Rolls-Royce Holdings PLC – Reorganizing the Business to Tackle Medium-Term Challenges Presented by COVID-19 mayhem

Rolls-Royce Holdings PLC (LON: RR.) is a FTSE 100 engineering Company which serves over 400 airlines, 70 navies, 160 armed forces and 5,000 power & nuclear customers in more than 150 countries.

Recent News
On 20^th May 2020, the Group announced a major reorganization of its business, which will primarily affect the Civil Aerospace business. The purpose of reorganization is to cater to the change in demand pattern from the customers.

AGM Statement (7^th May 2020)
The Group affirmed that it had taken several steps to mitigate the risk arising from COVID-19 disruption such as delivering cash savings of £1.0 billion in 2020, further conserving £137 million in cash by cancelling a final dividend, strengthened liquidity position through additional revolving credit facility (RCF) of £1.5 billion. Power system division witnessed weaker trading during the first quarter of 2020 while air travel restrictions put pressure on Civil aerospace division as well. However, the defense segment has been resilient during the pandemic.

Share Price Performance

Daily Chart as on 28^th May 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

RR.’s shares were trading at GBX 318.50 on 28^th May 2020 (before the market close at 10.55 AM GMT+1), down by 7.97% against the last day closing price. Stock's 52 weeks High is GBX 924.31 and Low is GBX 235.50.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day exponential moving average prices, which reflects an upward trend in the stock and carrying the potential to move up further.

Valuation Methodology


Valuation Metrics
 
(Source: LSE)

As on 30^th April 2020, Price/Sales multiple of the Rolls-Royce Holdings PLC was 0.4x which was lower as compared with the Aerospace & Defence industry. Hence, it is indicating that the Company is trading at a lower multiple against its peers.

Growth Catalysts
Addressing medium-term challenges through reorganization of the business. Further, the synergy between the segments provides them with long-term potential to cater to their market. Also, the defence business remained robust in the UK and US during the pandemic.

Conclusion
During the financial year 2019, the total reported revenue surged by 5 per cent in FY2019 versus FY2018. However, the challenges presented by the Coronavirus outbreak has certainly impacted the business. Hence, the Group has adopted several cost-cutting measures and bolstering liquidity while introducing a reorganization plan. Through the reorganization, the Group is expecting a loss of 9,000 positions out of 52,000 of total workforce. Further, the reorganization shall generate annualized savings of around £1.3 billion. In the medium-term, the outlook is uncertain though the Company is taking appropriate measures and closely monitoring the situation. In the long run, the Group has the potential to generate returns in terms of free cash flow, operating profit margin and cash flow return on invested capital. Overall, the Company has a substantial amount of liquidity to emerge strongly in the long run.

The Group reported a compounded annual growth rate of 4.85 per cent in revenue over the past four years (FY2015 – FY2019), as revenue increased to GBP 16,587.00 million in FY2019 from GBP 13,725.00 million in FY2015.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Buy” recommendation at the current market price of GBX 314.36 (as on 28th May 2020, before the market close at 10.58 AM GMT+1) with lower double-digit upside potential based 10.10 Industry NTM Median Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).
 
Aston Martin Lagonda Global Holdings PLC – Facing Some Difficulties Amid Elevated Global Volatility

Aston Martin Lagonda Global Holdings Plc (LON: AML) is a Warwick, United Kingdom-based manufacturer of the luxury sports car and grand tourers.

The Company will hold its Annual General Meeting on 3^rd June 2020.

Recent News
On 26^th May 2020,Tobias Moers will be appointed as an Executive Director and Chief Executive Officer and will take over from Dr Andy Palmer (stepped down as President and Group CEO 25 May 2020). Tobias will join on 1^st August 2020.

First Quarter Highlights (for the three months to 31 March 2020)

(Source: Presentation, Company Website)

On 13^th May 2020, the Company provided the first-quarter results, the revenue was reduced by 60 per cent to GBP 79 million as compared with the corresponding period of the last year (Q1 FY19: GBP 196 million), driven by COVID-19 impacted dealer demand, lower average selling price (ASP), lower core retail sales (down 31 per cent), and a decrease in core wholesales (down 44 per cent). Operating loss for the current quarter increased to GBP 76.7 million in Q1 FY20 against the last year same period, due to the revenue decline, partially offset by FX was a GBP 7 million headwind to operating profit. On 31st March 2020, the net debt increased to GBP 956.1 million (Q1 FY19: GBP 701.7 million) and closing cash balance was GBP 172 million. DBX was on-track for deliveries in summer 2020, with St. Athan reopened on 5 May 2020. AML has successfully completed a GBP 536 million of equity capital raise.

Share Price Performance

1-Year Chart as at May-28-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 28th May 2020, before the market close (at 9:05 AM GMT+1), Aston Martin Lagonda Global Holdings PLC’s shares were trading at GBX 54.80 and were up by 7.98 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 353.13/GBX 27.50.

From the technical standpoint, its shares were trading well below its long-term support level of 200-day simple moving average prices, which reflects a downtrend in the stock.

Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the EV/EBITDA and Price to Book multiples of the AML were 9.5x and 1.9x, respectively, and the same multiples were higher as compared with the Automobile & Parts industry. It is reflecting that the company is trading at a higher multiple as compared to its peers.

Risk Assessment
COVID-19 has created significant challenges for companies given its widespread adverse global economic, social and operational impact.  The group faces a risk of fines and investigations which can impact future growth as it operates in an industry which is subject to the adverse regulatory headwinds. Liquidity and interest rate risks can also affect the operations of the company.

Conclusion
The Company is planning on the assumption that trading will stay challenging for the rest of the current year and is executing measures to take further actions on controlling cash and operating costs. The Group is not able to provide a clear view on the full-year outlook, due to the uncertainty surrounding the duration and impact of the COVID-19 pandemic on the international economy. Whilst the company withdraw its earlier guidance for the current year. As per the continuing uncertainties, the Group continues to review all refinancing options and future funding to increase liquidity. Based on these successful early orders for DBX, the company plan to unveil future derivatives starting from 2021.

Based on the above rationale, we have given a "Watch" recommendation at the current price of GBX 55.32 (as on 28th May 2020, before the market close at 10.24 AM GMT+1), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.

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