Vesuvius PLC

FTSE-250 listed Vesuvius PLC (LON: VSVS) provides molten metal flow engineering and technology services. It serves the steel and foundry industries.

Rationale for Valuation – BUY at GBX 464.20

• Guidance: FY21’s trading profit is expected to be in line with current analyst expectations.
• Growth Drivers: The demand dynamics for steel and foundry end markets remained strong. Adjacently, the expansion of Steel Flow Control capacity is progressing well.
• Dividend: There was a 100% improvement in the interim dividend, reflecting confidence in the optimized manufacturing footprint, new product pipeline, and ongoing R&D investment to generate substantial value for its shareholders.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, Price/Book, and Price/Cash Flow valuation multiples of VSVS are undervalued against the median of the Industrials sector.
• Technical Indicator: From a technical standpoint, the MACD line has given a bullish crossover against the signal line, supporting a positive price potential.

Key Risks

• Omicron Variant: The Government-led restrictions due to the increasing number of Covid-19 cases in the UK may adversely impact the UK Equities. Moreover, it can exacerbate supply chain difficulties.
• Subdued Factory Activity: British factories are witnessing sluggish growth amid soaring costs as they are struggling with supply bottlenecks.

Recent News

• Acquisition: On 6 December 2021, Vesuvius completed the acquisition of Universal Refractories that holds strategic importance for Vesuvius. It will significantly expand the North American presence and strengthen the Foundry business.

Trading Statement (for the period from 1 July to 31 October 2021, as on 11 November 2021)

• Price Increase: In order to offset increase raw-material and freight costs, the Group increased prices.
• Financial Position: Despite interim dividend payment and short-term investments, FY21’s leverage (Net Debt / LTM EBITDA ratio) is expected to be in-line with its level of 1.1x.

One Year Share Price Chart

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

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

Conclusion 

Vesuvius has reinforced its technology leadership, increased penetration of value-creating solutions, captured growth in developing markets, and improved cost margins. In addition, the revenue growth to October was in line with expectations despite the weakening of auto end markets. Vesuvius continued to launch new products since H1 FY21 to gain market share and improve margins. The stock made a 52-week High and Low of GBX 595.00 and GBX 408.80, respectively. 

Based on the strong commercial performance, end markets recovery, incremental selling prices, market share gains, upcoming growth opportunities, and favourable valuation conducted above, we have given a “BUY” stance on Vesuvius PLC at the closing market price of GBX 464.20 (as on 11 January 2022), with lower double-digit upside potential based on 16.25x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

888 Holdings PLC  

888 Holdings PLC (LON: 888) is an FTSE 250 index listed provider of online gaming entertainment and solutions.

Rationale for Valuation – BUY at GBX 288.20

• Acquisition of William Hill International Update: 888 will release a combined circular for the Acquisition and Capital Raise during Q2 2022. The acquisition is expected to be occur during Q2 FY22. Previously, 888 also announced the disposal of B2C and B2B bingo businesses to Saphalata Holdings Ltd, to bolster liquidity and enhance focus on core business.
• Government Support: Rishi Sunak pledged additional GBP 1-billion package to support the Covid-19 hospitality sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~36.73) is in the oversold zone, which the current market price is close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis, valuation metrics – EV/Sales, and EV/EBITDA are quite undervalued against the median of the Hotel & Entertainment Services industry.

Key Risks

• Macroeconomic Uncertainty: The ongoing economic instability with Omicron coronavirus variant, potential tightening of monetary policy, subdued consumer confidence, and currency fluctuations can also impact business performance.
• Licensing Award: The uncertainty regarding the timing of any licence award within the Netherlands may adversely impact the bottom-line business of the Company.

Q3 FY21 Trading Update (for three months ended 30 September 2021, as of 19 October 2021)

   (Source: Company result)

• Decent Increase in Revenue: The Company’s top-line business jumped by around 28% on a YTD basis and around 7% during Q3 FY21 when compared with the prior-year levels.
• Strong B2C Segment Performance: The Company had shown 11% growth in B2C Gaming revenue during Q3 FY21.
• Product Launches: 888 had launched more than 150 new casino games, including several in-house developed games.

Share Price Chart

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

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

Conclusion 

888 has made strong progress towards completing William Hill International's acquisition, which is now expected to be completed in Q2 FY22. 888 needs to raise nearly £500 million of gross proceeds by issuing new equity, prior to the William Hill’s acquisition.

Nevertheless, the acquisition will strengthen its worldwide leading online betting and gaming position in key regulated markets. The stock made a 52-week High and Low of GBX 494.00 and GBX 279.80, respectively. 

Based on the decent profitability, interim dividend growth, penetration of new geographies, and support from the valuation as done using the above method, we have given a “BUY” recommendation on 888 Holdings PLC at the closing market price of GBX 288.20 (as on 11 January 2022), with lower double-digit upside potential based on 16.63x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

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

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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