Virgin Money UK PLC

Virgin Money UK PLC (LON: VMUK) is an FTSE 250 listed digital banking entity engaged in diverse range of banking services catering to both retail and institutional clients.

Investment Rationale for Valuation – Buy at GBX 169.65

• Solid Fundamentals: During Q1 FY22, VMUK maintained a robust asset quality, continued strong delivery of new digital propositions, and increased guidance on net interest margin (NIM) for FY22.
• Strong Capital Position: Driven by strong profitability, the CET1 ratio further increased by around 30 basis points (bps) to 15.2% at the end of Q1 FY22.
• Technical Indicator: The price of the stock seems to be hovering around the middle Bollinger band after touching the lower band, with a 14-day RSI level of ~46.05, reflecting a possible upward movement in price.
• Undervalued Multiples: On a forward 12-month basis, key valuation multiples (EV/Sales, Price/Earnings, and Price/Book) are quite lower than the average of the Financial Services sector.

Key Risks

• Weak Global Growth Forecast: The World Bank had reduced its global growth forecast for 2022 from 4.1% to 3.2%.
• Regulatory Risk: The company’s business model is prone to the risk of change in regulations, which might have a direct impact on its operations. It must maintain appropriate solvency levels as per the regulatory framework.

Financial Highlights (for Q1 FY22 ended 31 December 2021, as of 01 February 2022)

(Source: Company Website)

• Improvement in NIM: The Group reported an improvement in NIM in Q1 FY22 to 177 basis points, compared from 170 bps in Q4 FY21. This was achieved on the back of higher hedge contributions, lower cost of funds, and a higher-yielding lending mix.
• Customer Deposits: The Group reported a drop in customer deposits by 2% to £65,503 million at the end of Q1 FY22, from a level of £66,870 million in the prior period end. The cost of deposits in Q1 FY22 witnessed a reduction owing to an improvement in mix.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Approach (FY22E)

Conclusion

VMUK expects NIM to be 175 bps for FY22, aided by growth in higher-yielding lending. However, it is expected to be offset by mortgage competition and savings market normalisation. Notwithstanding, the Company has several proposed launches going forward and will also focus on digitizing key customer experiences like the deployment of a self-service chatbox. 

Based on the improvement in NIM, pipeline of proposed launches, optimistic guidance and support from the valuation as done using the above method, we have given a “Buy” recommendation on Virgin Money UK PLC at the closing market price of GBX 169.65 (as of 19 April 2022) with lower double-digit upside potential based on 0.56x Price/NTM Book (approx.) on FY22E book value per share (approx.).

Please note that markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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