Hutchmed (China) Limited

Hutchmed (China) Limited (LON: HCM) is listed on the FTSE AIM All-Share index. It is engaged in the manufacturing and sale of drugs.

Investment Rationale – Sell at GBX 588.00

• As of H1 FY2021, HCM has a loss-making operation.
• The Company is dependent on external funds for its product development programs.
• On the profitability front, the net margin in H1 FY2021 has been lower than the industry median of 15.0%.
• In the last three months, the stock generated a decent return of about 66.67%, offering investors an opportunity to book a decent profit.
• The stock is trading near its 52-week high price, raising doubt about its upside potential from the current level. Hence, a correction in the near term cannot be ruled out.
• On the technical front, the 20-day SMA at about GBX 593.00 is sustaining above the stock price. Hence, there could be a correction in the stock price in the near term.

Key Risks

• The Company operates in a highly regulated market. Hence, any failure to comply with regulations could lead to penalties and loss of reputation.
• There could be delays in the rolling out of treatments. It could lead to a loss of revenues.
• Any delay in attaining funds could lead to a delay in operations and plans for product development.

Financial Highlights (for six months ended 30 June 2021 (H1 FY2021), as of 28 July 2021)

(Source: LSE Website)

• Driven by a 161% YoY increase in oncology revenues, total revenues in H1 FY2021 surged 47% YoY.
• However, due to an increase in the cost of third-party prescription drug products, the cost of revenues rose to USD 123.2 million in H1 FY2021 from USD 83.6 million in H1 FY2020.
• Also, due to the expansion in the development of oncology drug candidates, research and development expenses in H1 FY2021 surged by ~66.3% YoY.
• Driven by this dramatic rise in expenses, loss from operations in H1 FY2021 rose ~83.9% YoY.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

Conclusion

Recently, HCM announced a collaboration with Epizyme to develop and commercialize TAZVERIK. Also, the Company has initiated the phase II trial of ORPATHYS in collaboration with AstraZeneca. However, the Company has a loss-making operation, and its net loss has more than doubled YoY in H1 FY2021.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading near its 52-week high, indicating overstretched valuation. Overall, we do not have significant catalysts to support an uptick in the stock price and recommend exiting the position currently. The stock made a 52-week low and high of GBX 337.00 and GBX 656.00, respectively.

Considering the loss-making operation of the Company, its dependence on external funds, and lower profitability of the Company than the industry, we have given a “SELL” recommendation on Hutchmed (China) Limited at the closing market price of GBX 588.00 (as of 13 August 2021), while we will revisit our stance based on further corporate announcements by the Company.

Dr. Martens Plc

Dr. Martens Plc (LON: DOCS) is listed on the FTSE 250 index and manufactures footwear and durable boots.

Investment Rationale for Valuation – Buy at GBX 402.00

• During Q1 FY2022, DOCS achieved growth in all the regions, with the Americas recording triple-digit revenue growth.
• The trading in Q1 FY2022 exceeded the management’s expectations, as the easing of lockdown restrictions boosted the sales.
• On the profitability front, DOCS had a higher EBITDA margin than the industry median of 29.8% in H2 FY2021.
• On the liquidity front, DOCS has a higher current ratio than the industry median of 1.47x since H1 FY2021.
• On the technical front, the 14-day RSI at about 30.78 is moving towards the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• There could be potential supply chain disruptions due to the spread of the delta-variant of Covid-19, increasing the costs of the Company.
• Due to muted disposable income, customers could come under financial stress. Hence, there could be a loss of customers.
• Due to the Company’s international operations, there could be an exchange rate impact on the Company’s financials.

Q1 FY2022 Trading Statement (released on 29 July 2021)

(Source: LSE Website)

• In Q1 FY2022, DOCS achieved recovery in retail and solid growth in eCommerce driven by normalisation of order patterns.
• It led to good growth in all regions, with the Americas recording triple-digit revenue growth.
• Also, the easing of restrictions led to retail revenue in Q1 FY2022 more than tripling YoY.
• This strong performance resulted in Q1 FY2022 revenue surging 52% YoY. Also, compared to Q1 FY2020, the revenue rose 31%.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

During Q1 FY2022, retail sales made a strong recovery due to the reopening of stores. It led to a dramatic rise in revenues, especially in the Americas. The management is wary of supply chain delays in Q2 FY2022 but remains confident of achieving the expected results in FY2022 and beyond. Meanwhile, the stock made a 52-week low and high of GBX 395.80 and GBX 521.60, respectively.

Based on the strong recovery in retail sales, continued growth in eCommerce, decent prospects of the Company, and support from valuation as done using the above method, we have given a “BUY” recommendation on Dr. Martens Plc at the closing market price of GBX 402.00 (as on 13 August 2021), with a lower double-digit upside potential based on 29.95x Price/NTM Earnings (approx.) on FY22E 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.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

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

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