Severn Trent PLC – Operating with Good Set of Results and Strong Balance Sheet
Severn Trent Plc (LON: SVT) is amongst the 10 largest water and sewerage regulated companies in England and Wales. The company is focused to provide high-quality services to both households and business customers.

On 15th July 2020, the Company will hold the annual general meeting.

Financial Highlights (for the year 31^st March 2020)

(Source: Preliminary Results, Company Website)

On 20^th May 2020, the Company provided the full-year results for the year ended 31^st March 2020, with a good set of results rounding off a strong AMP6 and strong cost control, good non-regulated growth and surged IRE investment for a good start to AMP7. Group’s turnover for FY20 increased by GBP 76 million or 4.3 per cent to GBP 1,844 million as compared with the previous year (2019: GBP 1,767 million). Reported PBIT (profit before interest and tax) stood at GBP 568 million, a growth of GBP 5 million (0.9 per cent) against the last year (FY19: GBP 563 million). Cumulative AMP6 (Asset Management Plan) RoRE (Return on Regulated Equity) of 8.5 per cent, delivered across all three levers of outperformance. Underlying basic earnings per share increased by 0.1 per cent to 146 pence. The Group is on-track to manage the financial impact of Coronavirus with GBP 755 million undrawn debt facilities, less than 2.5% of debt maturing in FY21, and GBP 200 million raised on US Private Placement market. The Board has recommended a final ordinary dividend per share of 60.05 pence for 2019/20 (FY19: 56.02 pence). This gives a total ordinary dividend per share for the year of 100.08 pence (FY19: 93.37 pence).

Share Price Performance

1-Year Chart as at May-22-20, after the market closed (Source: Refinitiv, Thomson Reuters) 

On 22^nd May 2020, Severn Trent PLC’s shares closed at GBX 2,371 and were down by 3.93 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,716.00/GBX 1,900.50.

In addition, momentum oscillator RSI (14), after forming a base around 40 level (oversold position), has begun northward journey, supporting the bullish view on this counter.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price to Earnings multiple of SVT was 18x and the same multiple was lower as compared with the Gas, Water & Multiutilities industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
The Group has been contributing to 9 per cent real RCV (Regulatory Capital Value) growth over AMP6. The Company is well-positioned for AMP7 after a strong final year of AMP6. SVT has continued enhancements in main customer measures.

Conclusion
The Group reported decent financial results in FY2020.The business stays robust, and SVT has made further growth against the things that really matter to the clients with supply interruptions, water quality, and leakage complaints all improving. The Company has good financial resilience to manage the impact of the COVID-19 outbreak. The total invested in the capital programme over the AMP to GBP 3 billion. The Group is considered as income stock offering steady and reliable dividend and capital gain at relatively low risk profile. The Company has proven track record of paying consistent dividends. Further, SVT has consistently delivered a ROE of above 15 per cent over the past five years.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 2,371 (as on 22^nd May 2020) with high single-digit upside potential based on 9x NTM Price/Cash Flow (approx.) on FY21E cash flow per share (approx.).

Ten Entertainment Group PLC - Second Largest Tenpin Bowling Operator, with Robust Balance Sheet
Ten Entertainment Group PLC (LON: TEG) is a Bedford, United Kingdom-based tenpin bowling operator. It has 45 centres with around 1,000 bowling lanes in the UK.

Financial Highlight (for the 52 weeks to 29 December 2019) – Operating with Strong Cash Position

(Source: Final Results, Company Website)

On 13^th May 2020, the Group announced its audited full-year results for the 52 weeks to 29 December 2019, with an eighth consecutive year of like-for-like growth, showing terrific momentum and a great start to 2020. In FY19, the total sales increased by 10.2 per cent to GBP 84.1 million as compared with the previous year. Group’s adjusted EBITDA surged by 14.7 per cent to GBP 23.6 million (FY18: GBP 20.6 million). Profit after tax rose by 11% to GBP 9 million (FY18: GBP 8.1 million). Earnings per share climbed by 11 per cent 13.9 pence against the previous year (FY19: 12.5 pence). Trading in the first 11 weeks of the year to 15 March was robust with total sales growth of 12.7 per cent and like-for-like sales growth of 9.3 per cent.

Share Price Performance

1-Year Chart as at May-22-20, after the market closed (Source: Refinitiv, Thomson Reuters) 

On 22^nd May 2020, Ten Entertainment Group PLC’s shares closed at GBX 138 and were down by 6.76 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 339.00/GBX 110.00.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price to Earnings multiple of TEG was 12.7x and the same multiple was lower as compared with the Travel & Leisure industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
The Company’s pipeline of new site opportunities continues to increase with acquisitions and new developments. The group has been eighth consecutive year of like-for-like growth showing terrific momentum and financially positioned at a low level of gearing with a healthy balance sheet.

Conclusion
The Company is well-positioned to operate in the “new normal” post Covid-19 UK scenario. The Group has a detailed reopening plan to ensure that business operates smoothly. The prospects are strong, with a clear ability to sustain a prolonged period of closure. Moreover, the uncertainty about macroeconomic factors and change in consumer disposable income might impact the share of income which consumers would spend over leisure activities. The company’s business is highly cash generative with self-financed growth and decent balance sheet. TEG is developing a strong pipeline of sites through acquisitions and new developments.

Over the four years (FY15 - FY19), the company’s revenue surged from GBP 52.96 million in FY15 to GBP 84.1 million in FY19. Compounded annual growth rate (CAGR) stood at 12.26 per cent.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 138 (as on 22^nd May 2020) with lower double-digit upside potential based on 17.57x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy or Speculative Buy” recommendation is valid for the current price as covered in the report (as on 26th May 2020).

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