Amigo Holdings Plc (AMGO)

Amigo Holdings Plc (AMGO) is a consumer finance company and was incorporated in the year 2005. Since then, it has grown to become one of the largest providers of guarantor loan in the UK. The guarantor loan business model brings the second individual to the lending relationship, and they could be a friend, a family member, those who have a strong credit profile than the user of the fund.
 
Financial Performance – FY2019 (£mn)
For the year ended March 31, 2019, group’s revenue surged by 28.4% to £270.7 mnfrom £210.8 mn in the year-ago period. The stellar performance was driven by decent growth in the loan book and new customers added. Net loan book during the year under review expanded by £104.9 mn or 17.4% to £707.6 mn and number of customers at the year-end was at 224,000 and recorded a growth of 23.1% from 182,000 in the year-ago period.

Amigo’s cost-to-income ratio during the FY19 period stood at 17.5%against 21.9% recorded in the previous financial year.  Post-tax profit of the lender increased substantially by 75.1% to £88.6 mnfrom £50.6 mn reported in 2018. However, the group's adjusted profit after tax improved by 38.3% to £100.1mn from £72.4 mn in the FY18. Basic earnings per share of the company surged to 19.4 pence per share and improved by 52.8% against the corresponding previous year. On an adjusted basis, basic earnings per share increased by 21.5% to 22.0 pence per share.

During the financial year 2019, the board of the Amigo Plc has recommended a final dividend of 7.45 pence per share and bringing the total dividend for FY19 to 9.32 pence per share. However, the final dividend is subject to the shareholders' approval.

Stock Performance

Daily price chart (as on May 29, 2019), after the market closed. (Source: Thomson Reuters)

As on May 29, 2019, shares of AMGO closed at GBX 236.0 and added 2.0 points or 0.85% against the previous day closing price. The stock has registered a 52w high of GBX 314.95 and a 52w low of GBX 145.06, and at the current price level, the stock was trading around 62.7% above the 52w low price level.
Shares of the Amigo Plc were trading above the 60-day simple moving average price level, but slightly below the 200-day simple moving average price level.

Valuation Methodology


Conclusion
Amigo's solid balance sheet with low debt, high liquidity and conservative provisioning create a competitive moat for its peers. The group performed well during the financial year 2019, with free cash flow surged by 35% to £515.7 mn. Also, the cost-to-income ratio of the lender improved from 21.9% in FY18 to 17.5% during FY19, an accounting measure that reflects the relation between the running cost of business against its operating income. The lower the ratio is, the more lucrative the bank should be. It provided insights into the efficiency of the operation.

During the FY19, group's stage-1 provisioning rate has fallen from 6.4% to 4.2%, and this reflects the group's risk management system. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Buy” recommendation at the closing of GBX 236 (as on May-29-2019) with low double-digit upside potential, based on the 8x NTM Industry Median Price-to-Cash Flow (approx.) multiple on the FY20E cash flow per share (approx.).
 

Renold Plc (RNO)

Renold PLC (RNO) is a Manchester, United Kingdom-based world's leading manufacturer of industrial chain, gearboxes and couplings. The company’s market-leading products deliver high precision engineered and power transmission products that can be used for diverse applications, including power transmission, lifting, conveying and processing. The company has an international network of distribution partners and operations in almost 20 countries, helping it to provide specific solutions to customer's problems and tackle thousands of demanding operating environments. The company’s operations are differentiated in two operating segments: Chain segment and Torque Transmission segment.

Key Financial Highlights (FY 2019, in £m)

 (Source: Company Filings)

Driven by the targeted recovery of material price increases and organic volume growth, underlying revenue increased by £11.6m (+6.1%) to £202.4 mn.Reported operating profit after adjusting items was £16.2m (2018: £5.6m), while adjusted operating profit for the year rose to £16.4m (2018: £14.2m). Reflecting improved performance of the Chain division, adjusted operating profit margin rose from 7.4% in FY 2018 to 8.1% in FY 2019. Adjusted EBITDA was £24.1m (2018: £21.5m). Adjusted profit before tax rose to £14.2m (2018: £12.5m), while the reported profit before tax (PBT) was £11.2m (2018: £1.4m). From a loss of £2.2m reported in FY 2018, a profit after tax of £7.7m was achieved in FY 2019, translating into basic EPS of 3.3p. Basic adjusted EPS increased to 4.9p from 4.5p in FY 2018.

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


Share Price Commentary

Daily Chart as at May-29-19, after the market closed (Source: Thomson Reuters)
 
On 29^th May 2019, RNO shares closed at GBX 29.50, down by 1.67 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 40.80/GBX 24. On the fundamental front, the company was trading at a trailing twelve months P/E multiple of 6.1x, against industry median of 12.7x. The company’s stock beta was 0.79, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £66.64 million.

Conclusion
The company’s operations can be disrupted due to the threat of increased tariff restrictions, especially in the US, which represents 34% of group revenue. However, despite partial introduction on tariffs, the business has continued to grow. Strong order intake continued through the year, with orders for the full year were ahead of the revenue and providing the basis for a continuous improvement in the new financial year and underpinning future growth. Growth rates in more developed markets continue to be outperformed by growth in the developing markets of China and India. Adjusted operating profit for the year represents the highest level delivered under the current strategic plan, driven by encouraging organic growth as well as improved operational efficiency. Despite labour cost inflation and the significant relocation of the Chinese factory, continued successful execution of the strategic plan has enabled margin improvement. Based on a decent prospect and supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 29.50 (as on 29th May 2019) with a low double digit-upside potential based on 1.37x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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