Frontier Developments PLC

Frontier Developments PLC (LON: FDEV) is a UK-based software technology Company, engaged in the development of video games for the entertainment industry. The Company is listed on the FTSE AIM UK 50 Index.

FY21 results are due for release in early September 2021.

Rationale for Valuation – SPECULATIVE BUY at GBX 2,240.00

• FDEV reported a record revenue in FY21. Moreover, it has a robust portfolio of existing game franchises, new game franchises, and growing contribution from games label for third-party publishing.
• For FY22, the Board expects to report revenue in the range of £130 million to £150 million based on the anticipated ongoing performance.
• The resurgence of Covid-19 cases and reintroduced restrictions can continue to accelerate the gaming trend.
• From a technical standpoint, FDEV’s stock price is approaching towards the lower Bollinger Bands, reflecting an oversold scenario. The momentum oscillator 14-day RSI (43.73) reiterated the same.
• Since FY17, FDEV has maintained strong profitability margins as gross margin, operating margin and net margin have remained above 60.9%, 8.2% and 10.5%, respectively.

Key Risks

• Increasing cases of Delta variant of coronavirus can keep the economic outlook gloomy in the short-term.
• The continuous weakening of the Pound against the US Dollar can impact the Company’s financial condition.
• Restricted trading environment can impact the release of new games.

Recent News

Partnership: On 14 June 2021, FDEV announced its publishing partnership with Swiss based development team, Okomotive for FAR: Changing Tides.

Trading Statement and Game Announcement (as on 11 June 2021)

• Jurassic World Evolution 2 is scheduled for release later in the calendar year 2021.
• For FY21, the unaudited revenue is approximately £91 million, driven by the record performance demonstrated by the gaming portfolio.
• The Group continued to manage the Covid-19 related challenges well and continued to release its games.
• FDEV is well-positioned to grow significantly in FY22 based on its exciting game portfolio.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

Despite booking a record revenue in FY21, FDEV is still trading below 52-week mid-level, which is giving an incredible opportunity for long-term growth. The Group has given explicit revenue guidance for FY22 and FY23, which shows management’s confidence in the outlook and its ability to manage the Covid-19 induced developments well. As gaming now accounts for over half of the entertainment market and the video gaming industry is booming amid the pandemic, the industry prospects also seem promising. The stock made a 52 week High and Low of GBX 3,470.00 and GBX 1,707.34, respectively.

Based on revenue guidance, robust game pipeline, favorable market drivers, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Frontier Developments PLC at the closing market price of GBX 2,240.00 (as on 21 July 2021), with lower double-digit upside potential based 60.09x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

Essentra PLC

Essentra PLC (LON: ESNT) is a FTSE 250 listed manufacturer and distributor of vinyl dip moulded, plastic injection moulded, and metal items.

On 30 July 2021, Essentra is likely to announce its H1 FY21 results.

Rationale for Valuation – SPECULATIVE BUY at GBX 285.50

• Favorable price trends in Packaging and Components divisions shall offset the inflationary pressure in H2 FY21.
• ESNT has an excellent base to generate substantial cash and profitability. It is well-positioned to recover from the pandemic, underpinned organic growth, accretive M&A, and cost reduction initiatives.
• The Group expects the positive momentum to continue, given the robust order book trends.
• From a technical standpoint, ESNT’s stock price is approaching towards the lower Bollinger Bands, reflecting an oversold scenario. Meanwhile, 14-day RSI (40.89) is also reiterating the same.
• In terms of valuation metrics – EV/Sales, EV/EBITDA and Price/Earnings multiples are lower than the Container & Packaging’s industry median on a forward 12-month basis.

Key Risks

• The packaging division remained impacted due to the reduced level of prescriptions and elective surgeries.
• As Delta coronavirus variant is now present in over 90 countries, potential restrictions can impact the volume and overall demand in the short term within the commercial and industrial sectors.

Recent News

Change of Registered Office: On 1 July 2021, the Company updated that it would move its head office to an existing Essentra site in Oxfordshire from 2 August 2021. Previously, the office was moved to its shared office space in Milton Keynes.

H1 FY21 Pre-Close Trading Update (as on 07 July 2021)

• ESNT continued focusing on delivering organic growth, accretive growth through M&A, and cost reduction initiatives.
• Revenue surged 13.6% in H1 FY21, while supported by the strong performance of the Components division.
• Filters’ division also witnessed revenue growth of 15.2% in Q2 FY21 versus Q1 FY21.
• The recent order book trends also remained positive despite the macroeconomic uncertainties.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

ESNT has recently undertaken an acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (Hengzhu), which is likely to be earnings accretive and shall deliver sustainable value over the long term. In a nutshell, Essentra is well-positioned to deliver significant value to its shareholders, underpinned by recent bolt-on acquisition, effective capital structure, and strong liquidity position. The diverse nature of its business model has provided resilience to the financial performance against the macro uncertainty caused by the pandemic. The Management believes that the positive trading momentum shall continue given the recent order book trends; however, short-term uncertainties cannot be ruled out. The stock made a 52-week high and low of GBX 342.20 and GBX 230.84, respectively.

Based on the strong trading performance, order book trends, bolt-on acquisition with support from the valuation conducted, we have given a “SPECULATIVE BUY” recommendation on Essentra PLC at the closing market price of GBX 285.50 (as on 21 July 2021), with lower double-digit upside potential based on 18.08x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

FD Technologies Group PLC

FD Technologies Group PLC (LON: FDP) is a FTSE AIM UK 50 Index listed Software & Computer Service Company, which provides consulting services to the world’s leading companies from the technology, energy, and finance domain. Earlier, the company’s name was First Derivatives.

Rationale for Valuation – SPECULATIVE BUY at GBX 2,050.00

• FDP won new contacts in key markets that bolstered the Company’s pipelined. Hence, the Company anticipates FY22 revenue is likely to be in the range of £255 million to £260 million, with adjusted EBITDA in the range of £31million - £33 million.
• The growing demand for digital acceleration has created ample opportunity for the Group. The release of the 4.0 version of Kx shall increase the Company’s competitiveness.
• From a technical standpoint, FDP’s stock price is approaching towards the lower Bollinger Bands, reflecting an oversold scenario. Meanwhile, 14-day RSI (40.24) is also reiterating the same.
• In the past year, FDP has fallen over 21%, showing significant underperformance against the FTSE AIM UK 50 index.

Key Risks

• Due to the resurgence of the pandemic, travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact over cash flows.
• The increased competition can affect the Company's leadership position and its growth trajectory.
  

Recent News 

AGM Update: From 12 July 2021, the Group started trading under the name FD Technologies PLC. However, the Company’s ticker (FDP) remained the same. 

Financial Highlights for the year ended 28 February 2021 (as on 18 May 2021)

(Source: Company Website)

• Despite the impact of Covid-19, FDP delivered robust performance in FY21 on the back of high levels of customer retention.
• During the year, the Company also bolstered its leadership position capitalise on growing market opportunities.
• The new contract wins strengthened pipelines and continued the strong momentum in FY22.
• FDP also launched KX insights that gained early commercial traction and generated positive customer reaction.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

The increased technology capabilities can growth market opportunities for FDP. The rebranding of three businesses - KX, First Derivative and MRP as FD Technologies PLC shall create distinct value proposition for its respective market. The Board has also approved additional investments for KX which shall accelerate the technology road map, increase the go-to-market capability, and rapidly increase the scale of business. The stock is still trading close to the 52-week low and giving long-term growth opportunities. The stock made a 52-week High and Low of GBX 3,625.00 and GBX 1,894.00, respectively. 

Based on the current trading, revenue guidance, accelerated growth strategy, strategic investments, favourable valuation conducted above, we have given a “SPECULATIVE BUY” stance on FD Technologies Group PLC at the closing price of GBX 2,050.00 (as on 21 July 2021), with lower double-digit upside potential based on 90.37x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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

*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).

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