Hikma Pharmaceuticals PLC

FTSE 100-listed Hikma Pharmaceuticals PLC (LON: HIK) is a FTSE 100 listed Pharmaceuticals and Biotechnology Company that manufactures a portfolio of branded and non-branded generic medicines.

On 24 February 2022, it expects to release its FY21 results for the year ended 31 December 2021.

Investment Rationale – BUY at GBX 2,267.00

• Strong Guidance: Hikma has reiterated the full-year guidance and expects revenue growth for all three divisions – Injectables (revenue growth in the mid-single digits), Generics (expect revenue to be in the range of US$810 million to US$830 million) and Branded (expect revenue to grow in the mid-single digits in constant currency).
• Solid Fundamentals: Over the past two years (H1 FY19 to H1 FY21), Hikma has maintained strong profitability multiple since its gross margin, EBITDA margin and net margin have remained above 47.5%, 26.4%, and 17.7%, respectively.
• Health Balance Sheet: At the end of H1 FY21, Hikma maintained low leverage with net debt to core EBITDA of 0.9x (31 December 2020: 0.9x).
• Technical Indicator: From a technical standpoint, 14-day RSI (~34.95) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples with Higher Dividend Yield: In terms of forward 12-month – EV/Sales EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book valuation multiples are undervalued against the industry median of the Health Care industry. Moreover, its dividend yield is higher than the industry median.

Key Risks

• Market Slowdown: The lockdown easing can reduce the sales of its injectable division and expected growth trajectory might not achieve.
• Principal Risks: The commercial viability of its products can change significantly with political action, economic factors, regulatory interventions, societal pressures, and changes to participants in the industry's value chain.

Recent News

Acquisition: On 27 September 2021, Hikma announced the acquisition of Custopharm Inc for an initial cash consideration of $375 million, from Water Street Healthcare Partners.

Trading Statement (as on 04 November 2021)

• Strong Trading Momentum: Hikma continued to perform strongly and set to achieve another year of financial growth.
• Operational Achievement: It launched new specialty products, established new partnerships, expanded portfolio and pipeline for resilient commercial and operational capabilities.

One Year Share Price Chart

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

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

Conclusion

In FY21 so far, Hikma was benefitted from a flexible manufacturing footprint and resilience of its portfolio, which reflected in its year-on-year increase in revenue and gross profit. The acquisition of Custopharm will complement the Company’s injectable product portfolio by adding 14 approved products and enhanced R&D capabilities. The Company has a robust pipeline of new medicines and a clear strategy to ensure a bright outlook and deliver increased value for its stakeholders. The stock made a 52-week High and Low of GBX 2,703.00 and GBX 2,158.00, respectively.

Based on the Custopharm’s acquisition, strong first half performance, continued revenue growth in all three businesses, reiterated guidance, broad and growing portfolio, we have given a “BUY” recommendation on Hikma Pharmaceuticals PLC at the current price of GBX 2,267.00 (as on 26 November 2021, at 9:10 AM GMT), with lower double-digit upside potential based on 18.35x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Johnson Matthey PLC

Johnson Matthey PLC (LON: JMAT) is a FTSE 100 listed multinational Speciality Chemicals Company. The Group bifurcates its operations into four segments: Health, Clean Air, New Markets, and Efficient Natural Resources.

Key Dates: The interim dividend will be paid on 1 February 2022 to shareholders on the register on 3 December 2021.

Investment Rationale – BUY at GBX 2,024.00

• Simpler Portfolio: The disposal of Advanced Glass Technologies business is another step towards focusing its resources towards growth areas targeted at climate change solutions.
• Strong Fundamentals: Driven by higher underlying operating profit in H1 FY22, return on invested capital increased to 17.7% from 10.4% in H1 FY21.
• Shareholder Distribution: There is a 10% jump in interim dividend, reflecting the confidence in the outlook. Meanwhile, the Company is also planning to begin share buyback in the New Year.
• Technical Indicator: From a technical standpoint, 14-day RSI (~19.58) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On a forward 12-month basis – EV/EBITDA, Price/Earnings, Price/Cash Flow, Price/Earnings, and Price/Book valuation multiples are undervalued against the median of the Chemicals sector.

Risk Assessments

• Macroeconomic Instabilities: The concerns regarding US dollar strengthening, potential interest rate hike, volatile precious metal prices, and resurgence in Covid-19 cases in Europe can keep the market unstable in the short-term.
• Supply Chain Snags: The shortage of semiconductor chips can impact production volumes in Automotive and truck OEMs division.

Recent News

Disposal: On 24 November 2021, JMAT announced the sale of its Advanced Glass Technologies business for £178 million on a cash free debt free basis, to Fenzi Holdings SPV S.p.A. The transaction is expected to be completed by spring 2022.

Interim Results (or the six months ended 30 September 2021, as on 24 November 2021)

(Source: Company Website)

• Financial Growth: During H1 FY22, sales and underlying operating profit surged by 21% and 102% year-on-year, respectively.
• Earnings Per Share: The underlying EPS grew significantly on the back of underlying operating profit and lower net finance costs.
• Health Balance Sheet: As lower auto demand benefited working capital, net debt stood around £700 million at the end of H1 FY22. The net debt to EBITDA stood at 0.9 times.

Share Price Chart

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

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

JMAT reported strong results on underlying basis, albeit unveiled reported loss per share of 14.8 pence in H1 FY22. It seems market has not perceived the disposal of advanced glass technologies positively and share went slightly down yesterday post its half-yearly results.

Notwithstanding, it has witnessed good momentum and increased demand. The Company is also likely to get benefit from improved end-market conditions and higher precious metal prices. It has also decided to exit Battery Materials and will be focus on other attractive growth areas aligned with its leadership position across chemicals value chain.

In the long-term, Clear Air division shall witness sustainable demand, while the Company has strong pipeline of projects under Efficient Natural Resources division. The stock made a 52-week High and Low of GBX 3,363.00 and GBX 1,959.46, respectively.

Based on the increase demand, improved economic outlook, diversified business portfolio, and favourable valuation conducted above, we have given a “BUY” recommendation on Johnson Matthey PLC at the current price of GBX 2,024.00 (as on 26 November 2021, at 8:25 AM GMT), with lower double-digit upside potential based on 11.18x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

Boohoo Group PLC

Boohoo Group PLC (LON: BOO) is a FTSE AIM 100 listed Online Fashion Retailing Company. The Company was founded in 2006 and has grown rapidly in the UK and internationally.

Rationale for Valuation – SPECULATIVE BUY at GBX 172.10

• Favourable Dynamics: British retailers anticipated strong pre-Christmas demand, while the factory order book has surged significantly in November 2021. Even the US GDP numbers and falling unemployment claims are encouraging to support the market sentiments.
• Strong Guidance: The Company expects 20% to 25% revenue growth for the year to February 2022. The adjusted EBITDA margin for FY22 is expected to be in the region of 9.5-10%. The Group has made a strong start to the FY22, and medium-term guidance remained unchanged. 
• Market Expansion: Boohoo has expanded its target addressable market, with up to 500 million potential customers in key markets.
• Technical Indicator: From a technical standpoint, 14-day RSI (~33.49) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Strong Profitability: Since H1 2020, Boohoo has maintained strong profitability margins as gross margin, operating margin and net margin have remained above 53.4%, 7.4% and 1.8%, respectively.

Key Risks

• Macroeconomic Risk: UK retail sales can get impacted by the reduced footfall due to the lower consumer confidence amid rising fuel concerns and resurgence in Covid-19 cases in Europe and Africa.
• Emerging Risk: The Company can face additional cost pressure to resolve supply chain malpractice as nearly 60% of its products are manufactured in overseas markets.

Financial Highlights (for the six months ended 31 August 2021, as on 30 September 2021)

 (Source: Company Website)

• Top-line Growth: During H1 FY22, Boohoo recorded sales of £976 million, reflecting a 73% increase since H1 FY20.
• Increased Market Penetration: It has doubled market share in the UK and US over the past two years.
• Growth Prospect: The Group has placed its platform for future growth by investing £172 million in H1 FY22.

One Year Share Price Chart

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

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

Boohoo continued to gain market share and maintained a compelling consumer proposition with several acquisitions, which shall cement its position as a leader in global fashion e-commerce. It is planning to strengthen its proposition with the opening of a new distribution centre in North America in 2023.

Boohoo has a prominent online business model, and the lifting of lockdown restrictions and revival of the hospitality sector shall support the business further.  The stock made a 52 week High and Low of GBX 378.90 and GBX 161.30, respectively.

Based on favourable market drivers, increased active customers, prospects of recent acquisitions and supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Boohoo Group PLC at the current market price of GBX 172.10 (as on 26 November 2021, at 8:50 AM GMT), with lower double-digit upside potential based 23.64x Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

*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).

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

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

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

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