Genus PLC

Genus PLC (GNS) is a Basingstoke, United Kingdom-headquartered world-leading animal genetics company that enables farmers to produce higher-quality animal protein more efficiently by providing them with superior genetics, which is done by accurately selecting animals with desirable characteristics and using them for breeding subsequent generations. The company owns technology that enables it to screen and process semen for desirable traits, and in the form of breeding animals, semen or embryos, it distributes genetically superior animals to customers. The operations of the company are differentiated in three operating segments, namely Research & Development, Genus PIC and Genus ABS.
Financial Highlights (FY 2019, in £m)

 
(Source: Company Filings)

As revenues grew by 7% in ABS in constant currency (6% in actual currency) and revenue was stable in PIC in constant currency (up 2% in actual currency), revenue increased by 3% in constant currency (4% in actual currency) to £488.5 million (2018: £470.3 million). Led by strong growth in ABS, which was increased by 15% in constant currency basis, adjusted operating profit including joint ventures and excluding gene editing rose by 6% in both constant and actual currency basis to £72.2 million, while adjusted operating profit including joint ventures was reported at £64.9 million (2018: £63.1 million), up by 3% in both actual and constant currencies. Representing the impact of a one-off Guaranteed Minimum Pension equalisation charge and non-cash fair value movements in biological assets, statutory profit before tax was £9.9 million (2018: £7.8 million), while adjusted profit before tax increased by 4% to £61.0 million (5% in constant currency). Statutory basic earnings per share decreased 82% to 12.4p, and due to the result of the higher tax rate and increased share count, adjusted basic earnings per share declined by 4% to 73.2p (down 3% in constant currency). Cash generated by operations of £48.4 million (2018: £58.3 million). Net debt decreased to £79.6 million at 30 June 2019 (2018: £108.5 million), with net debt/EBITDA ratio of 1.0x (2018: 1.4x).

Share Price Commentary
 
Daily Chart as at 15-November-19, before the market closed (Source: Thomson Reuters)

On 15 November 2019, at the time of writing (before the market closed, GMT 12:06 pm), GNS shares were trading at GBX 3,028, down by 2.32% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 3,215.60/GBX 2,090.00. The company's stock beta was 0.94, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.01 billion, with a dividend yield of 0.89%.

Conclusion
The company recorded decent performance in the FY19, with increased revenue, expanded operating profit, reduced debt and decent pay-out ratio. But we believe, the recent surge in the stock price over the past couple of months has already discounted these things and at a current trading level, its shares were quoting at a premium. Moreover, the company is facing increased competition to secure elite genetics and faces the risk that it may fail to develop its business in China appropriately and other emerging markets, which might lead to lower demand for its products.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 3,100 (as on 14 November 2019), while we look for any upcoming catalysts in the near term.

Qinetiq Group PLC

Qinetiq Group PLC (QQ) is a Farnborough, United Kingdom-headquartered leading science and engineering company that seeks to help customers to protect and advance their vital interests by providing technological and scientific expertise. Its customers are predominantly government organisations, as well as international customers and it operates primarily in the defence, security and critical infrastructure markets, with the aim of providing customers world-class expertise in advice, services and innovative technology-based products. The operations of the group are differentiated in two operating segments, namely EMEA Services and Global Products.

Financial Highlights (H1 FY 2020, in £m)
 
(Source: Company Filings)

Driven by the £60 million orders through the EDP contract and £67 million order for the UK Robust Global Navigation System (R-GNS) programme, the company reported a strong performance in the period with orders of £410.8 million, compared to £298.1 million in the same period a year ago. As Global Products revenue was up 14% organically and EMEA Services was up 9% on an organic basis, underlying revenue was £486.5 million (H1 2019: £420.3 million), up 10% on an organic basis. Underlying operating profit was £59.7 million (H1 2019 restated: £51.6 million) and it was up £4.2 million (8%) on an organic basis if non-recurring trading items, acquisitions and the effect of foreign exchange are excluded, while statutory operating profit was £68.5 million (H1 2019 restated: £47.8 million). Underlying profit after tax was £52.0 million (H1 2019 restated: £45.8 million) and statutory profit after tax was £62.2 million (H1 2019: £50.1 million). Statutory basic earnings per share were 11.0p (H1 2019: 8.9p) and underlying earnings per share were 9.2p (H1 2019 restated: 8.1p).

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary
 
Daily Chart as at 15-November-19, before the market closed (Source: Thomson Reuters)

On 15 November 2019, at the time of writing (before the market closed, GMT 10:03 am), QQ shares were trading at GBX 343.2, down by 2.39% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 355.00/GBX 265.00. The company's stock beta was 0.93, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £1.99 billion, with a dividend yield of 1.94%.

Conclusion
The impending Brexit might lead to a loss of market confidence and a reduction in collaborative EU funding, while UK Government budget constraints can lead to reduced spending in the core markets in which the company operates, not least as a significant part of the revenue is derived from UK Government contracts. It also faces risk arising from the introduction of disruptive technologies/alternative business models, and its international business may be impacted by external influences outside of its control, especially as spending in the major markets remains under pressure. Moreover, the company is trading near a 52-week high, indicating a limited potential upside.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 351.6 (as on 14 November 2019), while we look for any upcoming catalysts in the near term.
 
*Peers of the company are BAE Systems PLC, Senior PLC, Meggitt PLC, Ultra Electronics Holdings PLC, Cobham PLC, Safran SA and Rolls-Royce Holdings PLC
*All forecasted figures and peers have been taken from Thomson Reuters.

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