Imperial Brands Plc

Imperial Brands Plc (LON: IMB) is an FTSE 100 listed fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers, and cigars.

Investment Highlights - Imperial Brands Plc – Buy at GBX 1,370.50

• As per valuation metrics, EV/Sales, EV/EBITDA and Price/Cash Flow multiples of the Imperial Brands Plc are currently lower as compared to the corresponding multiples of the Food & Tobacco industry. It reflects, shares are undervalued as compared to the industry.
• Over the past four years (FY15 – FY19), the Company’s revenue has surged from GBP 25,289 million in FY15 to GBP 31,594 million in FY19, compounded at an annual growth rate (CAGR) of ~ 5.72 per cent.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 1,350.40) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• The macroeconomic fluctuations and Covid-19 uncertainties have been impacting consumer confidence.
• The Covid-19 pandemic has placed the supply chain under pressure, which is resulting in increased cost.

Recent News

On 28 September 2020, Imperial Brands announced that sale of Worldwide Premium Cigar Businesses would be delayed from the original timetable, due to Covid related challenges.

Financial Highlights – H1 FY2020

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, the results stood in line with revised expectations shared in the AGM update, which reflected lower NGP sales and £95 million of impairments.
• The Company gained market share in 7/10 priority markets, while Asset brand revenue was down due to lower sales of blu and Backwoods.
• IMB delivered cash conversion of 103% on a 12-month basis, driven by the £445 million working capital inflow. Reported net debt increased to £763 million.
• The board of IMB has declared an interim dividend of 41.70 pence per share.

One Year Share Price Chart

Daily Chart as of 29 September 2020, before the market close (Source: Kalkine Group, Refinitiv)

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

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. The Company responded quickly to the situation has been taking necessary action to safeguard the interests of stakeholders. The impact of pandemic was relatively small in H1 FY2020. The pandemic would have a low single-digit impact on earnings per share in FY20. However, IMB is well-positioned with the financial stability to navigate the challenges arising from COVID-19. The impact of foreign exchange translation is expected to be neutral on full-year earnings per share. The stock made a 52-week low and high of GBX 1,218.00 and GBX 2,072.00, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Imperial Brands Plc at the current price of GBX 1,370.50 (as on 29 September 2020, before the market close at 10:25 AM GMT+1) with lower double-digit upside potential based 6.20x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Eddie Stobart Logistics Plc

Eddie Stobart Logistics Plc (LON: ESL) is a United Kingdom-based company, which is involved in the business of supply chain and logistics.

Investment Highlights - Eddie Stobart Logistics Plc – Avoid at GBX 6.95

• In the last one year, the Company delivered a negative return of ~ 89.22% and delivered significantly lower returns compared to the benchmark Index (FTSE-AIM Index).
• On the liquidity front, Eddie Stobart Logistics Plc’s current ratio of 0.79 was lower than the industry median of 0.88, reflecting insufficient liquidity profile. The current ratio is continuously declining from FY2016.
• From the technical standpoint, 14-day RSI is currently supporting downward movement (around 55 level), which means the stock price could decline in the short term.

Key Risks

• The Company’s revenue will be significantly impacted by the loss of one or more key customers.
• A failure of key IT system, cybersecurity breach or unauthorised access could impact the reputation and financial performance.

Financial & Operational Highlights – H1 FY2020

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company did not generate any revenue and reported loss for the period.
• The Company concluded a transaction with DBAY (DBAY Advisors Limited) to provide additional funding to Eddie Stobart Group.
• The Company continue to deliver excellent service to customers, have won a new contract with Morrison’s, acquired the Eddie Stobart brand, progress in reducing warehouse space, begun to repay senior debt and exited underperforming contracts, despite the Covid-19 crisis.
• The Company’s board is committed to convert into Investing company before 9 December 2020 and require £6 million of funds.

One Year Share Price Chart

Daily Chart as of 29 September 2020, before the market close (Source: Kalkine Group, Refinitiv)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. The Company is in the development stage and hence rely on grants and cash balances to carry on all the business activities, and the bottom-line performance has declined, as operating expenses are not managed efficiently, and the profitability margins remained in the negative zone for the period.

The liquidity position as on 31 May 2020 has declined, with the weak balance sheet. Eddie Stobart Group needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the company’s financial performance. The Company is focussed on building strong business fundamentals with improved performance. The stock made a 52-week low and high of GBX 4.00 and GBX 20.00, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Eddie Stobart Logistics Plc at the current price of GBX 6.95 (as on 29 September 2020, before the market close), and we will watch out at the benefit of the recently concluded transaction with DBAY. 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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