Pennon Group PLC

Founded in 1989, Pennon Group PLC is a FTSE 100-listed Environmental Infrastructure Company, which provides services related to waste management, water & wastewater, and water retail services.

Key Date: The ordinary shares will go ex-dividend on 27 January 2022 and will be paid on 5 April 2021.

Investment Rationale – HOLD at GBX 1,225.00

• Dividend: Following the top-line and bottom-line growth in H1 FY22, interim dividend per share increased by 4.9% year-on-year to 11.70 pence in H1 FY22.
• Capital Distribution: Pennon has paid £1.5 billion of special dividend, while it has completed the share consolidation. The share buyback of circa £400 million is still underway.
• Strong Fundamentals: Pennon Group PLC has a sector-leading dividend policy, supported by the strong financial and operational performance, discipline management of net proceeds from Viridor’s disposal and robust cash resources.
• Technical Indicator: From a technical standpoint, the momentum oscillator, the current market price is trading above the 20-day EMA (GBX 1,208.00), reflecting a bullish price momentum.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow are undervalued against the average of the Utilities industry.

Risk Assessments

• Covid-19 Pandemic: The resurgence in coronavirus cases (Omicron variant) could lead to reintroduction of restrictions, and hamper demand prospects.
• Business Risk: The revenues generated by recycling and energy businesses can be affected by a decrease in the power prices, reduced global demand for recycled commodities and continued austerity measures undertaken by the local authority.

Recent News

Share Repurchase Programme: On 1 December 2021, Pennon announced that it has commenced the first phase of share buy-back programme of nearly £400 million.

Financial Highlights (for the half year ended 30 September 2021, as on 30 November 2021)

(Source: Company Website)

• Resilient Performance: Pennon’s financial performance in H1 FY21 remained in line with management expectations, and it witnessed record levels of demand for water.
• Carbon Emission: It launched an ambition of net zero 2030 plan in July 2021.
• Acquisition: It is progressing well with the acquisition of Bristol Water, which shall contribute £7.2 million in profit.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion 

Pennon is encouraged by the increased demand, and thus, the pressure on its operational network has remained high. Moreover, increased revenues have offset the increase in input costs. In a nutshell, the Company aims to be the industry leader in the UK water industry after the disposal of the Viridor division. The defensive business nature of the Company is allowing shares to uphold despite free fall in the broader market space. The stock made a 52-week High and Low of GBX 2,627.55 and GBX 1,119.00, respectively.

Based on the revenue growth, solid growth in customer base, expected profit before tax, long-term market opportunity, and favourable valuation conducted above, we have given a “HOLD” stance on Pennon Group PLC at the closing market price of GBX 1,225.00 (as on 30 November 2021), while we look forward to taking fresh positions once the inflation and supply chain related concerns fade away.

Moneysupermarket.com Group PLC

Moneysupermarket.com Group PLC (LON: MONY) is an FTSE 250 listed Company, which provides price comparison services through three brands - TravelSupermarket, MoneySuperMarket, and MoneySavingExpert.

Investment Highlights – BUY at GBX 201.20

• Growth Prospects: MoneySuperMarket is repositioning the brand image to drive growth. It is focusing on attracting more customers by enhancing data management. FY21 performance is expected to align with market expectations since the factor influencing the performance remained unchanged.
• Acquisition of Quidco: The transaction will bolster MONY’s position in the cashback business and shall be earnings accretive in FY22.
• Economic Recovery: The continuous improvement in economic activity supporting the recovery in the labor market, improving retail sales, and boosting factory outlook.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~38.59) reflecting an oversold scenario, while the share price is trading close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow are undervalued against the median of the Technology industry.

Key Risks

• Subdued Energy Market: The energy market dynamics remained challenging, which led to a 10% fall in Q3 FY21 revenue year-on-year basis.
• Macroeconomic Risk: British inflation rose to its highest in 10 years, while the strengthening of US Dollar with an increase in US Treasury Yields can hinder the MONY’s growth prospects. Moreover, the resurgence in Covid-19 cases across the globe can dampen the economic recovery and keep the travel market disrupted.

Recent News

Acquisition: On 19 October 2021, MONY acquired 100% stake in the Maple Syrup Media Ltd (trading as Quidco) for an initial consideration is £87 million in cash with additional deferred payment of £14 million.

Q3 FY21 Trading Update (for the quarter ended 30 September 2021, as on 19 October 2021)

 (Source: Company Website)

• Revenue Impact: The revenue was impacted by unprecedented energy market conditions.
• Operational Progress: The demand for travel insurance returned to nearly half of pre-Covid-19 levels, for the third quarter. It also intensified customer acquisitions despite the softened car and home insurance market.
• Guidance: FY21 EBITDA is likely to be in line with current market expectations, with strong margin performance.

One Year Share Price Chart

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

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

Conclusion

MONY sustained strong gross margin performance in Q3 FY21, and projects FY21 EBITDA to be in line with the market expectations. The positive future is underpinned by continued investment in technology platform, good cash conversion, and constant recovery in the travel market. Moreover, the modernisation of data infrastructure and capabilities shall simplify internal processes and expand offerings. Moreover, the expected synergy with the combination of TravelSupermarket and Icelolly.com shall offset the expected EBITDA loss of Icelolly.com due to the travel restrictions. The stock made a 52-week high and low of GBX 311.00 and GBX 198.00, respectively.

Based on the strong strategic execution, sustained dividend, resilient business performance, unchanged market factors, full-year outlook, with support from the valuation as done using the above method, we have given a “BUY” recommendation on Moneysupermarket.com Group PLC at the closing price of GBX 201.20 (as on 30 November 2021), with lower double-digit upside potential based 20.77x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.). 

*All forecasted figures and Peer information have been taken from REFINITIV.

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

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