WH Smith Plc – Well-Positioned from Long-term Perspective

WH Smith Plc (LON: SMWH) is engaged in high street retail and travel businesses. The high Street business sells a variety of products which are differentiated into some categories: Books, Stationery, and few entertainment products in some stores.

Financial Highlights - Good first-half performance, with Strong Growth in Travel in H1 FY2020

(Source: Interim Report, Company Website)
 
In the first half of 2020, the group revenue increased by 7 per cent to £747 million as compared with £695 million in H1 FY2019, with Group LFL revenue fell 1%. Travel trading profit increased by 11% to £49 million (IAS 17) as against £44 millionin H1 FY2019. For the first half of 2020, the high Street trading profit stood at £44 million, headline profit before tax was at £80 million and statutory profit before tax was stated at £63 million. The online businesses have performed sturdily, particularly in books (seen an increase of 400% in sales in April 2020). In April 2020, Group’s total revenue decreased by 85% as compared with the corresponding period of the last year. Similarly, revenue for High Street was down by 74% and Travel was down by 91%, compared to the same period last year. 
 
Share Price Performance

Daily Chart as of June 4^th, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

WH Smith Plc shares were trading at GBX 1,153.99 at the time of writing before the market close (at 11:54 AM GMT+1) on 4^th June 2020 and were down by 2.78% versus the previous day closing price. Stock's 52 weeks High is GBX 2,660.00 and Low is GBX 584.04.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology


Growth Catalysts
The fundamentals of the Group are intact, and the business prospects of the company remain strong. The Company is focusing on cost control and increasing gross margin gains. In international travel, WH Smith is still operating as a small player with good growth potential.

Conclusion
The Company has made good progress in the first half of the fiscal year 2020. There was a slight impact of Coronavirus on the first half of 2020 results; however, inexorably the performance in H2 FY20 is likely to be different. Since March, SMWH has seen a substantial impact on financial performance, with most of the stores closed around the world. In the critical time, the Group has supported many good causes and kept more than 300 stores open to serve the communities. The Company had recently completed the acquisition with MRG (Marshall Retail Group) and has been performing well. In the upcoming summer, the business is planning to start a new pharmacy format at Heathrow Terminal 2. WH Smith was fast to react to the COVID-19 disruption and issued new equity through a placing of approximately £162 million on 6 April 2020 as well as secured an additional bank funding of £120 million. Looking ahead, the Company is well-positioned for the long term and continue to grow the share in the international travel retail market.

Based on the decent fundamental prospects and support from valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 1,145 (as on 4^th June 2020, before the market close at 11:30 AM GMT+1) with single-digit upside potential based on 2.34x NTM EV/Sales (approx.) on FY20E sales (approx.).

Vivo Energy Plc – Reflecting Decent Business Model, with Strong Balance Sheet 

Vivo Energy Plc (LON: VVO) is engaged in the business of oil refining and markets under the brand of Shell to retail and commercial customers. The company distributes fuels, lubricants, and liquefied petroleum gas (LPG).

Q1 2020 Trading Update with Solid Liquidity Position
In the first quarter of 2020, the gross cash profit increased by 6% to $179 million versus $169 million in Q1 FY2019. In January and February, the company saw a growth of 20% in gross cash profit, while in March 2020, the performance was impacted by COVID-19. In the last two weeks of the month, the performance affected by full lockdowns imposed in several countries. The volumes for the first quarter of 2020 surged by 7% to 2,602 million litres, with an improved Shell-branded Retail performance (before the government restrictions were imposed) and the Group benefiting from two months of additional Engen contribution. Gross cash unit margins stood at $69 per thousand litres in Q1 FY20. Margins impacted in March 2020, primarily due to the impact of the reduction in demand and valuation of stocks. The Company has strong liquidity position of $1.6 billion as at the end of March. The Group has taken a prudent decision to withdraw recommendation of the payment of the 2019 final dividend, but it will consider an additional dividend payment until the situation stabilises.

Share Price Performance
 

Daily Chart as of June 4^th, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Vivo Energy Plc shares were trading at GBX 89.40 at the time of writing before the market close (at 12:10 PM GMT+1) on 4^th June 2020 and up by 3.47% versus the previous day closing price. Stock's 52 weeks High is GBX 144.70 and Low is GBX 59.80.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology


     *Currency Exchange Rate taken for 1 USD = 0.79678 GBP.

Growth Catalysts
Increased spend on growth projects, primary focused on the retail network and non-fuel offerings. The company delivered strong commercial segment performance in FY2019.

Conclusion
The gross cash profit for the first quarter rose by 6 per cent to $179 million, reflecting a robust start to the year before the government restrictions were imposed in March 2020 and ongoing fall in demand. In the short-term period, the outbreak of COVID-19 is adversely impacting the performance of the company. Vivo has also built good momentum into 2020 and is excited about the remainder of the financial year. However, to weather the short-term uncertainties, the group also has taken several steps to slash marketing and capital expenditures. The group has a strong balance sheet and access to liquidity as well as a strong base to navigate through these unprecedented crises.

Based on the decent growth prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 85.00 (as on 4^th June 2020, before the market close at 11:05 AM GMT+1) with single-digit upside potential based 16.70x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Pendragon Plc – Leading Automotive Retailers with Multiple Brand Portfolio

Pendragon Plc (LON: PDG) is the motor retailer company, which is headquartered in Annesley, Nottingham.

Recent News
On 29^th May 2020, Pendragon announced the signing of agreement for sale and leaseback at Porsche Stockport based Property with Al Mana (Al Mana Property International Limited). As per the agreement, the company has received cash of GBP 10.5 million and will retain property at lease for 15 years.

Trading Update For Q1 FY2020 and Actions Taken to Combat Covid-19
On 21st May 2020, Pendragon released an update of the trading performance for the first quarter of the financial year 2020 with actions taken to combat covid-19 outbreak. The group’s performance in the first two months of Q1 was encouraging and started March trading strongly, but due to imposed lock-down lead to retail store closures, which impacted underlying PBT (profit before tax) by around GBP 10 million in the Q1 FY2020. Despite the negative impact of coronavirus outbreak, the LBT for Q1 stood at GBP 2.3 million versus LBT of GBP 2.8 million in Q1 FY2019. The group has opened its 125 service centres and are operating at reduced capacity with new safety procedures. PDG has taken measures to preserve cash, and its senior management has agreed to take reduced salaries. As on 20th May 2020, the net debt stood at GBP 100.5 million and total facility of GBP 235 million. The group is planning to open its stores on 1st June 2020 and with strict social distancing norms.  

Share Price Performance

Daily Chart as of June 4^th, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Pendragon Plc shares were trading at GBX 8.35 at the time of writing before the market close (at 12:14 PM GMT+1) on 4^th June 2020 and up by 2.61% versus the previous day closing price. Stock's 52 weeks High is GBX 24.45 and Low is GBX 4.02.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology


Growth Catalysts
The four-pillar strategy of the company is focussed on creating stand-alone used car brand, stable platform in Franchised UK Motor division, generating growth in Pinewood and further powering their leasing business. 

Conclusion
There are some principal risks which are faced by the company. Excessive dependency on vehicle manufacturers for the success of the company’s business is one of the principal risks faced by the company. The Group has been cautious during ongoing economic uncertainty post the UK's exit from the EU and threat pertinent to Covid-19 pandemic scenario and its economic implications. The Company is expecting a significant and attractive market opportunity for the car store. The Group is expecting a recovery in profitability during the second half, due to the reduction in the excess used car inventory. The company’s management is fully focussed on maximising performance in the near term. Subsequently, the Company has deferred its commitments related to capital expenditures, marketing spends programme and monitoring inventory level.

Based on the decent prospects, we have given a “HOLD” recommendation at the current price of GBX 8.25 (as on 4^th June 2020, before the market close at 1:15 PM GMT+1).

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

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