BP Plc

BP Plc (LON: BP.) is listed on the FTSE 100 index and is an integrated energy business. It has major operations in Europe, Asia, North and South America, Africa and Australasia.

On 2 November 2021, BP would announce its Q3 FY2021 results.

The next dividend of USD 0.0546 per share would be paid on 24 September 2021 (interim dividend).

Investment Rationale for Valuation – Hold at GBX 303.70

• BP has recently announced a major share buyback programme to return its surplus capital to its shareholders.
• In Q2 FY2021, the Company had four major project start-ups.
• On the profitability front, BP’s net margin in Q1 FY2021 outperformed the industry median of 10.2%.
• In the last six months, the stock has outperformed the benchmark FTSE 100 index. Given the prospects of BP, it could continue in future.
• On the technical front, the 20-day EMA at about GBX 296.86 is below the stock price. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• The Company’s carbon offset programme could be hit by the US forest fires.
• A fall in the oil price due to more supply from the OPEC nations could affect the margins of the Company.
• The payment of dividends could affect the Company’s liquidity.

Financial Highlights (for three months ended 30 June 2021 (Q2 FY2021), as on 3 August 2021)

(Source: LSE Website)

• Driven by four major project start-ups and solid performance in the customers’ business, BP in Q2 FY2021 delivered a resilient operating performance.
• However, profit for Q2 FY2021 went down to USD 3.1 billion from USD 4.7 billion in Q1 FY2021.
• On a positive note, driven by higher oil prices, underlying replacement cost profit rose to USD 2.8 billion from USD 2.6 billion in Q1 FY2021.
• Also, the Company reduced its net debt to USD 32.7 billion from USD 33.3 billion in Q1 FY2021.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The oil demand is expected to recover in the coming months due to continuous normalisation of economic activities, driven by Covid-19 vaccination drives. However, OPEC nations’ production would play a key role in driving the oil price. Also, the global gas demand is expected to bounce back and exceed FY2019 levels by FY2021 end. Meanwhile, the stock made a 52-week low and high of GBX 188.52 and GBX 361.71, respectively.

Based on decent growth prospects but continued macroeconomic uncertainty, decent performance in Q2 FY2021, better profitability of the Company than the industry, and support from valuation as done using the above method, we have given a “HOLD” recommendation on BP Plc at the current market price of GBX 303.70 (as on 3 August 2021 at 9:40 AM GMT), and would recommend fresh buying at the right time depending on how quickly macroeconomic conditions would recover. 

ASOS Plc

ASOS Plc (LON: ASC) is listed on the FTSE AIM All-Share index and is a UK listed fashion retailer. The Company caters to over 24 million active global customers with a product portfolio consisting of roughly 850 brands.

On 13 October 2021, ASC would announce its FY2021 results.

Investment Rationale for Valuation – Speculative Buy at GBX 3,891.00

• ASC has recently announced a new strategic partnership with US-based multi-channel retailer Nordstrom. It could attract young customers and drive the growth of the brands in North America.
• The second-hand clothing market is expected to double in size in the next five years. ASC, having already established its own second-hand marketplace, has the edge over its competitors.
• On the profitability front, ASC has consistently achieved a decent performance since FY2019, with net margin always outperforming the industry median of negative 4.0%.
• In the last two years, the stock has outperformed the benchmark FTSE AIM All-Share index. Given the prospects of ASC, it could continue in future.
• On the technical front, the 14-day RSI at about 36.62 is sustaining just above the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• The fashion retail market in the UK has intense competition. Hence, there could be impacts on ASC’s market share.
• ASC could face supply chain issues as the majority of its products are manufactured overseas, increasing costs.
• The weak consumer confidence and muted disposable income could impact consumer spending. Hence, ASC’s margins could be affected.

Four months ended 30 June 2021 Trading Statement (released on 15 July 2021)

(Source: LSE Website)

• Driven by accelerated demand in the US and solid growth in the UK, sales were up 21% YoY in the four-month period till 30 June 2021.
• Furthermore, ASC increased its active customer base by 1.2 million since H1 FY2021.
• However, due to elevated freight costs and FX headwinds, gross margins fell by 150 bps.
• The management continues to invest to be well-positioned to utilise the long-term opportunity. The investments are boosted by ASC’s strong liquidity position.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The management anticipates FY2021 performance to be in line with expectations despite expected issues in the global supply chain. The management also wants to focus on investments to drive growth globally and is helped by the Company’s solid liquidity position. The Company is well-positioned to capture the expanding online fashion market. Meanwhile, the stock made a 52-week low and high of GBX 3,258.00 and GBX 5,994.95, respectively.

Based on the new partnership with Nordstrom to drive growth, the bright prospect in the second-hand clothing market, decent growth prospects as per the management guidance, better profitability of the Company than the industry, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on ASOS Plc at the current market price of GBX 3,891.00 (as on 3 August 2021 at 2:15 PM GMT), with a lower double-digit upside potential based on 28.00x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change 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.

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