Greggs PLC

Greggs PLC (LON: GRG) is an FTSE 250 Index listed company founded in 1939. The Company is a bakery foods retailer and offers fresh and frozen bakery products, sandwiches and drinks.

GRG would announce its H1 FY2021 results on 3 August 2021.

Investment Rationale for Valuation – SELL at GBX 2,793.00

• Recently the positive impact of pent-up demand has declined, and there could be more competition from cafes and restaurants.
• Due to macroeconomic uncertainty, the management could not provide any detailed guidance for FY2021 so far.
• On the profitability front, the EBITDA margin in FY2020 has been lower than the industry median of 17.1%.
• On the liquidity front, the current ratio since FY2019 has been lower than the industry median of 0.93x.
• On the leverage front, the debt/equity ratio in FY2020 has been higher than the industry median of 0.83x.
• In the last year, the stock generated a substantial return of about 79.56%, offering investors an opportunity to book a good profit.
• The stock is trading at its 52-week high price of GBX 2,793.00, raising doubts about its upside potential.
• From a technical standpoint, 14-day RSI (71.29) is hovering in the overbought position, price retracement can be expected.

Key Risks

• The rise in unemployment levels and reduction in disposable income may cause a decline in consumer spending tendency, which could adversely impact consumer demand, affecting GRG’s margins.
• GRG operates in a highly competitive environment with competition from cafes and restaurants.
• High rentals due to less availability of land could affect the performance.

Recent News

Change in Director: On 8 June 2021, GRG announced that a Non-Executive Director of GRG, Peter McPhillips, would retire on 31 July 2021 and Mohamed Elsarky would join as a new independent non-executive director, effective 21 June 2021.

Trading Update (released on 28 June 2021)

• The management expected increased competition from cafes and restaurants since their reopening.
• After the reopening, there was substantial pent-up demand, which has declined recently.
• However, like-for-like sales growth in company-managed shops is expected to be between one and three per cent compared to the similar period in pre-Covid FY2019.
• This sustained recovery in revenue exceeds the management’s expectations.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

Since the reopening, there could be tougher competition from cafes and restaurants. The management could not provide detailed guidance for FY2021 due to a lack of visibility.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading at its 52-week high, indicating overstretched valuation. Overall, we do not have significant catalysts to support an uptick in the stock price and recommend exiting the position currently. The stock made a 52-week low and high of GBX 1,113.00 and GBX 2,793.00, respectively.

Considering the macroeconomic uncertainty, poorer profitability, liquidity, and leverage position of the Company than the industry, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Greggs PLC at the closing market price of GBX 2,793.00 (as of 5 July 2021), while we will revisit our stance based on an updated picture presented by the Company.

Clarkson PLC

Founded 1852, Clarkson PLC (LON: CKN) provides integrated services to the shipping and offshore markets. It employs around 1,600 people in 53 countries.

On 9 August 2021, CKN expects to release its interim results.

Investment Rationale – SELL at GBX 3,310.00

• Due to the Covid-19 pandemic induced uncertainties, the global trade environment is already disrupted, which can cause significant volatility in commodity prices.
• The Tanker market is still weak, while the stock price is hovering around the 52-week high.
• From a technical standpoint, 14-day RSI (72.68) is hovering in the overbought position, while the price has gone above the lower standard deviation line of the Bollinger bands.
• Since FY19, CKN reported weaker EBITDA and net margin than the industry median.
  

Trading Statement for the period from 1 January 2021 to 4 May 2021 (5 May 2021)

• The Company has delivered an encouraging start to FY21 with improved working conditions.
• The average ClarkSea Index was US$17,461/day in Q1 FY21, increased by 6.5% on Q1 FY20. However, it was still impacted by the Covid-19 pandemic.
• The improved activity in the global shipping market improved the financial division. Meanwhile, the Support division also remained in with expectations.

Risk Assessments

• Macroeconomic uncertainties can impact the client’s financial performance and lead to credit risk.
• The resurgence of Covid-19 cases can keep the shipping environment in the short-term, and hence, impact the Company’s operations.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Although the trading has improved, the Covid-19 uncertainties cannot be ruled out in the short-term with the resurgence in cases. Moreover, the stock seems overstretched and overbought at the current level, and price retracement can be anticipated in the short-term. Moreover, the Company still does not have specific financial guidance given the level of uncertainties. As the stock price has already given a significant increase of around 38%, it is giving an attractive opportunity to book profit. The stock made a 52-week High and Low of GBX 3,335.00 and GBX 1,966.00, respectively.

Based on the volatile market scenario, overstrained share prices, inconsistent profitability, coupled with the unfavourable valuation conducted above, we have given a “SELL” recommendation on Clarkson PLC at the closing market price of GBX 3,310.00 (as on 5 July 2021), while we look forward to reinvesting capital plus gains when due corrections are done and there is clarity about the financial guidance.

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

Disclaimer

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