Legal & General Group PLC

Legal & General Group PLC (LON: LGEN) is an FTSE 100 listed company, which provides financial services across the UK, and the US. The Company operates with four business segments.

On 04 August 2021, LGEN expects to release its H1 FY2021 results.

The last dividend of GBX 12.64 per share was paid on 27-May-2021 (final dividend).

Investment Rationale for Valuation – Hold at GBX 260.60

• Fitch has recently revised LGEN’s outlook from Negative to Stable.
• The Company has a strong new business pipeline to sustain the momentum of growth and profitability.
• On the profitability front, LGEN has achieved a decent performance in FY2020, with the pretax ROE outperforming the industry median of 4.6%.
• In the last year, the stock has achieved a higher return than its benchmark FTSE 100 index. Given the prospects of LGEN, this trend could continue in the future.
• From a technical standpoint, the 14-day RSI of ~41.95 is moving towards the oversold zone and indicating an upside potential in the stock price.

Key Risks

• The low return from the investments to meet the claim payments can harshly impact the value of the assets.
• The payment of dividends could affect the liquidity of the Company.
• The insurance sector is highly susceptible to change in the government’s policy, legislation and capital requirement. Any lack of meeting the regulatory requirement could result in additional costs and penalties.
  

Financial Highlights (for the year ended 31 December 2020 (FY2020), as of 10 March 2021)

(Source: LSE Website) 

• The Company had delivered an operating profit of £2,218 million during FY2020, with three out of five businesses delivering growth.
• The profit after tax dropped by 12% from £1,834 million during FY2019 to £1,607 million during FY2020, illustrating the adverse impact of lower interest rates on LGEN and the unrealized impact of market movements.
• The Company had maintained a robust balance sheet with a Solvency II coverage ratio of 192% as of 05 March 2021.
• LGEN had paid around 99.9% of scheduled cash-flows on the annuity portfolio’s direct investments.

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

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

Conclusion

LGEN provided cumulative financial guidance for five years from 2020 to 2024. LGEN had expected to generate cash & capital ranging from £8.0 billion to £9.0 billion. Moreover, it is expected to pay dividends ranging from £5.6 billion to £5.9 billion. However, the outlook of the broader economy over the near term is still highly uncertain. Meanwhile, the stock made a 52-week low and high of GBX 175.04 and GBX 299.20, respectively.

Based on the improved outlook of the Company, decent growth prospects as the market recovers, and support from valuation as done using the above method, we have given a “Hold” recommendation on Legal & General Group Plc at the current market price of GBX 260.60 (as on 16 July 2021 at 11:35 AM GMT) and would recommend fresh buying at the right time depending on the recovery of the broader economy and improvement in profitability of the Company. 

Avast Plc

Avast Plc (LON: AVST) is an FTSE 100 index listed company that provides digital security and privacy products and serves over 435 million users online.

On 11 August 2021, AVST would announce its H1 FY2021 results.

The last dividend of USD 0.112 per share was paid on 18-June-2021 (final dividend).

Investment Rationale for Valuation – SELL at GBX 610.40

• AVST has confirmed advanced merger talks with NortonLifeLock. The stock price surged on the news. Hence, it would be prudent to book a profit on the stock.
• On the liquidity front, the current ratio since FY2018 has been lower than the industry median of 1.26x.
• On the leverage front, the Company has a significantly higher debt/equity ratio than the industry median of 0.14x since FY2018.
• In the last three months, the stock generated a decent return of about 27.62%. Hence, it is an opportunity for investors to book a decent profit.
• The stock is trading very near its 52-week high price, raising doubt about its upside potential from the current level. Hence, a correction in the near term cannot be ruled out.
• From a technical standpoint, 14-day RSI at about 86.54 is sustaining at the overbought zone, indicating a potential short-term downward movement in the stock price.

Key Risks

• Any disruptive technology from a competitor could significantly affect the margins of the Company.
• Cloud migration could lead to higher operating costs for AVST, impacting its margins.
• Due to its international operations, foreign exchange rate fluctuations could affect the financials of the Company.
  

Q1 FY2021 Trading Update (released on 20 April 2021)

(Source: LSE Website)

• The Company had a solid start to FY2021, with continued demand for security, privacy, and performance solutions.
• On an organic basis, revenue surged 10.4% YoY in Q1 FY2021, as consumer business delivered decent growth and SMB business sustained positive momentum.
• It led to adjusted EBITDA rising 10.3% YoY in Q1 FY2021.
• In March 2021, AVST renewed its contract for the distribution of its CCleaner utility application and consumer antivirus products.
  

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

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

Conclusion

There had been merger news for AVST recently. Hence, the future of AVST remains uncertain, and the management could not provide detailed guidance for FY2021.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading near its 52-week high, indicating overstretched valuation. Overall, we do not have significant catalysts to support an uptick in the stock price and recommend exiting the position currently. The stock made a 52-week low and high of GBX 418.00 and GBX 604.50, respectively.

Considering the future uncertainty about the Company’s prospects, poorer liquidity and leverage position of the Company than the industry, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Avast Plc at the current market price of GBX 610.40 (as of 16 July 2021 at 3:30 PM GMT), while we will revisit our stance based on further corporate announcements by the Company. 

*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.

Disclaimer

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