Spire Healthcare Group PLC

Spire Healthcare Group PLC (LON: SPI) is an FTSE All-Share listed independent hospital group. Moreover, it has 39 hospitals and eight clinics operating across the UK.

On 09 September 2021, SPI expects to release interim results for the six months ended 30 June 2021.

Investment Highlights – Spire Healthcare Group PLC – Sell at GBX 245.50

• On the profitability aspect, SPI had witnessed a turnaround and moved into losses during FY20, while it had reported a net profit during FY19.
• Moreover, the Company’s profitability metrics are in negative territory, whereas the industry has been delivering positive numbers.
• The stock price surged by more than 27% in a single day because of an acquisition bid made by Ramsay Health Care (UK) Limited. Currently, the stock is trading near a 52-weeks high of GBX 249.00.
• The Company has a Debt/Equity ratio of 1.66x during FY20 and is continuously increasing on a year-on-year basis since FY16, illustrating an increase in the debt structure, and is currently ahead of the industry median of 1.04x.
• From the technical standpoint, 14-day RSI stood at around 84.13, which means the stock price could decline in the short term.

Key Risks

• The Company operates in a strict regulatory environment; any change in regulations or government policies could affect its overall business.
• The widening demand-supply gap of skilled professionals can have detrimental consequences in FY21.
• Covid-19 uncertainties may cause a significant delay in various development projects.

Recent Developments

On 26 May 2021, SPI unveiled the recommended the cash offer from Ramsay Health Care (UK) Limited worth £999.6 million on a fully diluted basis. Each shareholder of SPI will receive GBX 240 in cash upon the completion of the transaction, representing around a 24.4% premium from yesterday’s (25 May 2021) closing price of GBX 193 per share.

Financial Highlights (for 12 months ended 31 December 2020, as of 04 March 2021)

 (Source: Company result)

• The Company had witnessed over 210,000 NHS patients under the Covid-19 contracts during 2020.
• SPI had demonstrated a decline in revenue and net profit illustrating, the adverse impact of the Covid-19 pandemic.
• With regards to the financial position, SPI had a net debt of £318.7 million as of 31 December 2020.
• The net debt to EBITDA ratio remained 3.9x during FY20, while it was 3.0x for FY19.
• SPI has a Senior Loan Facility of £425 million and an undrawn Revolving Credit Facility (RCF) of £100 million.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

SPI remained cautious regarding the additional cost and uncertainty associated with the Covid-19 pandemic. The trading performance during January 2021 and February 2021 was adversely impacted by the Covid-19 pandemic. However, it believed that trading would return to 2019 levels in FY21.  Meanwhile, SPI had seen a major turnaround in profitability as it made a significant net loss during FY20. Moreover, the recent surge in stock price was driven by a proposed cash offer from Ramsay Health Care (UK) Limited. The stock made a 52-week low and high of GBX 72.60 and GBX 249.00, respectively.

Based on the weak profitability, uncertain outlook, recommended cash offer, and the valuation method discussed above, we have given a "Sell" stance on Spire Healthcare Group PLC at the current market price of GBX 245.50 (as of 26 May 2021 at 12:56 PM GMT).

Vectura Group Plc

Vectura Group Plc (LON: VEC) is focused on the research, development and commercialization of drug delivery system and therapeutic system. VEC is a constituent of the FTSE 250 index.

Rationale for Valuation – Sell at GBX 162.20

• The stock price surged by more than 32.34% in a single day because of a recommended cash acquisition.
• Trading near a 52-week high, while on a trailing 12 months, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of VEC are currently higher than the corresponding multiples of the Pharmaceuticals industry, reflecting overstretched valuations.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.
• From the technical standpoint, 14-day RSI stood at around 88.73, which means the stock price could decline in the short term.

Key Risks

• The Company is exposed to the risk of damage to flutiform® performance or long-term value due to actions.
• Moreover, VEC may get failed in offering robust, differentiated technologies, which meet present and future customer needs.
• The failure of co-development partners to deliver on the targets may impact the revenue of the Company.

Recent News

On 26 May 2021, VEC unveiled the recommended cash acquisition news from Murano Bidco Limited (a newly formed company indirectly controlled by funds managed by Carlyle Europe Partners V) worth around £958 million. Pursuant to the Acquisition, holders of VEC shall be entitled to receive 155 pence for each Vectura Share.

AGM Update (as on 26 May 2021)

• The Company made decent progress in CDMO (Contract Development and Manufacturing Organisation) strategy. At the same time, it expects CMDO revenues to remain in line with previous guidance.
• In the Product Supply, Q1 FY21 market volumes were similar to Q3 FY20 and Q4 FY20. Moreover, the gross profit stays in line with the prior guidance, due to an improved margin expectation.
• In Q1 FY21, the Company had received £13 million for GSK's Ellipta® products.
• In Q2 FY21, it will recognise further royalty payments for Ellipta®.
• In the first quarter, VEC has signed an agreement to sale of its oral manufacturing facility in Lyon.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Conclusion

Recently, the Company stated that it has recommended a cash acquisition from Carlyle Europe Partners V. Vectura directors believe that this is an attractive offer for the VEC’s shareholders. The Company has made strong progress in FY20 and Q1 FY21, supported by good financial and operational results in the royalties and product supply business. However, VEC remained cautious regarding the additional cost and uncertainty associated with the Covid-19 pandemic.  Meanwhile, VEC had seen a major turnaround in profitability as it made a significant net loss during FY19. Moreover, the recent surge in stock price was driven by a proposed cash acquisition from Bidco. Currently, the stock is trading near its 52-week high, suggesting that the upside potential might be limited. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to the pandemic and the given cash acquisition. The stock made a 52-week low and high of GBX 84.60 and GBX 163.80, respectively.

Based on the recommended cash offer, uncertain outlook, and the valuation method discussed above, we have given a "Sell" stance on Vectura Group at the current market price of GBX 162.20 (as of 26 May 2021 at 3:20 PM GMT).

Cineworld Group Plc

Cineworld Group Plc (LON: CINE) is an FTSE 250 index listed and the United Kingdom-based global cinema chain. The Company has several segments, including the US, the UK and Ireland and the rest of the world.

Investment Rationale for Valuation – Avoid at GBX 91.84

• Due to poor visibility on CINE’s liquidity and future prospects, Fitch recently put the Company on rating watch negative (18 May 2021) and also withdrew its ratings because of commercial purposes.
• Following a recent judgement, CINE has to pay USD 255 million to shareholders of Regal Entertainment (17 May 2021) which it acquired in 2018.
• There is still material uncertainty of Covid-19 impact on the Group. Hence, the management abstained from issuing detailed guidance for FY2021.
• On the profitability front, the net margin of negative 311.1% in FY2020 is significantly lower than the industry median of negative 5.7%.
• On the liquidity front, the current ratio is consistently lower than the industry median of 0.97x since FY2016. Similarly, on the leverage front, CINE has a higher debt/equity ratio than the industry median of 0.33x since FY2016, indicating that the Company could have a higher cost in raising debt than the industry.
• In the last three months, the stock has achieved a lower return than its benchmark FTSE 250 index. This underperformance could continue in the future as there is still significant uncertainty in the entertainment industry.

Key Risks

• CINE has received a rating watch negative from Fitch. It could put significant stress on raising further debt capital.
• Paying USD million to shareholders of Regal Entertainment could materially affect the Group’s liquidity.
• Any further disruption due to the Indian variant of Covid-19 could put further pressure on revenue, profitability and liquidity.
• Foreign exchange fluctuations could impact financial performance.
• Even after opening, CINE would need many blockbuster contents to make up for the closure in early FY2021.

Recent News

Reopening and US CARES Act Refund: On 24 May 2021, the Company announced that due to the success of Peter Rabbit 2: The Runaway, CINE had a strong opening weekend in the UK. The Group has also received the full USD 203 million tax refund under the US CARES Act. 

Financial Highlights (for the year ended 31 December 2020 (FY2020), as of 8 April 2021)

(Source: Company website)

• Due to Covid-19, all sites across the Group were closed from mid-march 2020. As a result, the Group revenue was down ~80.5% YoY in FY2020.
• Driven by this dramatic fall in revenue and substantial fixed costs, CINE reported a gross loss of USD 35.8 million and a net loss of USD 2.65 billion in FY2020.
• To mitigate this loss and preserve liquidity, CINE raised USD 810.8 million additional liquidity during FY2020. It included the issuance of equity warrants.
• Due to its highly stressed leverage with a debt/equity ratio of 38.15x in FY2020, CINE had to obtain leverage covenant waivers until June 2022.
• To avoid further cash burn, CINE temporarily suspended Group dividends to its shareholders.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

The global leisure industry has been severely impacted due to the disruption caused by the Covid-19 pandemic and the subsequent lockdown measures. It has materially affected the cinema chains. The Company has a negative net margin and significantly higher leverage in FY2020 than in FY2019. Overall, the business performance is severely impacted by the Covid-19 pandemic, and there is no proper guidance for FY2021. The stock made a 52-week low and high of GBX 15.11 and GBX 124.85, respectively.

Based on the uncertainty over the leisure sector, lack of visibility about the Company’s prospects, negative margins of the Company, extremely higher leverage of the Company compared to the industry, and support from valuation as done using the above method, we have given an “Avoid” recommendation on Cineworld Group Plc at the current market price of GBX 91.84 (as on 26 May 2021 at 2.25 PM GMT) and will watch out for the turnaround in both the leisure sector and the Company’s prospects depending on further reopening and the pent-up demand and revisit our stance accordingly.

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

* The reference data in this report has been partly sourced from REFINITIV.

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