3i Group PLC

3i Group Plc (III) is a London, the United Kingdom investment management company. Its areas of operation are categorised into three segments, which are private equity, infrastructure and debt management. The group has a geographical presence in Northern Europe, Asia/Pacific, United Kingdom and North America.

Financial Highlights (FY2019, £ million)

(Source: Full Year Results, Company Website)

During the period ended on March 31, 2019, the group has reported a total return of 18 per cent on the opening shareholder’s fund, against the total return of 24 per cent in the last year. Total return for FY19 stood at £1,252 million against the total return of £1,425 million in the FY18. In FY19, the group's private equity segment continued to perform well, with a gross investment return of 20 per cent or £1,148 million. In a highly competitive private equity market, the private equity team took a cautious approach while deploying capital.

Deployed proprietary capital stood at £332 million, including two new investments. During the year, the group again took exposure in Scandlines to the tune of 35 per cent stake for a total consideration of £529 million. Their infrastructure business segment reported a strong performance during FY19 and generated a 33 per cent return for the shareholders.

Realisation remained stronger during the year 2019 at £1,242 million or £713 million post-deployment of £529 million into Scandlines. Diluted net asset value per ordinary share was 815 pence against 724 pence in the year-ago. The board of 3i Group Plc recommended a second dividend of 20.0 pence, and together with the first dividend of 15 pence, the total dividend for FY19 was at 35 pence per share against 30 pence in FY18.

Share Price Performance
 
Daily Chart as at June-26-19, before the market closed (Source: Thomson Reuters) 

On 26th June 2019, at the time of writing (before the market close, GMT 12:54 PM), III shares were trading at GBX 1,108.50 and increased by 0.910 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,112.00/GBX 754.60. The company’s stock beta stood at 1.58, reflecting higher volatility of the stock as compared to the benchmark index.

 Valuation Methodology


Conclusion
The group entered the FY2020 with a decent balance sheet and diversified investment portfolio, with decent growth potential and accompanied with decent defensive characteristics. The board is assured that the company’s experienced investment teams, clear strategy, and controlled but opportunistic method to business will continue to bring greater returns for shareholders.

Despite a challenging market condition globally and coupled with uncertainties around the Withdrawal agreement, the speciality finance group has reported a decent performance in FY19. Reported net asset per share of 815 pence was around 12.5 per cent above the 724 pence reported in FY18.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of GBX 1098.50 (as on June 25, 2019) with single digit upside potential, based on the 7.85x NTM Peer Average EV/Sales (approx.) on the FY20E sales(approx.).

Johnson Matthey PLC

Johnson Matthey PLC (JMAT) is a British multinational speciality chemicals company. The company provides battery materials for automotive applications, battery systems for a range of applications and fuel cell technologies. The group’s operations have been organised into four segments: Clean Air, Efficient Natural Resources, Health and New Markets.

Financial Highlights (FY2019, £ million)

(Source: Annual Report, Company Website)

The company reported revenue of £10,745 million for the fiscal year ended March 2019, an increase of 5 per cent against the £10,274 million in FY2018. Operating profit for the year under review stood at £531 million against the operating profit of £359 million in FY18 and recorded a surge of 48 per cent. However, on an underlying basis, sales (excluding precious metals) grew by 10 per cent in FY19 to £4,214 million from £3,846 million in FY18.
Reported pre-tax profit increased to £488 million against £320 million reported a year-ago period. Reported pre-tax profit grew by 52.5 per cent on a year on year basis. Reported earnings per share surged by 38.7 per cent to 215.2 pence per share. However, on an underlying basis, earnings per share reported a growth of 10 per cent to 228.8 pence per share in FY2019.

In FY19, the group’s free cash flow was an outflow of £13 million, primarily because of platinum group metal refinery downtime, which has increased precious metal working capital and higher capex. During the year under assessment, return on invested capital (excluding net pension fund assets) declined to 16.4 per cent from 17 per cent recorded in the FY18, primarily because of increased precious metal working capital. The board of the company recommended an ordinary dividend per share of 85.5 pence against 80.0 pence recorded in FY18.

Share Price Performance

Daily Chart as at June-26-19, before the market closed (Source: Thomson Reuters) 

On 26th June 2019, at the time of writing (before the market close, GMT 1:45 PM), JMAT shares were trading at GBX 3,223 and increased by 0.84 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 3,783/GBX 2,574. The company’s stock beta stood at 1.53, reflecting higher volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company has entered into few agreements to expand its business. For instance, in April, the speciality chemical group has introduced mining CRT diesel emission control systems for underground mining equipment and in March 2019, the group secured two major contracts to build first commercial-scale eLNO plant in Poland and on the same day John Matthey entered into an agreement with Nemaska Lithium to expand lithium hydroxide supply agreement.

The company has a strong portfolio of products and technologies. In the environmental industry, the group's products and technologies are used to control emissions from vehicles and factories, remove unwanted impurities in oil refining processes and produce chemicals from sustainable feedstocks. Such contracts will increase the reach and expertise of the company, thus helping it to increase its revenue in the future.

Therefore, based on above rationale and valuation done using the above methodology, we have given a “Buy” recommendation at the closing price of GBX 3,196 (as on June 25, 2019) with single digit upside potential, based on the 11.25x NTM Peer Average Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 

Woodford Patient Capital Trust PLC

Woodford Patient Capital Trust PLC (WPCT) is a closed-ended investment company. The group's main principal activity is an investment in unquoted and quoted equities of companies listed or incorporated predominantly in the United Kingdom. Its investment objective is to attain long-term capital growth over investing in a portfolio containing mainly of the United Kingdom companies, both unquoted and quoted. The company's portfolio is differentiated across several sectors, which include industrials, financials, telecommunication, technology, healthcare, and consumer goods industries.

Financial Highlights (FY2018, £’000)

(Source: Annual Report, Company Website)

The company’s total return before finance costs and taxation increased from a loss of £13,439 thousand in FY17 to the profit of £54,757 thousand in FY18. Total return for the period stood at £51,905 thousand, an increase from the loss of £15,798 thousand in the financial year 2017. Total return per ordinary share surged to 6.27 pence as compared with the financial year 2017 loss per ordinary share of 1.91 pence.

At 31^st December 2018, net assets rose by 6.87 per cent to £807,200 thousand as compared with the financial year 2017 of £755,295. Net asset value per share stood at 97.61 pence, an increase of 6.9 per cent against the 91.33 pence in FY2017. On 31^st December 2018, share price decreased by 2.8 per cent to 82.10 pence as compared to 84.45 pence as on December 31, 2017. Ongoing charges ratio stood at 0.2x.

Share Price Performance

Daily Chart as at June-26-19, before the market closed (Source: Thomson Reuters) 

On 26th June 2019, at the time of writing (before the market close, GMT 10:55 AM), WPCT shares were trading at GBX 56.039 and decreased by 0.29 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 93.95/GBX 51.80. The company’s stock beta stood at negative 0.08, reflecting a negative correlation of the stock as compared to the benchmark index.

Key Risks
Portfolio risk, portfolio manager risk, Outsourced service provider model risk, NAV gearing, and Brexit.

Conclusion
The business environment does not augur well for its performance. The geopolitical and economic uncertainties in the United Kingdom as well as abroad has caused significant volatility in the market. The Brexit implication, stiff competition, and operational risks may affect the growth of the company.

The development made by some of the company’s higher unquoted holdings has resulted, in the surge in NAV (net asset value) during the financial year 2018 of 6.9 per cent. However, this was toughened by the performance of some of the medium and small-sized quoted holdings in the portfolio where growth has often not been reflected in the share price.

The company’s board is evolving, and steps have been taken to increase the scope of the Audit Committee, allowing it to spend even additional time with the Portfolio Manager on its plan and the portfolio.

The company has decent signs of progress in the current financial year, while the portfolio is well reputable with strength and depth. Previously, the portfolio manager has stated that performance should be arbitrated on a 3-5 years view.

Based on the headwinds faced by the company, we have given a “WATCH" recommendation at the closing price of GBX 56.20 (as on 25 June 2019), while we look for any upcoming catalysts.
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The “Buy” recommendation is also valid at the current price as on June-26-2019.

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