Redrow Plc – Operating with a robust balance sheet and a strong forward order book

Redrow Plc (LON: RDW) is the United Kingdom-based housebuilder Company and is acknowledged as one of the famous residential housing developers in Wales and England.

Rationale for Valuation – Hold at GBX 528.50

• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of the RDW are currently lower as compared to the corresponding multiples of the Homebuilding & Construction Supplies industry.
• With a healthy balance sheet and a strong forward order book, the Company seems to be well-positioned to provide a solid platform for the future and also deliver a robust set of results this financial year.
• The Company recorded a lower debt-equity ratio of 0.10x (June 2020) against the industry median, which reflects that RDW is less leveraged as compared to the industry.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 459.20) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company faces a significant risk of availability of raw materials and supplies due to Covid-19 crisis.
• The project’s completion could be delayed due to a complex regulatory environment and lockdown restrictions.
• The recessionary economic conditions can impact consumer confidence and demand in the short-term.

Trading Update (for the period ending 30 October 2020, as on 6 November 2020)

• In the 18 weeks to 30 October 2020, the value of net private reservations increased by 5% year-on-year to £630 million (2019: £598 million (excluding £119.5 million PRS sale at Colindale Gardens)).
• The Company witnessed strong demand in the regions, with an increase of 17% in the value of reservations 1.
• On a like-for-like basis, the private revenue per outlet per week increased to £0.3 million (excluding the PRS sale) as compared to £0.26 million in 2019.
• For the first 18 weeks, the average selling price of private reservations was up by 2% to £396,000 against the £389,000 (excluding the PRS sale) in 2020.
• For the 18 weeks to 30 October 2020, the homes turnover was 48% ahead of last year at £657 million.
• The Company has shown a strong balance sheet, with net cash of £115 million at the end of week 18.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has entered the new financial year with strong trading since the start of the year. Presently, the total forward order book for the period ending 30 October 2020 was up by 10% year-on-year to £1.5 billion. The Company expects cash to be positive for the remainder of the financial year. Further, the Company reported that it is making good progress on scaling-back the operations in London. On the year to date (till 30 October 2020) basis, the Company has operated from 116 outlets and expects 118 outlets at the end of the current financial year. Overall, it has a healthy balance sheet and a strong forward order book, which creates a solid platform for the future. The stock made a 52-week low and high of GBX 293.00 and GBX 850.76, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Redrow at the current price of GBX 528.50 (as on 26 November 2020, before the market close at 8:32 AM GMT) and will recommend fresh buying at the right time.

UK Oil & Gas Plc

UK Oil & Gas Plc (LON: UKOG) is an oil and gas exploration Company. The Company’s main focus is to ensure and meet the growing need of energy for the UK and to ensure the conservation of natural beauty of the region. The Company is having a portfolio of investments in onshore exploration, development, appraisal and production assets.

Rationale for Valuation – Avoid at GBX 0.225

• The Company’s profitability margins and Return on equity are in the negative zone.
• The stock has underperformed the index (FTSE AIM All-Share) during the last year and delivered a negative return of approximately 83% in the last year.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• Price to Earnings, Price to Cash Flows and EV to EBITDA metrics are in the negative zone as compared to the Oil & Gas industry multiple.
• From the technical standpoint, the 200-day simple moving average price is currently at around GBX 0.26, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• Any failure to generate substantial free cash flow can affect the business prospects of the Company.
• Besides the liquidity risk, the Company operations are subject to regulatory and environmental risk.
• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.

Recent News

On 20 November 2020, the Company stated in the Horse Hill Judicial Review that it has decided (at this time) to grant long-term production planning consent at UKOG's 85.64% owned Horse Hill oil field. Further, the court will uphold SCC's (Surrey County Council's) decision.

On 2 October 2020, the Company has successfully raised £2.2 million of fund for Turkish Resan oil appraisal and exploration project.

Financial Highlights (for the six-month period ended 31 March 2020 (H1 FY20), as on 30 June 2020)

(Source: Company Website)

• Led by lower oil prices and lower oil production, the revenue declined to £88 thousand in H1 FY20 (H1 FY19: £103 thousand).
• Reflecting lower revenue for the period, the gross profit declined to £48 thousand as compared with the corresponding period of the last year.
• The basic and diluted loss per share stood at 0.01 pence in H1 FY20.
• On 31 March 2020, the cash balance was £780 thousand, a decrease from the same period last year.
• The borrowings increased to £5.48 million at the end of March 2020 from £2.3 million at the end of March 2019, due to the acquisitions of additional equity stakes in Horse Hill Development Ltd.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company’s operational performance was challenged by Covid-19 outbreak and collapse in the price of Brent Crude. The Company remains exposed to low prices for the products. While the price of oil and related products has improved in the last few months. UKOG’s business is exposed to economic and market fluctuations, which may adversely affect the Company’s business and financial performance. However, it has taken actions to mitigate any impact of COVID-19 on operations. The Company has also adopted several cost-cutting measures (until the crisis gets subside). Overall, the Company is still in the development stage and works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The stock made a 52-week low and high of GBX 2.08 and GBX 8.75, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on UK Oil & Gas at the current price of GBX 0.225 (as on 26 November 2020, before the market close at 8:31 AM GMT).

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

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

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