Hikma Pharmaceuticals PLC

FTSE 100-listed Hikma Pharmaceuticals PLC (LON: HIK) is the United Kingdom-based Pharmaceuticals and Biotechnology Company, specializes in the business of developing, manufacturing, and marketing of a portfolio of branded and non-branded generic medicines.

Investment Rationale – BUY at GBX 2,544.00

• During H1 FY21, Hikma was benefitted from a flexible manufacturing footprint and resilience of its portfolio, which reflected in its year-on-year increase in revenue and gross profit.
• The Company has a robust pipeline of new medicines and a clear strategy to ensure a bright outlook and deliver increased value for its stakeholders.
• Hikma delivered revenue growth in all three businesses during the first half of FY21, reflecting good demand for new and recently launched products.
• From a technical standpoint, the stock price is nearly at the lower standard deviation of the Bolling Bands, while the RSI (~47.18) confirms the oversold position.
• Over the past three years, Hikma has maintained strong profitability multiple since its gross margin, EBITDA margin and net margin have remained above 49.7%, 27.0%, and 13.7%.

Key Risks

• The commercial viability of its products can change significantly with political action, economic factors, regulatory interventions, societal pressures, and changes to participants in the industry's value chain.
• The lockdown easing can reduce the sales of its injectable division and expected growth trajectory might not achieve.

Recent News

FDA approval: Hikma received the approval of KLOXXADOTM (nasal spray 8mg) by the US Food and Drug Administration for the emergency treatment of opioid overdose.

Financial Highlights (for the six months ended 30 June 2021, as on 06 August 2021)

 (Source: Company Website)

• During H1 FY21, Hikma delivered a 7% year-on-year growth in core revenue, underpinned by strong performance in Generics and Branded.
• Similarly, core operating profit grew 9% year-on-year and generated 25% of core operating margin.
• The Group also generated solid cashflow from operating activities of US$224 million.
• At the end of H1 FY21, Hikma maintained low leverage with net debt to core EBITDA of 0.9x (31 December 2020: 0.9x).

One Year Share Price Chart

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

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

Conclusion

During the H1 FY21, Hikma Pharmaceuticals strong revenue and profit growth with further progress in increasing availability of important medicines. Therefore, it has improved the outlook and expects FY21 revenue growth for all three divisions – Injectables (revenue growth in the mid-single digits), Generics (expect revenue to be in the range of $810 million to $830 million) and Branded (expect revenue to grow in the mid-single digits in constant currency). Overall, the Company is making a positive impact, and has flexible manufacturing capabilities and diversified portfolio to withstand the evolving challenges of the COVID-19 pandemic. The stock made a 52-week High and Low of GBX 2,768.00 and GBX 2,158.00, respectively.

Based on the strong first half performance, continued revenue growth in all three businesses, improved FY21 outlook, broad and growing portfolio, with support from the valuation conducted above, we have given a “BUY” recommendation on Hikma Pharmaceuticals PLC at the closing price of GBX 2,544.00 (as on 12 August 2021), with lower double-digit upside potential based on 22.30x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Direct Line Insurance Group PLC

Direct Line Insurance Group PLC (LON: DLG) is a General Insurance Company, which operates through four segments – Motor, Home, Rescue, and other personal lines and Commercial.

Investment Rationale – Sell at GBX 309.00

• The claim frequency in the motor division remained below the normal level with fewer new car sales. Moreover, the softer rate environment in the motor division can increasing impact earnings in H2 FY21.
• During H1 FY21, the gross written premium was reduced by 1.5% year-on-year, reflecting a decline in the Motor and Travel division.
• The premium could shrink due to battered disposable income and dented consumer sentiments amid the Covid-19 crisis.
• From a technical standpoint, 14-day RSI (~57.65) is hovering close to an overbought position, while the stock price is near the upper Bollinger Band.
• In terms of valuation multiples - EV/EBITDA, Price/Cash Flow, Price/Book, and Price/Earnings are higher against the industry median of the Financials sector.

Key Risks

• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets in the short term.
• The changing customer expectations and the entrance of new InsurTech players can significantly disrupt the business growth.
• Any uncertainty in the financial transactions and losses above the charged premiums could lead to financial and insurance risk.

Recent News

Share Repurchase Programme: On 4 August 2021, DLG affirmed its intentions to commence a share repurchase programme up to a maximum consideration of £100 million to be carried out in tranches in the next twelve-month period.

Financial Highlights (for the six months ended 30 June 2021, as on 03 August 2021)

 (Source: Company Website)

• During H1 FY21, DLG unveiled strong financial performance, and momentum in strategic transformation.
• Therefore, it declared an interim dividend of 7.6 pence per share, reflecting an increase of 2.7% over H1 FY21.
• The operating profit increased to £369.9 million following a reduction in operating expenses.
• The medium-term guidance for combined operating ratio has been reiterated in the range of 93% to 95%, normalised for weather.

Share Price Chart

(Data Source: REFINITIV, Analysis by Kalkine Group)

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

Conclusion

The direct and indirect implications of the Covid-19 pandemic can impact the Company's operations and prospects. Moreover, the fluctuations in interest rates, exchange rates and credit spreads due to macroeconomic instabilities can worsen the Company's financial conditions. In addition, subdued motor market premium and claims severity inflation can hurt the overstretched position of the stock. Furthermore, the speculations regarding tightening of monetary policy can strengthen the US dollar and impact the value of its assets. Moreover, market conditions are still challenging due to the Covid-19 pandemic and there is a high investment risk with market volatility. Therefore, it is prudent to liquidate the position and reinvest when short-term uncertainties fade away. The stock made a 52-week High and Low of GBX 342.10 and GBX 259.50, respectively.

Based on the macroeconomic instabilities, overstretched technical stance, and unfavourable valuation conducted above, we have given a “SELL” recommendation on Direct Line Insurance Group PLC at the closing price of GBX 309.00 (as on 12 August 2021).

*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).

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.