Legal & General Group PLC

Legal & General Group PLC (LON: LGEN) is a British holding company, which mainly involved in products and services related to insurance and investment management.

On 5^th August 2020, the company will release its half-year results 2020.

Recent News
On 3^rd April 2020, the company affirmed its consent to pay 2019 final dividend.

Financial Highlights for the Year Ended 31^st December 2019 – Reflecting Robust Performance

(Source: Presentation, Company Website)

For the 12 months to 31 December 2019, the group attained a total return of more than 40% for investors, reflecting the consistently robust performance of the business and greater political and market clarity towards the year-end. Operating profit from continuing divisions surged by 17% to £2,514 million (2018: £2,152m), with all businesses delivering growth over the prior year. The operating profit for the financial year 2019 rose by 12% to £2,131 million, excluding mortality release.

The group has continued to deliver a robust IFRS ROE of 20.4%.The Board has proposed a final dividend per share of 12.64 pence (2018: 11.82 pence), giving a full-year dividend per share of 17.57 pence (2018: 16.42p), 7% higher than 2018. The company has achieved the five-year ambition of 10% EPS (earnings per share) CAGR (58% growth over the period) in just four years, reporting underlying EPS of 28.66 pence in 2019, reflecting 12% annual growth since 2015.

Share Price Performance

Daily Chart as at April-22-20, before the market closed (Source: Thomson Reuters)

Legal & General Group PLC’s shares were trading at GBX 201.47 before the market close (at 1:32 PM GMT) on 22^nd April 2020 and were up by 4.39% versus the previous day closing price. Stock 52 weeks High and Low are GBX 324.70/GBX 138.00.

Valuation Methodology
 

Valuation Metrics

(Source: LSE)

As on 31st March 2020, the Price to Earnings multiple of the LGEN was around 6.3x, which was lower as compared to the industry multiples. It reflects, shares are undervalued against its peers.

Growth Catalysts - Progressive Dividend, Growth in Annuities written & Investing in New PRT
LGEN has maintained solvency, while paying a progressive dividend and investing in new PRT(pension risk transfer), with operational surplus generation over 4 years at £5.4 billion, Dividends paid over 4 years - £3.6 billion, and annuities written over 4 years - £33.9 billion. The company has an estimated Solvency II surplus of £7.3 billion at 31st December 2019 over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 184% on a shareholder basis.

Conclusion
Despite political uncertainty, a decline in the asset market, COVID-19 outbreak in China and slowing global economic growth, the company has attained a 5-year EPS increase in 4 years at 58% since 2015. The company has shown good growth in the financial year 2019. The company continues to invest in technology, and its balance sheet remains strong, with a steady increase in surplus regulatory capital. Society’s increasing emphasis on ESG investing, net-zero carbon, among others, would create future growth opportunities. However, in the short-term period, there are several macro-economic uncertainties.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 193 (as on 21^st April 2020) with lower double-digit upside potential based on 1.30x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

AB Dynamics PLC

AB Dynamics Plc (LON: ABDP) provides the testing systems to the global motor industry. The company designs products for automobile companies and the global automotive research and development sector.

Financial Highlights for the Six-Month Period to 29 February 2020 – Robust Financial and Operational Performance

(Source: Interim Report, Company Website)

For the first half of 2020, the company’s revenue increased by 34% to £34.7 millionas compared with the corresponding period of the last year (H1 FY19: £25.8 million), driven by good performance across both operating sectors. The revenue from Track testing increased by 29%, due to ADAS test platform sales and track testing services while Laboratory testing & simulation surged by 82%, due to robust contribution from newly acquired rFpro in addition to new product sales. Led by the higher gross margin, the adjusted operating margin surged by 24.8% in H1 FY20 against the same period last year. The statutory profit after tax for H1 FY20 stood at £3.1 million, a decrease of 45% from the corresponding period of the last year. Adjusted diluted earnings per share increased by 10% to 31.2 pence in H1 FY20 (H1 FY19: 28.3 pence), while basic earnings per share declined by 52% to 13.7 pence. The drop-through was lower than the increase in adjusted operating profit due to the improved tax rate. The company has delivered a strong debt-free balance sheet, with significant net cash of £35.1 million providing resources to withstand the likely impact of the Coronavirus pandemic and to support the ABDP's investment requirements.

Share Price Performance

Daily Chart as at April-22-20, before the market closed (Source: Thomson Reuters)

AB Dynamics PLC’s shares were trading at GBX 1,489 before the market close (at 2:15 PM GMT) on 22^nd April 2020 and were down by 1.55% versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,850.00/GBX 855.00.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 31st March 2020, the Price to Earnings multiple of the LGEN was around 29.6x, which was lower as compared to the industry multiples. It reflects, shares are undervalued against its peers.

Growth Catalysts - Strong Demand and Shows the Early Benefit
As per the operational highlights, the contract for aNVH Axle Level NVH system for major OEM; the launch of static simulator product expanding simulator product family; increased recurring revenue through rFpro software licensing and support; and a significant pipeline of aVDS system sales opportunities. The company has delivered the highest geographic growth in the Asia Pacific, USA and UK. From FY16 to H1 FY20, the company has attained a 36% CAGR growth in revenue and 39% CAGR growth in adjusted operating profit.

Conclusion
The company has delivered strong revenue growthdriven by acquisitions, international expansion and increased service/support, with the growth of 11% in underlying revenue. The strong first-half performance shows the early benefit of the revised strategy, and the acquisitions are performing well. In the second half of 2020, the group remains uncertain due to the COVID-19 pandemic, with the withdrawal of guidance and suspension of interim dividend. Future growth prospects stay supported by long-term structural and regulatory growth drivers in active safety and autonomous systems.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 1,160.40 (as on 22^nd April 2020, at 8:27 AM GMT), with lower double-digit upside potential based on 4.30x NTM EV/Sales (approx.) on FY20E sales per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 22^nd April 2020).

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