Pets at Home Group Plc - Operating in a challenging environment

Pets at Home Group Plc (LON: PETS) is a retailer of pet food, pet products and pet-related services. On 26 May 2021, the Company will announce the FY21 preliminary financial results.

Rationale for Valuation – Expensive at GBX 435.00

• The Company is trading near a 52-week high, and Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiples are significantly higher as compared to corresponding multiples of the Speciality Retailers industry, reflecting overstretched valuations.
• The Company has lower liquidity with a current ratio of 0.80x, reflecting insufficient current assets to pay its short-term obligations.
• From the technical standpoint, 90-day RSI stood at ~57.25, which means the stock price could decline in the short term.

Key Risks

• The government has announced a series of stimulus, the next wave of the outbreak could be a catastrophe, especially for the non-essential and discretionary product retailers.
• Failure to achieve the anticipated efficiency cost-saving measures or difficulties in implementing supply chain investment could result in a greater impact on margins.

Trading Update (for the third quarter of the current financial year (which concluded on 31 December 2020), as on 8 January 2021)

• As highlighted in H1 FY21, the Company delivered a resilient performance in both the underlying pet care market and the pet care model.
• D0espite the challenging external environment, the Company has shown strong sales momentum across the Veterinary and Retail operations in Q2.
• Therefore, during the third quarter, the Company has accelerated across all channels, with high-teens Group LFL sales growth in December 2020.
• The Company witnessed a robust balance sheet and liquidity position, with initial cash proceeds of £80 million (relating to the completion of the disposal of the Specialist Group).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company expects 2021 full-year underlying pre-tax profit to be at least £77 million (including the repayment of business rates relief), which is ahead of the prior guidance. It also maintained a strong balance sheet and liquidity positions. The Company continues to offer a market-leading range of branded and own-label products across all price points, both in-store and online. Further, it is investing in online infrastructure to meet the changing market dynamics. Moreover, the business is more exposed to the economic uncertainties arising from the Covid-19 pandemic. In the future, the Company may face emerging headwinds and cost pressures. The Group is presently trading near the 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 174.90 and GBX 474.80, respectively.

Based on the factors as highlighted above, we believe the stock of Pets at Home Group is “Expensive” at the closing price of GBX 435.00 (as on 8 January 2021), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of London market and improved investors sentiments.

Reach Plc

Reach Plc (LON: RCH) is a West Sussex, United Kingdom-headquartered commercial national and regional news publisher in the country, The Company’s joint venture includes the Pools, Pub in the Park, and The Handmade Festival.

Rationale for Valuation – Expensive at GBX 204.50

• The Company has lower liquidity in H1 FY2020, with a current ratio of 0.92x, reflecting insufficient current assets to pay its short-term obligations.
• The Company is trading near a 52-week high, and Price/Cash Flow multiple (on a trailing twelve months) is significantly higher as compared to corresponding multiple of the Media industry, reflecting overstretched valuations.
• In H1 FY20, the net margin and ROE are in the negative zone.
• From the technical standpoint, 14-day RSI stood at ~90.63 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The next wave of Covid-19 virus could impact the staff and customer base.
• The uncertainty about macroeconomic factors and change in consumer disposable income might impact the share of income consumers would spend on leisure activities.
• Moreover, consumer confidence is battered in recessionary economic conditions.
• The Company is increasingly exposed to foreign exchange risk for overseas operations.

Trading Update (as on 8 January 2021)

• In Q4 FY20, the total revenue declined by 10.2% as compared with the 14.8% decrease in Q3.
• Digital revenue for Q4 FY20 increased by 24.9%, up from 13.4% in Q3 FY20.
• However, the print circulation sales declined by 11.7% in Q4, but it has improved from the Q3 FY20.
• The Company achieved 5 million online customer registrations in December 2020. It also completed the development of Reach ID in December.
• In January 2021, the Company will expand its MyLondon editorial team and launch new sites covering Buckinghamshire and Bedfordshire.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In FY20, the Company expects underlying operating profit to be in the range of £130-£135 million, which is also ahead of market expectations. It saw a record digital revenue performance in Q4 FY20. However, the new Covid-19 restrictions will bring macro-economic uncertainty. Moreover, RCH remains cautious on the FY21 outlook, due to the current pandemic trends. Further, the business is more exposed to the economic uncertainties arising from the Covid-19 pandemic. In the future, the Company may face emerging headwinds and cost pressures. The Company is presently trading near the 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 47.95 and GBX 228.50, respectively.

Based on the factors as highlighted above, we believe the stock of Reach Plc is “Expensive” at the closing price of GBX 204.50 (as on 8 January 2021), with support from few catalysts needs to be evaluated at a later stage.

*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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