Royal Mail PLC

Royal Mail PLC (LON: RMG) is an FTSE 100 listed Courier Company that provides postal services.

Investment Rationale – BUY at GBX 315.80

• Solid Guidance: For FY23, RMG expects to deliver high single digit revenue growth and operating profit €370 - 410 million, though GLS division.
• Shareholders’ Return: RMG has returned £400 million return to shareholders through share buyback and special dividend.
• Growth Catalysts: Automatic parcel processing, digital transformation, strong international capabilities, and diversified network holds potential for the long-term growth.
• Transformational Programme: The transformational programme undertaken to streamline operational management may result in expected annualised benefits of around £40 million, with £30 million in FY23.
• Technical Indicator: From a technical standpoint, the current stock price is hovering below the middle Bollinger Band, while the 14-day RSI (~44.19) is still close to the oversold position.

Key Risks

• Volume Uncertainty: Weakening GDP, market slowdown, Covid-19 uncertainties and underlying structural changes in consumer behaviour can reduce letter volumes.
• Supply Chain Snags and Rising Costs: Increasing wage inflation and rising operating costs pose a risk to the Company’s profitability margins. Moreover, the shortage of fuel and lorry drivers cause fears around supply disruption.

Financial Highlights (for the year ended 27 March 2022, as of 19 May 2022)

(Source: Company Website)

• Resilient Performance: RMG reported a decent financial performance in FY22, driven by the growth in GLS division, while the domestic parcel volume for Royal Mail remained 31% higher than the pre-pandemic period.
• Maintained Dividend: With solid cash generation of £353 million in-year trading cash flow, the Group recommended full-year dividend of 20 pence per share, in line with policy.

Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)  

*Peers: Global Ports Holding PLC, Go-Ahead Group PLC, and Stagecoach Group PLC.

*All selected peers are LSE listed Companies from the Industrial Transportation sector.  

Conclusion

Based on the decent fundamentals, transformation progress, and favourable valuation conducted above, we have given a “BUY” recommendation on Royal Mail PLC at the current market price of GBX 315.80 (as of 31 May 2022, at 11:35 AM GMT+1), with a lower-double digit upside potential based on 7.10x Price/NTM Earnings (approx.) on FY23E Earnings per share (approx.).

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Halfords Group PLC

Halfords Group PLC (LON: HFD) is an FTSE All-Share listed Company that provides products and services related to motoring and cycling.

Investment Rationale for Valuation – Speculative Buy at GBX 227.40

• Q3FY22 Update: The company reported resilient performance during the quarter with LFL revenue growth of 10.4% on the corresponding period in FY20, driven by decent Autocentres, Services, and B2B performance.
• Acquisition Benefits: The company has acquired the Axle Group which is expected to bolster the motoring division with 70% of the Group’s revenue.
• H1FY22 Performance: Revenue was at £694.8 million during H1FY22, compared to £638.9 million posted in H1FY21. It has reported market share gains in Motoring products, Garages, and its mobile services business.
• Decent Operating Model: The Group has a resilient operating model, underpinned by a larger Services, B2B and Retail motoring business. The management expects tailwinds in the Motoring Services business to aid in growth going forward.

Key Risks

• Macro Risk: There is the risk of the continued impact of the COVID-19 pandemic and supply chain issues in the sector, which can cap the growth prospects.
• Interest Risk: The demand in the Auto industry might get impacted by the hike in interest rates to combat inflation.

Financial Highlights (for the 13 weeks to 31 December 2021, as of 13 January 2022)

(Source: Company Website)

• Digital Execution: The Group has developed a digital-first business, with sales reflecting 71% increase through decent site traffic and an improvement in conversion.
• Growth in Services: Group services-related sales went up by 91% and B2B up by 60%.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Peers considered are Pendragon PLC, SCS Group PLC and Topps Tiles PLC.

*All selected peers are LSE-listed Companies from the Consumer Discretionary sector.  

Conclusion

The management is targeting a full-year underlying profit before tax on a post-IFRS 16 basis of £80 million to £90 million in FY22.

Based on the decent LFL performance, acquisition synergy and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Halfords Group PLC at the current market price of GBX 227.40 (as on 31 May 2022, at 08:50 AM GMT+1) with lower double-digit upside potential based on 8.07x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Kin and Carta PLC (LON: KCT)

Kin and Carta PLC is an FTSE All-Share index listed United Kingdom-based Company that offers digital transformation services. It has achieved a B Corp certification from the London Stock Exchange.  

Investment Rationale for Valuation – Speculative Buy at GBX 216.00

• Acquisition of Melon and Additional Listing: On 10 May 2022, KCT completed the acquisition of Melon AD, to bolster its digital transformation consulting services. Pursuant to its acquisition, KCT issued application on 13 May 2022 for the admission of a further 3,251,861 ordinary shares, relating to the initial consideration for the acquisition.
• Solid Divisional Performance: The Americas net revenue rose by around 76%, and Europe net revenue grew by approximately 41% YoY in H1 FY22.
• Bright Growth Prospects: KCT kickstarted H2 FY22 with a record backlog, and thus, it anticipated organic net revenue growth ranging from 35% to 40% and an adjusted operating margin of 10-11% for FY22. Overall, the Company expects to remain in a net cash position at the end of FY22 to pursue further acquisition activities.
• Technical Indicator: From a technical standpoint, the current stock price is hovering below the middle Bollinger Band, while the 14-day RSI (42.98) is still close to the oversold position.

Key Risks

• Macroeconomic Risk: Markets are likely to remain jittery in the short term over rising interest rates, the strongest U.S. dollar in two decades, concerns over inflation and possible recession.
• Principal Risks: KCT is also exposed to pricing risk from competition, inability to realise anticipated synergies, and loss of key clients.  
  

H1 FY22 Financial Highlights (for the six months ended 31 January 2022, as of 24 March 2022)

(Source: Company Filings)

• Decent Fundamentals: The Company had shown a decent top-line business and bottom-line business growth during H1 FY22, supported by the strong US markets, which remained as the largest digital transformation market in the world. KCT had managed to win contracts with several prestigious clients such as UK Government Home Office, Wayfair, Wendy's, Canadian National, L'Atelier.
• Robust Top-line Business: The Company’s net revenue grew 63% YoY to £85.6 million during H1 FY22.
• Profitability: The adjusted profit before tax from continuing operations increased from £0.6 million during H1 FY21 to £5.0 million during H1 FY22.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Ascential PLC, FDM Group (Holdings) PLC, and Softcat PLC.

*All selected peers are LSE-listed Companies from the Technology sector. 

Conclusion

Based on the revenue guidance for FY22, several new contracts, improved cash position, decent bottom-line business, strong operational progress, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Kin and Carta PLC at the current market price of GBX 216.00 (as of 31 May 2022, at 8:27 AM GMT+1) with lower double-digit upside potential based on 24.61x Price/NTM Earnings (approx.) on FY23E Earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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