Vivo Energy Plc – Witnessed strong improvement in gross cash profit

Vivo Energy Plc (LON: VVO) is a FTSE 250 listed Company, which is engaged in the business of oil refining and markets under the brand of Shell to retail and commercial customers.

Rationale for Valuation – Speculative Buy at GBX 78.90

• During the quarter, the Company is encouraged by the resilient performance, with a strong improvement in gross cash profit.
• As per valuation metrics, EV/Sales and EV/EBITDA multiples of the VVO are currently lower as compared to the corresponding multiples of the Oil & Gas industry.
• The Company recorded a lower debt-equity ratio of 1.25x (H1 FY20) against the industry median, which reflects that VVO is less leveraged as compared to the industry.
• From the technical standpoint, shares are trading well above the short-term support level of 200-day (GBX 78.05) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company is exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change.
• It may experience an increase in operating expenses due to disruptions in the supply chain.
• The Company’s business is exposed to risks such as compliance risk, fraud, criminal activity and bribery, which could result in reputational damage.

Recent News

On 7 December 2020, the Company stated that it had paid an interim dividend per share of 2.65000 US cents (1.94019 pence) to the shareholders.

On 25 November 2020, the Company announced the appointment of Douglas Lafferty, as Chief Financial Officer. Douglas will take up his position and be appointed to the Board with effect from 1 February 2021. While the current Chief Financial Officer (Johan Depraetere) has decided to retire from his role in the first half of 2021.

Q3 FY20 Trading Update (for the quarter ended 30 September 2020 (Q3 FY20), as on 30 October 2020)

(Source: Company Website)

• During the quarter, the gross cash unit margins were higher at $75 per thousand litres as compared with the corresponding period of the last year.
• Led by the easing of COVID-19 related mobility restrictions in the markets, the volumes for Q3 FY20 has significantly improved from the previous quarter (Q2 FY20). However, it remained 7% lower year-on-year.
• Unit margins benefitted by US$1 per thousand litres, driven by the accounting treatment of hyperinflation in Zimbabwe and positive forex impact.

Six Months Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In September 2020, the Company successfully accomplished the debut bond offering, raising US$350 million to refinance the existing amortising long-term debt. This provides additional balance sheet flexibility and enhances the Company's presence in the capital markets. While it is cautiously optimistic for the rest of the year and into 2021. The Board has restarted dividend payments, which will strengthen the Company’s balance sheet. Overall, in Q3 FY20, the Company is encouraged by the resilient performance and seems to be well-positioned for the future, with attractive long-term growth opportunities across Africa. The stock made a 52-week low and high of GBX 59.80 and GBX 131.00, 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 Vivo Energy at the current market price of GBX 78.90 (as on 21 December 2020, before the market close at 10:55 AM GMT), with lower double-digit upside potential based on 22.58x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Sabre Insurance Group Plc

Sabre Insurance Group Plc (LON: SBRE) is a UK based motor insurer that offers diversified products through different distribution channels. The Company owns brands, such as Insure 2 Drive and GO Girl.

On 16 March 2021, the Company will release the 2020 full-year results.

Rationale for Valuation – Speculative Buy at GBX 248.00

• Gross Written Premiums picked up in Q3 FY20, with strong organic capital generation and robust balance sheet.
• The Company seems to be well-positioned and is giving a consistent performance, with an attractive dividend for the full-year and current solvency ratio of 186%.
• The debt/equity ratio was nil in the past three years, reflecting that the Company is less leveraged as compared to the industry.
• The Company has decent fundamental metrics as it has maintained a pre-tax ROE (return on equity) above 8% for the last two years.
• From the technical standpoint, 14-day RSI stood at 43.15, which is supporting the upside movement.

Key Risks

• Any uncertainty in the financial transactions and losses above the charged premiums could lead to financial and insurance risk.
• Moreover, the Company operates in a strict regulatory environment; any change in regulations or government policies could affect the overall business of the Company.

Recent News

On 3 December 2020, the Company announced the appointment of Karen Geary as a Non-executive Director.

Trading Update (for the nine months ending 30 September 2020, as on 13 October 2020)

• The Company has increased the prices of premium to cover underlying claims and other cost inflation of approximately 10% per year (which are fully covered).
• The Company has shown a strong organic capital generation, with a solvency coverage ratio of 186% as at the end of September 2020 (which was higher than the target range of 140% to 160%).
• Despite the COVID-19 pandemic and related disruption, the Company has continued to perform well.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

SBRE witnessed a strong balance sheet with no debt obligations. On a year-on-year basis, the gross written premium for FY20 is anticipated to be in-line with guidance, with a likely outcome of approximately 10% lower year-on-year. For FY20, the Company expects a combined ratio to be close to the long-term mid-70%'s target. It also expects an attractive dividend for the full year, with an increase in current solvency ratio from the target 140% to 160% range. The Company has shown a higher policy volume than anticipated and also achieved high average premiums. Overall, the Company is giving a consistent performance, with a strong balance sheet. The Board is also confident of performing well through the rest of this financial year and in the longer-term. The stock made a 52-week low and high of GBX 196.27 and GBX 328.76, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Sabre Insurance Group at the current market price of GBX 248.00 (as on 21 December 2020, before the market close at 10:30 AM GMT), with lower double-digit upside potential based on 2.75x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.

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

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