Britvic PLC

Britvic PLC (BVIC) is a Hemel Hempstead, United Kingdom-headquartered leading soft drinks company with numerous brands under its name, including Robinsons, Teisseire, Maguary and DaFruta. The group has operations in Great Britain (GB), Ireland, France and Brazil, and produces and sells several famous soft drinks brands of PepsiCo, including Pepsi, 7UP, SoBe and Mountain. Apart from its key geographical markets, it has been reaching into other territories, particularly the United States, through franchising, export and licensing. The operations of the group are differentiated in six operating segments, namely GB Stills, GB Carbs, Ireland, France, Brazil, and International.

Trading Statement – Q3 to 7^th July 2019
Even as Brazil and International continued to deliver revenue growth, a decline in value and volume led to a decrease of 1.5% (constant currency) in revenue to £360.1 million. The group would release its preliminary results for the financial year 2019 on 27 November 2019.

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

For the first half of the fiscal year 2019, the company’s revenue surged by 4.9% AER (actual exchange rate) to £769.2 million as against £733.2 million in H1 FY2018. The revenue rose by 1.9% on CER (organic constant exchange rate) basis for the period. The company’s EBIT (adjusted) surged by 5% (CER) to £83.7 million in H1 FY2019 from £80.5 million in H1 FY2018. The adjusted EBIT surged by 4% on AER basis for the period. The company’s EBIT margin (adjusted) rose by 0.3% to 10.9% in the first half of the financial year 2019. The company’s PAT (profit after tax) surged by 4.8% (AER) to £34.9 million in H1 FY19 from £33.3 million in H1 FY18. The company’s adjusted EPS (earnings per share) surged by 5.2% to 22.3 pence per share in H1 FY19 from 21.2 pence in H1 FY2018. An interim dividend of 8.3 pence per share was declared by the company in H1 FY19.

Share Price Commentary

Daily Chart as at 25-September-19, before the market closed (Source: Thomson Reuters)

On 25 September 2019, at the time of writing the report (at 2:20 pm GMT, before the market closed), BVIC stock was trading at GBX 969, down by 0.56 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 980.00/GBX 740.50. The company’s stock beta was 0.55, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.57 billion, with a dividend yield of 2.93 per cent.

Conclusion
The company has been undertaking the Transformational Business Capability Programme, which is nearing completion and is expected to result in a strong cash generation and long-term growth and help in building a more flexible and sustainable business model. The consumer trend towards low and no-sugar brands has accelerated from the soft drinks levy, which has benefitted the portfolio of the group. Group revenue, organic margin and adjusted earnings per share increased as organic brand contribution grew in all the markets, which also augurs well for the company, which is confident of meeting market expectations for the full year.

Based on the above rationale, we have given a "HOLD" recommendation at the current price of GBX 969 (as on 25 September 2019, before the market closed).
 

Close Brothers Group PLC

Close Brothers Group PLC (CBG) is a London, the United Kingdom-headquartered merchant banking group. The company offers deposit-taking, securities trading, lending, and wealth management services to small businesses and individuals in the UK. The company’s portfolio of solutions comprises brewery rentals, commercial vehicle hire, motor finance, professional services finance, aviation and marine, insurance premium finance, technology services, invoice finance, asset-based lending, broker finance, and property finance. The company’s business is differentiated in three segments: Banking, Securities and Asset Management.

Recent Development
The company on 24 September 2019 announced that Preben Prebensen would step down as the Chief Executive Officer after holding the position for the last ten years. To ensure a smooth handover, he will remain with the group for the next 12 months, and the group will start a formal search for a successor. The company further informed that it would consider both internal and external candidates.

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

While adjusted operating income increased by 1% to £816.4 million (FY 2018: £805.8 million), adjusted operating expenses increased 4% to £497.4 million (FY 2018: £480.5 million), leading to a 3% decline in adjusted operating profit to £270.5 million (FY 2018: £278.6 million). Most of the increase in expenses was in the Banking division and the decline in adjusted operating profit reflected continued investment across all businesses and a challenging environment for the market-facing businesses. The Banking expense/income ratio increased to 50% (FY 2018: 49%), and the expense/income ratio of the group was marginally higher at 61% (FY 2018: 60%). On a statutory basis, group operating profit before tax from continuing operations decreased by 2% to £264.7 million, and operating profit before amortisation of intangible assets on acquisition declined from £278.5 million in FY 2018 to £270.5 million. Profit after tax from continuing operations declined by 2% to £200.3 million from £204.2 million while profit attributable to shareholders from continuing and discontinued operations decreased to £201.6 million against £202.3 million recorded in FY 2018. Reflecting the consistently strong credit performance across the lending portfolios and continued the prudent application of the lending criteria, bad debt ratio remained low at 0.6% (FY 2018: 0.6%). Taking the full-year dividend per share to 66.0p (FY 2018: 63.0p), the board proposed a final dividend per share of 44.0p (FY 2018: 42.0p). Driven by loan book growth in the year, total assets increased by 3% to £10.6 billion (1 August 2018: £10.2 billion) and return on assets declined marginally to 1.9% (FY 2018: 2.0%).

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


Share Price Commentary

Daily Chart as at 25-September-19, before the market closed (Source: Thomson Reuters)

On 25 September 2019, at the time of writing the report (at 8:53 am GMT, before the market closed), CBG stock was trading at GBX 1,342, down by 1 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,682.00/GBX 1,209.00. The company’s stock beta was 0.55, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.04 billion, with a dividend yield of 4.87 per cent.

Conclusion
As the pressure on the Bank of England grows to decrease benchmark interest rates, the net interest margin of the group is expected to decline, which would hurt the profitability. Despite ongoing competition across various markets, the net interest margin remained broadly stable at 7.9% (FY 2018: 8.0%) during the period. The company recognises uncertainties in the external economic and political environment, and profitability margins have remained stagnant or declined. The company operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of its competitors.

Based on the headwinds faced by the group and valuation as done above, we have given a "WATCH" recommendation at the closing price of GBX 1,354 (as on 24 September 2019), while we look for any upcoming catalysts in the near term.

*Peers of the company are Non-Standard Finance PLC, OneSavings Bank PLC, Arrow Global Group PLC and Provident Financial PLC
*All forecasted figures and peers have been taken from Thomson Reuters.

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