Smith & Nephew PLC

Smith & Nephew PLC is an FTSE 100 listed medical technology company with global operations. The Group was established in 1856 in Hull, United Kingdom. Currently, it operates in over 100 countries with more than 17,500 employees.

SN. will pay an interim dividend of 14.40 US cents per share on 27 October 2021, while the ex-dividend date was 30 September 2021.

On 04 November 2021, the Company will release the Q3 FY21 trading report.

Investment Rationale for Valuation – BUY at GBX 1,464.50

• All three business segments, Orthopaedics, Sports Medicine & ENT (“Ear, Nose and Throat”), and Advanced Wound Management, had witnessed strong top-line revenue growth during H1 FY21.
• The top-line revenue, bottom-line profitability, and operating cash flow had shown an upward trend during H1 FY21.
• SN expects to deliver double-digit underlying revenue growth during FY21 boosted by increased R&D investments and unlocking potential value from recent acquisitions.
• From a technical standpoint, SN. is hovering around the lower Bollinger band, supporting the bullish stance on the stock. Moreover, the 14-day RSI (~38.94) is inching towards the oversold zone, indicating an upside momentum in the stock price.

Key Risks

• The restrictions on elective surgery had raised the likelihood of the commercial execution risk.
• The increased financial pressure on governments and hospitals caused by the Covid-19 pandemic had exposed SN to pricing and reimbursement risk.
• The failure of partner relationships could adversely impact the business in the near term.
  

H1 FY21 Financial Highlights (for the six months ended 03 July 2021, as of 29 July 2021)

(Source: Company result)

• The top-line revenue had shown a robust growth of around 27.8% on a reported basis and a strong increase of about 21.3% on an underlying basis during H1 FY21.
• On the profitability front, SN. had demonstrated a positive turnaround and reported an operating profit of USD 239 million for H1 FY21.
• The Company had generated robust cash from operations in the amount of USD 459 million during H1 FY21, while it had reported USD 125 million during H1 FY20.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The lucrative investment in the portfolio and pipeline had helped the Company producing outstanding H1 FY21 results. Moreover, the Company had targeted FY21 underlying revenue growth ranging from 10% to 13%. Furthermore, SN. expects to report a trading profit margin ranging from 18.0% to 19.0% during FY21. Meanwhile, the Company had assumed surgery volumes to remain unaffected by the Covid-19 pandemic during H2 FY21. Looking ahead, the Company would prioritize delivering revenue growth over the medium term driven by the impressive product pipeline. The stock made a 52-week low and high of GBX 1,317.00 and GBX 1,681.50, respectively. 

Based on the outstanding H1 FY21 results, and valuation as done using the above method, we have given a “BUY” recommendation on Smith & Nephew PLC at the current market price of GBX 1,464.50 (as on 30 July 2021 at 11:20 AM GMT), with lower-double digit upside potential based on 27.93x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Taylor Wimpey PLC

Taylor Wimpey PLC (LON: TW.) is a FTSE 100 listed residential property developer, which builds a wide range of properties in the different price range. It produces both private and affordable homes.

On 4 August 2021, Taylor Wimpey is likely to release its H1 FY21 results.

Rationale for Valuation – Buy at GBX 164.40

• Despite a moderate drop in July 2021 due to stamp duty holiday withdrawal, the UK house prices are now nearly 30% higher than even pre-2008 crisis peak and around 10.5% higher than a year ago.
• The Covid-19 pandemic has accelerated the demand for larger home, and the overall property market buoyant during the pandemic.
• Taylor Wimpey has been trading in line with expectations and well-positioned to meet its FY21 guidance.
• From a technical standpoint, TW’s stock price is sustaining above the 20-day EMA (GBX 162.65), reflecting a bullish price momentum.
• Since FY16, operating margin and net margin have remained significantly higher than the industry median of 9.3% and 4.3%, respectively.
  

Key Risks

• The withdrawal of stamp duty holiday can lead to a drop in house prices.
• The performance can be impacted by changes in inflation and interest rates amid a volatile macroeconomic environment, the unavailability of sufficient borrowing facilities, and availability of raw materials, suppliers, and sub-contractors.
• Also, the change in a complex regulatory environment can lead to a considerable delay in project completions. Furthermore, the unavailability of land can also impact the volume targets.

Trading Statement (since 1 January 2021, as on 22 April 2021)

• The UK housing market continued to be resilient, and thus, trading of the Taylor Wimpey remained in line with its full-year forecast.
• The customer demand for high-quality home remained robust, and the Company maintained a healthy order book.
• The Group remained cash generative and sustained a strong balance sheet to drive healthy operating profit margins.

Share Price Chart

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

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

Conclusion

Taylor Wimpey has strengthened the business for the long term by enhancing build quality, increasing production capacity, and improving customer service. The Company is now operating nearly at normal capacity with a product profile well positioned to meet customer demand. It has excellent customer and construction quality scores, which reflects the potential to serve customers in a responsible manner. Meanwhile, the quick recovery of the housing market and resilient trading is testament to the underlying strength of demand and supportive lending backdrop. Taylor Wimpey has a growing high-quality landbank and a robust balance sheet, which is likely to grow the business further whilst generating compelling returns. It is well-positioned for strong progress and delivers enhanced shareholder value with a renewed focus on costs and efficiency. The stock made a 52-week High and Low of GBX 193.80 and GBX 98.12, respectively.

Based on the business capability, industry prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Taylor Wimpey PLC at the current market price of GBX 164.40 (as on 30 July 2021, at 7:56 AM GMT), with lower double-digit upside potential based on 12.44x Price/Earnings (approx.) on FY21E earnings per share (approx.).

DCC PLC

DCC PLC (LON: DCC) is a FTSE 100 quoted entity, which provides services related to sales, marketing, and support services. It operates through four divisions, namely Retail & Oil, LPG, Technology and Hardware.

On 9 November 2021, DCC expects to release its H1 FY22 results (for six months to 30 September 2021).

Rationale for Valuation – BUY at GBX 5,962.00

• DCC shall continue development activity and thus, FY22 is expected to be another year of strong operating profit growth.
• DCC is a large-cap support services provider that reported strong performance, development and returns in Q1 FY22. It reported growth in operating profit across all divisions, despite the challenging trading environment.
• In FY21, the final dividend soared 12.6% against FY20 with a 10% increase in the total dividend. It reflected the 27th consecutive year of dividend growth.
• The Group has also expanded its EV fast-charging infrastructure by 50% and working towards cleaner energy solutions.
• The Company has committed around £375 million to acquisitions in FY21, which would significantly expand the LPG business in the US and strengthen healthcare business in the German and Swiss primary care markets.
• From a technical standpoint, the MACD line is trading below the centerline; however, it has given a bullish crossover against the signal line.
• Since FY17, DCC has maintained a return on equity above 10.1%, significantly higher than the industry median.

Key Risks

• As Delta coronavirus variant is now present in over 90 countries, potential restrictions can impact the volume and overall demand in the short-term within the commercial and industrial sectors.
• There is an acquisition risk if the committed takeovers do not yield the expected synergies due to the challenging trading environment.

Recent News

Board Changes: On 16 July 2021, DCC appointed Ms. Laura Angelini as a non-executive Director. She will also become a member of the Governance and Sustainability Committee post conclusion of the Company's AGM.

Board Appointment: On 18 May 2021, Mr. Mark Breuer has been appointed as Chairman Designate. On 16 July 2021, he will succeed Mr. John Moloney, the present Chairman.

Financial Highlights (for the first quarter ended 30 June 2021, as on 16 July 2021)

• DCC continued the strong momentum of FY21 and traded well during Q1 FY22.
• Therefore, operating profit growth in Q1 FY22 was significantly ahead of the prior year, driven by the strong performance of DCC Healthcare and DCC Technology.
• With increased demand from commercial and industrial customers, DCC LPG also shown volume recovery and delivered a decent operating profit growth.
• Similarly, gradual re-opening of economies supported DCC Retail & Oil to generate good operating profit growth.

One Year Share Price Chart

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

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion 

During Q1 FY22, DCC maintained operating profit growth across segments. Previously, it continued a remarkable growth and development track record with excellent cash generation, strong trading performance, and solid returns on capital employed in FY21. It is supported by a diverse, resilient, and agile business model which delivers excellent cash flow performance. Moreover, it has conducted several acquisitions during the past year, which holds substantial growth prospects. DCC expects FY22 to be another year of profit growth and development. In a nutshell, DCC has exciting growth opportunities, both organically and through acquisitions. The stock made a 52-week high and low of GBX 7,144.00 and GBX 4,943.00, respectively. 

Based on the continued operating profit growth, strong trading performance, excellent free cash flow, bolt-on acquisitions with support from the valuation conducted, we have given a “BUY” recommendation on DCC PLC at the current market price of GBX 5,962.00 (as on 30 July 2021, at 7:50 AM GMT) with lower double-digit upside potential based on 17.01x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Tate & Lyle PLC

Tate & Lyle PLC is an FTSE 250 listed Company, which is the global provider of food and beverage ingredients and solutions.

The Company will pay a final dividend of 22.0 pence per share on 06 August 2021, while the ex-dividend date was 24 June 2021

Investment Rationale for Valuation – BUY at GBX 731.00

• The Company will return approximately USD 700 million to shareholders in the form of a special dividend and share consolidation received from the net sale proceeds upon the completion of the disposal of the primary products business.
• TATE had shown a modest 4.1% increase in the total FY21 dividend when compared with the dividends paid in the prior year.
• The new products revenue had shown a robust growth of around 21% in constant currency during FY21, boosted by double-digit growth in texturants and sweeteners platforms.
• The acquisition of stevia and tapioca businesses would consolidate TATE’s presence in Asia.
• From a technical standpoint, TATE is hovering between the lower Bollinger band and middle Bollinger band, indicating an upside potential in the stock price.

Key Risks

• The disposal of primary products business might adversely impact the revenue and profitability of TATE.
• The failure to promote health-related products might create reputational damage resulting in loss of customers.
  

Recent News 

On 12 July 2021, TATE had decided to sell a controlling stake in NewCo to KPS Capital Partners. Moreover, the Company expects to receive net cash proceeds of approximately USD 1.20 billion upon the completion of the sale. 

FY21 Financial & Operational Highlights (for the twelve months ended 31 March 2021, as of 27 May 2021)

(Source: Company result) 

• For Food & Beverage Solutions division, the Company had shown decent revenue growth of around 6% at constant currency at £970 million.
• With regards to the balance sheet, TATE had managed to reduce the net debt by £34 million to £417 million during FY21.
• The Return on Capital Employed (“ROCE”) stood at 17.2% during FY21. 

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

TATE had anticipated the food & beverages solutions division to show accelerated progress during FY22. Furthermore, TATE expects to complete the sale of the controlling stake in NewCo by the first quarter of 2022. Looking ahead, the Company will primarily focus on the global food and beverage solutions business to penetrate rapidly growing speciality markets. The stock made a 52-week low and high of GBX 587.20 and GBX 821.20, respectively.

Based on the dividend growth, bright prospects, and valuation as done using the above method, we have given a “BUY” recommendation on Tate & Lyle PLC at the current market price of GBX 731.00 (as on 30 July 2021 at 07:30 AM GMT), with lower-double digit upside potential based on 17.12x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Centrica PLC

Centrica PLC (LON: CNA) is a FTSE 250 listed global energy solutions and services provider, which concentrates on satisfying the client’s changing needs and enabling the changeover to a lower-carbon future.

Investment Rationale – Buy at GBX 45.77

• Centrica continued to make progress towards the simplification of the Company. Following the sale of Direct Energy, Centrica has significantly reduced its net debt to £0.1 billion at the end of H1 FY21, from £3.0 billion at the start of FY21.
• Moreover, free cash flow from continuing operations grew 4% year-on-year in H1 FY21 with lower capital expenditures.
• From a technical standpoint, Bollinger Bands suggests that the price is hovering close to the lower standard deviation, while the 14-day RSI (24.66) is also in the oversold zone.
• In terms of valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, and Price/Cash Flow multiples are relatively undervalued against the industry median of the multi-utilities sector.

Risk Assessments

• No interim dividend was declared in H1 FY21 since the Covid-19 pandemic continued to impact the trading environment.
• The electricity demand slump from the UK business customers and subdued residential boiler installations can affect profitability.
• Risks related to the environment and climate change could hamper the operations of the Company.

Recent News

Disposal: On 1 June 2021, Centrica announced the sale of its Peterborough site to Whitetower Holdings UK Limited for a consideration of £20 million (subject to other completion adjustments). The transaction is expected to complete by September 2021.

Interim results for the period ended 30 June 2021 (as on 22 July 2021)

(Source: Company Website)

• Centrica continued resilient financial performance in H1 FY21, and thus, adjusted operating profit from continuing operations remained broadly flat at £262 million in H1 FY20.
• The statutory operating profit from continuing operations rose to £1,003 million in H1 FY21 from a loss of £338 million in H1 FY20, driven by rising commodity prices and profit on certain remeasurements.
• For FY21, the Group expects to deliver operating cost savings of over £100 million year-on-year since the restructuring steps remained on track.

Share Price Chart

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

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

Conclusion

Centrica has strengthened its balance sheet with the simplification of portfolio. The disposal of the Peterborough site is consistent with CNA’s strategy to build a leaner and simpler business, as it targets to be net-zero by 2045. The Group is focusing on creating a more profitable and sustainable entity. Moreover, the reduced net debt and planned operating cost savings shall put them in a good position to deliver greater value for its shareholders. In a nutshell, Centrica is moving in the right direction for the long run. The stock made a 52-week High and Low of GBX 59.32 and GBX 35.69, respectively.

Based on the progress on restructuring plans, expected cost savings, reduced net debt with supported by the valuation conducted above, we have given a “BUY” recommendation on Centrica PLC at the current market price of GBX 45.77 (as on 30 July 2021, at 7:55 AM GMT), with lower double-digit upside potential based on 15.94x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*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).

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

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

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

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