Rolls-Royce Holdings Plc

Rolls-Royce Holdings Plc (LON: RR.) is a London, United Kingdom-headquartered multinational engineering Company. It focuses on power and propulsion systems.

Investment Highlights - Rolls-Royce Holdings – Buy at GBX 160.15

• As per valuation metrics, EV/EBITDA, Price/Earnings and Price/Book Value multiples of the Rolls-Royce Holdings Plc are currently lower as compared to the corresponding multiples of the Aerospace & Defense sector. It reflects, shares are undervalued as compared to the industry.
• On the liquidity front, Rolls-Royce Holdings Plc’s current ratio of 1.02x was slightly lower than the industry median of 1.07x. Despite the lower liquidity, the Company has sufficient liquidity profile to tackle the uncertainty due to covid-19 outbreak.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 10 level), which means the stock price could increase in the short term.

Key Risks

• The Company is exposed to a number of market risks, some of which are of a macro-economic in nature such as, fluctuations in foreign currencies, oil prices, and interest rates.
• COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is shrinking as activity levels have reduced.

Recent News

On 21 September 2020, Rolls-Royce replied to media speculation related to the possibility of undertaking fundraising. The Company continues to review funding options available to increase the strength and resilience of the balance sheet. RR is evaluating the merits of raising equity of around £2.5 billion. The Company is also reviewing new debt issuance but has not made any final decision.

Financial Highlights – H1 Financial Year 2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the reported revenue declined by 26%, and underlying revenue declined by 24%, reflecting lower revenue from Civil Aerospace, Power Systems and ITP Aero businesses.
• Due to the impact of covid-19 resulted in one-off charges in Civil Aerospace of £1.2 billion, the underlying operating loss stood at £1.7 billion; reported operating loss stood at £1.8 billion.
• On the Liquidity front, the Company has a cash balance of £4.2 billion as on 30 June 2020, along with RCF (revolving credit facility) of £1.9 billion. The Company also announced term loan backed by UKEF (UK Export Finance) for £2 billion in July and finalised in August.

One Year Share Price Chart

Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance for the first half of the financial year 2020. The Company expects the market to remain uncertain despite the economic recovery and easing of travel restrictions. RR believes business recovery will commence by the end of H2 FY2020, based on a gradual recovery in civil aviation. The Company expects the majority of Power Systems end markets will recover by the end of 2021, and revenue will reach normal levels in 2022, while Defense performance stood resilient. The Company expects large engine deliveries to increase gradually beyond 2022.

The underlying revenue in FY2020 is expected to be 25% to 30% below FY2019 data, with free cash outflow of around £4 billion, liquidity of £6 billion and net debt will increase to £3.5 billion approximately. The Company is targeting to return to positive free cash generation by H2 FY2021 and free cash outflow in FY2021 will be significantly lower versus FY2020. The stock made a 52-week low and high of GBX 160.15 and GBX 798.12, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for Rolls-Royce Holdings Plc at the current price of GBX 160.15 (as on 21 September 2020, before the market close at 8:40 AM GMT+1), with lower double-digit upside potential based on 0.76x EV/NTM Sales (approx.) on FY20E sales (approx.).

Essentra Plc

Essentra Plc (LON: ESNT) is a manufacturer and supplier of essential components and solutions, including caps, plugs, plastic, fibre, foam and packaging products

Investment Highlights - Essentra Plc – Avoid at GBX 257.60

• As per valuation metrics, EV/EBITDA, and Price/Cash Flow multiples of the Essentra Plc are currently higher as compared to the corresponding multiples of the Containers & Packaging industry, reflecting overstretched valuations.
• In the last one year, the Company delivered a negative return of ~ 44.28% and delivered significantly lower returns compared to the benchmark Index (FTSE-250 Index).
• From the technical standpoint, shares were trading below the short-term support level of 20-day simple moving average prices of 288.90, which reflects a downtrend in the stock and can decline further.

Key Risks

• The Company is facing some direct impact on demand from the coronavirus (COVID-19) outbreak.
• Some risks are currency fluctuations and macroeconomic risk; regulatory risk across a wide range of industries; and investment risk and liquidity risk.

Recent News

On 18 September 2020, Essentra announced the completion of Placing and Subscription of 37,223,079 Shares and concurrent Retail Offer. The shares were placed by Jefferies (Jefferies International Limited) and Peel Hunt (Peel Hunt LLP) at 260 pence issue price.

On 17 September 2020, Essentra announced the signing of SPA (sale and purchase agreement) to purchase issued share capital of 3C! (3C! Packaging Inc) for $65 million of the total consideration.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company’s operation was significantly impacted by covid-19 pandemic, the order intake and revenue improved in Q2 FY2020 across all divisions.
• The performance from the Packaging division and Filters division stood strong at the end of H1 FY2020.
• All the Company’s warehouse and manufacturing facilities were fully operational and maintained strong underlying liquidity position throughout H1 FY2020.
• Despite the impact of a pandemic, the Company provide resilient performance and trends improvement seen in Q2 FY2020.

One Year Share Price Chart

Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters).

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

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, with lower profitability margins. Despite the lower financial performance, the Company witnessed an improvement in the trend of all 3 divisions. ESNT has maintained a strong liquidity position and all 71 warehouse and manufacturing facilities were fully operational.

The Company expects the macro-economic environment to remain uncertain in H2 FY2020, while all business divisions are expected to return to growth. The Company has a strong operating cash flow position and is looking to resume dividend payments for FY2020. The stock made a 52-week low and high of GBX 206.80 and GBX 459.13, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Essentra Plc at the current price of GBX 257.60 (as on 21 September 2020, before the market close at 8:00 AM GMT+1), and we will watch out at the improvement in the trend in the near term.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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