Imperial Brands Plc

Imperial Brands Plc (LON: IMB) is an FTSE 100 listed fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers, and cigars.

Investment Highlights - Imperial Brands Plc – Buy at GBX 1,378.50

• The Company performed resiliently despite the covid-19 crisis, and experienced change in consumer behaviour, which resulted in higher demand. The Company further strengthened the Executive Team with key external leadership appointments, which will provide fresh skills and perspectives.
• As per valuation metrics, EV/EBITDA, Price/Cash Flow and Price/Earnings multiples of the Imperial Brands Plc are currently lower as compared to the corresponding multiples of the Food & Tobacco industry. It reflects, shares are undervalued as compared to the industry.
• Over the course of 5 years (FY15 – FY20), the Company’s revenue surged from GBP 25,289 million in FY2015 to GBP 32,562 million in FY2020. Compounded annual growth rate (CAGR) stood at ~ 5.19%.
• From the technical standpoint, shares were trading well above the support level of 20-day simple moving average prices (1,291.18), which reflects an uptrend in the stock and can move up further.

Key Risks

• The macroeconomic fluctuations and Covid-19 uncertainties have been impacting consumer confidence.
• Changes in consumption patterns and continued pressures on the duty-free & travel retail business would impact the Company’s performance in FY2020.

Financial Highlights – FY2020 (30 September 2020) (released on 17 November 2020)

(Source: Annual Report, Company Website)

 

• For the financial year 2020, the net revenue surged by 3.1%, reflecting growth in Tobacco net revenue.
• The Company’s adjusted EPS was down by 5.6%, reflecting lower profit from tobacco business due to increased regulatory costs and covid-19.
• IMB has a strong cash conversion at 127% for the period, with an annual dividend of 137.7 pence.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a strong performance despite the disrupted and uncertain trading environment in the financial year 2020. The Company expects to deliver low to mid-single-digit growth in adjusted operating profit at the constant exchange rate for FY2021. IMB believes tobacco pricing will remain strong, while sector volumes will decline. The Company’s focus in NGP has been on improving performance, returns and capabilities, while will be delivering a moderated level of loss in FY2021. The Company has shown an impressive growth in the last few years, which indicates the financial resilience and strong business model. The stock made a 52-week low and high of GBX 1,203.00 and GBX 2,072.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Imperial Brands Plc at the current price of GBX 1,378.50 (as on 17 November 2020, before the market close at 8:10 AM GMT), with lower double-digit upside potential based on 6.10x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Easyjet Plc

Easyjet Plc (LON: EZJ) is an FTSE 250 listed low-cost European point-to-point Airline Company. The Company has four geographic segments, which include the United Kingdom, Southern Europe, Northern Europe and Other.

Investment Highlights - Easyjet Plc – Avoid at GBX 792.00

• Due to covid-19 pandemic, the number of passengers declined by 50% with a capacity decline of 47.5%, which resulted in a revenue decline by 52.9% in FY2020.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of the Easyjet Plc is currently higher as compared to the corresponding multiples of the Passenger Transportation Services industry, reflecting overstretched valuations.
• The current ratio in H1 FY2020 stood at 0.55x, which is lower than the industry median of 0.89x, reflecting insufficient current assets to pay its short-term obligations.
• From the technical standpoint, 14-day RSI is in the overbought zone and is currently supporting downward movement (around 81 level), which means the stock price could decline in the short term.

Key Risks

• The prolonged travel restrictions and battered passenger demand can widen the losses and put liquidity at significant risk.
• Moreover, the failure in cybersecurity and a critical data breach could hamper the operations as well as the reputation of the Company.

Recent News

On 17 November 2020, easyJet announced the selection of David Robbie as Director Non-Executive effective immediately.

Financial Highlights – FY2020 (30 September 2020) (released on 17 November 2020)

(Source: Annual Report, Company Website) 

• For the financial year 2020, due to the impact of the covid-19, the revenue declined significantly by 52.9%, with a significant decline in passenger numbers and capacity.
• The headline Airline cost surged by 30.2% per seat for the period, while the Company launched the largest cost-out programme.
• The Company reported a significant loss for the period, with negative ROCE of 19.9% and with no recommended dividend.
• EZJ has a strong balance sheet with increased total liquidity and investment-grade credit ratings.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has shown a significant decline in financial performance in the first half of the financial year 2020. The Company remained focused on cash generative flying during the winters to minimise losses in H1 FY2021. EZJ adapted quickly in accordance with challenging environment and taken actions to reduce cash burn, bolster liquidity, minimise losses and launched a major restructuring programme. The Company has the flexibility to ramp up capacity quickly to meet the improved demand. The Company expects to fly at around 20% of planned capacity in the first quarter of the financial year 2021, based on current travel restrictions. The stock made a 52-week low and high of GBX 410.00 and GBX 1,570.00, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on EasyJet Plc at the current price of GBX 792.00 (as on 17 November 2020, before the market close at 8:00 AM GMT), and we will watch out at the turnaround or improvement initiatives to be taken in the near term.

 

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

*Dividend Yield may vary as per the stock price movement.

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