Severfield Plc – Operating with a strong order book

FTSE All-Share listed Severfield Plc (LON: SFR) is an industrial engineering Company, which is engaged in the business of structural steel.

Rationale for Valuation – Speculative Buy at GBX 69.00

• As per valuation metrics, Price/Earnings, EV/Sales and EV/EBITDA multiples are currently lower than the Construction & Engineering industry multiples.
• The company's debt/equity ratio in the past two years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.12x.
• In the last six months, the Company has delivered a decent return of ~20.52%, which was higher as compared to the FTSE All-Share Index.
• The Company has a robust balance sheet and a strong reputation for delivery of complex projects, with good visibility of future earnings from the order books.
• From the technical standpoint, shares were trading well above the short-term support level of 100-day (around GBX 65.3) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company works on complex and potentially hazardous projects, which require continuous monitoring of health and safety risks.
• SFR operates in multiple locations, and any change in the economic and political policy could hamper the Company’s operating performance.

Financial Highlights (for the period ended 30 September 2020 (H1 FY21), as on 24 November 2020)

(Source: Company Website)

• The revenue for H1 FY21 increased by 40% year-on-year, driven by an increase in order flow and production activity as well as generated additional revenue from Harry Peers (which acquired in October 2019).
• The Company has undertaken more than 80 projects in the UK, Ireland, and continental Europe during the period.
• It has shown good cash generation and strong balance sheet, with the UK and Europe order book of £287 million as of 1 November 2020.
• The Company has declared an interim dividend per share of 1.1 pence, which will be paid on 8 January 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company delivered a strong performance in the period, with increased UK and Europe order book, increased revenues and good cash generation. Further, the Company expects to improve profitability in H2 FY21 as compared with H1 FY21. Moreover, SFR has a strong order book, with an encouraging pipeline of opportunities, a strong balance sheet position and good long-standing client relationships. It has also declared an interim dividend, which shows financial growth and operational improvements. The stock made a 52-week low and high of GBX 51.20 and GBX 92.20, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Severfield at the current market price of GBX 69.00 (as on 22 February 2021, before the market close at 8:27 AM GMT), with lower double-digit upside potential based on 13.7x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Card Factory Plc – Achieved good growth in online sales

Card Factory PLC (LON: CARD) is a FTSE All-Share listed retailing Company, which deals in gift dressings, gifts and greeting cards.

On 20 April 2021, the Company will announce the preliminary results for the year to 31 January 2021.

Rationale for Valuation – Speculative Buy at GBX 32.76

• As per valuation metrics, Price/Earnings and EV/EBITDA multiples of the CARD are currently lower as compared to the corresponding multiples of the Speciality Retailers industry.
• On the liquidity front, the current ratio was 0.97x in H1 FY21, which was in line with the industry median.
• Despite the lower sales during the period, the online business continues to improve and generate higher sales.
• From the technical standpoint, 14-day RSI stood at 41.79, which is supporting the upside movement.

Key Risks

• The Company is facing a significant financial impact due to stores closure with coronavirus led restriction.
• Another wave of the pandemic would result in the shutdown of the stores and might hamper the supply chain of the group.
• The UK economy and the business may be adversely affected by regional tensions and instability.

Trading Update (for the eleven months ended 31 December 2020, as on 14 January 2021)

• During the period, the sales stood at £281.4 million, with a decrease of 38.1% YoY in store sales.
• The Company saw strong online sales, with an increase in cardfactory.co.uk of 137% LFL and gettingpersonal.co.uk of 10% LFL.
• Over the period, the sales to trading partners increased by around 63% as compared with the previous year.
• The Company expects existing bank facilities would be sufficient to meet the current requirements if current lockdown does not extend beyond 30 April 2021.
• The recovery post first lockdown stood ahead of management’s expectations.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company expects revenue for full-year to be around £284 million and LBT (loss before tax) to be approximately £10 million. CARD will be able to fully open all stores once the lockdown is eased. Moreover, the Company is in no position to provide any guidance for the financial year 2022. Meanwhile, it has taken significant actions to strengthen financial liquidity and remained highly cash generative. Before the impact of COVID-19, the Company had made a satisfactory start to the year. Moreover, the first-half results were in line with the expectations and successfully launched the new Cardfactory.co.uk platform. The stock made a 52-week low and high of GBX 22.00 and GBX 89.25, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Card Factory at the current market price of GBX 32.76 (as on 22 February 2021, before the market close at 8:35 AM GMT), with lower double-digit upside potential based on 1.17x EV/NTM Sales (approx.) on FY21E sales (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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