Pets at Home Group Plc - Balance sheet and liquidity remained strong

Pets at Home Group Plc (LON: PETS) is a retailer of pet food, pet products and pet-related services.

On 24 November 2020, the Company will announce the FY21 interim results.

Rationale for Valuation – Hold at GBX 394.40

• The Company has decent fundamental metrics as it has maintained a Gross margin above 45% for the last five years.
• Pets at Home Group recorded a lower debt-equity ratio of 0.67x (FY20) against the industry median, which reflects that PETS is less leveraged as compared to the industry.
• In the last year, the Company has delivered a sparkling return of ~90.16%, which is higher as compared to the FTSE 250 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 303.85) and 50-day (GBX 290.06) simple moving average price, which reflects an uptrend in the stock.

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 first half of the financial year, as on 24 September 2020)

• As earlier highlighted on 31 July 2020, the last eight weeks of Q1 FY21 had seen sales momentum returning across all regions.
• The positive momentum experienced in Q1 FY21 has continued into the second quarter of 2021, with a double-digit LFL growth in customer sales (the eight weeks to 10 September 2020).
• However, COVID-19 has created several uncertainties around the trading environment, due to the potential risk of second round of lockdown.

One Year Share Price Chart

 Daily Chart as of 25 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

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

Conclusion

For FY21, the Company expects the underlying pre-tax profit to be ahead of current market anticipations. It also maintained a strong balance sheet and liquidity positions. The Company continue 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. Overall, the Company has substantial resources in place to navigate through the challenging phase of the pandemic and generate long-term value for shareholders. The stock made a 52-week low and high of GBX 174.90 and GBX 394.40, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Pets at Home Group at the closing price of GBX 394.40 (as on 25 September 2020) and will recommend fresh buying at the right time.

PZ Cussons Plc – Expecting a strong demand for hygiene brands.

PZ Cussons Plc (LON: PZC) is a consumer products company. The Company operations are divided into four categories being Home Care, Personal Care & Beauty, Electricals, and Food & Nutrition.

Rationale for Valuation – Hold at GBX 230.50

• In the last year, the Company has delivered a positive return of ~11.89%, which is higher as compared to the FTSE 250 Index.
• STEM’s current ratio (at 1.37x) is higher while debt/equity (at 0.36x) is lesser than the industry median, reflecting that the Company is less leveraged and managing the short-term obligations well.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 203.40) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company has limited suppliers from where it sources the strategic raw materials and any breakdown in the supply, especially considering the risk from Covid-19 and Brexit, would result in the Company's inability to manufacture and satisfy customer demand.
• Moreover, there is a shift in consumer demand with channel closures due to lockdown.
• Also, the volatility in the prices of commodities and raw materials can affect the operational margins.

Trading Update (for the first quarter ended 31 August 2020, as on 23 September)

(Source: Company Website)

• The Company witnessed a good performance in Q1 FY21, with revenue growth of 23%. It has also shown growth in all three regions and an improvement in profitability.
• PZ Cussons has a strong balance sheet and liquidity position, after the decrease in net debt (against the year-end).
• The Company saw a recovery of results in Nigeria, Australia, and Beauty.
• It has delivered an excellent performance in Indonesia and the UK.

One Year Share Price Chart

 Daily Chart as of 25 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

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

Conclusion

In Q2 FY21, the Company plan to increase investment in building the brands and capabilities. The operating landscape stays highly volatile, with the continuing uncertainty of the COVID-19 pandemic. Hence, it remains difficult to provide guidance. Further, the Company expects some adverse headwinds for the rest of the financial year 2021. However, the first-quarter results have given a good start to the new financial year with a growth in Focus Brands of 37% (at constant rates of exchange) and an improvement in profitability.

Moreover, the Company has a strong balance sheet and financial resources to meet the challenges ahead. Overall, the Company is likely to deliver sustainable top-line growth and improved operating margin. The stock made a 52-week low and high of GBX 149.00 and GBX 240.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on PZ Cussons at the closing price of GBX 230.50 (as on 25 September 2020) and will recommend fresh buying at the right time. 

*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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