Standard Chartered PLC

Standard Chartered PLC is FTSE 100 quoted international banking group. It is listed on the London and Hong Kong Stock Exchanges.

On 20 May 2021, the Company will pay the recommended dividend of 9 cents per share.

Investment Rationale – Avoid at GBX 509.00

• From a technical standpoint, 14-day RSI (62.71) is supporting the upside potential.
• Revenues declined significantly in FY20, and subsequently, the total comprehensive income also fell against FY19.
• The challenging macroeconomic environment deteriorated asset quality.
• Due to the impact of Covid-19, credit impairment was more than doubled.

Risk Assessments

• The economic disruption caused by the Covid-19 pandemic can worsen the expected credit losses.
• The geopolitical tensions, social unrest in Hong Kong and US-China spat could also impact the market sentiments.
• The financial risk arising from the unfavourable interest and exchange rate movements.

Recent News

5 March 2021: STAN purchased 1,685,198 own shares for the weighted average price per share of 498.4967 pence.

Financial Highlights for the year ended 31 December 2020 (as on 25 February 2021)

 (Source: Company Website)

• Covid-19 impact and economic shock impacted the loan portfolio in FY20.
• Retail banking portfolio remained resilient and stable.
• The Group maintained a strong liquidity and funding position as the Liquidity Coverage Ratio stood at 143% at the end of FY20, broadly stable year-on-year.
• Common Tier 1 ratio increased by 60 basis points to 14.4%, which was above the target range.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The recovery in FY21 is expected to be uneven as the threat of a prolonged weak economic outlook might result in increased risk aversion and uncertainty. Moreover, the resurgence of the virus can lead to tightening restriction on economic activity again. Also, there is a significant exposure to risk pertinent to interest rate, foreign exchange rate fluctuations, commodity prices and equity volatility. Stock 52 week High and Low were GBX 519.80 and GBX 334.25, respectively.

Based on the macroeconomic uncertainties, declined financials, and supported from valuation conducted above, we have given an “Avoid” recommendation on Standard Chartered PLC at the closing market price of GBX 509.00 (as on 8 March 2021), while we look forward to reviewing the recovery in the loan portfolio.

Aviva PLC (LON: AV.)

Aviva PLC is a FTSE 100 quoted Company, which provides a broad range of insurance and savings products. It operates through six divisions, namely UK & Ireland Life, Canada, Aviva Investors, UK & Ireland General Insurance, Continental Europe, and Asia.

Dividend Declaration: The Board has recommended a final dividend of 14 pence per share, subject to the approval at the AGM 2021. Post approval, dividend will be paid on 14 May 2021 with record date of 9 April 2021. Further, the dividend for H1 FY21 is likely to be payable on 30 June 2021 with record date of 4 June 2021.

Investment Rationale – Hold at GBX 396.70

• In terms of a technical indicator, 20-day SMA (367.80) is favourable and supporting the uptrend.
• Aviva has a robust capital framework, sustainable and resilient dividend policy, which underpins long-term opportunities for capital return to shareholders.
• Over the past three years (H1 FY17 to H1 FY20), total premiums earned has grown at a CAGR of ~2.07%.
• In the last two years, Aviva’s combined ratio has also remained below 100%, which reflects that the Company is making an underwriting profit.
• The disposal of Vietnam, Singapore, Hong Kong, Turkey, and Indonesia business is a major progress towards strategic transformation.
• FY20 results demonstrated record sales in bulk purchase annuities, group protection, and record net inflows in savings and retirements.

Risk Assessments

• The changing customer expectations, and the entrance of new InsurTech players can significantly disrupt the business growth.
• Also, the lower profitability amid weak macro-economic conditions can create funding and liquidity issues. Similarly, increasing incidents of Cybercrimes can put consumer data at risk.
• Adjacently, the premium could shrink due to battered disposable income and dented consumer sentiments amid Covid-19 crisis.

Recent News

4 March 2021: Aviva announced the disposal of its remaining Italian Life and General Insurance businesses for €873 million in cash. The seven disinvestments as per new strategy will generate over £5 billion of cash proceeds.

Financial Highlights for the year ended 31 December 2020 (as on 1 March 2021)

 (Source: Company Website)

• Post strategic disposals, Aviva will focus on the operations of the UK, Ireland, and Canada.
• Solvency II ratio was maintained at 31% as FY19, reflecting robust financial strength.
• Announced total dividend of 21 pence for FY20, including 14 pence of final dividend.
• In H1 FY21, the Group expects £1.7 billion of deduction in net debt, and will invest in cash generative growth in core markets.

One Year Share Price Chart   

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Going forward, Aviva would focus on the business portfolio, and it will invest for growth in the businesses where it will see substantial returns and robust cash flows. The Company would withdraw from the businesses that do not meet the strategic objectives. Furthermore, the recent disposal Aviva’s Vietnam business is anticipated to enhance the Net Asset Value and Solvency II surplus by around £0.1 billion. The Company is among the market leaders in the insurance sector with a strong balance sheet and insurance cover. It has maintained its financial strength by building a robust capital framework, liquidity, and reducing debt leverage. Moreover, it has long-term relationships with customers and distributors to deliver resilient performance. However, the economic and social outlook is likely to remain uncertain in the short-term; however, the Company is confident in its strategy to unlock long-term value for its shareholders. Stock 52 week High and Low were GBX 399.00 and GBX 205.70, respectively.

(Source: Company Presentation)

Considering the strong solvency position, decent fundamental performance, robust liquidity position, and support from the valuation as done using the above method, we have given a “Hold” recommendation on Aviva PLC at the closing market price of GBX 396.70 (as on 8 March 2021), while we look forward to reviewing the recovery in macroeconomic conditions.

Pearson PLC

Pearson PLC (LON: PSON) is a FTSE 100 index listed Company, which provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools.

Investment Rationale – Hold at GBX 808.80

• The major trading multiples of PSON (Price/Book, Price/Earnings, and EV/Sales) are lesser than the same multiples of the Media & Publishing sector.
• The Company’s current ratio is better, whereas debt/equity is lesser than the industry median, which reflects that the Company is less levered and yet managing the short-term obligations well as compared to peers.
• Improved financial position: Net debt reduced to £463 million (2019: £1,016 million) while available liquidity at the end of FY20 was £1.9 billion.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day simple moving average prices (760.20), reflecting an uptrend in the stock, and carrying the potential to move up further.

Risk Assessments

• The prolonged closure of schools and test centres can cause liquidity risk.
• Moreover, failure to adopt new technologies can impact the competitive positioning.
• Also, the inability to manage intellectual property rights could impair the value of core assets.

Preliminary Results for the year ended 31 December 2020 (as on 8 March 2021)

 (Source: Company Website)

• The underlying revenue declined 10%, while the Global Online Learning revenue rose 18% year-on-year driven by increased demand for virtual learning.
• In line with Covid-19 expectations, revenue from North American Courseware declined 13% year-on-year.
• The adjusted earnings per share stood at 28.7 pence in FY20 against 57.8 pence in FY19.
• PSN recommended a dividend of 13.5 pence, equating to 19.5 pence of total dividend.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

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

Conclusion

Pearson has repositioned itself for sustainable growth with a solid direct to consumers focus. Also, there are strong market opportunities with the rise in digital learning tools, demand for accreditation and certification, and workforce skills gap. The Group is also simplifying its property portfolio to occupy substantial smaller square footage. The Global Online Learning business shall benefit from Virtual Schools. Moreover, decent recovery is expected for Global Assessment and North American Courseware businesses in FY21. Stock 52 week High and Low were GBX 909.00 and GBX 412.08, respectively.

Based on the strong balance sheet and cash performance and factors discussed above, we have given a “Hold” recommendation on Pearson PLC at the closing market price of GBX 808.80 (as on 8 March 2021), while we look forward to reviewing the recovery North America Courseware division.

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

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

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