Hastings Group Holdings PLC

Hastings Group Holdings PLC (HSTG) is a British holding company with a focus across the insurance value chain. The group, along with its subsidiaries, offers general insurance products in the United Kingdom, with the primary focus on the UK motor market, including private car insurance, motorbike and van insurance. It also provides home insurance, premium financing and ancillary products. The group's brands include Hastings Direct, which is the company's largest and best-known brand, Hastings Premier, Hastings Essential, and many more.

Recent News
On 16^th July 2019, the company announced the Lord Chancellor regarding the change to the discount rate applicable for personal injury damage awards (Ogden rate) to -0.25 per cent from -0.75 per cent.


Q1 FY19 Trading Update (as on 26^th April 2019)
The company’s gross written premiums increased by 4 per cent to £235.5 millionas compared with the corresponding period of the last year. Live customer policies surged by 3 per cent to 2.75 million. Net revenue declined by 1 per cent to £183.1 million, reflecting the lower earn through reinsurance and premiums income from 2018. UK private car market share rose by 20 bps to 7.6 per cent as compared with the previous year same period data. Material development made in the transformation of mobility and repair services. The company focus remains on delivering operational efficiencies from the continued digitalisation business. Total loss claims are almost 35 per cent being settled digitally and policies of more than 1.6 million on Guidewire.

Financial Highlights (FY2018, £million)

(Source: Annual Report, Company Website)

The Net earned premium rose by 7 per cent to £440.7 million in FY 2018, from £410.1 million in FY 2017. Gross premium increased to £958.3 million for the year, up by 3 per cent from £930.8 million last year. The adjusted operating profit increased by 4 per cent to £190.6 million. The profit after tax increased by 3 per cent to £130.6 million, reflecting solid operating performance. The group reported free cash generation of £167.7 million, reflecting strong growth of 42 per cent over the prior year. This helped the company to achieve its net debt leverage multiple targets of around 1.0x during the year. A final dividend of 9 pence per share for 2018 was proposed, vs 8.5 pence per share in FY 2017. Together with the interim dividend, the dividend payout ratio for the year equates to 58.8 per cent of adjusted profit after tax against 55.5 per cent in FY 2017. The total dividend also increased by 7 per cent over the prior year.

Share Price Performance

Daily Chart as at 19^th July 2019, before the market closed (Source: Thomson Reuters)

On 19th July 2019, at the time of writing (before the market close, GMT 9:21 AM), HSTG shares were quoting at GBX 198.30 and increased by 0.66 per cent against the previous day closing price. Stock's 52 weeks High is 277.01 and 52-weeks Low is GBX 169.50. The company’s stock beta was 1.51, reflecting higher volatility as compared with the benchmark index.

Valuation Methodology


Conclusion
The strong capital position and continuing cash generation have prompted the company to increase its target dividend payout ratio to a range of 65 per cent to 75 per cent in future. The current market premium and claims dynamics continued through the year and the company’s loss ratio would be projected to move towards the higher end of the 75 per cent to 79 per cent target range.The management foresees significant growth opportunities in both its core motor and home markets. Fundamental changes in the motor industry, most notably electric and autonomous vehicles, can change the nature of the motor insurance industry, something the company may not be prepared for.

The company is relatively immune from the volatility arising from Brexit uncertainties and is in an excellent position to profit from the customers' push towards online sources, especially primarily price comparison websites, to buy insurance. There are significant growth opportunities in both its core motor and home markets.

Based on the above valuation done, we have given a “BUY” recommendation at the closing price of GBX 197 (as on July 18, 2019) with single-digit upside potential based on 15.28x NTM Peers Median Price to Cash Flow (approx.) on FY19E cash flow per share (approx.).

Genedrive Plc

Genedrive Plc (GDR) develops and markets point of need molecular diagnostics platform for identifying infectious diseases and pathogens and providing other indications. The Genedrive hepatitis C virus (HCV) ID test is the company’s CE-IVD certified molecular diagnostics platform, which also finds application in genotyping or patient stratification. The company has differentiated its operations in four geographical segments: the United Kingdom, Europe, the United States of America and Asia.

Trading Update (as on 9^th July 2019)
For the 12 months ended 30th June 2019, Diagnostic revenue increased by 36.31 per cent to £2.4 millionas compared with the financial year 2018 of £1.9 million. The group closed the period with cash ahead of market expectations at £5.2 million as compared to £5.8 million at 31^st December 2018 and the R&D tax credit was £1 million received in the second half of the year 2019. Commercial sales to the US DoD (Department of Defense) relating to biohazard identification were £0.9 million and composed only of orders of assays and units as different to development income in the previous year. The work performed under grant-funded projects were £1.4 million,an increase from the corresponding period of the last year. The group expects to announce results for the full year 2019 in October 2019.

Financial Highlights (H1 FY19, £million)

(Source: Interim Report, Company Website)

The company’s total revenue and other income increased from £1.3 million in H1 FY18 to £1.5 million in H1 FY 19, driven by the shift to commercial revenues from development grant revenue. The trading loss for the period H1 FY19 stood at £2.0 million against the loss of £2.2 million in H1 FY18. The amendment to the sale and purchase Agreement for Visible Genomics created a fair value gain of £0.6 million. In H1 FY19, operating loss stood at £1.4 million. The loss before taxation stood at £1.7 million (H1 FY18: loss of £2.3 million). The basic and diluted loss per share from continuing operations stood at 7 pence (H1 FY2018: loss of 10.9 pence).

Share Price Performance

Daily Chart as at 19^th July 2019, before the market closed (Source: Thomson Reuters)

On 19th July 2019, at the time of writing (before the market close, GMT 10:31 AM), GDR shares were quoting at GBX 16 and reduced by 8.57 per cent against the previous day closing price. Stock's 52 weeks High is GBX 31.90 and 52-weeks Low is GBX 16.30.

Conclusion
The company traded in line with management's expectations in the current trading updateowing to the first commercial order received from the DoD (Department of Defence). While the company continues to make progress in gaining the country’s registrations for the Genedrive HCV-ID Kit, as previously communicated, this process has taken longer than originally expected. From the DoD, the fulfilment of the order was £0.3 million delayed until FY2020, driven by the supplier issue. The company are confident of additional orders for fulfilment in FY2020. The company remain positive of forwarding revenue momentum with the DoD. The UK's exit from the European Union (Brexit) has been considered by the Board and is not considered as a material risk to the short- and medium-term plans of the group.

Based on the risks associated with the operations of the company and the stock trading near the 52w low, we recommend investors to keep a cautious “Watch” on the stock at the closing price of GBX 17.50 (as on 18^th July 2019), and support from future growth catalysts needs to be evaluated at a subsequent stage.
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The Buy recommendation is also valid at the current price as on 19-July-19.

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