Unilever PLC – Completed the unification for improving governance.

Unilever PLC is a FTSE 100 FMCG (fast-moving consumer goods) Company. It markets and produces a broad portfolio of products such as home care, food, beverages, health, and wellbeing products.

On 4 February 2021, ULVR expects to release full-year results for FY20.

Investment Rationale – Buy at GBX 4,258.86

• On 30 November 2020, Unilever completed the unification to remove complexity, greater flexibility and improve the portfolio.
• The volume-led growth underpins business resilience and its ability to respond to the changing market dynamics.
• Over the past four years, ULVR’s EBITDA margin and net margin have remained above 22.20% and 10.00%, respectively, which is higher than the industry median.
• From a technical standpoint, 14-day RSI (38.68) is supporting the upside potential.
• Over the past five years, the stock has outperformed the benchmark index (FTSE 100 with a return of around ~8.11%) by delivering a positive return of nearly ~55.30%.
• As per valuation metrics, EV/Sales, EV/EBITDA, and Price/Cash Flow multiples of the Unilever are currently lower as compared to the corresponding multiples of the Consumer Non-Cyclicals sector.

Risk Assessments

• The Company has limited suppliers from where it sources the strategic raw materials. Therefore, any breakdown in the supply, especially considering the risk from Covid-19 and Brexit uncertainties, could result in the Company's inability to manufacture and satisfy customer demand.
• Moreover, there is a shift in consumer demand with channel closures.
• Also, the volatility in the prices of commodities and raw materials can affect the operational margins.

Recent News

14 December 2020: Unilever is seeking approval from shareholders for climate transition action plan, whereby it targets zero-emission from its own operations by 2030 and a 50% reduction in the average footprint of its products by 2030.

Q3 FY20 Trading Statement (as on 22 October 2020)

 (Source: Company Website)

• ULVR’s underlying sales growth improved by 4.4% year-on-year. However, total turnover declined by 2.4% due to a 7.7% negative currency impact against the same quarter the previous year.
• The underlying sales in Beauty & Personal Care, Home Care, and Foods & Refreshment grew by 3.8%, 6.7%, and 3.7% respectively, against Q3 FY19.
• The underlying sales in developed and emerging markets grew by 3.1% and 5.3%, respectively, against Q3 FY19.
• The quarterly dividend of €0.4104 per share is payable in November 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For the remainder of FY20, the Company will continue to deliver cash, and absolute profit with volume led competitive growth to maximise the shareholder value. Moreover, the unification of the Group’s legal structure will strengthen the strategic future. The volume-led growth reflected the resilience of the product portfolio and its ability to respond to changing dynamics across consumer segments, geographies, and channels. Stock 52 week High and Low were GBX 4,944.00 and GBX 3,583.50, respectively.

Based on the strong trading performance, unified structure and valuation support, we have given a “BUY” recommendation on Unilever PLC at the current market price of GBX 4,258.86 (as on 29 January 2021, before the market close at 10:40 AM GMT), with lower double-digit upside potential based on 16.98x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

GlaxoSmithKline PLC – Encouraged by disciplined cost control and strong commercial momentum.

GlaxoSmithKline PLC (LON: GSK) is a FTSE 100 listed multinational Healthcare Company, which operates with three global businesses that manufacture and conduct research on products related to pharmaceutical, consumer healthcare and vaccines.

On 3 February 2021, GSK expects to announce results for Q4 FY20.

Rationale for Valuation – Buy at GBX 1,359.40

• From a technical standpoint, 14-day RSI (48.01) which is supporting the upside movement.
• The Company has decent fundamental metrics as it has maintained a Net margin above 15% for the last three years and ROE (return on equity) above 10% for the last two years.
• GlaxoSmithKline continued progress in biopharma pipeline with three approvals since Q2 FY20.
• GSK is on track to deliver full-year Adjusted EPS at the lower end of the -1% to -4% range at the constant exchange rate.
• GSK has responded well to a challenging operating environment with disciplined cost control and strong commercial momentum in key growth products.

Key Risks

• Brexit uncertainties and Covid-19 pandemic situation may impact the supply chain, clinical trials, and growth plans of the Company.
• Moreover, the healthcare industry is rapidly changing with the digital landscape and entrants of new players, which can lead to intense pricing pressure.
• Furthermore, the stringent regulatory policies and societal expectations regarding the safety, quality and efficacy puts substantial pressure over the profitability.

Recent News

21 December 2020: ViiV Healthcare (owned by GSK) received approval for Cabenuva for the treatment of HIV-1 infection in adults.

Q3 FY20 Results for the quarter ended 30 September 2020 (as on 28 October 2020)

 (Source: Company Website)

• In Q3 FY20, GSK reported the sales of £8.6 billion, wherein the sales of new and specialty pharmaceuticals contributed £2.5 billion.
• The Group operating margin was 21.5%; however, the total EPS declined 20% year-on-year to 25.0 pence.
• In terms of pipeline, the Group continued progress in biopharma pipeline with 3 approvals since Q2 results.
• GSK declared a dividend of 19 pence for the quarter.

One Year Share Price Chart

 (Source: Kalkine Group, Refinitiv) 

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

Conclusion

Overall, the Company is maintaining good momentum on the strategic priorities, and the fundamentals of GSK’s business stay strong. Regarding Covid-19 solutions, GSK and Sanofi have signed a statement of intent with Gavi (the legal administrator of the COVAX Facility) to support COVAX with 200 million doses of adjuvanted. Looking ahead, Glaxo maintained the guidance of annual adjusted earnings per share falling between 1% to 4% at constant currency. Also, GSK has made strategic investments in next-generation vaccine and antibody technologies. stock made a 52-week low and high of GBX 1,284.00 and GBX 1,847.00, respectively.

Based on the strong pipeline, industry prospects and support from the valuation as done using the above method, we have given a “BUY” stance on GlaxoSmithKline PLC at the current market price of GBX 1,359.40 (as on 29 January 2021, before the market close at 8:10 AM GMT), with lower double-digit upside potential based on 14.07x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Diageo PLC – Increase dividend following the good cash generation in H1 FY21.

Diageo PLC (LON: DGE) is engaged into alcoholic beverage business and provides various categories of beer and spirits. Its products are sold in over 180 countries around the world.

Rationale for Valuation – Buy at GBX 2,883.75

• From a technical standpoint, 100-day SMA (2,798.90) is supporting the upside potential.
• The North American market is performing ahead of market expectations, while the ecommerce channel remained strong.
• The Group has been rapidly responding to the increased demand patterns, resulting in improved market share.
• Over the past four years (H1 FY18 to H1 FY21), gross margin and EBITDA margin have remained above 57% and 28%, respectively, reflecting decent track record of fundamentals.

Key Risks

• The Covid-19 pandemic has created extreme volatility in the short term due to the social restrictions implemented across the world.
• Further, the impact of the virus on economic conditions over the medium-term is a highly uncertain post Brexit.
• The Company’s products are sold in more than 180 countries worldwide, which subjects the Group to risks and uncertainties in multiple jurisdictions across developing and developed markets.

Recent News

28 January 2021: Lavanya Chandrashekar will be appointed as Chief Financial Officer from 1 July 2021.

Interim Results for the six months ended 31 December 2020 (as on 28 January 2021)

(Source: Company Website)

• During H1 FY21, reported net sales were down by 4.5%, while the operating profit dipped by 8.3% year-on-year.
• Subsequently, basis earnings per share plunged 14.6% year-on-year, which was primarily driven by lower operating profit and unfavourable exchange rates.
• However, interim dividend per share was increased by 2% to 27.96 pence.
• During the period, the Company also increased investment in its digital capabilities and completed the acquisitions of Davos and Aviation American Gin brands.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Diageo delivered a decent performance in H1 FY21 amid the heightened level of market uncertainties, with improved operating leverage and tight cost control. The Group is putting endeavours to bolster brand equity and expand digital capabilities. The medium and long-term growth strategy remained intact as the Company has improved its market share as well. The stock made a 52-week low and high of GBX 2,050.60 and GBX 3,209.50, respectively.

Based on the resilient financial performance, business capabilities, industry growth drivers and support from the valuation as done using the above method, we have given a “BUY” recommendation on Diageo PLC at the current price of GBX 2,883.75 (as on 29 January 2021, before the market close at 8:15 AM GMT), with lower-double digit upside potential based on 29.62x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Avast PLC – Continued to perform in line with pre-pandemic level.

Avast PLC (LON: AVST) is a FTSE 100 quoted Company, which offers digital security and privacy products and serves over 435 million users online.

On 3 March 2021, the Company will announce the 2020 full-year results.

Rationale for Valuation – Buy at GBX 468.56

• Avast recently appointed Shane McNamee as Chief Privacy Officer to strengthen the privacy strategy.
• EBITDA margin shall stay broadly same in FY20, while the adjusted revenue is anticipated to register upper end of mid-single-digit growth.
• The Company has a strong and liquid balance sheet, with additional development opportunities.
• The Company has decent fundamental metrics as it has maintained a Net Margin and ROE (return on equity) above the industry median.
• From the technical standpoint, 14-day RSI (16.56) is supporting the upside potential.

Key Risks

• Increasing competition can also put pricing pressure in the future.
• In the short-term period, the market environment remains uncertain and volatile because of Covid-19 mayhem.
• Reduced government funding can derail future opportunities.
• The heavy reliance on large customer poses uncertainties to the obtained revenue.

Q3 FY20 Trading Update for the period from 1 July 2020 to 30 September 2020, as on 21 October 2020)

(Source: Company Website)

• In Q3 FY20, the adjusted revenue increased by 8.6% YoY on an organic basis (up 2.6% YoY at actual rates). While adjusted revenue in the year to date (9M FY20) surged by 7.3% YoY on an organic basis (up 1.9% YoY at actual rates).
• The Company delivered a decent performance in Consumer Desktop business and also in-line with pre-pandemic levels.
• For Q3 FY20, the adjusted EBITDA increased by 3.3% YoY. The adjusted EBITDA for the year to date was up by 2.5% YoY with an Adjusted EBITDA margin year to date of 55.7%.
• The Company witnessed a robust balance sheet, with strong organic cash flow generation, the voluntary repayment of US$100 million debt in Q3 and net debt to LTM Adjusted EBITDA of 1.5x at 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The structural growth drivers of the industry shall create opportunities for the business in the long-term, despite the short-term macroeconomic uncertainties. The strong demand shall drive the revenue growth in the H2 FY21, and thus, the adjusted revenue for FY20 will be at the upper end of mid-single-digit growth. In a nutshell, Avast has been delivering a resilient financial performance, while focusing on innovation and continued investment in the growth. The stock made a 52-week low and high of GBX 263.60 and GBX 604.50, respectively.

Based on the strong balance sheet, business capabilities, industry growth drivers and support from the valuation as done using the above method, we have given a “BUY” recommendation on Avast at the current price of GBX 468.56 (as on 29 January 2021, before the market close at 8:20 AM GMT), with lower-double digit upside potential based on 22.51x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Centrica PLC – Delivered a resilient financial performance in H2 FY20.

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.

Investment Rationale – Buy at GBX 51.90

• The Company has maintained good customer service levels, with continued high customer retention.
• CNA showed robust cash flows and liquidity, with a decrease in net debt of £0.4 billion against the start of the year.
• From a technical standpoint, 14-day RSI (49.97) is supporting the upside movement.
• Centrica has leading positions in energy supply, services, and solutions for both residential and business customers.
• The disposal of Direct Energy will simplify Centrica’s business, while the Company has a stable financial profile.

Risk Assessments

• 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.
• Any change in regulations and government policies could affect the overall business of the Company.
• Risks related to environment and climate change could hamper the operations of the Company.

Recent News

18 January 2021: Kate Ringrose has been appointed as Group Chief Financial Officer since Johnathan Ford decided to step down from his position.

Trading Update for the second half of FY20 (as on14 January 2021)

• CNA maintained tight control on expenditure and cash generation, which ensured a resilient performance a H2 FY20.
• The planned restructuring remained on track, especially in its LNG business.
• The customer base remained in line against FY19 as there were 3.6 million UK services customers and 6.9 million UK energy supply customers at the end of FY20.
• The demand for electricity in the UK remained 15% lower year-on-year in H2 FY20.
• The cash collection trend remained in line 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

Centrica now anticipates adjusted earnings per share from continuing and discontinued operations for FY20 to be ahead of market projections. The net debt is expected to be nearly £2.8 billion at the end of FY20, demonstrating a 10% reduction against the previous year position. The net proceeds of Direct Energy shall also strengthen the balance sheet. Post selling Direct Energy, Centrica has a strong market position, and it is now operating as a leaner, simpler, and more modern entity. The stock made a 52-week low and high of GBX 29.10 and GBX 94.09, respectively.

Based on the resilient financial performance, and support from the valuation as done using the above method, we have given a “BUY” stance on Centrica PLC at the current market price of GBX 51.90 (as on 29 January 2021, before the market close at 8:10 AM GMT), with lower double-digit upside potential based on 3.86x 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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