Lloyds Banking Group Plc

Lloyds Banking Group Plc (LON: LLOY) is an FTSE 100 index listed Banking Company. It operates under three segments: Commercial Banking, Retail Banking and Insurance and Wealth.

On 29 July 2021, the Company will release its H1 FY2021 results.

The next dividend could be declared on 29-July-2021 with the H1 FY2021 results (interim dividend).

Investment Rationale for Valuation – Expensive at GBX 48.39

• Vimlesh Maru, director of retail of LLOY, recently sold a substantial £435,000 worth of stock of the Group.
• Fitch has recently downgraded LLOY’s long-term issuer default rating to ‘A’ from ‘A+’.
• LLOY’s pre-tax ROE and pre-tax ROA are lower than corresponding industry medians of 6.6% and 0.5%, respectively, in FY2020.
• Over the last two years, LLOY’s stock yielded a lower return than its benchmark FTSE 100 index.
• The stock is currently trading near its 52-week high price of GBX 50.56, raising doubts about its upside potential.
• On the technical front, the 20-day EMA at around GBX 48.41 is higher than the stock price. Hence, the stock price could have a downward movement in the near term.

Key Risks

• LLOY added £400 million central overlay in FY2020 due to significant uncertainties that are still in place.
• The group is exposed to credit and counterparty risks and there are financial risks from unfavourable interest and exchange rate movements. These could affect LLOY’s margins.
• Unfavourable macroeconomic factors could reduce the pipeline of opportunities.
• There is a change in the CEO position, which adds to the uncertainty.

Q1 FY2021 Trading Update (released on 28 April 2021)

(Source: LSE Website)

• Due to Covid-19 induced lower business activities and lower interest rates, Net Interest Income was under pressure. It went down by ~9.3% YoY in Q1 FY2021.
• However, driven by expected credit loss provisions, the statutory profit after tax significantly rose by ~191% YoY in Q1 FY2021.
• CET1 ratio surged to 16.7% in Q1 FY2021 with a notable improvement from 16.2% in FY2020.
• Driven by an increase of £6.0 billion in the open mortgage book, loans and advances to customers went up by £3.3 billion in Q1 FY2021.
• Primarily due to optimisation activity undertaken in Commercial Banking, risk-weighted assets were down by £3.8 billion in Q1 FY2021.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

Though LLOY has achieved a decent result in Q1 FY2021, the outlook remains uncertain. The change in the CEO position of the Group further added to this uncertainty. However, resilient consumer spending and auto finance could revive the margins. Overall, the UK banks could benefit from a resilient UK mortgage market. However, the stock is currently trading near its 52-week high, indicating overstretched valuation. The stock made a 52-week low and high of GBX 23.59 and GBX 50.56, respectively.

Considering the rating downgrade, recent stock selling by an insider, lower return of the Company than the industry, and unfavourable valuation as done using the above method, we have given an “Expensive” recommendation on Lloyds Banking Group Plc at the current market price of GBX 48.39 (as on 14 June 2021 at 7.10 AM GMT), while we look forward to reinvesting when the benefits from the resilient UK mortgage market become visible.

Dev Clever Holdings Plc

Dev Clever Holdings Plc (LON: DEV) is a UK based software and computer services company. DEV uses its technology to engage, educate and experience, these three core channels.

Investment Rationale – Expensive at GBX 26.71

• DEV has still a loss-making operation, which may not turn into profit in the near future.
• The Company relies on equity funding to raise liquidity. Failure to do so would lead to a liquidity crunch.
• Since FY2018, DEV’s net margin is negative and lower than the industry median of 11.0%.
• On the technical front, the 50-day EMA at around GBX 27.23 is higher than the stock price, indicating a potential downward movement in the near term.

Key Risks

• The disruptive technologies by competitors could affect the margin and market share of DEV.
• Due to its loss-making operations, DEV could be exposed to liquidity risk.
• Recently, there was a change in management. It could pose some uncertainty to DEV’s strategy.
• The acquisition of Phenix Digital may not offer the desired synergy.

Recent News

Contract win in India: On 9 June 2021, DEV announced that it had secured a USD 1.5 million contract in India, which involves a five-year exclusive partnership with the National Independent Schools Alliance. This institution is India's largest governing body for budget private educational institutions.

Financial Highlights (for the year ended 31 October 2020 (FY2020), as of 29 March 2021)

(Source: LSE Website)

• Driven by the establishment of sales channels and the acquisition of Phenix Digital, total revenue was up 161% YoY in FY2020.
• Due to the significant costs incurred in ongoing investments, strengthening of management teams and initiating a dedicating marketing function, DEV suffered a loss before tax of £1.06 million in FY2020 compared to the loss of £1.07 million in FY2019.
• It led to an adjusted loss per share of GBX 0.19 compared to GBX 0.23 in FY2019.
• However, due to the equity capital raising, cash position significantly surged to £1.03 million in FY2020 from £0.50 million in FY2019.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Conclusion

Though DEV has made significant investments and secured key contracts, the results of these are not yet visible. As of FY2020, DEV still has loss-making operations.  The management could not provide detailed guidance for DEV’s future profitability. The Company relies on external liquidity to manage its working capital needs. The stock is also trading near its 52-week high, indicating overstretched valuation. The stock made a 52-week low and high of GBX 5.30 and GBX 39.50, respectively.

Considering the loss-making operations, reliance on external funding, lack of detailed guidance, lower profitability of the company than the industry, and unfavourable valuation as done using the above method, we have given an “Expensive” recommendation on Dev Clever Holdings Plc at the current market price of GBX 26.71 (as on 14 June 2021 at 8.30 AM GMT), while we look forward to reinvesting when the positive results of DEV’s significant investments and contract wins become visible.

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

Disclaimer

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