Reckitt Benckiser Group Plc – Expects mid-single-digit revenue growth in the medium term

Reckitt Benckiser Group Plc (LON: RB.) is a FTSE 100-listed global Company offering consumer goods. The Company operations are divided into three categories being Hygiene, Nutrition and Health.

Rationale for Valuation – Buy at GBX 6,510.00

• The LFL revenue forecast improved to low double digits for FY20, supported by strong performance and robust growth in various products.
• The Company has shown double-digit percentage growth in most markets under hygiene division.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above 15% and 8%, respectively, in the last period.
• From the technical standpoint, 14-day RSI stood at around 47.08, which is supporting the upside movement.

Key Risks

• The Covid-19 outbreak can cause massive supply chain disruption and increase operating costs.
• Moreover, extreme weather and water shortages can also impact the business.
• Lack of product regulations and product safety can lead to safety risks.

Q3 FY20 Trading Update (as on 20 October 2020)

(Source: Company Website)

• On a like-for-like basis, the Company’s net revenue increased by 13.3% year-on-year in Q3 FY20, driven by the healthy infiltration of hygiene products and products launched in new markets.
• It is also on-track of £1.3 billion productivity programme with YTD savings of £300 million, reflecting progress ahead of plan.
• The e-Commerce sales surged by 45% year-on-year in Q3 FY20 and more than 50% on a YTD basis, with increased investment, better savings and improved execution.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is well-placed, and it expects to post like-for-like net revenue growth in low double-digit for FY20. The objective was to rebuild a strong earnings model and outperform, with mid-single-digit organic revenue growth, mid-20s margins and high single-digit earnings per share growth, by the mid-2020s. Moreover, the increased consumption for hygiene products and preventative treatments shall uplift the portfolio of Hygiene and Health. Adjacently, lockdown and social-distancing measures have increased the consumption of household goods. Further, RB plans to invest £2 billion over the next three years on growth-related initiatives, which shall help them to generate strong free cash conversion and sustain the dividend payout policy. The stock made a 52-week low and high of GBX 5,130.00 and GBX 8,020.00, 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 Reckitt Benckiser Group at the current market price of GBX 6,510.00 (as on 30 November 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 22.64x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Smith & Nephew Plc - Shown stronger third quarter as US returned to growth

Smith & Nephew Plc (LON: SN.) is a FTSE 100 listed medical technology company with global operations. It has manufacturing facilities in several countries.

On 18 February 2020, the Company will release the Q4 and Full Year results.

Rationale for Valuation – Buy at GBX 1,449.50

• The Company witnessed an improvement in trading performance in Q3, with growth in Chinese and the US markets.
• As per valuation metrics, Price/Cash Flow, EV/Sales, Price/Earnings and EV/EBITDA multiples are currently lower than the Healthcare Equipment & Supplies industry.
• In October 2020, S&P affirmed “BBB+” issuer debt rating, with a stable outlook on SN.
• From the technical standpoint, 90-day RSI stood at around 48.17, which is supporting the upside movement.

Key Risks

• The rising geopolitical tensions have increased uncertainty, and the trading conditions have taken a toll on consumer’s confidence and investment decision.
• Defects in design or manufacturing of products could result in a life loss or injury.
• The failure in obtaining approvals for new or changed technology can put the product at risk.

Trading Statement (for the third quarter ended 26 September 2020 (Q3 FY20), as on 29 October 2020)

• The Company saw a significant recovery from the previous quarter (Q2 FY20), with Q3 revenue of $1,200 million.
• On an underlying basis, the US business has returned to a growth of 0.9% year-on-year, but Other Established Markets was down by 6.2% year-on-year.
• Moreover, the Company witnessed an improvement in all three franchises from the second quarter of 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Smith & Nephew had delivered a substantial improvement in performance over Q2, driven by growth in the two largest markets (the US and China). Recently, the Company announced an acquisition and launched multiple new innovative products that will strengthen the position of Smith & Nephew. The Company has a substantial liquidity headroom, experienced management and an established strategy, which would support the business in the medium term. Moreover, it has a capital allocation framework that prioritizes reinvesting cash in organic growth and returns excess cash to shareholders. Overall, the Company has witnessed a slight recovery in Q3 FY20, but it is cautious over the future, and thus it withdrew the forward-looking guidance. The stock made a 52-week low and high of GBX 1,055.01 and GBX 2,023.00, 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 Smith & Nephew at the current market price of GBX 1,449.50 (as on 30 November 2020, before the market close at 8:20 AM GMT), with lower double-digit upside potential based on 31.20x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Severn Trent Plc – Operating with strong liquidity

Severn Trent Plc (LON: SVT) is a FTSE 100 listed Utility Company, which deals in providing water and waste-water services and developing renewable energy solutions.

Rationale for Valuation – Buy at GBX 2,375.00

• SVT has consistently delivered an ROE of above 9% over the past three years.
• In terms of credit ratings, both Moody’s and Standard & Poor’s are on stable outlook with long-term credit ratings of Baa2 and BBB, respectively.
• The liquidity position stays strong, with the confidence to increase the investment for the future.
• From the technical standpoint, 14-day RSI stood at around 36.15, which is supporting the upside movement.

Key Risks

• The Company also operates in a strict regulatory framework, which can affect the pricing and performance.
• Moreover, the unfavourable economic conditions can lead to a non-recovery of customer debt and change in the commodity prices.

Financial Highlights (for the six months to 30 September 2020 (H1 FY21), as on 26 November 2020)

(Source: Company Website)

• The Company delivered a strong operational performance, with 4 EPA accreditation from the Environment Agency, full-year ODI reward of at least £25 million and improvement in the UK customer satisfaction index scores.
• Group turnover was in line with expectations.
• The Company witnessed strong liquidity, with a sustainable bond issue of £300 million and a one-year extension of the RCF (£890 million of undrawn facilities).
• It announced an interim dividend per share of 40.63 pence, an increase of 1.5% as compared with the previous year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Operationally, it has delivered a strong start and remained confident of a net positive outcome on Customer ODIs (Outcome Delivery Incentives). The Company has substantial liquidity with £890 million of undrawn facilities. Moreover, SVT has a proven track record of paying consistent dividends. The business remained financially strong, and it has made significant improvement against leakage, supply interruptions and water quality complaints. The stock made a 52-week low and high of GBX 1,994.50 and GBX 2,716.00, 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 Severn Trent at the current market price of GBX 2,375.00 (as on 30 November 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 10.81x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Direct Line Insurance Group Plc – Good trading performance in Q3, with strong growth and some improvement

Direct Line Insurance Group Plc (LON: DLG) is a FTSE 250-listed General Insurance Company, which operates through four segments – Motor, Home, Commercial, Rescue and other personal lines.

Rationale for Valuation – Buy at GBX 295.00

• The Company has made decent progress on strategic transformation agenda and saw a return to strong growth in Commercial and Green Flag and some improvement in Home own brands and Motor business.
• As per valuation metrics, Price/Earnings, EV/Sales and EV/EBITDA Value multiples are currently lower than the Insurance industry.
• The loss ratio and expense ratio recorded by the Company in the past three years was considerably below the industry median, which shows the Company will be more profitable in the future.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 282.9) 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.

Q3 FY20 Trading Update (as on 10 November 2020)

(Source: Company Website)

• The Company has shown decent trading performance in Q3 FY20, with some improvement in Motor and Home own brands and strong growth in Green Flag and Commercial.
• On a year-on-year basis, the Company’s gross written premium and in-force policies by 1% and 1.5%, respectively.
• DLG’s commercial direct own brands, NIG and other business also delivered a strong performance during the third quarter.
• It has also made good progress on the strategic transformation agenda, with a launch of a new mileage moneyback proposition in Direct Line Motor.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

As the customer shopping activity started to recover, the Company saw strong growth in Commercial and Green Flag business and some improvement in Home own brands and Motor business. Looking ahead, it is on track to deliver a combined operating ratio in 2020 while reiterating combined operating ratio target for medium-term. The Company has also reiterated its expense ratio target of 20% by FY23, as growth trajectory has been impacted by Covid-19. DLG believe that outstanding customer service and market-leading brands will give fundamental strengths and will be able to deliver growth in the future. The stock made a 52-week low and high of GBX 215.83 and GBX 339.92, 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 Direct Line Insurance Group at the current market price of GBX 295.00 (as on 30 November 2020, before the market close at 8:02 AM GMT), with lower double-digit upside potential based on 1.90x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Centrica Plc – H1 performance was resilient with strong balance sheet and robust liquidity position

Centrica Plc (LON: CNA) is a global energy solutions and services provider, which concentrates on satisfying the changing needs of the clients and enabling the changeover to a lower-carbon future.

On 25 February 2021, the Company will announce the preliminary financial results.

Rationale for Valuation – Buy at GBX 44.88

• On the liquidity front, the current ratio was 1.04x in H1 FY20, which is slightly higher than the industry median.
• As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA and Price/Cash Flow multiples of the CNA are currently lower as compared to the corresponding multiples of the Multiline Utilities industry.
• In the last six months, the Company has delivered a sparkling return of ~17%, which was higher as compared to the FTSE 250 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 41.4) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The deteriorated demand in gas amid the COVID-19 restrictions has led to commodity or gas price slump, which can affect the profitability in FY20.
• Risks related to environment and climate change could hamper the operations of the Company.

Financial Highlights (for six months ended 30 June 2020, as on 24 July 2020)

(Source: Company Website)

• The Company has maintained good customer service levels, with continued high customer retention.
• On a year-on-year basis, the adjusted operating cash flow and free cash flow increased by 34% and 74%, respectively.
• CNA has shown robust cash flow and liquidity position, with a decrease in net debt of £0.4 billion against the start of the year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In October 2020, it had received notice from the Federal Trade Commission and the Department of Justice regarding the sale of Direct Energy. Therefore, the transaction remains on track to complete in Q4 FY20. Meanwhile, Centrica has a strong market position in the UK & Ireland. With the ease in lockdown, CNA has shown a recovery in demand for energy and normal sales level of services and solutions in the core market. Further, the Company assumes an increasing trend in the second half of the financial year 2020. Overall, it has shown an improvement in financial performance in the first half of the financial year 2020. The stock made a 52-week low and high of GBX 29.10 and GBX 95.32, 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 Centrica at the current market price of GBX 44.88 (as on 30 November 2020, before the market close at 8:18 AM GMT), with lower double-digit upside potential based on 4.20x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

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

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

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