Darktrace PLC

Darktrace PLC (LON: DARK) is an FTSE 250-listed world-leading provider of Artificial Intelligence in cyber security for enterprises.

Investment Rationale for Valuation – SELL at GBX 973.00

• On the profitability front, the operating margin and the net margin remained negative during FY21, while the respective industry median was positive.
• The Return on Equity and Return on Assets remained negative during FY21. Moreover, the net loss got widened by around 421.70% during FY21.
• The stock price traded very close to the 52-week high, raising doubts regarding the further upside potential in the stock price.
• From a technical standpoint, DARK is hovering around the upper Bollinger band, indicating a correction in the stock price.
• The momentum indicator, 14-days RSI of ~77.32, is falling in the overbought territory, making it difficult for the stock price to show any upside potential.

Key Risks

• Market volatility can impose liquidity risk with an impact on the lending volumes. Also, the risk of cybercrime and dependency on technology continues to grow.
• There are several strategic, operational, and financial risks associated with early-stage companies, like seeking to bring new products and services to the market.
• It operates in highly competitive markets and faces intense pricing competition, which can put pressure on margins.
  

Financial and Operational Highlights (for 12 months ended 30 June 2021 as of 15 September 2021)

 (Source: LSE Website)

• With regards to the top-line business, the revenue grew by around 41.30% from USD 199.07 million during FY20 to USD 281.34 million for FY21.
• DARK witnessed a 45.3% increase in customer base, largely because of the rising cyber-attacks.
• The Company had demonstrated a cash inflow from financing activities during FY21.

Share Price Chart (since 30 April 2021)

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

DARK had anticipated adjusted EBITDA margin to fall between 2% and 5% during FY22. Moreover, the Company expects year-on-year revenue growth of between 35% and 37% during FY22, which was previously 29% to 32%. The management also expects that approximately 45% to 46% of the revenue and net constant currency ARR added will be recognized in H1 FY22. Meanwhile, the stock price recently touched 52-week high driven by the improved guidance for FY22. Thus, it would be prudent to exit the position and book profit on this loss-making company. The stock made a 52-week low and high of GBX 250.00 and GBX 997.00, respectively.

Based on the weak profitability and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Darktrace PLC at the current market price of GBX 973.00 (as on 24 September 2021 at 08:10 AM GMT+1), while we will suggest reinvesting after analysing more corporate announcements made by the Company.

Telecom Plus PLC

Telecom Plus PLC (LON: TEP) is an FTSE 250 index multi-utility supplier company based in the United Kingdom. It supplies gas, electricity, landline, broadband and mobile services to residences and businesses.

TEP had paid a final dividend of 30 pence per share on 30 July 2021, while the ex-dividend date was 08 July 2021.

Investment Rationale for Valuation – SELL at GBX 1,178.00

• The top-line revenue and profit before tax demonstrated a decline during FY21 as compared to FY20.
• On the profitability front, the operating margin and the net margin remained lower than the respective industry median of 7.3% and 4.3% during FY21.
• From a technical standpoint, TEP is trading above the upper Bollinger band, indicating a correction in the stock price.
• Moreover, the 14-days RSI of ~79.93 suggests a correction in the stock price.

Key Risks

• The unplanned service disruption and poor customer service experience could affect the Company’s ability to sustain and grow revenue.
• The growing competition can dilute the addressable market and put pressure on margins.

FY21 Financial Highlights (for full-year ended 31 March 2021, as of 18 June 2021)

(Source: LSE Website)

• The company also maintained the dividend at 57 pence per share despite lower profits than FY20.
• The volatile energy price also impacted the bottom line of the company, and the profit before tax declined by around 7.7%.
• Meanwhile, the number of customers grew by 0.8%, from 652,237 during FY20 to 657,411 for FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The medium-term objective of TEP is to take customer numbers to one million. Moreover, the Company had shown an increasing trend in the number of customers and service suppliers during FY21. However, TEP reported a noticeable decline in top-line & bottom-line business. Thus, it would be advisable to book profit at the current levels and exit the position. The stock made a 52-week low and high of GBX 993.65 and GBX 1,514.00, respectively.

Based on the decline in revenue and profitability during FY21, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Telecom Plus PLC at the current market price of GBX 1,178.00 (as on 24 September 2021 at 10:34 AM GMT+1).

*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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