GB Group Plc

GB Group Plc (LON: GBG) is an FTSE AIM All-Share index listed Company founded in 1989. The Company provides a range of solutions to its clients for validating and verifying the location and identity of their customers.

On 29 July 2021, the Company will conduct its annual general meeting.

The next dividend of GBX 3.40 per share would be paid on 3-August-2021(final dividend).

Investment Rationale for Valuation – Speculative Buy at GBX 822.00

• During FY2021, GBG acquired 100% of the share capital of Investigate 2020 Ltd and 10.53% of the share capital of CredoLabs Pte Ltd.
• David Ward, the new CFO, recently bought 7,656 shares of GBX 2.50 each in the Company.
• In FY2021, GBG achieved a record financial performance, exceeding market expectations.
• On the profitability front, the net margin in FY2021 is higher than the industry median of 11.2%.
• On the leverage front, the debt/equity ratio in FY2021 is below the industry median of 0.19x.
• In the last two years, the stock has achieved a higher return than its benchmark FTSE AIM All-Share index. There is a good chance that this trend could continue in the future.
• On the technical front, 14-day RSI at about 30.68 is sustaining just above the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• The acquisitions may not bring the desired synergy to the Company, increasing costs and affecting the margins.
• The change in top management could affect the short-term company strategy.
• The payment of dividends could affect GBG’s liquidity.
• Disruptive technologies from competitors could reduce the market share of GBG.

Financial Highlights (for the year ended 31 March 2021 (FY2021), as of 15 June 2021)

(Source: LSE Website)

• Driven by solid demand from existing customers as well as the addition of new customers, revenue was up 9.3% YoY in FY2021.
• This led to adjusted operating profit up by 20.8% YoY and net income surging by 66.1% YoY in FY2021.
• The surge in net income and GBG’s cash-accretive operations resulted in a net cash position of £21.1 million from net debt of £35.0 million in FY2020.
• Due to this solid liquidity, GBG announced a final dividend per share of GBX 3.40.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

Covid-19 acted as a tailwind to GBG as it accelerated customer digitalisation and led to more online activity for customers. The Company would continue to invest in technology and market capabilities in FY2022. The Company has a solid liquidity position to continue its value accretive acquisitions in FY2022. The completed acquisitions could add significant scale, market share and value to the Company. The stock made a 52-week low and high of GBX 641.00 and GBX 999.00, respectively. On the technical chart, the next important support level is GBX 682.00.

Based on better profitability and leverage profile of the Company than the industry, its favourable prospect driven by continued solid customer demand, its decent growth prospects, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on GB Group Plc at the closing market price of GBX 822.00 (as on 21 June 2021), with a lower double-digit upside potential based on 50.57x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Hotel Chocolat Group Plc

Hotel Chocolat Group Plc (LON: HOTC) is an FTSE All-Share index listed British food producer company founded in 1993. It produces cocoa and premium chocolate related products and sells to consumers directly in the UK and abroad.

On 22 July 2021, the Company will release its next trading update.

Investment Rationale for Valuation – Speculative Buy at GBX 367.50

• HOTC has planned to acquire the entire share capital of Rabot 1745 Limited.
• During the past year, HOTC increased its customer base drastically, with over one million new customers added to the database.
• HOTC has opened its physical locations again, and it would launch a strong pipeline of new products during the summer of 2021.
• On the profitability front, HOTC’s net margin in H1 FY2021 is higher than the industry median of 3.1%.
• In the last five years, the stock has achieved a higher return than its benchmark FTSE AIM All-Share index. Given the prospects of HOTC, this trend could continue.
• On the technical front, 14-day RSI at about 44.80 is moving towards the oversold zone. Hence, there could be a potential uptick in the stock price in the near term.

Key Risks

• HOTC now operates in new locations. It could increase business complexities and costs, affecting the margins of HOTC.
• Negative publicity could affect customer demand and loss of customers. It could affect the top-line.
• British food producers are facing global inflation for raw materials as well as post-Brexit customs challenges. Hence, it could affect HOTC’s margins.
• Inconsistent quality of products could impact the demand as well as the goodwill of HOTC.

.Eight-Week Period ended 25 April 2021 Trading Update (released on 10 May 2021)

• Due to the strength of HOTC’s Omni-channel sales model, it has achieved strong performance driven by its digital channels and subscription products.
• It led to a dramatic revenue increase of 60% for the eight weeks ended 25 April 2021, compared to the same period in FY2020.
• HOTC’s revenue for the eight-week period was even 19% higher than the comparative eight-week period in pre-Covid 2019.
• This resilience in performance has led the Board to decide torepay the furlough funding received from the UK Government. The cost of repayment would be ~ £3.1 million.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

Driven by its Omni-channel capabilities, HOTC now performs better than even the most recent pre-Covid period. It has also increased its customer portfolio by 47% and opened its physical locations. Furthermore, it has an attractive pipeline of new products to be launched in the summer of 2021. Due to this, the management looks forward to further growth and substantial investment in FY2021 and plans to acquire the entire share capital of Rabot. Overall, the Company has a decent prospect in 2021. The stock made a 52-week low and high of GBX 277.00 and GBX 475.00, respectively. On the technical chart, the next important support level is GBX 310.00.

Based on better profitability of the Company than the industry, its decent prospect driven by Omni-channel capabilities, strong new product pipeline, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Hotel Chocolat Group Plc at the closing market price of GBX 367.50 (as on 21 June 2021), with a lower double-digit upside potential based on 3.00x EV/NTM sales (approx.) on FY22E sales (approx.).

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

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

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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