Dixons Carphone Plc

Dixons Carphone Plc (LON: DC) is a FTSE 250-listed electrical and telecommunications retailer, which provides a full range of services and support across the value chain, ranging from mobile virtual network operator services to consumer electricals and mobile phones.

On 16 December 2020, the Company will publish the interim results for the financial year 2021.

Rationale for Valuation – Sell at GBX 118.40

• The outlook for the General Retailer industry and the Company seems dim in the near-term.
• On a trailing twelve-month basis, the Company’s Price/Earnings multiple is significantly higher as compared to the Specialty Retailers industry multiple, reflecting overstretched valuations.
• From the last two years, the Company’s net margin and Return on equity were in the negative zone.
• The stock has underperformed the index (FTSE 250 index) during the last two years period and delivered a negative return of around 31%.
• From the technical standpoint, 14-day RSI stood at ~69.65, which means the stock price could decline in the short term.

Key Risks

• The business operations have been impacted due to the covid-19 crisis.
• Further, a slump in the consumer purchasing power due to massive lay-offs and furloughs could have a weigh on the demand side of the economics.

Trading Update (for 17 weeks ended 29 August 2020, as on 10 September 2020)

• The Company delivered strong sales in all markets, with online sales more than tripled year-on-year.
• In Dixons Travel stores, the sales were down by around 90%.
• In UK & Ireland Electricals, the Company was impacted by approximately 5% in like-for-like and total sales.
• In international markets, the gross margin was slightly down.
• The Company has shown a decent net cash position and has continued access to more than £1.3 billion of available committed debt facilities.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is in the initial stages of exploring the option of listing a minority stake of the Nordics business next year. For the 17 weeks ended 29 August 2020, the retail business was dim in all the markets, but their online business has given an outstanding performance. It has started the year well, but the Company and economic outlook for this year remain uncertain. Moreover, the retail market has borne the brunt of the impact of lockdown. Further, the prolonged impact of the COVID-19 outbreak continued to affect its financial results, plans, operations, outlook, goals, reputation, liquidity and stock price. The stock made a 52-week low and high of GBX 53.50 and GBX 166.45, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Dixons Carphone at the current price of GBX 118.40 (as on 13 November 2020, before the market close at 1:20 PM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Morgan Advanced Materials Plc

Morgan Advanced Materials PLC (LON: MGAM), is a Windsor, United Kingdom-based engineering company.

Rationale for Valuation – Sell at GBX 288.00

• The operating landscape remains highly volatile with the continuing uncertainty of the COVID-19 pandemic, UK market might be moving into recession, and categories remaining highly competitive.
• On a trailing twelve-month basis, the Company’s Price/Earnings and Price/Cash Flow multiples are significantly higher as compared to the Industrials industry multiple, reflecting overstretched valuations.
• On leverage front, the debt-equity ratio stood at 1.39x in H1 FY20, which was higher as compared to the industry median of 0.31x, reflecting that the Company is highly leveraged as compared to the industry.
• The Company is trading near a 52-week high, raising doubts at the upside potential at the current level.
• From the technical standpoint, 14-day RSI stood at ~77.25 (overbought zone), which means the stock price could decline in the short term.

Key Risks

The geopolitical changes and recession in the economy could hamper the Company’s operations and will affect the financial performance and operational stability of the Company.

Q3 FY20 Trading Update (as on 6 November 2020)

• On an organic constant currency basis, the sales for the nine months to 30 September 2020 were 9.8% lower than the previous year.
• In the nine months to 30 September 2020, the Carbon & Technical Ceramics division sales decreased by 6.3% year-on-year and Thermal Products division sales declined by 14.1% year-on-year.
• On 30 September 2020, the net debt was £129 million (excluding lease liabilities), with cash and cash equivalents of £136 million and undrawn headroom of £119 million.
• It has no debt maturities until 2023.
• The Board has declared an interim dividend per share for 2020 of 2.0 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For FY20, the Company’s sales decline will be in the range of 10%-14% (on an organic constant currency basis). Moreover, the current environment stays challenging. The Company may suffer material losses from several risks or certain claims due to the technicality in the operations. While the barriers to entry in its market are high, there are a number of competitors for each of the Company's product categories which may have a material adverse impact on the MGAM's revenues and profitability. Overall, the Electronic & Electrical Equipment industry outlook stays uncertain in the global market. Due to the impact of Covid-19, the Company is facing emerging headwinds and cost pressures. Presently, the company is trading near the 52-week High, raising doubts at its upside potential at the current price level. The stock made a 52-week low and high of GBX 168.80 and GBX 339.40, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Morgan Advanced Materials at the current price of GBX 288.00 (as on 13 November 2020, before the market close at 8:43 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Equiniti Group Plc

Equiniti Group PLC (LON: EQN) is a FTSE 250 listed Company, which provides payment and administration services to the UK’s largest public-sector organisations and the world's best-known brands.

Rationale for Valuation – Sell at GBX 108.40

• Despite the usual seasonal acceleration into Q4, the current external environment stays challenging and is projected to remain the same for the balance of the year.
• The Company’s EV/Sales multiple is significantly higher as compared to the Professional & Commercial Services industry multiple, reflecting overstretched valuations.
• In H1 FY20, ROE was in the negative zone.
• The stock has underperformed the index (FTSE All-Share index) during the last year period and delivered a negative return of around 50%.
• From the technical standpoint, the 200-day simple moving average price is currently at around GBX 145, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company reported a substantial decline in revenue and net profit in H1 FY20 due to Covid-19 mayhem.
• Moreover, the timing and rate of recovery are uncertain.
• A combination of the unprecedented crisis brought by COVID-19 and depressed capital markets and can create unavoidable headwinds in the near-term.

Trading Update (for the period 1 July 2020 to 5 November 2020, as on 6 November 2020)

• The order intake was up by 33% (excluding renewals) as compared with the last year.
• In the current period, the trading environment remains very challenging and expected to remain the same in the rest of the year.
• The Company has maintained a decent financial position and balance sheet, with senior debt facilities of £520 million and more than £175 million of stable liquid resources.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For FY20, the Company’s performance will continue to be affected by the reduction in central bank interest rates and the continuing disruption to capital markets. It also remains uncertain in the operating environment. For FY20, the Company expects revenue to be £480-£490 million, underlying EBITDA between £93 million and £97 million, and cash conversion to be 75%-85%.

Overall business confidence stays low, and clients continue to closely control costs.  The Company’s operations can be affected negatively due to ongoing uncertainties created over the COVID-19. As the Company operates in multiple geographies, the profits can be impacted negatively due to foreign exchange rate fluctuations. From a technical perspective, a simple moving average is indicating a bearish setup for the stock, and it is not financially viable to take a fresh position currently. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 96.00 and GBX 229.18, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Equiniti Group at the current price of GBX 108.40 (as on 13 November 2020, before the market close at 11:10 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable. 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.

Mitie Group Plc

Mitie Group PLC (LON: MTO) is a provider of outsourced facilities management services. On 19 November 2020, the Company will publish the financial results for the six months to 30 September 2020.

Rationale for Valuation – Sell at GBX 34.45

• The Board does not expect to recommend an interim dividend for FY21.
• Led by the ongoing uncertainties of the impact of COVID-19 on the business, MTO will not be providing guidance for FY21.
• On a trailing twelve-month basis, the Company’s Price/Cash Flow multiple is significantly higher as compared to the Professional & Commercial Services industry multiple, reflecting overstretched valuations.
• The stock has underperformed the index (FTSE All-Share index) during the last one-year period and delivered a negative return of around 55%.
• On leverage front, the debt-equity was higher as compared to the industry median of 1.01x, reflecting that the Company is highly leveraged as compared to the industry.
• From the technical standpoint, the 200-day simple moving average price is currently at around GBX 41.09, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• There are several risks and uncertainties which can impact the Mitie’s business, such as the uncertainties regarding the availability of labour and materials post-Brexit, the financial impact of Covid-19 and credit risk arising from market volatility.
• Further, a changing regulatory environment may adversely affect the activities.

H1 FY21 Trading Update (for the six-month period ended 30 September 2020, as on 4 November 2020)

• Q2 revenue increased by 12% quarter-on-quarter, with a monthly improvement in sales, mainly in Cleaning, Security and fixed Technical Services contracts.
• During the period, the Company witnessed a weak demand in the property and finance & professional services clients, but slightly better than the first quarter.
• For H1 FY21, the revenue was down by 9.8% year-on-year.
• On a post IFRS16 basis, the average daily net debt stood at £69.3 million in H1 FY21, with closing net cash of £89.7 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

During the first half of 2021, the Company has renewed or won contracts largely in security and cleaning, for a total consideration of approximately £500 million. It delivered a resilient performance and continued strategic progress. The Board has taken actions to mitigate the impact of the revenue decline due to COVID-19, with reductions in voluntary salary from April to August, overhead savings and additional self-help measures. Moreover, there is continued uncertainty with the impact of Covid-19. Further, the Company expects some adverse headwinds for the rest of the financial year 2021. MTO works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The stock made a 52-week low and high of GBX 26.60 and GBX 80.46, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Mitie Group at the current price of GBX 34.45 (as on 13 November 2020, before the market close at 1:50 PM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable. 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 Peer information have been taken from Refinitiv, Thomson Reuters.

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

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