Taylor Wimpey PLC

Taylor Wimpey PLC (LON: TW.) is a FTSE 100 listed residential property developer, which builds a wide range of properties in different price range.

Upcoming Event: On 11 November 2021, the Company expects to release its next trading update.

Investment Rationale – BUY at GBX 149.45

• Bright Outlook: TW expects to report approximately £820 million in FY21’s operating profit, above the top end of consensus. The net cash is also expected to be around £700 million at the year end.
• Attractive Dividends: In line with the dividend policy to return around 7.5% of net assets to shareholders, the Company recommended an interim dividend of 4.14 pence per share in H1 FY21.
• Favorable Market Dynamics: British house prices jumped to nearly 15-year high, ahead of the full tax expiry at the end of September 2021. The price shall continue to rise due to shortage of homes, demand for bigger houses and low-interest rates scenario.
• Technical Indicator: From a technical standpoint, 14-day RSI (~34.46) indicates an oversold signal while the stock is hovering around the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On trailing 12-month basis – EV/Sales, EV/EBITDA, Price/ Earnings and Price/Cash Flow valuation multiples are undervalued against the median of the Homebuilding & Construction Supplies industry.

Key Risks

• Softened Activity Level: The UK Construction Purchasing Managers' Index was impacted by the staff shortages, rising prices and supply chain disruption, and fell to 52.6 in September 2021 from 55.2 in August 2021.
• Regulatory Changes: 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.

Financial Highlight for the half-year ended 4 July 2021 (as on 4 August 2021)

 (Source: Company Website)

• Robust Home Completions: During H1 FY21, TW completed 7,303 homes (H1 FY20: 2,771), reflected a robust first-half performance, which was partly due to the delayed completions of Q4 FY20.
• Solid Margins: The strong cost and price discipline reflected strong margin performance. The Group operating margin stood at 19.3% in H1 FY21.
• Solid Balance Sheet: At the end of H1 FY21, the Group reported net cash position of £906.5 million.

Share Price Chart

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

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

Conclusion

The UK housing market fundamentals remained strong, underpinned by good mortgage availability, low interest rates, and government support for customers. Moreover, the Company has an excellent trading momentum to accelerate volume growth and generate operating margin target of circa 21-22% and at a ROCE of over 30% in the medium term. The stock made a 52-week high and low of GBX 193.80 and GBX 102.43, respectively.

Based on the strong operating margin, solid orderbook, promising housing market dynamics, and unfavourable valuation conducted above, we have given a “BUY” recommendation on Taylor Wimpey PLC at the closing price of GBX 149.45 (as on 25 October 2021), with lower double-digit upside potential based on 10.38x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Essentra PLC

Essentra PLC (LON: ESNT) is a FTSE 250 listed Company that provides essential components and solutions. It manufactures and distributes vinyl dip moulded, plastic injection moulded, and metal items.

Rationale for Valuation – SPECULATIVE BUY at GBX 273.50

• Strategic Progress: ESNT continued focusing on delivering organic growth, accretive growth through M&A, and cost reduction initiatives.
• Guidance:
  • The Components and Filters division is expected to continue the growth, and thus, FY21 operating profit shall be in line with the Board's expectations.
  • FY21 adjusted operating profit is expected to be in the range of analysts' forecasts
• Technical Indicator: From a technical standpoint, the current market price is trading above the 20-day EMA (GBX 262.00), reflecting a bullish price momentum. Undervalued Multiples: On trailing 12-month basis – EV/Sales, EV/EBITDA, and Price/ Earnings valuation multiples are undervalued against the median of the Container & Packaging industry.

Key Risks

• Macroeconomic Risk: The slowdown in Chinese economy, supply chain snags, acute power shortages, sluggishness in factory activity, and inflationary market conditions can impact the Company's growth prospects.
• Activity Slowdown: British’s final manufacturing Purchasing Managers' Index sank for a fourth month in a row in September 2021 to 58.6 in September from August's 61.4.

Recent News

Acquisition: On 3 August 2021, Essentra completed the acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd, and expects this transaction to be earnings accretive and deliver sustainable value over the long-term.  

Q3 Trading Update (as on 26 October 2021)

• Top-line Growth: During Q3 FY21, Group revenue surged 5.1% year-on-year, mainly supported by the strong revenue growth of Components division.
• China Joint Venture (JV): Under the Filters’ division, the China JV led to volume increase and delivered revenue growth.
• Strategic Focus: Essentra targets to become a pure play global Components business over time to maximise shareholder value.

One Year Share Price Chart

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

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

Conclusion

ESNT has an excellent base to generate substantial cash and profitability. It is well-positioned to recover from the pandemic, underpinned organic growth, accretive M&A, and cost reduction initiatives. The Group also expects the positive momentum to continue, given the robust order book trends. Moreover, the favourable price trends in Packaging and Components divisions shall offset the inflationary pressure in H2 FY21. The stock made a 52-week high and low of GBX 338.60 and GBX 230.84, respectively.

Based on the bolt-on acquisition, significant organic growth, positive full-year outlook, with support from the valuation conducted, we have given a “SPECULATIVE BUY” recommendation on Essentra PLC at the closing market price of GBX 273.50 (as on 25 October 2021), with lower double-digit upside potential based on 17.91x Price/NTM Earnings (approx.) on FY21E 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).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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