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.

Dividend Date: The ex-dividend date for interim dividend is 23 September 2021, while the dividend is scheduled for payment on 29 October 2021 to equity holders on the share register on 24 September 2021.

Rationale for Valuation – SPECULATIVE BUY at GBX 281.50

• On 3 August 2021, ESNT has completed the acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd (Hengzhu), which is likely to be earnings accretive and shall deliver sustainable value over the long term.
• The Group also expects the positive momentum to continue, given the robust order book trends.
• The Company recommended an interim dividend of 2 pence in H1 FY21, against nil dividend in H1 FY20. It is reflecting confidence in the outlook.
• From a technical standpoint, 14-day RSI (~43.28) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.
• On a forward 12-month basis – EV/Sales, EV/EBITDA and Price/Earnings multiples are undervalued than the median of Container & Packaging’s industry.

Key Risks

• The packaging division remained impacted due to the reduced level of prescriptions and elective surgeries.
• As Delta coronavirus variant is now present in over 90 countries, potential restrictions can impact the volume and overall demand in the short term within the commercial and industrial sectors.

Recent News

Appointment of Board Trainee: On 13 August 2021, ESNT appointed Dupsy Abiola as Board Trainee and Non-Executive Director of the Board with effect from 29 July 2021.

Change of Registered Office: On 1 July 2021, the Company updated that it would move its head office to an existing Essentra site in Oxfordshire from 2 August 2021. Previously, the office was moved to its shared office space in Milton Keynes.

Financial Highlights (for the six months ended 30 June 2021, as on 30 July 2021)

(Source: Company Website)

• ESNT continued focusing on delivering organic growth, accretive growth through M&A, and cost reduction initiatives.
• The adjusted operating profit and adjusted earnings per share grew 34.0% and 39.9% year-on-year, respectively.
• In H1 FY21, the net cash flow from operating activities was reported as £26.1 million.
• The Company maintained a strong balance sheet and reduced net debt to £212.2 million at the end of H1 FY21 (H1 2020: £297.0 million).

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. Moreover, the favorable price trends in Packaging and Components divisions shall offset the inflationary pressure in H2 FY21. In a nutshell, Essentra is well-positioned to deliver significant value to its shareholders, underpinned by recent bolt-on acquisition, effective capital structure, and strong liquidity position. The diverse nature of its business model has provided resilience to the financial performance against the macro uncertainty caused by the pandemic. The Management believes that the positive trading momentum shall continue given the recent order book trends; however, short-term uncertainties cannot be ruled out. 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 current market price of GBX 281.50 (as on 23 August 2021, at 1:05 PM GMT), with lower double-digit upside potential based on 18.66x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

RM PLC

RM PLC (LON: RM.) is a FTSE All-Share listed Company that supplies technology and resources to the education sector,

The ex-dividend date for the interim dividend was 22 July 2021, while the payment date is scheduled as 27 August 2021.

Investment Rationale – SPECULATIVE BUY at GBX 228.25

• The improvement in global education fundamentals keeping the positive medium-term outlook.
• The digital and automation investment programmes shall yield operational and financial benefits.
• The UK Consumer Price Index fell back to 2%, while the UK unemployment rate has also fallen. It is boosting hopes for a quick economic recovery.
• The reduced net debt showed a healthier state of the balance sheet from the start of FY21, reflecting a better potential to build a path to sustainable growth for RM.
• As per valuation metrics, EV/Sales, Price/Earnings, and EV/EBITDA multiples of the RM PLC are currently lower as compared to the corresponding multiples of the Technology industry.
• From a technical standpoint, 14-day RSI (~41.80) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.

Risk Assessments

• The resurgence in Covid-19 delta variant can impact the near-term outlook and pipeline development.
• The stock price has merely yielded ~5% return in the last year, reflecting a considerable underperformance against the benchmark index.
• Sustained high demand for IT products and consumer electronics categories has created logistic delays, which can impact the Company’s growth strategy.

Recent News

Board Changes: Charles Bligh was appointed as Non-Executive Director by the RM from 2 July 2021.

Interim Results (for the six months ended 31 May 2021, as on 6 July 2021)

 (Source: Company Website)

• Despite UK Schools being closed for 8 weeks during H1 FY21, RM reported improved financial performance.
• Revenue jumped 21% year-on-year in H1 FY21 on the back of strong trading in RM Resources, which nearly doubled the figure of adjusted operating profit from H1 FY20.
• The balance sheet also remained robust with movement of the pension position from a deficit to a surplus, following the improvement in net debt position.
• The interim dividend for H1 FY21 was recommended as 1.7 pence (H1 FY20: Nil)

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

The strong UK curriculum resources sales boosted the revenue in Q2 FY21. Moreover, the reopening of UK schools in March has placed the Company in good position to deliver growth. With lower net debt, the Company is well-placed to generate positive operating cash flows as well. Moreover, the accelerated positive market trends and long-term market drivers shall bring bright attractive growth opportunities for the Company. The stock made a 52-week high and low of GBX 260.00 and GBX 157.00, respectively.

Based on the strong financial performance, reduction in net debt, the re-opening of UK schools, surplus of pension position, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on RM PLC at the current market price of GBX 228.25 (as on 23 August 2021, at 11:54 AM GMT), with lower double-digit upside potential based on 18.65x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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

*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).

Disclaimer

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