Legal & General Group Plc

Legal & General Group Plc (LON: LGEN) is an FTSE 100 index listed company, which provides financial services across the UK, and the US. The Company operates in four business segments.

The next dividend of GBX 5.18 per share would be paid on 20 September 2021 (interim dividend).

Investment Rationale for Valuation – SELL at GBX 277.50

• Lower interest rates and potential further risks to interest rates could create further headwinds for companies operating in the UK insurance sector.
• On the leverage front, the debt/equity ratio since FY2019 has been higher than the industry median of 0.39x.
• In the last year, the stock generated a decent return of about 21.81%, offering investors an opportunity to book a decent profit.
• The stock is trading near its 52-week high price, raising doubt about its upside potential from the current level. Hence, a correction in the near term cannot be ruled out.
• On the technical front, the 14-day RSI at about 62.00 is moving towards the overbought zone. Hence, there could be a downward movement in the stock price in the near term.

Key Risks

• Any failure or delay in meeting the regulatory requirements could lead to additional costs and penalties.
• Due to the payment of dividends, there could be stress on LGEN’s liquidity.
• Interest rate movements and inflation affect the value of investments LGEN holds to meet the obligations in its insurance business.

Financial Highlights (for six months ended 30 June 2021 (H1 FY2021) as of 4 August 2021)

(Source: LSE Website)

• Driven by strong financial performance above pre-Covid FY2019 levels, operating profit in H1 FY2021 surged 14% YoY.
• It led to EPS rising 21% with respect to the FY2019 level.
• Increased profit and cash-accretive operations led to cash generation of £0.9 billion, up 14% YoY.
• It encouraged the Company to increase the interim dividend by 5% YoY.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

There are continuing macro uncertainties in FY2021 with further potential threats to interest rates. Also, the delta plus Covid-19 variant could pose further uncertainty to the economies.  Meanwhile, the stock is trading close to the 52-week high of GBX 299.20. The stock made a 52-week low and high of GBX 175.04 and GBX 299.20, respectively. 

Considering the continued low-interest rates, higher leverage profile of the Company than the industry, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Legal & General Group Plc at the current market price of GBX 277.50 (as of 9 August 2021 at 7:35 AM GMT), while we will revisit our stance based on further corporate announcements by the Company.

Games Workshop Group Plc

Games Workshop Group Plc (LON: GAW) is an FTSE 250 index listed company that manufactures miniature figures and games.

On 15 September 2021, GAW would conduct its Annual General Meeting.

The next dividend of GBX 40.00 per share would be paid on 13 September 2021 (interim dividend).

Investment Rationale for Valuation – SELL at GBX 11,840.00

• Due to the lack of visibility, the management is yet to provide detailed guidance for FY2022.
• In the last year, the stock generated a decent return of about 28.39%. Hence, it is an opportunity for investors to book a decent profit.
• The stock is trading near its 52-week high price. Hence, there is doubt about its upside potential from the current level. Also, a correction in the near term cannot be ruled out.
• The stock price is sustaining between the upper and middle Bollinger bands, indicating a potential downward movement in the stock price in the near term.

Key Risks

• The heavy reliance on online channels could enhance the risk of cyber-attacks.
• Due to macroeconomic uncertainty, there could be delays or shortages in production, affecting the margins.
• Dividend payments could put stress on GAW’s liquidity position.
  

Financial Highlights (for the year ended 30 May 2021 (FY2021) as of 27 July 2021)

(Source: LSE Website)

• Driven by strong growth in online sales of 70% YoY, gross margin in FY2021 improved to 72.7% from 67.0% in FY2020.
• This strong sentiment resulted in operating profit surging ~68.6% YoY in FY2021.
• The increase in profitability contributed to strong £131.7 million of cash after-tax from the Company’s core operating activities. It was an improvement of ~39.5% YoY.
• The solid liquidity prompted the Company to increase the dividend by ~62% YoY in FY2021.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

There could be potential supply chain headwinds causing cost overruns. Also, pandemic related challenges could reappear due to the delta variant of Covid-19.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading near 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 8,360.00 and GBX 12,260.00, respectively.

Considering the continued economic and market uncertainty, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Games Workshop Group Plc at the current market price of GBX 11,840.00 (as of 9 August 2021 at 10:20 AM GMT), while we will revisit our stance based on further improvements in the macroeconomic condition.

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

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