Melrose Industries Plc

Melrose Industries Plc (LON: MRO) is an FTSE 100 listed investment Group that specialises in buying manufacturing businesses with strong fundamentals, which can be further improved in terms of performance.

Investment Highlights - Melrose Industries Plc – Buy at GBX 115.85

• As per valuation metrics, EV/Sales and Price/Book multiples of the Melrose Industries Plc are currently lower as compared to the corresponding multiple of the Machinery, Tools, Heavy Vehicles, Trains & Ships industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company delivered a significant return of ~ 44.68% and delivered significantly higher returns compared to the benchmark Index (FTSE-100 Index).
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 107.77) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• The ongoing Covid-19 mayhem has already impacted the sales in H1 FY20, and it continues to impact the business growth trajectory in the near term.
• The Company could not meet the target of being cash neutral due to the difficult trading environment.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the company’s financial performance declined with lower revenue and profitability for the period.
• The trading stood higher than management’s expectations over the summer months, primarily in key Nortek and automotive markets.
• The Company has a strong cash generation with an adjusted free cash flow of £213 million, with significant working capital inflow in the first half.
• The Company managed to reduce net debt and improved banking terms, which gives flexibility over the medium-term to improve business.
• MRO focused on restructuring projects, which will improve trading performance by more than £100 million in 2021.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Cash Flow 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, while profitability remained in the negative zone. Despite the lower financial performance, the Company has strong cash generation ability, and trading stood higher over the summer months. The Company is looking to implement restructuring projects to improve trading performance by 2021.

MRO is continuously investing in energy-efficient and ground-breaking technology to achieve maximum out of growth opportunities. At present, the Company is not planning to pay any interim dividend but is intended to pay as soon the market environment gets back to normal. The stock made a 52-week low and high of GBX 72.00 and GBX 309.40, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation on Melrose Industries Plc at the current price of GBX 115.85 (as on 1 October 2020, before the market close at 8:01 AM GMT+1), with lower double-digit upside potential based 15.30x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

Moneysupermarket.Com Group Plc

Moneysupermarket.Com Group Plc (LON: MONY) is an FTSE-250 listed Company, which provides price comparison services through three brands - TravelSupermarket, MoneySuperMarket, and MoneySavingExpert.

Investment Highlights - Moneysupermarket.Com Group Plc – Buy at GBX 269.80

• As per valuation metrics, EV/Sales and Price/Book multiples of the Moneysupermarket.Com Group Plc are currently lower as compared to the corresponding multiple of the Software & IT Services industry. It reflects, shares are undervalued as compared to the industry.
• Over the past four years (FY15 – FY19), the Company’s operating profit has surged from GBP 80.45 million in FY15 to GBP 118.30 million in FY19, compounded at an annual growth rate (CAGR) of ~ 10.12 per cent.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 48 level), which means the stock price could increase in the short term.

Key Risks

• The Company operations may be impacted by an increase in the competition as it operates in a highly competitive and dynamic marketplace.
• MONY may experience operational glitches, which may result in the transfer of incomplete or incorrect data to or from partners, which could negatively impact brands reputation.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, due to lower revenue generated by Insurance and Money businesses, the revenue declined by 8%.
• The Company’s profitability declined for the period, driven by lower revenue and increased operating expenses.
• The Company reported robust cash conversion with operating cash of £41.7million in H1 FY2020 and net cash of £7.5 million as on 30 June 2020.
• Despite the lower financial performance, MONY maintained an interim dividend at 3.1 pence, indicating confidence in the business model and strong cash flow characteristics.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

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

Conclusion

In the first half of the financial year 2020, the company has shown a decline in financial performance. Despite the decline in financial performance, the Company’s Home Services business performed well. MONY maintained interim dividend, which reflects, confidence in the business model and strong cash flow characteristics. The Company has a strong cash conversion with £41.7 million of operating cash and £7.5 million of net cash.

At present, the Company expects uncertainty in some markets and will not be able to provide any future guidance and believe to face greater earnings pressure in the second half. The Company is committed to making an additional marketing investment of £5 million in H2 FY2020 and will continue to control Operating expenditure. The stock made a 52-week low and high of GBX 210.00 and GBX 402.10, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation on Moneysupermarket.Com Group at the current price of GBX 269.80 (as on 1 October 2020, before the market close at 9:39 AM GMT+1), with lower double-digit upside potential based 21.80x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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