Hikma Pharmaceuticals PLC – Improved guidance following the strong H1 FY20.

FTSE 100-listed Hikma Pharmaceuticals PLC (LON: HIK) is the United Kingdom-based pharmaceuticals and biotechnology Company, specializes in the business of developing, manufacturing, and marketing of a portfolio of branded and non-branded generic medicines.

Rationale for Valuation – Buy at GBX 2,547.00

• The recent approval of its generic version of Advair Diskus® is an important milestone against its strategy to develop complex respiratory products.
• From the technical standpoint, 90-day RSI (45.79), which is supporting the upside movement.
• It has raised full-year guidance for Generics and reiterated current guidance for Injectables and Branded.
• For Generics division, it continued to expect core operating margin in the range of 18% to 19% for the FY20.
• As per valuation metrics, Price/ Cash Flow, EV/Sales, Price/Book, and Price/Earnings multiples of the AstraZeneca PLC are currently lower.

Key Risks

• The global macroeconomic, political, and regulatory risks could further affect business performance.
• Being a Pharmaceuticals Company, it needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.

Recent News

17 December 2020: Hikma launched a generic version of GlaxoSmithKline's Advair Diskus® (Fluticasone Propionate and Salmeterol Inhalation Powder). Hikma worked with Vectura Group, to develop the proprietary dry powder inhaler and formulation technology.

5 November 2020: Hikma has launched Icosapent Ethyl Capsules, 1gm, in the US through its US affiliate, Hikma Pharmaceuticals USA Inc.

Trading Statement (as on 5 November 2020)

• Hikma has been performing well, maintaining the positive momentum of H1 FY20.
• The operational excellence is supported by the breadth of its portfolio, the flexibility of its manufacturing capabilities and the strength of commercial and distribution channels.
• It continued to see good demand for marketed products and delivering strong performance from new launches.

One Year Share Price Chart

 (Source: Kalkine Group, Refinitiv)

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

Conclusion

Hikma has been performing well, maintaining the positive momentum of H1 FY20. The operational excellence is supported by the breadth of its portfolio, the flexibility of its manufacturing capabilities and the strength of commercial and distribution channels. Moreover, it continued to see good demand for marketed products and delivering strong performance from new launches.

In terms of guidance, for global injectables division, it has reiterated its FY20’s revenue guidance of between US$950-980 million, with core operating margin in the range of 38% to 40%. For Generics division, it has increased the revenue guidance from US$710-730 million to US$720-740 million. In terms of financial position, it has been maintaining a healthy balance sheet with low leverage at 0.8x net debt to core EBITDA. The stock made a 52-week low and high of GBX 1,596.00 and GBX 2,768.00, respectively.

Based on the positive trading momentum, decent fundamentals, and support from the valuation as done using the above method, we have given a “Buy” stance on Hikma Pharmaceuticals PLC at the current market price of GBX 2,547.00 (as on 4 January 2021, before the market close at 8.05 AM GMT), with lower double-digit upside potential based on 24.21x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Beazley PLC – Witnessing growth across all divisions.

Beazley PLC (LON: BEZ) is a FTSE 250 listed specialist insurance Company. The major operations are based in Europe, the United States, and the Pacific region.

On 5 February 2021, BEZ expects to release the FY20 results.

Rationale for Valuation – Buy at GBX 366.40

• Pricing conditions are positive, and the Company has substantial capital in place to take advantage of these market conditions.
• The Company recorded a lower debt-equity ratio of 0.33x (H1 FY20) against the industry median, which reflects that Beazley is less leveraged as compared to the industry.
• As per valuation metrics, EV/Sales and Price/ Book Value multiples of the BEZ are currently lower as compared to the corresponding multiples of the Insurance industry. It reflects, shares are undervalued as compared to the industry.
• Growth was achieved across six of the seven divisions. In FY20, the Board believes that it will maintain double-digit top-line growth.
• From a technical standpoint, 20-day SMA (360.20), 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.
• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.
• The Company’s performance is also subject to certain risks such as volatility and fluctuations arising from the prevailing COVID-19 mayhem, Brexit and US-China tension can significantly impact the market prices of assets, liabilities, equity, and credit markets.

Recent News

25 September 2020: Nicola Hodson has been appointed as a member of the Remuneration Committee, while John Reizenstein became a member of the Nomination Committee, with immediate effect.

Trading Statement for the nine months ended 30 September 2020 (as on 6 November 2020)

(Source: Company Website)

• The gross written premium increased by 16% to US$2,534 million (Q3 FY19: US$2,192 million), which was ahead of expectations.
• The premium renewal rates also surged by 14% against 9M FY19.
• The Covid-19 first party loss estimate remained unchanged at US$340 million net of reinsurance.
• As of 30 September 2020, the investment return stood at the US$124 million.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters) 

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

Conclusion

During the 9M FY20, the Company witnessed strong, double-digit premium growth across the business, driven primarily by rate increase across all divisions. The Company expects to maintain low double-digit top-line growth by 31 December 2020. Also, it expects that the FY20 combined ratio will be achievable of approximately 100%. The Company has entered the second half of 2020 with a strong balance sheet. The Company seems to be well-positioned to adapt to face the challenges of an everchanging post lockdown world. Moreover, the demand for specialist insurance products is also likely to rise in Canada, Europe and Asia. The stock made a 52-week low and high of GBX 287.60 and GBX 613.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Beazley at the current market price of GBX 366.40 (as on 4 January 2021, before the market close at 8.20 AM GMT), with lower double-digit upside potential based on 2.05x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

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

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

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