Burberry Group PLC

Burberry Group PLC (LON: BRBY) is a FTSE 100 luxury brand retailer with global operations. The Company sells products to customers globally through franchised stores and owned stores.

Rationale for Valuation – HOLD at GBX 1,832.00

• Economic Recovery: The upbeat payroll numbers, encouraging retail data, China’s export growth, pickup in British consumer spending, and UK construction recovery shall support the argument for a swift economic recovery.
• Promising Prospects: Burberry is confident of achieving its medium-term targets despite the challenging external environment as it continued to show growth across core strategic categories.
• Guidance: It expects high single-digit top-line growth in the medium-term and meaningful margin improvement on the back of a strong order book.
• Technical Indicator: From the technical standpoint, the momentum oscillator 14-day RSI (~45.85) is still close to the oversold zone, while the stock price is hovering between the lower and the middle Bollinger Bands.
• Undervalued Multiples: As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow, Price/Book, and Price/Earnings multiples are currently lower than average of the Speciality Retailers industry.

Key Risks

• Inflation: British inflation topped a 10-year high in October 2021 due to skyrocketing energy bills and supply chain snags, which can compel the Bank of England to raise interest rates.
• Macroeconomic Risk: The disrupted supply chain and change in demand patterns due to the COVID-19 crisis can further impact revenue and profitability.

Financial Highlights (for 26 weeks ended 25 September 2021, as on 11 November 2021)

 (Source: Company Website)

• Strong Growth: Burberry made an excellent start to H1 FY22 and witnessed double-digit sales growth, margin expansion, and robust free cash generation.
• Acceleration Phase: It continued to roll out new stores and enhance customer experience. Thus, it is on track to achieve its medium-term goals.
• Distribution: It reinstated the interim dividend at 11.6 pence per share and recommenced the share buyback.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

As the office reopening has brought shoppers back on high streets, British retail sales have got a boost. Adjacently, Burberry is well-positioned to drive performance and deliver growth in the medium term since sales growth has been accelerated, and the Company has sustained the positive momentum in digital sales as well. The stock made a 52-week high and low of GBX 2,267.00 and GBX 1,673.50, respectively.

Based on decent growth prospects, medium-term guidance, and support from the valuation as done using the above method, we have given a “HOLD” stance on Burberry Group at the closing market price of GBX 1,832.00 (as on 6 December 2021), while we look forward to taking fresh positions once the inflation and supply chain related concerns fade away.

Lenta IPJSC

Lenta IPJSC (LON: LNTA) is a multi-format food and FMCG retailer based in Russia. It operates supermarkets, hypermarkets, and has a proximity store, called “Mini Lenta”.

Rationale for Valuation – BUY at USD 2.69

• Improved Dynamics: The concerns regarding the omicron COVID-19 variant started receding since the variant has shown only mild symptoms so far. Moreover, the inflationary pressure is easing, and thus, it can delay plans for an interest rate hike by the regulatory authorities.
• Acquisitions: Lenta has recently completed the acquisitions of Semya Group business and Billa Russia supermarket business. Both the acquisitions likely to generate multiple synergies going forward.
• Online Growth: The online sales grew 237% year-on-year to RUB 4.4 billion, following the 231% year-on-year growth in online orders.
• Outlook: Fitch Ratings upgraded Lenta's credit rating to 'BB+' with a Stable Outlook.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~34.18) is still close to the oversold zone, while the stock price is hovering between the lower and the middle Bollinger Bands.
• Undervalued Multiples: In terms of valuation multiples on a forward 12-month basis – Price/Earnings, EV/Sales, and EV/EBITDA multiples are undervalued against the Consumer Non-cyclical sector.

Key Risks

• Coronavirus: The new Omicron variant can impact shopper behaviour or footfall.
• Sluggish Retail Growth: The persistent supply shortage is topping new records and capping the growth of the retail sector.

Recent News

Listing: On 30 November 2021, Lenta announced that it will commence the trading of Ordinary shares on Moscow Exchange (MOEX) from 1 December 2021. The global depositary receipts (GDRs) will be delisted from MOEX in the first half of 2022. However, GDRs will continue to be listed and traded on the London Stock Exchange.

Acquisition: On 26 August 2021, Lenta completed the acquisition of Semya Group business for the purchase price of around RUB 2.45 billion.

Q3 FY21 Operational and Financial Highlights (for the quarter ended 30 September 2021, as on 25 October 2021)

 (Source: Company Website)

• Top-line Growth: During Q3 FY21, the retail sales surged by 13.5% year-on-year to RUB 116 billion in Q3 2021.
• Selling Space: With opening of new stores, selling space grew by 16% year-on-year in Q3 FY21.
• Financial Position: At the end of Q3 FY21, the Net Debt to EBITDA (LTM) ratio stood at 1.9x.

One Year Share Price Chart

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

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

 Conclusion

In Q3 FY21, Lenta opened 36 new stores in new Mini format; acquired 190 supermarkets and 44 convenience stores; and completed two acquisitions. Therefore, it can pursue and achieve both growth and profitability, even in a challenging operating environment. Moreover, the Company has a solid balance sheet and maintained a stable credit rating outlook from Fitch.

As the stock is still trading close to its 52-week low with decent fundamentals, it is giving a lucrative opportunity for value investing. The stock made a 52-week High and Low of USD 3.74 and USD 2.65, respectively. 

Based on the roust online sales growth, strategic acquisitions, launch of new Mini store, and favourable valuation conducted above, we have given a “BUY” stance on Lenta IPJSC at the closing market price of around USD 2.69 (as on 6 December 2021), with lower double-digit upside potential based on 9.06x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*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).

*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.

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