Reckitt Benckiser Group Plc

Reckitt Benckiser Group Plc (LON: RKT) is listed on the FTSE 100 index and develops and distributes consumer products in Health, Hygiene and Nutrition categories.

On 26 October 2021, RKT would release its Q3 FY2021 trading statement.

The next dividend of GBX 73.00 per share would be paid on 15 September 2021 (interim dividend).

Investment Rationale for Valuation – Hold at GBX 5,650.00

• RKT has a 50% larger innovation pipeline in FY2022 than in FY2021.
• The Company achieved two-year stacked LFL revenue growth of 17.6% in H1 FY2021.
• On the profitability front, RKT has a higher EBITDA margin than the industry median of 21.5% since FY2016.
• On the technical front, the 14-day RSI at about 35.66 is sustaining above the oversold zone. Hence, the stock price could move upwards in the near term.

Key Risks

• There could be potential supply chain disruptions due to the spread of the delta-variant of Covid-19, increasing the costs of the Company.
• Due to muted disposable income, customers could come under financial stress. Hence, there could be a loss of customers.
• Due to the Company’s international operations, there could be an exchange rate impact on the Company’s financials.

Financial Highlights (for six months ended 30 June 2021 (H1 FY2021), as of 27 July 2021)

(Source: LSE Website)

• Driven by continued growth in Hygiene, like-for-like (LFL) net revenue in H1 FY2021 surged 3.7% YoY excluding IFCN China.
• Due to two-year stacked LFL net revenue growth of 34.1% in Hygiene, two-year stacked LFL revenue for the group excluding IFCN China rose 17.6% in H1 FY2021.
• However, due to adverse product mix and continued investments, the overall adjusted operating margin declined to 22.7% in H1 FY2021 from 25.1% in H1 FY2020.
• Furthermore, due to the capital investment, free cash flow declined to £520 million in H1 FY2021 from £1,902 million in H1 FY2020.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

During H1 FY2021, RKT achieved a resilient result. However, its adjusted operating margin declined YoY in H1 FY2021. The management is making considerable efforts to improve customer service capabilities, quality and supply chain. Also, there is a continued investment in research and development, which enhances the innovation pipeline. Meanwhile, the stock made a 52-week low and high of GBX 5,466.00 and GBX 7,774.00, respectively.

Based on the Company’s resilient performance in H1 FY2021, continued growth in the innovation pipeline, decent prospects of the Company, and support from valuation as done using the above method, we have given a “HOLD” recommendation on Reckitt Benckiser Group Plc at the closing market price of GBX 5,650.00 (as on 18 August 2021), while we will revisit our stance based on improvement in profitability of the Company. 

AVEVA Group Plc

AVEVA Group Plc (LON: AVV) is listed on the FTSE 100 index. It is an engineering and software company and provides industrial software to shape a sustainable future.

On 27 October 2021, AVV would provide its October 2021 trading update.

The last dividend of GBX 23.50 per share was paid on 4 August 2021 (final dividend).

Investment Rationale for Valuation – Sell at GBX 4,053.00

• The management could not provide detailed guidance for FY2022 due to a lack of visibility.
• On the profitability front, the net margin since H1 FY2021 has been lower than the industry median of 10.5%.
• In the last three months, the stock generated a decent return of about 26.96%, offering investors an opportunity to book a decent profit.
• The stock is trading 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.
• On the technical front, the 14-day RSI at about 64.90 is moving towards the overbought zone, indicating a potential correction in the stock price in the near term.

Key Risks

• Any disruptive technology from a competitor could take away market share from AVV, affecting its financials.
• Due to the payment of dividends, there could be stress on AVV’s liquidity.
• The spread of the delta variant of Covid-19 could cause a delay in product development, impacting AVV’s revenues.

Q1 FY2022 Trading Update (released on 30 July 2021)

• AVV had a decent start to FY2022, with all of the Company’s revenue lines recording growths.
• Driven by its solid performance, AVV’s perpetual licences surged significantly in Q1 FY2022.
• Due to the overall decent performance, group revenue in Q1 FY2022 rose 11% YoY on an organic constant currency basis.
• The Company’s subscription revenue rose in line with the group revenue in Q1 FY2022.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The management could not provide detailed guidance for FY2022. Also, pandemic related challenges could reappear due to the delta variant of Covid-19.  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 3,064.00 and GBX 4,302.95, respectively.

Considering the continued economic and market uncertainty, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on AVEVA Group Plc at the closing market price of GBX 4,053.00 (as of 18 August 2021), while we will revisit our stance based on further improvements in the macroeconomic condition.

*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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