpoint, the 20-day simple moving average price is currently at around GBX 6,247.8, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• COVID-19 has reduced customer demand and increased volatility while simultaneously impacting the entire supply chain.
• The emergence of the Covid-19 pandemic has significantly impacted global markets and presented major challenges for the chemical industry.
• Fluctuations in exchange rates could impact the profitability and balance sheet position.

Recent News

On 18 November 2020, the Company announced a retail offer via PrimaryBid.com.

On 18 November 2020, CRDA announced that it had agreed to acquire Iberchem, for a total consideration of approximately £736 million (€820 million) on a debt-free, cash-free basis.

On 10 November 2020, the Company had entered into an agreement with Pfizer Inc. for an innovative delivery system for COVID-19 vaccine. The contract runs for five years with Pfizer.

Financial Highlights for the six months ended 30 June 2020 (H1 FY20), as on 23 July 2020)

(Source: Company Website)

• The Company delivered a resilient performance in H1 FY20, with only a modest reduction in sales, healthy cash generation and a resilient margin.
• The Company witnessed a strong balance sheet and has signed the acquisition with Technology-rich Health Care in July 2020.
• On a year-on-year basis, the return on sales declined to 24.0%, adjusted profit before tax was down by around 11% and adjusted basic earnings per share declined by approximately 10%. This was a creditable performance in challenging Covid-19 conditions.
• The Board has declared an unchanged interim dividend per share for 2020 of 39.5 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company has faced several challenges in the second quarter of 2020, due to the lockdown restrictions, but trading has stabilised. For FY20, the guidance remains unclear. However, The Company has continued opportunities in the Health Care division, and Life Sciences will benefit from the phasing of Crop Care sales. It expects cash generation and gross margin to remain robust. Croda has shown a decent business model, robust liquidity and low leverage. The Company has limited suppliers from which it sources its strategic raw materials and any breakdown in the supply, especially considering the risk from Brexit, would result in the Group's inability to manufacture and satisfy customer demand. Moreover, the Company’s stock is trading near a 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of GBX 3,814.00 and GBX 6,884.00, respectively.

Based on the factors as highlighted above, we believe the stock of Croda International is “Expensive” at the closing price of GBX 6,030.00 (as on 18 November 2020), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of London market and improved investors sentiments.

British Land Company Plc

FTSE 100 listed British Land Company PLC (LON: BLND) is a property development and investment company, which manages a portfolio of around GBP 13.7 billion of assets under management.

Rationale for Valuation – Avoid at GBX 498.60

• The Company’s EV/Sales, Price/Earnings and Price/Cash Flow multiples are significantly higher as compared to the Residential & Commercial REITs industry multiple, reflecting overstretched valuations.
• In FY20 and FY19, the Net margin and ROE were in the negative zone.
• In August 2020, Fitch Ratings affirmed the unsecured credit rating 'A', with a stable outlook.
• The stock has underperformed the index (FTSE 100 index) during the last six months period and delivered a negative return of around 15%.
• The first half results reflect the challenges in retail and also resumed the dividend.
• From the technical standpoint, 14-day RSI stood at ~78.02 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• Political and regulatory outlook, including the UK's decision to leave the EU or potential Government policy, could impact the businesses of the occupiers as well as their own business.
• In UK real estate, the reduction in investor demand may result in falls in asset valuations.
• The UK future movements and economic climate in interest rates present risks in financing and property markets and the businesses of the occupiers, which might impact both the financial performance and the delivery of the strategy.

Recent News

On 18 November 2020, the Company announced that it had completed on the sale of Clarges Mayfair to Deka, which is for a consideration of £177 million. This amount was 7.6% higher than the September 2020 valuation.

On 12 November 2020, BLND announced that Rebecca Worthington, as a Non-Executive Director, will be stepping down from the Board on 31 December 2020.

Financial Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 18 November 2020)

(Source: Company Website)

• On a year-on-year basis, the Company delivered a decent financial performance in H1 FY21, with a decrease in underlying EPS of 34.8% (due to an increase in provisions for rent receivables), portfolio value of 7.3% and EPRA Net Tangible Assets (NTA) of 10.3%.
• BLND witnessed a strong and flexible balance sheet, with £1 billion of undrawn facilities and cash and LTV (loan to value) of 35.7%.
• The Board has resumed its dividend and paying interim dividend per share of 8.4 pence on 19 February 2021.
• The Company has continued solid performance on sustainability benchmarks, with awarded a green star rating.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Led by Covid-19 and Brexit related uncertainty, the leasing volumes in Offices are likely to be lower. Retail occupational markets are tough, and occupiers will stay under pressure. According to the market, GDP falling by 15.5% in the September quarter and also put a one-month national lockdown in England in November 2020. From this, consumer confidence remains fragile. Moreover, interest rates have fallen to all-time lows, and the Bank of England's (BoE) projection is for unemployment to peak at 7.75% in 2021. In the UK, the retail and office investment markets were subdued. Meanwhile, the first half of 2021 results naturally reflect the challenges in the retail market. Overall, the Company is facing several challenges and operating with a decent performance to tackle short term uncertainties. Moreover, the uncertain crisis of Covid-19 would further affect guidance. The stock made a 52-week low and high of GBX 309.40 and GBX 648.40, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on British Land Company at the closing price of GBX 498.60 (as on 18 November 2020).

 

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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