Avast Plc – Expects adjusted revenue to be at the upper end of mid-single-digit growth

Avast Plc (LON: AVST) is a FTSE 100 quoted Company, which offers digital security and privacy products and serves over 435 million users online.

On 3 March 2021, the Company will announce the 2020 full-year results.

Rationale for Valuation – Buy at GBX 528.50

• FY20 outlook for adjusted revenue is expected to be at the upper end of mid-single-digit growth, and adjusted EBITDA margin shall remain broadly flat.
• The Company has a strong and liquid balance sheet, with additional development opportunities.
• The Company has decent fundamental metrics as it has maintained a Net Margin and ROE (return on equity) above the industry median.
• As per valuation metrics, Price/Earnings and Price/Cash Flow multiples of the AVST are currently lower as compared to the corresponding multiples of the Software & IT Services industry.
• In the last month, the Company has delivered a decent return of ~11.18%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 493.20) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Reduced government funding can derail future opportunities.
• The heavy reliance on large customer poses uncertainties to the obtained revenue.
• Increasing competition can also put pricing pressure in the future.
• In the short-term period, the market environment remains uncertain and volatile because of Covid-19 mayhem.

Q3 Trading Update (for the period from 1 July 2020 to 30 September 2020, as on 21 October 2020)

(Source: Company Website)

• In Q3 FY20, the adjusted revenue increased by 8.6% YoY on an organic basis (up 2.6% YoY at actual rates). While adjusted revenue in the year to date (9M FY20) surged by 7.3% YoY on an organic basis (up 1.9% YoY at actual rates).
• The Company delivered a decent performance in Consumer Desktop business and also in-line with pre-pandemic levels.
• For Q3 FY20, the adjusted EBITDA increased by 3.3% YoY. The adjusted EBITDA for the year to date was up by 2.5% YoY with an Adjusted EBITDA margin year to date of 55.7%.
• The Company witnessed a robust balance sheet, with strong organic cash flow generation, the voluntary repayment of US$100 million debt in Q3 and net debt to LTM Adjusted EBITDA of 1.5x at 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite the potential macroeconomic risks arising from Covid-19, the Board remains confident in the market opportunity and the health of the business, supported by structural growth drivers. Following the strong demand in Q2, the Company expects revenue to continue to outpace billings growth in H2 FY20. Therefore, the adjusted revenue for FY20 will be at the upper end of mid-single-digit growth. Also, the adjusted EBITDA margin is expected to be broadly in FY20. Overall, the Company is reflected a resilient financial performance, which underpins continued investment in the growth and focuses on innovation. The stock made a 52-week low and high of GBX 263.60 and GBX 604.50, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation on Avast at the current price of GBX 528.50 (as on 7 January 2021, before the market close at 11:53 AM GMT), with lower-double digit upside potential based on 24.50x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Capita Plc - Expects to make further disposals, which will strengthen the balance sheet

Capita Plc (LON: CPI) is a London, the United Kingdom-based company, which provides support services to clients in the public and private sectors.

Rationale for Valuation – Hold at GBX 38.26

• Capita has continued to trade in line with our expectations, despite the ongoing challenges caused by Covid-19.
• The Company expects a stable business, with sustainable free cash flow for the shareholders.
• It expects to make further disposals which will strengthen the balance sheet and sustainable performance for the long term.
• As per the valuation metrics, EV/Sales, Price/Earnings, and EV/EBITDA multiples of CPI are currently lower than Professional & Commercial Services industry.
• In the last three months, the Company has delivered a decent return of ~25%, which was higher as compared to the FTSE 250 Index.
• From the technical standpoint, 14-day RSI stood at 42.28, which is supporting the upside movement.

Key Risks

• The Company may fail to refine strategy for medium-term, which may delay the transformation and could weaken the balance sheet.
• The COVID-19 pandemic has put clients, customers and the service delivery under huge pressure.
• This pandemic has also thrown up a myriad of challenges and opportunities.
• The operational and financial pressures have slowed down the transformation programme.

Recent News

On 18 December 2020, the Company had been selected for Royal Navy training contract as the winning bidder. The contract will be worth an estimated £1 billion over 12 years for Capita.

On 14 December 2020, the Company has agreed to sell its Education Software Solutions (‘ESS’) business to Tiger UK Bidco Limited, which values ESS at up to £400 million.

On 11 December 2020, the Company announced that it had been awarded a contract extension with the Ministry of Defence to continue to deliver the recruitment service for the British Army.

Trading Update (for the period ended 30 September 2020 (Q3 FY20) as on 10 November 2020)

(Source: Company Website)

• In Q3 FY20, the Company’s trading was in line with the expectations as the greater revenues have remained resilient.
• However, the Company saw a year-on-year reduction, primarily in transactional business (due to the impact of Covid-19).
• It has improved operating profit and adjusted EBITDA from the corresponding period of the last year.
• Moreover, the Company continued to proceed with the disposal of its Education Software Solutions business.

 One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company stated that the trading has remained in line with the expectations, and it expects to comply with the debt covenants at 31 December 2020. The Company continued to deliver operational improvement to tackle covid-19 related uncertainty with strong and decisive actions. Capita continues to make further progress with the disposal of non-core assets, which will strengthen the balance sheet. Overall, the Board stays confident in Capita’s ability to emerge from such an unprecedented period and also sustainable for the long term. The stock made a 52-week low and high of GBX 19.84 and GBX 176.55, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Capita at the current price of GBX 38.26 (as on 7 January 2021, before the market close 8:20 AM GMT) and will recommend fresh buying at the right time.

*All forecasted figures and Industry/Peers information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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