Quilter PLC

Quilter PLC (LON: QLT) is a FTSE 250 index listed Financial Service Company, which is engaged in wealth management, advisory and investments in the UK and Internationally.

On 11 August 2021, QLT expects to release H1 FY21 results.

Investment Rationale – SELL at GBX 163.20

• Britain’s economic recovery can be stalled with Covid-19 variant strain. Moreover, significant market volatility and inflationary pressure can dampen the investor sentiments.
• QLT has weak profitability margins against the industry median. Since FY16, operating margin and net margin have remained below the industry median of 37.5% and 24.4%, respectively.
• QLT has given a return of around 7% in the past year, which is decent but showing significant underperformance against the benchmark FTSE 250 index.
• From a technical standpoint, QLT’s stock price is hovering close to the upper Bollinger band, while the 14-day RSI (69.29), reiterated the overbought position.

Key Risks

• As the Delta variant of Covid-19 is gradually becoming dominant, it is raising fears of slower economic recovery. The Covid-19 pandemic has been putting pressure over gross inflows. Moreover, the challenging external environment could impact the funds under management and the ability to attract new advisers.
• It is exposed to financial risks related to fluctuations in exchange rates and interest rates besides liquidity and credit risk. Furthermore, the volatility in the financial markets can negatively impact the Company's solvency, capital, and liquidity position.

Recent News

Director Change: On 30 July 2021, QLT announced Tazim Essani will join the Board Audit Committee from 1 September 2021.

Financial Highlights (for the year first quarter 31 March 2021, as of 21 April 2021)

 (Source: Company Website)

• At the end of Q1 FY21, QLT reported £119.9 billion in Assets under Management and Administration ("AuMA"), representing a 26% growth from March 2020 end.
• QLT also reported positive investment performance and improved net flows in Q1 FY21 as gross sales increased by 15% on a comparable period and integrated flows surged 25% on the prior year.
• The Company also received a positive market reaction to the proposed sale of Quilter International.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (FY21) (Illustrative) 

Conclusion 

QLT has given a decent return in the past year; however, market conditions are still challenging due to the Covid-19 pandemic. Moreover, there is high investment risk with market volatility. In addition, weakness of Chinese market, inflationary pressure, derailed economic growth, slow vaccination progress, and limited profitability can restrict the Quilter’s growth prospects. Therefore, it is prudent to liquidate the position, and reinvest when short-term uncertainties fade away. The stock made a 52-week High and Low of GBX 169.75 and GBX 119.60, respectively.

Based on the macroeconomic instabilities, overstretched technical stance, stalled economic recovery, and unfavorable valuation conducted above, we have given a “SELL” recommendation on Quilter PLC at the current market price of GBX 163.20 (2 August 2021, 7:40 AM GMT).

Kainos Group PLC

Kainos Group PLC (LON: KNOS) is a FTSE 250 listed Company, which provides IT services across two business divisions, namely Workday Practice and Digital Services. 

Key Dates:

• In September 2021, Kainos has scheduled its interim trading update.
• On 23 September 2021, Kainos is likely to hold its annual general meeting.

Investment Rationale – SELL at GBX 1,760.00

• KNOS’ sock has already yielded a stellar return of over 60%, giving an opportunity to book profit.
• The inflationary market conditions, China demand concerns, and other macroeconomic uncertainties can impact the customer and investor sentiments in the short-term.
• On trailing 12-month basis - EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book valuation multiples are quite overvalued against the corresponding multiples of Software & IT services.
• From a technical standpoint, Bollinger Bands suggests that the price has breached the upper Bollinger Band, while the 14-day RSI (76.39) is also in the overbought position.

Risk Assessments

• There is an increased credit risk notably through clients in vulnerable sectors. Kainos also did not declare a final dividend for FY20.
• The macro-economic disruption can also impact consumer confidence and their spending capacity.

Recent News

Acquisition: On 1 June 2021, Kainos announced the acquisition of Cloudator Oy's to bolster its Workday Practice.

Financial Highlights for the year ended 31 March 2021 (as on 24 May 2021)

 (Source: Company Website)

• FY21 results demonstrated strong business performance on the back of solid sector demand, and therefore, the top-line and bottom-line of the income statement shown remarkable growth.
• Booking in FY21 were 6% up against FY20, while the contracted backlog grew 15% on FY20.
• The Group remained highly cash generative with cash conversion of 112%, and subsequently ended FY21 with £80.9 million (FY20: £40.8 million) in net cash.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

Kainos Group has topped its 52-week high today and yielded a return of over 60% in the past year. Therefore, it is rational to book profit at the current levels, while the markets are hit by concerns about subdued Chinese demand data. The risk appetite of investors can remain dampened with rising inflationary pressure and resurgence of Covid-19 cases, while vaccination rate is slow. The overall demand contraction can derail the economic recovery and put pressure on customer sentiments as well. The stock made a 52-week High and Low of GBX 1,760.00 and GBX 945.00, respectively.

Based on the macroeconomic instabilities, exceptional notional gains, overstrained technical stance, and negative valuation conducted above, we have given a “SELL” recommendation on Kainos Group PLC at the current market price of GBX 1,760.00 (as on 2 August 2021, at 8:10 AM GMT), while we look forward to reinvesting when short-term uncertainties fade away.

FDM Group (Holdings) PLC

FDM Group (Holdings) PLC (LON: FDM) is a FTSE 250 listed global professional services provider. It provides solutions related to recruiting, business consultancy, training, and deploying its own permanent IT services on-site or remotely.

Investment Rationale – SELL at GBX 1,204.00

• FDM has yielded a return of around 30% in the past year, giving an attractive opportunity to book profit.
• As most of the revenue is contributed by the financial services sector, any financial crisis with economic downturn can lead to credit risk and customer loss.
• The prevailing health emergency can cause a significant reduction in new Mountie placements. Moreover, the pandemic induced restrictions have led to the global economic downturn, adversely impact the revenue and operating profit with the shrinking customer base. Consequently, it can hurt the share price as well.
• Over the past two years (H1 FY19 to H1 FY21), gross margin has remained below the industry median of 70.90%.
• From a technical standpoint, Bollinger Bands suggests that the price has breached the upper Bollinger Band, while the 14-day RSI (74.64) is also in the overbought position.

Risk Assessments

• The prevailing health emergency can cause a significant reduction in new Mountie placements. Moreover, the pandemic induced restrictions have led to the global economic downturn, adversely impact the revenue and operating profit with the shrinking customer base. Consequently, it can hurt the share price as well.
• The business is also exposed to several operational uncertainties, such as cyber-attacks, loss of market share with the inability to expand service offerings, business interruption, and failure to comply with regulatory compliance.

Financial Highlights for the six months ended 30 June 2021 (as on 28 July 2021)

 (Source: Company Website)

• FDM continued trading in line with Board’s expectations and made a decent progress in H1 FY21.
• However, cash conversion and interim dividend per share declined 35% and 19% year-on-year, respectively.
• The Group revenue declined 7% in H1 FY21 against H1 FY20, due to the impact of a lower average number of Mounties deployed.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

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

Conclusion

FDM’s stock price is hovering close to its 52-week high. However, demand has been subdued, which impacted the deployment of mounties in H1 FY21 and lead to a decline in revenue. Therefore, the Company has significantly reduced its dividend, while the cash conversion of 93.3% in H1 FY21 was significantly below 143.3% of cash conversion in H1 FY20. Therefore, it is rational to book profits at the current levels. The stock made a 52-week High and Low of GBX 1,208.00 and GBX 882.00, respectively.

Based on the declined revenue, subdued cash generation, overstrained technical stance, and negative valuation conducted above, we have given a “SELL” recommendation on FDM Group (Holdings) PLC at the current market price of GBX 1,204.00 (as on 2 August 2021, at 7:20 AM GMT), while we look forward to reinvesting when short-term uncertainties fade away.

Forterra PLC

Forterra PLC (LON: FORT) manufactures masonry products. It operates through two segments, namely Bricks & Blocks and Bespoke products.

Investment Rationale – SELL at GBX 305.50

• Rising raw-material cost and labor shortage could impact the results in H2 FY21.
• As compared to H1 FY19, Forterra reported 17% and 20% decline in profit before tax and interim dividend in H1 FY21.
• FORT’s stock price has yielded a return of over 93% in the past year, giving an attractive opportunity to book profit.
• From a technical standpoint, Bollinger Bands suggests that the price is hovering close to the upper standard deviation, while the 14-day RSI (61.39) is in the overbought territory.
• In terms of valuation metrics (on forward 12-month basis) - EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book multiples are relatively overvalued against the median of Basic Materials industry.

Risk Assessments

• The withdrawal of stamp duty holiday has impacted the house prices in July 2021, it can also impact the overall construction market.
• The ongoing disruption to global supply chain and health emergencies has caused significant labor shortage and cost inflation, which can exacerbate the cost of construction.

Trading Update (for the six months ended 30 June 21, as on 29 July 2021)

 (Source: Company Website)

• The robust demand in homebuilding market supported a strong recovery in H1 FY21, and therefore, revenue and EBITDA increased by 47.3% and 351.2% year-on-year.
• The Group reported strong operating cash flow and recorded £26.3 million in a net funds balance at the end of H1 FY21.
• The orderbook remained robust with solid customer sentiments.
• Therefore, there is a slight upgrade in the management’s expectations for FY21.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

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

Conclusion

FORT’s stock price has already tested its 52-week high in the past week and could face some price retracement given the negative technical stance and short-term macroeconomic uncertainties. The Company has also indicated the increasing signs of cost inflation, which could adversely affect the operating results of H2 FY21. As the stock has yielded an exceptionally great returns in the past year, it is prudent to liquidate position in profit since travel restrictions could hamper the project deliveries and the anticipated order book pipeline. The stock made a 52-week High and Low of GBX 311.00 and GBX 144.16, respectively

Based on the cost inflation, supply chain disruptions, travel restrictions, overbought technical stance, with supported by the valuation conducted above, we have given a “SELL” recommendation on Forterra PLC at the current market price of GBX 305.50 (2 August 2021, at 7:20 AM GMT), while we look forward to reinvesting when short-term uncertainty fades away.

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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