Legal & General Group PLC

Legal & General Group PLC is an FTSE 100 listed Company, which provides financial services across the UK, and the US. The Company operates with four business segments.

On 04 August 2021, LGEN expects to release half-year results for FY21.

Investment Rationale for Valuation – BUY at GBX 258.40

• On the profitability front, the operating profit from divisions grew at a CAGR of around 9% from FY11 to FY20. Moreover, the earnings per share rose at a modest CAGR of approximately 5% between FY11 and FY20.
• LGEN ensured consistent returns for the shareholders as it delivered a CAGR growth of around 12% in dividend per share from FY11 to FY20.
• LGEN had expected annual dividend growth of around low to mid-single digits for 2021. Moreover, it expects earnings per share to grow faster than dividends.
• The Company has a strong new business pipeline to sustain the momentum of growth and profitability.
• From a technical standpoint, a 14-day RSI of ~30.87 inches towards the oversold zone and indicates an upside potential in the stock price.

Key Risks

• The negative mark to market movement on the hedging instruments or low return from the investments to meet the claim payments can harshly impact the value of the assets.
• The insurance sector is highly susceptible to change in the government’s policy, legislation and capital requirement. Any lack of meeting the regulatory requirement can result in additional costs and penalties.
  

Recent Trend of Dividend Payments

LGEN had paid a final dividend of 12.64 pence per share on 27 May 2021, while the ex-dividend date was 15 April 2021. The FY20 dividend remained flat at 17.57 pence per share when compared with the dividend distributed in the prior year because of the challenging conditions caused by the Covid-19 pandemic. Overall, the dividend per share grew at a CAGR of around 12% from 2011 to 2020.

The Company expects to pay the next interim dividend on 20 September 2021.

(Source: Company presentation)

FY20 Financial & Operational Highlights (for the twelve months ended 31 December 2020, as of 10 March 2021)

(Source: Company presentation) 

• The Company had delivered an operating profit of £2,218 million during FY20, with three out of five businesses delivering growth.
• The profit after tax dropped by 12% from £1,834 million during FY19 to £1,607 million during FY20, illustrating the adverse impact of lower interest rates on LGI and the unrealized impact of market movements.
• Moreover, the Company had maintained a decent return on equity of 17.3% despite market volatility during FY20.
• The Company had maintained a robust balance sheet with a Solvency II coverage ratio of 192% as of 05 March 2021.
• LGEN had paid around 99.9% of scheduled cash-flows on the annuity portfolio’s direct investments.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

LGEN provided cumulative financial guidance for five years from 2020 to 2024. LGEN had expected to generate cash & capital ranging from £8.0 billion to £9.0 billion. Moreover, it expected to pay dividends ranging from £5.6 billion to £5.9 billion. The dividend is expected to grow at low to mid-single-digit, starting from FY21. Also, it anticipated net capital surplus generation to exceed dividends. Looking forward, LGEN expects LGRR’s (Legal & General Retirement Retail) target market to continue to expand, driven by ageing demographics and welfare reforms. Over the next five years, the Group intends to write £40 billion to £50 billion of UK pension de-risking business. The stock made a 52-week low and high of GBX 175.04 and GBX 299.20, respectively.

The next important support level on the technical chart is at GBX 231.60.

Based on the encouraging outlook, consistent dividend growth, and valuation as done using the above method, we have given a “BUY” recommendation on Legal & General Group PLC at the current market price of GBX 258.40 (as of 30 June 2021 at 11:40 AM GMT), with lower-double digit upside potential based on 1.66x Price/NTM Book Value per share (approx.) on FY21E book value per share (approx.). 

Imperial Brands PLC

Imperial Brands PLC (LON: IMB) is an FTSE-100 listed company, which is engaged in providing consumer goods. It has two broad business segments: Tobacco and NGP (Next Generation Products).

Investment Rationale for Valuation – Buy at GBX 1,558.00

• The Company had achieved a strong cash conversion of around 122% during H1 FY21, boosted by working capital improvements and lower capex.
• On the profitability front, IMB expects to show a modest low-mid single-digit increase in the adjusted operating profit for FY21.
• The Covid-19 related change in consumer buying patterns had proven to be a net benefit to revenue.
• The net revenue for NGP rose by around 16.0% during H1 FY21.
• From a technical standpoint, a 14-day RSI of ~40.34 is inching towards the oversold zone. Moreover, the stock price is hovering around the lower Bollinger band, indicating an oversold zone.

Key Risks

• IMB is subject to strict regulatory standards and increased tobacco taxes.
• As tobacco-related products pose a health risk, the products might not get the same demand post-Covid-19 pandemic.
• There is constant pressure on the Company to reduce the health impact of their products, putting pressure on the R&D and marketing strategies.
• As the company operates in international markets, the company is exposed to adverse foreign exchange movements, as presented in the H1FY21 update, where the company expects a 2.5% - 3% headwind on full-year earnings.
  

Recent Trend of Dividend Payments

The Company has a progressive dividend policy of generating consistent and reliable cash returns. The Company had paid a quarterly dividend of 21.06 pence per share on 30 June 2021, while the ex-dividend date was 27 May 2021. Moreover, IMB will pay another quarterly dividend of 21.06 pence per share on 30 September 2021, with an ex-dividend date of 19 August 2021. Meanwhile, the interim dividend had demonstrated a marginal increase of around 1% as compared to the prior year.

Recent Developments

On 19 May 2021, IMB had appointed Lukas Paravicini as the Chief Financial Officer effective from the same day.

H1 FY21 Financial & Operational Highlights (for the six months ended 31 March 2021, as of 18 May 2021)

(Source: Company result)

• In the second half of 2021, the company expects the tobacco profitability to grow modestly on a YoY basis, while the NGP segment is likely to remain in line with the first half of 2021.
• For the first half of 2021, the group tobacco volumes decreased by 3.3 percent due to the travel restrictions and covid-19 influencing the buying patterns of customers and wholesalers. However, the company’s priority market US, UK, and Spain, saw improvement in market share while Germany and Australia market share declined.

• Despite the low volume, IMB showed solid fundamentals, with ROE above the industry median.

• The company is working on their priority combustible markets of the United States, Germany, the United Kingdom, Spain, and Australia, where they intend to invest more.
• Heated tobacco and vapour products will be launched in a limited number of European markets.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow (NTM) (Illustrative) 

Conclusion

The company expects adjusted operating profit to grow by low mid-single digit at constant currency as the volume starts to normalize in H2 FY21. However, the Australian Excise regime will create headwinds of approximately £50 million. The company plans to expand its reach in the US and Europe and focus on its priority combustible markets. Moreover, the company’s outlook for FY21 remains in line with the previous expectations supported by a good start in implementing the new strategy. The stock made a 52-week low and high of GBX 1,203.00 and GBX 1,686.00, respectively.

The next important support level on the technical chart is at GBX 1,377.50.

Based on the decent interim dividend growth, robust cash generation and valuation as done using the above method, we have given a “BUY” recommendation on Imperial Brands PLC at the current market price of GBX 1,558.00 (as on 30 June 2021 at 11:24 AM GMT), with lower-double digit upside potential based on 8.07x Price/NTM Cash Flow per share (approx.) on FY21E cash flow per share (approx.).

Phoenix Group Holdings Plc

Phoenix Group Holdings Plc (LON: PHNX) is an FTSE 100 index listed insurance company founded in 1782. The Company is the largest life and pension consolidator in Europe.

On 11 August 2021, the Company will publish its H1 FY2021 results.

Investment Rationale for Valuation – Buy at GBX 671.10

• Phoenix had delivered a resilient business performance in FY2020, and the management is confident to carry the positive momentum in FY2021.
• PHNX completed the acquisition of ReAssure to become the UK’s largest saving and retirement business.
• The acquisition of the Standard Life brand would enable the Company to provide a multi-channel consumer experience and more broad-based products and services.
• In the last five years, the Company delivered a higher return than its benchmark FTSE 100 index return, i.e. the stock outperformed the index.
• On the technical front, the 14-day RSI at about 30.45 is just sustaining below the oversold zone. Hence, the stock price could go up in the short term.

Key Risks

• Any delay in delivering the promised performance could lead to serious reputational damage to PHNX.
• PHNX’s performance also depends on the market prices of its assets. Hence, any decline in the prices of such assets could affect the financial performance of PHNX.
• The Company should maintain substantial capital adequacy and liquidity to meet the claims requirement.
  

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by PHNX from FY2015 to FY2019. In FY2020, PHNX paid a total dividend of GBX 47.50 per share. The last dividend of FY2020 of GBX 24.10 per share was paid on 18 May 2021. It had an ex-dividend date of 1 April 2021. PHNX is likely to pay the next interim dividend on 3 September 2021.

Recent News

Secondary Placement: On 23 June 2021, PHNX announced that Swiss Re Finance Midco (Jersey) Limited had sold 66,199,917 ordinary shares of PHNX and raised ~£437 million.

Financial Highlights (for the year ended 31 December 2020 (FY2020), as of 8 March 2021)

(Source: LSE Website)

• PHNX achieved resilient operating performance in FY2020. Driven by that performance and the Company’s efficient cash conversion, it achieved a record cash generation of ~£1.7 billion.
• It also helped the Company in achieving a long term free cash flow of £13.4 billion in FY2020. It could help in deleveraging going forward.
• The cash accretion helped the Company to deleverage in FY2020. Hence, it could achieve a leverage ratio of 28% in FY2020, which is within the 25% to 30% target range.
• Driven by a solid balance sheet and strong liquidity, PHNX recommended a final dividend of GBX 24.1 per share, up 3% on the latest 2020 interim dividend.
  

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

Over the next two years, the management believes that it could achieve a higher cash generation target of £4.4 billion driven by new business and management actions. The acquisition of the Standard Life brand will help diversify PHNX’s offerings. PHNX is on track to deliver 100% renewable energy contracts across all offices by FY2021. There is a trend among people to invest more in insurance products. Also, the insurance sector would benefit from rising disposable income in the longer term. Hence, the Company is well-positioned to grow in the medium and long run. The stock made a 52-week low and high of GBX 624.00 and GBX 824.40, respectively. On the technical chart, the next important support level is GBX 550.00.

Based on the expected synergies from the acquisitions, the Company’s leading position in the UK insurance sector, its decent expected prospects, and support from valuation as done using the above method, we have given a “BUY” recommendation on Phoenix Group Holdings Plc at the current market price of GBX 671.10 (as on 30 June 2021 at 10.30 AM GMT), with a lower double-digit upside potential based on 9.45x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

Greencoat UK Wind Plc

Greencoat UK Wind Plc (LON: UKW) is an FTSE 250 index listed company that invests in operating UK wind farms and preserve capital in the process.

Investment Rationale for Valuation – Buy at GBX 127.40

• UKW maintains a strong pipeline for acquisitions throughout FY2021, following the strong growth in the previous year. The Company has also issued fresh equity worth £400 million to reduce its debt and focus on growth opportunities. 
• The UK government has become more aggressive in promoting and supporting sustainable and renewable energy projects. Currently, the UK has high wind resources and £70 billion worth of wind farms in operation. Also, the government is likely to double the capacity of renewable energy and increase the subsidy, creating more opportunities for investment for the Company. 
• UKW in FY2021 acquired a 50% stake in Braes of Doune wind farm.
• Over the last five years, the Company delivered excellent cash inflows that have supported the dividend policy while providing higher tolerance to downside risk.

• On the technical front, the 14-day RSI at around 42.14 is moving towards the oversold zone, indicating that the stock price could have an upward movement in the near term.

Key Risks

• As 50% of the Company's revenue is affected by fluctuating power prices, any volatility caused by Covid-19 lockdowns could have a short-term impact on the Company's financials.
• Any unfavourable change in government policies and regulations can adversely impact the value of green benefits earned.
• The Company's investment returns could be adversely affected if the wind turbines do not perform as expected or require more maintenance than anticipated.
  

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by UKW from FY2016 to FY2020. In FY2021, UKW paid a Q1 interim dividend of GBX 1.795 per share. It was paid on 28 May 2021. It had an ex-dividend date of 13 May 2021. It demonstrates the cash generative nature of operational wind farms. 

Financial Highlights (for the year ended 31 December 2020 (FY2020), as of 25 February 2021)

(Source: LSE Website)

• Driven by robust portfolio, strategic acquisitions and disciplined approach, UKW in FY2020 achieved ~74.8% YoY surge in return on investments.
• It led to a dramatic rise of ~141.1% YoY in net income in FY2020.
• UKW conducted some high-quality acquisitions in FY2020. It included investments in Slieve Divena II, Walney and Humber Gateway and an agreement to acquire Kype Muir Extension and South Kyle subsidy-free wind farm projects.
• UKW increased its net asset value per share from GBX 119.7 in FY2019 to GBX 120.4 in FY2020.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

The Company is the largest listed renewable infrastructure fund in the UK, giving them a unique position to reap the benefits of the government initiatives. The Company continues to focus on investing in high-quality assets, which contributes to the increased dividend policy in line with RPI inflation while preserving the capital value of the investment portfolio in real terms. However, the Covid-19 pandemic and further lockdowns due to the delta+ variant cause volatility in power prices in the near term. Nevertheless, the Company has been able to generate robust cash flows while maintaining low gearing. Overall, the Company maintains a strong pipeline of investment opportunities that could generate higher revenues in the future.

The stock made a 52-week low and high of GBX 124.60 and GBX 150.00, respectively. On the technical chart, the next important support level is GBX 98.00.

Based on the strong pipeline of acquisitions, support from the UK government, investment in high-quality assets, and support from valuation as done using the above method, we have given a “BUY” recommendation on Greencoat UK Wind Plc at the current market price of GBX 127.40 (as on 30 June 2021 at 11.20 AM GMT), with a lower double-digit upside potential based on 20.75x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

ContourGlobal Plc

ContourGlobal Plc (LON: GLO) is an FTSE 250 listed power generation company that operates in 18 countries across three core regions, namely Europe, Latin America, and Sub-Saharan Africa.

On 6 August 2021, the Company will publish its H1 FY2021 interim results.

Investment Rationale for Valuation – Buy at GBX 193.00

• Recently, the Company proposed to purchase contracted solar PV plants that will benefit both operations in Italy and provide synergistic advantages.
• Continuing with its acquisition strategy, Contour Global acquired The Western Generation portfolio, which increased the Company's gross capacity by 1,502 (MW) and added more than ten thermal power plants.

• On the liquidity front, the quick ratio since FY2018 has been higher than the industry median of 1.07x.
• On the technical front, the 20-day EMA at around GBX 194.40 is sustaining below the stock price. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• GLO can suffer a material loss from the acquisition if they fail to properly analyse the potential benefits.
• Unfavourable changes in government legislation, fluctuating global economic situations, and obstacles brought by climatic change are all threats to the organization.
• The risk due to technological changes in renewable generation, storage technologies, energy trading, and financial markets (i.e. blockchain) can hamper the ability to be competitive in the new investments. 
  

Recent trend of dividend payments

(Source: Company Presentation)

The above figure demonstrates the consistent dividend payment done by GLO from FY2018 to FY2020. GLO paid the last interim dividend of GBX 3.1675 on 11 June 2021. It had an ex-dividend date of 20 May 2021. GLO maintains a dividend policy of a 10% annual increase in dividend per share.

Recent News

Proposed Acquisition: On 4 June 2021, GLO proposed the acquisition of Contracted Solar Photovoltaic Operating Power Plants. 

Q1 FY2021 Trading Update (released on 13 May 2021)

(Source: LSE Website)

• Driven by the acquisition of the Western Generation portfolio, revenue in Q1 FY2021 surged 19.9% YoY.
• It resulted in a 4.6% YoY rise in adjusted EBITDA and a significant 178.1% YoY surge in net profit.
• Driven by its cash-accretive operations, GLO’s funds from operations jumped 37.2% YoY in Q1 FY2021.
• As a result of significantly improved cash conversion, FFO/adjusted EBITDA reached 57% in Q1 FY2021 from 43% in Q1 FY2020.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

GLO had a decent start to FY2021 following recent Western Generation Portfolio additions, and the Company is striving to expand its operations with the proposed acquisition of Contracted Solar PV Plants. The Company maintains a healthy financial position, with free cash flow exceeding $102.2 million and most of its debts at a fixed interest rate, hedging against potential interest rate hikes. The Company has a resilient business model, and the management reiterated its EBIDTA guidance of $770 million to $800 million while maintaining the dividend policy of a 10% annual increase. The stock made a 52-week low and high of GBX 181.17 and GBX 223.00, respectively. On the technical chart, the next important support level is GBX 162.00.

Based on the decent trading momentum, solid growth prospects driven by acquisitions, the better liquidity of the Company than the industry, and support from valuation as done using the above method, we have given a “BUY” recommendation on ContourGlobal Plc at the current market price of GBX 193.00 (as on 30 June 2021 at 3.15 PM GMT), with a lower double-digit upside potential based on 32.43x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

*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

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