British American Tobacco PLC

British American Tobacco PLC (BATS) is a FTSE-100 listed Consumer Goods Company, which serves consumers with tobacco and nicotine products around the world.

On 11 February 2022, BATS expects to announce its preliminary results for FY21.

Rationale for Valuation – BUY at GBX 2,656.00

• The UK Consumer Price Index fell back to 2%, while the UK unemployment rate has also fallen. It is boosting hopes for a quick economic recovery.
• BATS anticipating cash flow conversion of over 90% in FY21, while the adjusted Net debt/Adjusted EBITDA is expected to be around three times.
• The Group is committed to delivering a 65% dividend payout ratio and growth in sterling terms.
• From a technical standpoint, 14-day RSI (~39.55) is in the oversold position, supporting the upside potential.
• On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Consumer Non-Cyclicals industry.

Key Risks

• The resurgence in the Covid-19 delta variant can have a lasting impact on suppliers, operations, and customers.
• The regulatory restrictions regarding tobacco and new categories can impact its growth strategy.

Financial Highlights (for the six months ended 30 June 2021, as of 28 July 2021)

 (Source: Company Website)

• BATS reports strong interim results, as new categories revenues jumped 50% year-on-year to £942 million in H1 FY21.
• Similarly, vapour revenue was also up by 59% year-on-year. The Group added 2.6 million consumers to its non-combustible product in H1 FY21.
• The Group has also increased its savings target to £1.5 billion by FY22.
• The adjusted profit from operations was surged by 5.4% year-on-year in H1 FY21, including transactional FX impact of 2%.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

BATS liquidity profile remained robust, while the Company is deleveraging the balance sheet to reach ~3x adjusted net debt to adjusted EBITDA by the FY21 end. BATS is a highly cash generative business which is targeting an excellent cash conversion and dividend pay-out ratio in FY21. The market is gaining momentum, and the market growth is fueled by the rising consumer disposable income, new product launches, availability of superior-quality products, and increasing consumption among females and students. It continued to maintain investment-grade credit ratings with ratings from S&P/Moody’s at BBB+ (stable outlook)/Baa2 (stable outlook), respectively. Furthermore, it is targeting carbon neutrality by 2030 and accelerating existing environmental targets to 2025. The stock made a 52-week High and Low of GBX 2,961.50 and GBX 2,422.50, respectively.

Based on the new category acceleration, strong cashflow conversion, commitment to dividend pay-out ratio, improving market trends, and support from the valuation as done using the above method, we have given a “BUY” recommendation on British American Tobacco PLC at the current market price of GBX 2,656.00 (as on 19 August 2021, 7:10 AM GMT) with lower double-digit upside potential based on 10.03x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Persimmon PLC

Persimmon PLC (LON: PSN) is a FTSE 100 listed Company, which is involved in housebuilding business across England, Scotland, and Wales. It trades under the brand name of Persimmon Homes, Charles Church, Westbury Partnerships, and FibreNest.

Rationale for Valuation – BUY at GBX 2,851.00

• Consumer confidence is improving with a shrink in the UK employment rate, while the housing market fundamentals continued to remain positive.
• PSN has a solid platform for high-quality growth across the Group's 31 housebuilding businesses. There were 85,771 plots owned and under control on 30 June 2021 (December 2020: 84,174), while built rates were maintained at pre-Covid-19 levels.
• The Group reported robust forward sales of £2.23 billion at the end of Q2 FY21 while maintaining a healthy liquidity level.
• From a technical standpoint, 14-day RSI (~41.96) is in the oversold position, while the stock price is trading close to the lower Bollinger Band.
• On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Homebuilding & Construction Supplies industry.

Key Risks

• As the government started to taper the stamp duty holiday from the June 2021 end, house prices have fallen for the first time in 2021.
• Brexit and resurgence in Covid-19 cases are causing a huge impact on the construction supply chain. Such material shortage can delay projects and cap the expected growth prospects.
• The performance can be impacted by changes in inflation and interest rates amid a volatile macroeconomic environment, the unavailability of sufficient borrowing facilities, and the availability of raw materials, suppliers, and sub-contractors.

Recent News

Finance Director Succession: On 26 July 2021, PSN unveiled that Group Finance Director, Mike Killoran will retire from his position in early 2022 after serving the Company for 25 years.

Production Report for the 6 months ended 30 June 2021 (as on 18 August 2021)

 (Source: Company Website)

• During H1 FY21, Persimmon reported a robust financial performance as forward sales position is 9% ahead of H1 FY19.
• The average private sales rate for H1 FY21 was over 30% ahead of H1 FY20.
• The after-tax return on equity stood at 22.6% in H1 FY21 (H1 FY20: 21.5%), while the underlying return on average capital employed was 37.9% in H1 FY21 (December 2020: 29.4%).
• For the six months to 30 June 2021, the new housing operating margin was 27.6% against 26.6% in H1 FY20.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

Persimmon demonstrated a robust financial performance in H1 FY21 with new housing revenue of £1.75 billion in H1 FY21 (H1 FY20: £1.10 billion) and a profit before tax of £480.1 million (H1 FY20: £292.4 million). The Company also maintained high-quality land holdings, a resilient balance sheet, and disciplined land replacement for sustainable growth. Moreover, the fundamentals of the housing market shall remain favorable with low-interest rates. The Company is also well-positioned to manage the industry-wide inflationary pressure. The stock made a 52-week High and Low of GBX 3,272.00 and GBX 2,249.61, respectively.

Considering the high-quality homes, good forward sales, healthy balance sheet, encouraging industry dynamics, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Persimmon PLC at the current market price of GBX 2,851.00 (as on 19 August 2021, 12:30 PM GMT) with lower double-digit upside potential based on 14.38x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Phoenix Group Holdings PLC

Phoenix Group Holdings PLC (LON: PHNX) is engaged in the long-term savings and retirement business. The Company has around 13 million customers and manages assets under administration of around £300 billion.

Investment Rationale – BUY at GBX 628.90

• PHNX is on track to meet its cash generation guidance for FY21 at top end of £1.5 billion-to-£1.6 billion target range.
• The credit ratings agency, Fitch Group has upgraded its credit rating to ‘AA- ‘, reflecting the resilience of the Phoenix Group's business model.
• The disposal of Ark Life Assurance Company shall accelerate the cash release and simplify its European business, to drive incremental future cash generation.
• As per valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow, EV/EBITDA, and Price/Book multiples of the Phoenix Group Holdings PLC are currently lower as compared to the corresponding multiples of the Financials industry.
• From a technical standpoint, 14-day RSI (~28.96) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.

Risk Assessments

• The premium out-turn remained difficult to forecast for FY21 since there is an unprecedented temporary shift in market conditions and reduction in addressable market, as market volume remained subdued due to lockdown restrictions.
• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets in the short term.
• The changing customer expectations and the entrance of new InsurTech players can significantly disrupt the business growth.

Recent News

Sale of Ark Life Assurance Company: On 13 July 2021, Phoenix Group Holdings signed an agreement to dispose its Ark Life Assurance Company to Irish Life Group Limited for a total cash consideration of €230 million.

Production Update (for the six months ended 30 June 2021, as on 11 August 2021)

 (Source: Company Website)

• PHNX continued to report cash profit and delivered cash generation of £872 million in H1 FY21 (H1 FY20: £433 million).
• It declared an interim dividend per share of 24.1 pence (H1 FY20: 23.4 pence per share).
• The balance sheet showed resilience with Solvency II surplus of £5.1 billion as at 30 June 2021 (31 December 2020: £5.3 billion) and leverage ratio of 28% at the end of H1 FY21.
• The Group reported an operating profit £527 million in H1 2021 (H1 2020: £361 million).

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Phoenix Group Holdings has demonstrated resilience and growth during H1 FY21 as cash generation nearly doubled. The disposal of Ark Life business is also in tandem with the Company’s sustainability agenda. The Group has also maintained a solid customer satisfaction scores of over 90%. In a nutshell, the Company has a clear strategy to focus on three key priorities areas – deepen customer relationships, optimize in-force business, and acquire new customers. The stock made a 52-week high and low of GBX 824.40 and GBX 632.20, respectively.

Based on the robust cash generation, resilience balance sheet, increased new business, supported by the valuation conducted above, we have given a “BUY” recommendation on Phoenix Group Holdings PLC at the current market price of GBX 628.90 (as on 19 August 2021, 1:05 PM GMT), with lower double-digit upside potential based on 10.29x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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