SSE Plc – Shown strong operational performance and robust balance sheet

SSE Plc (LON: SSE) is a UK based energy group that is engaged in the business of regulated electricity networks and renewable sources of electricity.

On 2 February 2021, the Company will announce the Q3 trading statement.

Rationale for Valuation – Buy at GBX 1,365.50

• The Company’s disposals programme is on track, and has a robust balance sheet, strong operational performance, with significant opportunities for growth.
• As per valuation metrics, EV/Sales multiple is currently lower than the Electricity Utilities & IPPs industry.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above than the industry median.
• In the last three months, the Company has delivered a sparkling return of ~16%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 1,327.6) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company generates power, and if its operation leads to climate change or impact the natural environment, it will distress the business environment.
• The geopolitical events, including Brexit, can affect the business of the Company.

Recent News

On 4 December 2020, the Company announced that it has entered into an agreement to sell a 10% stake in the Dogger Bank Wind Farm to Eni, which is for an equity consideration of £202.5 million and expected to complete in early 2021.

Financial Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 18 November 2020)

(Source: Company Website)

• The Company has reported a strong operational performance, with gains on sale from Walney, MapleCo and Multifuel Energy and also raising more than £2 billion in Hybrid Capital and Eurobonds.
• In H1 FY21, the Company’s profitability improved on a reported basis, while profitability declined on an adjusted basis.
• SSE has a strong balance sheet and good liquidity, with £1.5 billion of undrawn committed facilities and the adjusted net debt and hybrid capital of £10.6 billion.
• The Company has declared an interim dividend per share of 24.4 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

In FY21, the Company expects adjusted earnings per share to be in the range of 75-85 pence, with gains on disposal of stakes in Seagreen and Dogger Bank offshore wind farms. While the reported EPS is expected to be well in excess of 150 pence in FY21 and adjusted net debt is expected to be approximately £9.5 billion in March 2021. Further, the total operating profit for the financial year 2021 expected to be in the range of £150-£250 million before mitigation. The Company has a £7.5 billion capex plan of low-carbon investments. The interim dividend was in line with a five-year dividend plan to 2023. Overall, SSE is well placed to play a significant part in helping the UK to complete the transition to net-zero emissions. The stock made a 52-week low and high of GBX 1,057.50 and GBX 1,703.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on SSE at the current market price of GBX 1,365.50 (as on 4 December 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 10.90x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Imperial Brands Plc - Expects a stronger financial performance in 2021

Imperial Brands Plc (LON: IMB) is an FTSE 100 listed fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers, and cigars.

Rationale for Valuation – Buy at GBX 1,454.50

• As per valuation metrics, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are currently lower than the Food & Tobacco industry.
• The Company has decent fundamental metrics as it has maintained a ROE above than the industry median.
• The shares are offering a lucrative dividend yield of 9.70%, with a minimum 5-years track record of consistent dividend payment.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 1,354) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Changes in consumption patterns and continued pressures on the duty-free & travel retail business would impact the Company’s performance in FY2020.
• The Covid-19 pandemic has placed the supply chain under pressure, which is resulting in increased cost.

Recent News

On 2 December 2020, the Company announced the appointment of Alan Johnson as a Non-Executive Director, which will be effective from 1 January 2021.

Financial Highlights (for the year ended 30 September 2020 (FY20), as on 17 November 2020)

(Source: Company Website)

• The Company delivered strong Tobacco volumes, with better market size and share trends in several markets.
• The Company has a strong underlying cash performance with a decrease in net debt and some additional benefit from the timing of excise payments.
• It has proposed a final dividend per share of 48.01 pence, bringing the 2020 total dividend per share of 137.71 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite the ongoing uncertainties from the global pandemic, the Company expects a stronger financial performance in 2021, with a low to mid-single-digit growth in organic adjusted operating profit at constant currency. Tobacco pricing is expected to remain strong, with constant currency IMB earnings per share expected to be slightly ahead of the previous year. Overall, it has shown an impressive growth in the last few years, which indicates the financial resilience and strong business model. The stock made a 52-week low and high of GBX 1,203.00 and GBX 2,072.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Imperial Brands at the current market price of GBX 1,454.50 (as on 4 December 2020, before the market close at 9:07 AM GMT), with lower double-digit upside potential based on 7.02x Price/NTM Earnings Flow (approx.) on FY21E earnings per share (approx.).

Phoenix Group Holdings Plc – Shown a strong trading update, with exceeding 2020 cash generation target

Phoenix Group Holdings Plc (LON: PHNX) is a FTSE 100 listed Company, which is the largest life and pensions consolidator in Europe.

Rationale for Valuation – Buy at GBX 731.60

• As per valuation metrics, Price/Earnings, Price/Book Value, EV/Sales and EV/EBITDA Value multiples are currently lower than the Insurance industry.
• The shares are offering a lucrative dividend yield of 6.35%, with a minimum 10-years track record of consistent dividend payment.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 718.7) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.
• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.

Trading Update (as on 3 December 2020)

• The Company has shown a strong trading update, with a huge increase in cash generation of 142%.
• On 30 September 2020, the solvency II surplus increased by £0.6 billion to £5.0 billion from £4.4 billion, on a pro-forma basis, due to the successful delivery of management actions.
• On 30 September 2020, the shareholder capital coverage ratio was 159%.
• The Company witnessed a high-quality credit portfolio, with 98% of £35 billion shareholder debt portfolio.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Cash generation was £1.7 billion, which is exceeding the upper end of the 2020 cash generation target range of £1.5 billion - £1.6 billion. Moreover, the balance sheet stays resilient, underpinned by a unique approach to risk management and the high-quality portfolio of assets. The Company has committed for the operations to become net-zero carbon by 2025. It is also setting a net-zero by 2050 target for the investment portfolio. Overall, it will deliver the sustainable cash generation for investors, supported by strong shareholder capital coverage ratio. The stock made a 52-week low and high of GBX 459.05 and GBX 824.40, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Phoenix Group Holdings at the current market price of GBX 731.60 (as on 4 December 2020, before the market close at 2:04 PM GMT), with lower double-digit upside potential based on 1.18x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Centamin Plc – Operating with a strong balance sheet

Centamin Plc (LON: CEY) is an FTSE-250 listed Gold Mining Company, which specialises into exploration and developments of minerals.

Rationale for Valuation – Buy at GBX 118.81

• As per valuation metrics, EV/EBITDA and Price/Cash Flow multiples are currently lower than the Metal & Mining industry.
• The Company has decent fundamental metrics as it has maintained a profitability margin above than the industry median.
• The debt-equity ratio was nil in the past three years, reflecting the CEY is less leveraged as compared to the industry.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 114.16) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Mining is a hazardous business, and hence, any accident or negative incident could cause production disruption, reputational damage, and financial loss.
• Further, there are significant operational risks associated with COVID-19 related restrictions, geological and weather conditions.

Recent News

On 2 December 2020, the Company announced that it had taken the measure to integrate contract-mining into the open pit medium-term mine plan at Sukari.

Q3 Trading Update (as on 21 October 2020)

(Source: Company Website)

• The revenue for Q3 FY20 stood at US$230 million from sales of 118,617 oz at an average realised price of US$1,933/oz.
• During the period operational safety remained the main focus, the Company has zero LTI (Lost Time Injuries) and LTIFR (Lost Time Injury Frequency Rate).
• In Q3 FY20, the cash costs and all-in sustaining costs (AISC) was US$682/oz and US$961/oz, respectively.
• After payment of the second interim dividend of US$69 million, the net cash and liquid assets at 30 September 2020 stood at US$345 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company has refined its 2020 production guidance to 445,000-455,000 ounces, while will continue to improve open pit’s operational flexibility. CEY expects FY21 production guidance to be in between 400,000-430,000 ounces. Further, the Company has started a waste stripping programme to improve open pit’s optionality, which is expected to start giving benefits in 2022. The Board has recommended 2020 final dividend of US$35 million, bringing the 2020 total dividend to US$104 million. Meanwhile, it has delivered a solid performance in Q3 FY20, along with a strong balance sheet and year to date free cash flow of US$137 million. The stock made a 52-week low and high of GBX 88.28 and GBX 233.30, respectively.

(Source: Company Website)

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Centamin at the current market price of GBX 118.81 (as on 4 December 2020, before the market close at 1:00 PM GMT), with lower double-digit upside potential based on 8.20x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

ContourGlobal Plc – Expects good progress, supported by strong operating and financial performance

ContourGlobal Plc (LON: GLO) is a FTSE-250 listed Power Generation Company with operations in 18 countries.

Rationale for Valuation – Buy at GBX 198.60

• ContourGlobal is on track to meet the 2020 Adjusted EBITDA guidance.
• As per valuation metrics, EV/EBITDA, EV/Sales and Price/Cash Flow Value multiples are currently lower than the Electric Utilities & IPPs industry.
• The Company has decent fundamental metrics as it has maintained a ROE above than the industry median.
• Also, the liquidity position stays strong, with the confidence to increase the investment for the future.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 195.2) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company is under the risk that the operational costs would increase, or it would face a loss of business and growth opportunities due to macroeconomic and political conditions.
• Furthermore, the sector is exposed to financial, and operational risks, each of which has the potential to significantly impact the Company’s performance.

Trading Update (for the period from 1 January 2020 to 30 September 2020, as on 27 October 2020)

(Source; Company Website)

• The Company delivered a strong operating and financial performance, with 0.05 Lost Time Incident Rate (LTIR) and average availability factor of 94.6% in 9M FY20.
• For 9M FY20, the adjusted EBITDA increased by 2% year-on-year, and the net profit surged by 64% year-on-year.
• It witnessed a strong cash flow generation, with Funds from Operations (FFO) of US$314.1 million and cash conversion rate of 58%.
• The Company has declared a quarterly dividend per share (Q3) of US$4.0591 cents, which will be paid on 29 December 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The current trading was in line with the expectations. Further, the Company reiterate the 2020 guidance for Adjusted EBITDA in the range of US$710-US$745 million. It has also maintained the dividend policy and shown an increase of 10% year-on-year in dividend per share. Meanwhile, it has made good progress, with GLO continuing to deliver strong and predictable cash flow generation. The stock made a 52-week low and high of GBX 120.00 and GBX 220.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on ContourGlobal at the current market price of GBX 198.60 (as on 4 December 2020, before the market close at 10:12 AM GMT), with single-digit upside potential based on 5x Price/NTM Cash Flow Value (approx.) on FY20E cash flow per share (approx.).

 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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

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