Compass Group PLC – Recovery of revenues and margins is unclear.

Compass Group PLC (LON: CPG) is a FTSE 100 listed, Vending and Catering Service Company with operations in 45 countries. It serves around 55,000 clients with a workforce of 600,000 people.

On 24 November 2020, CPG expects to release its FY20 results for the year ended 30 September 2020.

Investment Rationale – Sell at GBX 1,459.87

• From a technical perspective, 14-Day RSI (77.40) is in the overbought zone and hence, short-term correction can be expected.
• In terms of trading multiple, EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite overvalued as compared to the corresponding multiple of the Consumer Cyclicals industry.
• CPG’s EBITDA margin in H1 FY20 was 9.7%, whereas the industry median was 11.3%. Over the past four years, EBITDA margin has remained below 9.7%.
• Revenue significantly declined across all regions in FY20.
• The overall outlook and recovery of margins are still unclear.

Risk Assessment

• The outbreak of Coronavirus had a profound impact on business performance.
• Moreover, the Company’s performance is also subject to liquidity risk and concerns arising from the Brexit.

Pre-Close Trading Update for the year ended 30 September 2020

 (Source: Company Website)

• CPG’s organic revenue improved in the Q4 FY20 as clients Education and Business & Industry began to return to offices and schools.
• The Group revenue in FY20 was down by 19% year-on-year.
• The underlying operating margin after estimated impairments was 3%. For the computation of the underlying operating profit, resizing costs of around £130 million was not considered.
• The Capital expenditure for FY20 is expected to be around £720 million.
• As of 30 September 2020, liquidity was stood around £5 billion, comprising of £600 million available CCFF limit, £1.6 billion in cash, and £2.8 billion in undrawn credit facilities.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In FY20, financials are also expected to be impacted by unfavourable foreign exchange currency fluctuations. Moreover, the outlook for revenue generation and margins are unclear considering the level of uncertainties. Furthermore, the possible increase in lockdown measures in the Northern Hemisphere through winter months can impact the business. The technical indicator (14-day RSI) is also suggesting an overbought situation. Therefore, it is rational to book profit now. Stock 52 week High and Low were GBX 2,077.00 and GBX 865.80, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Compass Group  PLC at the current price of GBX 1,459.87 (as on 11 November 2020, before the market close at 8.05 AM GMT), while we look forward to reinvesting at the appropriate time when the current market dynamics turn favourable.

Aggreko PLC – Reduced economic activity leading to a gloomy outlook.

Aggreko PLC (LON: AGK) is a FTSE 250 index listed Company, which provides mobile power and temperature control systems. Its business line includes solutions, industrial and power solutions utility.

On 17 November 2020, AGK expects to announce a strategic update and Q3 FY20 trading statement.

Investment Rationale – Sell at GBX 519.50

• From a technical perspective, 14-Day RSI (79.54) is in the overbought zone and hence, short-term correction can be expected.
• On a YTD basis, AGK’s stock has plunged nearly 39.81%, whereas the benchmark index (FTSE 250) has only fallen around 13.52%.
• The outlook remained uncertain, and significant demand recovery is not expected in the short-term.
• Unfavourable events in the refining, petrochemical and oil & gas continued to put pressure over the Company’s revenue.

Risk Assessment

• Uncertainties surrounded with failure to deliver critical contracts effectively and customer payment defaults.
• Global macroeconomic uncertainty, failure to identify, develop and deploy new technology could also hinder growth prospects.
• COVID-19 pandemic and the lower oil price continued to cause operational and financial risks.

Recent News

29 October 2020: Diana Layfield will retire as a Non-executive Director from 31 December 2020.

Trading Update for the six months ended 30 June 2020 (as on 6 August 2020)

(Source: Company Website)

• AGK paid an interim dividend of 5 pence per share in H1 FY20.
• Due to lower oil price and Covid-19 impact, underlying revenue was down by 12%.
• As of 30 June 2020, net debt £499 million, reflecting £285 million of year-on-year reduction.
• There was £700 million of immediately available liquidity.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

During H1 FY20, both top-line and bottom-line items of the income statement declined. Moreover, there is a high degree of uncertainty when the market will recover from the Covid-19 led economic slump. Moreover, the travel restrictions will continue to impact the mobilisation and demobilisation of projects. Considering the uncertain outlook, it is suggested to book the available profit now. Stock 52 week High and Low were GBX 881.00 and GBX 285.90, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Aggreko  PLC at the current price of GBX 519.50 (as on 11 November 2020, before the market close at 8.30 AM GMT), while we look forward to reinvesting when the current market dynamics turn favourable.

Petrofac Ltd – Deterioration in market conditions triggered by the Covid-19 pandemic.

Petrofac Ltd (LON: PFC) is a FTSE 250 listed Company, which is engaged in the production and processing of oil and gas. It assists companies in transforming the value of their assets across the oil and gas life cycle.

On 16 December 2020, PFC expects to release pre-close trading update ahead for FY20 (for the period ending 31 December 2020). The full-year results are expected to be released on 24 February 2021.

Investment Rationale – Sell at GBX 158.67

• From a technical perspective, 14-Day RSI (85.33) is indicating a downward trend.
• In terms of trading multiples, EV/EBITDA and Price/Earnings are quite overvalued as compared to the corresponding multiples of the Energy industry.
• The net sales have been falling consistently every year since FY16.
• In H1 FY20, debt/equity ratio was 2.18x, and it has remained above the industry median for the past four years.
• PFC has turned into net losses in H1 FY20 from net profit of US$139 million in H1 FY19.
• Dividend payment has been suspended and the recovery in order intake is not expected in the short-term.

Risk Assessment

• The nosedived oil prices after Covid-19 crisis continued to disrupt business activity and delay project awards.
• The prolonged state of dented oil prices can widen the losses.
• Moreover, the uncertain economic outlook can also lead to liquidity and credit risk.

Recent News

3 November 2020: PFC completed the disposal of the remaining 51% interest in its upstream IES operations in Mexico. In total, US$120.2 million has been received till date regarding the sale.

Interim results for the six months ended 30 June 2020 (as on 11 August 2020)

 (Source: Company Website)

• During H1 FY20, trading was materially impacted by a sharp fall in oil and gas prices.
• In H1 FY20, the Company reported a net loss of US$78 million while there was US$1.0 billion of new order intake.
• In FY20, PFC expects to deliver the cost savings of US$125 million while it is also on track to save US$200 million in FY21.
• As of 30 June 2020, net debt stood around US$29 million while the liquidity was approximately US$1.2 billion.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Covid-19 pandemic and low oil prices continued to disrupt the trading environment. The macroeconomic disruption is also causing a delay in projects awards and hampering the supply chain. Adjacently, the depreciation of Mexican Peso could impact the revenue generation. Moreover, the Company has also suspended the dividend unless there is a sustained recovery in new order intake. Stock 52 week High and Low were GBX 422.00 and GBX 105.70, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Petrofac Ltd at the current price of GBX 158.67 (as on 11 November 2020, before the market close at 8.10 AM GMT), while we look forward to reviewing the upcoming catalysts and reinvest at the right price. Clients having a high-risk appetite can keep a close watch on the stock from a long-term perspective and take an informed decision as appropriate.

Hunting PLC – Covid-19 pandemic continued to depress demand and weigh heavily on oil price sentiment.

Established in 1874, Hunting PLC (LON: HTG) is a FTSE All-Share listed energy company, which provides services to upstream oil and gas companies.

Investment Rationale – Sell at GBX 174.20

• From a technical perspective, 14-Day RSI (74.56) is indicating a downward trend.
• In terms of trading multiple, EV/ EBITDA and Price/Cash Flow multiples are quite lower as compared to the corresponding multiples of the Energy sector.
• On a YTD basis, HTG’s stock has plunged nearly 57.99%, whereas the benchmark index (FTSE All-Share) has only fallen around 15.49%.
• Seasonal slowdown is likely to aggravate Covid-19 concerns, and therefore, revenue run rate in Q4 FY20 would be lesser than even Q3 FY20.
• Inventory levels have significantly reduced from FY19 level.
• In H1 FY20, gross margin was 21.90%, and it has remained below the industry median for the past four years.

Risk Assessment

• The decline in oil prices can impact the cash generation and profitability of the Company.
• The performance is also dependent on the production stoppages, equipment failures and supply chain amid Covid-19 crisis.
• The Company can face liquidity risk with insufficient borrowing facilities.

Recent News

9 October 2020: For the interim dividend per share of 2.0 US cents, the conversion rate was determined as US$1.2898 to £1. The second sterling interim dividend will be 1.5506 pence per share.

Q3 FY20 Trading Update for the quarter ended 30 September 2020 (as on 27 October 2020)

• The reduced level of energy demand continued to hamper the third-quarter results as clients have continued to curtail drilling and completion activity.
• During the quarter, monthly revenue has surged within the Hunting Titan and the Asia Pacific segments.
• As the global workforce reduced by around 30% from FY19 level, it has resulted in annualised savings of nearly US$74 million.
• At the end of Q3 FY20, cash position was US$69 million, before lease liabilities.
• As of Q3 FY20, YTD Group EBITDA was around US$28 million while Q3 EBITDA shown breakeven results.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

Given the current level of activity, revenue run rate for Q4 FY20 is likely to be lesser than Q3 FY20 due to usual seasonal slowdown. HTG’s EMEA segment shown a continuing decline in activity within the North Sea. Moreover, the well intervention business unit also showed depressing results. The management needs to reduce the cost base to stay resilient. Considering the gloomy and uncertain outlook, it is rational to register the profit now. Stock 52 week High and Low were GBX 444.80 and GBX 120.10, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Hunting PLC at the current price of GBX 174.20 (as on 11 November 2020, before the market close at 11.45 AM GMT), while we look forward to reviewing the upcoming catalysts and reinvest at the right price. Clients having a high-risk appetite can keep a close watch on the stock from a long-term perspective and take an informed decision as appropriate. 

 

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

---

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

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

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.