Burberry Group Plc - Strong double-digit full price growth in leather goods

Burberry Group Plc (LON: BRBY) is a FTSE 100 luxury brand retailer with global operations. The Company sells products to customers globally through franchised stores and owned stores.

On 12 November 2020, the Company will release the interim results.

Rationale for Valuation – Buy at GBX 1,528.50

• The Company has decent fundamental metrics as it has maintained a Gross margin above 60% for the last three years and ROE (return on equity) above 9% for the last five years.
• The Company has seen the improving trends in all regions, and the promising exit rate for June 2020, with an excellent response to the new product.
• It saw strong demand for leather goods in Mainland China and Korea.
• The sustainability bond is expected to be rated Baa2 by Moody's Investors Services, with a stable outlook.
• In the last six months, the Company has delivered a positive return of ~9.43%, which is higher as compared to the FTSE 100 Index.
• From the technical standpoint, 14-day RSI stood at 43.37, which is supporting the upside movement.

Key Risks

• The disrupted supply chain and change in demand patterns due to the COVID-19 crisis can further impact the revenue and profitability.
• The Company needs to develop new products, failure to do so will impact the operational performance.
• The Company and the industry have been under stress and pressure as the tastes and preferences of the consumer changing towards online shopping.

Recent News

On 15 September 2020, the Company announced that it had priced the inaugural Sustainability Bond, with 1.125% bond. The final terms are for £300 million, which was due 21 September 2025.

Q1 FY21 Trading Update (as on 15 July 2020)

(Source: Company Website)

• The Company experienced strong customer response to new product launches.
• Led by stores reopening, it has also shown improvement in business performance, and growth in China and Korea stood at ahead of pre-COVID-19 levels.
• BRBY continue to make an investment in a digital platform to improve sales and inspire customers.
• The Company has launched ReBurberry Edit and also launched tailored products for each market.
• It made organisational changes to improve agility and product focus and delivered a cost savings of £55 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is expecting a decline of 15% to 20% from retail business in Q2 FY21 and a sales decline of 40% to 50% from wholesale business in H1 FY21. Meanwhile, BRBY saw an improvement in the first quarter of 2020, with the strong customer response to new product launches. The demand for products has also improved in Korea and mainland China. Overall, the Company is focused on making an investment in the Burberry brand to bring flexibility to consumer-facing activities to achieve growth and increase opportunities. The stock made a 52-week low and high of GBX 1,017 and GBX 2,340, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Burberry Group at the current market price of GBX 1,528.50 (as on 16 October 2020, before the market close at 8:29 AM GMT+1), with lower double-digit upside potential based on 18.50x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Serco Group Plc – Improved the full-year guidance and strong Q3 trading across all regions

Serco Group Plc (LON: SRP) is a FTSE 250 listed Company, which is a provider of public services. The Company’s operations are divided into four regions: UK & Europe, North America, Asia Pacific and the Middle East.

On 17 December 2020, the Company will release the pre-close trading update.

Rationale for Valuation – Buy at GBX 131.70

• The Company witnessed strong Q3 FY20 trading across all regions worldwide and expected to deliver growth in revenue and underlying trading profit in FY20.
• In the last two years, the Company has delivered a sparkling return of ~40.77%, which is higher as compared to the FTSE 250 Index.
• As per the valuation metrics, EV/Sales and EV/EBITDA multiples of SRP are currently lower than Professional & Commercial Services industry.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 1.10x.
• The Company has decent fundamental metrics as it has maintained a ROE (return on equity) above 9% for the last two periods.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company may fail to refine strategy for medium-term, which may delay the transformation and could weaken the balance sheet.
• The COVID-19 pandemic has put clients, customers and the service delivery under huge pressure. This pandemic has also thrown up a myriad of challenges and opportunities.

Q3 FY20 Trading Update (as on 16 October 2020)

• In Q3 FY20, the Company has achieved strong revenue growth, with good cost control.
• All of the regions worldwide are performing better than the previously anticipated, with a strong performance across a number of contracts in the US and increase in the number of asylum seeker in the UK.
• Also, it saw an increase in project-related work on rail and facilities management contracts in the Middle East region.
• The cash generation in Q3 has also been better than expected and the successful issue of £154 million of US Private Placement loan notes.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has upgraded the full-year guidance and shown growth in revenue and underlying trading profit (UTP). This growth would represent organic growth in revenues of approximately 15%, growth in UTP of more than 30%, and a UTP margin of just above 4%. The Company expects the uncertainties of 2020 will continue into 2021 as the world grapples with recurring outbreaks of infection. Overall, the Board stays confident in Serco’s ability to emerge from such an unprecedented period. The stock made a 52-week low and high of GBX 97.00 and GBX 171.65, respectively.

(Source: Company Website)

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation on Serco Group at the current price of GBX 131.70 (as on 16 October 2020, before the market close at 8:48 AM GMT+1), with lower-double digit upside potential based on 13.60x Price/NTM Cash Flow (approx.) on FY20E cash flow (approx.).

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

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

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