Virgin Money UK PLC

Virgin Money UK PLC (LON: VMUK) is an FTSE 250 listed digital banking company.

Investment Rationale for Valuation – Buy at GBX 174.05

• Improvement in NIM: The Group reported an improvement in NIM in Q1FY22 to 177 basis points, compared to 170 bps in Q4FY21. This was achieved on the back of higher hedge contributions, lower cost of funds, and a higher-yielding lending mix.
• Improved Outlook: The company 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.
• Decent Pipeline of Proposed Launches: 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.
• 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 ~45.16, reflecting a possible upward movement in price.

Key Risks

• Macro Risk: The outbreak of the war in Ukraine and continuing impacts of the pandemic continue to put pressure on the equity markets and the banking sector.
• 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 has to maintain appropriate solvency levels as per regulatory framework.

Financial Highlights (for Q1FY22 ending 31 December 2021, as of 01 February 2022)

(Source: Company Website)

• Customer Deposits: The Group reported a drop in customer deposits by 2% to £65,503 million in the end of Q1FY22, from a level of £66,870 million in the prior period end. Cost of deposits in Q1FY22 witnessed a reduction owing to an improvement in mix.
• Mortgages: Mortgages stood at £57,785 million as of 31 December 2021, compared to £58,104 million as of 30 September 2021.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

*Peers: Peers considered are OSB Group PLC, Secure Trust Bank PLC, and Lloyds Banking Group PLC.

*All selected peers are LSE-listed Companies from the Financials sector.

Conclusion

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 174.05 (as of 01 April 2022) with lower double-digit upside potential based on 6.66x Price/NTM Earnings (approx.) on FY22E earnings 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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