Direct Line Insurance Group PLC

Direct Line Insurance Group Plc (LON: DLG) is a Greater London, United Kingdom-based general insurance company based out of the United Kingdom.

Recent News
On 3^rd March 2020, the company announced that Mike Biggs, as a Chairman of the group, will step down from the Board in 2020.

Financial Highlights for the year ended 31^st December 2019, £ million

(Source: Preliminary Results, Company Website)

The direct own brand in-force policies increased by 1.4% in FY19, with robust growth in Green Flag and Commercial direct own brands. Led by an underwriting discipline resulted in fewer Motor and Home policies and lower premiums, the total Group gross written premium for the financial year 2019 was broadly steady. The current-year Motor loss ratio was broadly stable. Profit before tax was reported at £509.7 million, a decrease of 12.2% from the previous year (2018 restated: £580.5 million). The impact of benign weather in 2019 was more than offset by lower reserve releases, in part Ogden discount rate-related, non-repeat of investment and property gains and restructuring and one-off costs in 2019. The Board has proposed final ordinary dividend per share of 14.4 pence. It delivered a robust capital position with a 165% of solvency capital ratio after recommended capital distributions.

Share Price Performance
 
Daily Chart as at March-03-20, before the market closed (Source: Thomson Reuters)

Direct Line Insurance Group PLC shares were trading at GBX 331.10 before the market close (at 8:50 AM GMT) on 3^rd March 2020 and were up by 6.05% versus the previous day closing price. Stock 52 weeks High and Low are GBX 358.69 /GBX 266.70.  The group’s stock is reflecting the lower volatility as against the benchmark index based on the company’s beta of 0.63.

From the technical standpoint, its shares were trading well above its long-term support level of 200-day simple moving average prices, which reflects an uptrend in the stock.

Direct Line Insurance Group V/S FTSE Mid 250 Index Performance – 3 Months

(Source: Thomson Reuters)

In the last three months, Direct Line Insurance Group Plc share price has delivered 11.56 per cent return as compared to negative 3.08 per cent return of FTSE-250 index, which shows that the stock has outperformed the index during the last 3 months.

Direct Line Insurance Group V/S Industry V/S Sector – 3 Months
 

(Source: Thomson Reuters)

In the last three months, Direct Line Insurance Group Plc share price surged by 2.43 per cent, which is significantly higher than the industry growth rate and sector growth rate.

Conclusion
Green Flag direct delivered double-digit growth for the third successive year. Direct Line Insurance is targeting increased efficiency through digitalisation and self-service and a decrease of 50 million pounds in operating expenses between 2018 and 2021. The company has delivered a good result in the current period and continued to enhance its quality. Led by all the product lines, the model of disciplined underwriting and cost reductions helped to maintain a 92.2% of combined operating ratio. This helped to deliver a growth of 2.9% in the final dividend. The company released the launch of a share buyback of up to 150 million pounds which the group expect to accomplish by the end of July 2020. DLG reiterate the continuing target of attaining a return on tangible equity per annum of at least a 15%. The company stay on track to attain the financial and operational targets. The group is excited about the delivery plan for 2020.

Based on the above rationale, we have given a “HOLD" recommendation at the closing price of GBX 312.20 (as on 2nd March 2020).

Greggs PLC

Greggs Plc (LON: GRG) is a bakery chain operator, grounded in the United Kingdom. It conducts business operations through its retail shops and bakeries.

Financial Highlights (for the 52 weeks ended 28 December 2019)
The company’s total revenue for the financial year 2019 increased by 13.5% to £1,167.9 million, with a growth of 9.2% in the company-managed shop like-for-like sales. Excluding exceptional items, the underlying profit before tax stood at £114.2 million in 2019 (2018: £89.8 million), a surge of 27.2%. The company has delivered decent cash generation, supporting additional shareholder returns, capital investment programme, and a record annual profit share and special payment for employees. Total ordinary dividend per share increased by 25.8% to 44.9 pence.

The group showed a decent start to 2020 in January, but the substantial slowdown in February due to storms. For the nine weeks to 29 February 2020, the company managed shop like-for-like sales rose by 7.5%.

Share Price Performance

Daily Chart as at March-03-20, before the market closed (Source: Thomson Reuters)

Greggs PLC shares were trading at GBX 2,200 before the market close (at 11:17 AM GMT) on 3rd March 2020 and were up by 5.26% versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,550.00 /GBX 1,689.09.  The group’s stock is reflecting the lower volatility as against the benchmark index, based on the company’s beta of 0.96. At the current trading level, its stock was trading below its long-term crucial support level of 20-day and 50-day Simple moving average price, and prices could fall further from the current trading level.

Valuation Methodology
 

Key Risks
The UK food-on-the-go market is already highly competitive and if other players were to become more aggressive, this could affect Greggs’ ability to attract customers. Failure to achieve the anticipated efficiency cost-saving measures or difficulties in implementing supply chain investment could result in a greater impact on margins.

Conclusion
The company has delivered decent progress in 2019. The group made a decent start to 2020, but in February, witnessed a substantial slowdown in sales, driven by the storms that have affected the United Kingdom. There are several uncertainties in the outlook, mainly given the potential impact of China Coronavirus (COVID-19).

The UK food market is already highly competitive, and if other players were to become more aggressive, this could affect Greggs’ ability to attract customers.  The main challenge for any retail food companies is to preserve its food products from contamination. However, inflationary pressure has reduced, but confidence levels will continue to remain low over uncertainties regarding the economic conditions. Weather condition is also a critical factor for the group, and dire wintry conditions and elongated heatwaves strongly impacted last year sales.

Moreover, the company is trading near its 52-week high, raising doubts at the upside potential at current prices. At the current trading level, the stock is trading quite below its short-term crucial support level, a bearish technical indicator which reflects prices could move down from the current trading level.

Based on the above rationale and valuation done using the above methodology, we have given a "Watch" recommendation at the current price of GBX 2,215.28 (as on 3^rd March 2020, before the market close at 10:55 AM GMT), based on the 21.85x NTM Price/Earnings (approx.) on the FY20E earnings per share (approx.), while we look for any upcoming catalysts.
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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