Pennon Group PLC

Founded in 1989, Pennon Group PLC is an FTSE 100-listed Environmental Infrastructure Company, which provides services related to waste management, water & wastewater, and water retail services.

Key Date: The ordinary shares went ex-dividend on 27 January 2022 and will be paid on 5 April 2022.

Investment Rationale – BUY at GBX 1,077.00

• Substantial Cash Reserves and Distribution: Pennon Group PLC has a sector-leading dividend policy, supported by strong financial and operational performance, discipline cash management, and liquidity boost with net proceeds from Viridor’s disposal and robust cash resources. Following the top-line and bottom-line growth in H1 FY22, interim dividend per share increased by 4.9% year-on-year to 11.70 pence in H1 FY22.
• Share Repurchase Programme: On 1 December 2021, Pennon announced that it has commenced the first phase of the share buy-back programme of nearly £400 million.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~34.35) is still close to the oversold zone, while the stock price is hovering around the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow are undervalued against the average of the Utility industry.

Risk Assessments

• Business Risk: The revenues generated by recycling and energy businesses can be affected by a decrease in the power prices and reduced global demand for recycled commodities.
• Macroeconomic Uncertainties: The risk appetite of investors can remain dented ahead of the Central Bank policy decision due this week.

Financial Highlights (for the half year ended 30 September 2021, as on 30 November 2021)

(Source: Company Website)

• Resilient Performance: Pennon’s financial performance in H1 FY21 remained in line with management expectations, and it witnessed record levels of demand for water.
• Carbon Emission: It launched an ambition of net zero 2030 plan in July 2021.
• Acquisition: It is progressing well with the acquisition of Bristol Water, which shall contribute £7.2 million in profit.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion 

Pennon has paid £1.5 billion of special dividend, while it has completed the share consolidation. The share buyback of circa £400 million is still underway. Moreover, the defensive business nature of the Company is allowing shares to uphold despite free fall in the broader market space. The stock made a 52-week High and Low of GBX 2,627.55 and GBX 1,032.00, respectively.

Based on the revenue growth, solid growth in customer base, expected profit before tax, long-term market opportunity, and favourable valuation conducted above, we have given a “BUY” stance on Pennon Group PLC at the current market price of GBX 1,077.00 (as of 31 January 2022, at 8:10 AM GMT), with lower-double digit upside potential based on 2.19x Price/NTM Book (approx.) on FY22E Book Value Per Share (approx.).

RWS Holdings PLC

RWS Holdings PLC is an FTSE AIM UK 50 Index listed Company, which is a leading provider of technology-enabled language, content management and intellectual property services.

RWS will pay a final dividend attributable for FY21 of 8.50 pence per share on 25 February 2022. with an ex-dividend date of 27 January 2022.

Rationale for Valuation – Speculative Buy at GBX 497.80

• Dividend Growth: RWS had shown a robust growth of around 17% in the annual dividend payments during FY21.
• Turnaround into Net Cash: RWS had witnessed a favourable turnaround from reporting net debt of £15.1 million during FY20 to reporting net cash of £45.3 million for FY21.
• Excellent Position: The company created competitive technology-enabled language, content and IP services post the acquisition of SDL plc.
• Operational Progress: RWS had enhanced its clients base and doubled its size with the successful integration of SDL PLC. Moreover, the Company would drive further synergies during FY22.
• Expanding Reach: RWS is focused on capitalising on scale, footprint and capabilities for clients, to augment decent organic growth from an efficient and effective cost base

Key Risks

• UK Services PMI: The UK Services PMI fell sharply to 53.2 in December 2021 from 58.5 in November 2021
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.

Recent Developments

Board Changes: On 29 December 2021, RWS updated that Des Glass had resigned from the Chief Financial Officer position with a six months’ notice period.

Financial and Operational Highlights (for the twelve months ended 30 September 2021, as of 14 December 2021)

(Source: Company result)

• Top-Line Business: The total revenue went up by 95% year-on-year during FY21, with good growth across all divisions and significant contributions made by the acquisition of SDL.
• Profitability: The adjusted profit before tax witnessed an increase of around 66% during FY21.

Daily Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

RWS had shown a resilient business performance during FY21, supported by the successful integration of SDL. The Company achieved better-than-expected profitability during FY21, driven by significant contributions made from SDL. RWS aimed to drive sustainable organic growth from an efficient cost base with accelerated investments towards the expansion of scale, footprint, and capabilities for clients. The stock made a 52-week high and low of GBX 701.00 and GBX 471.40, respectively.

Based on the strong trading performance, upgraded guidance, favourable market dynamics, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on RWS Holdings Group PLC at the current market price of GBX 497.80 (as of 31 January 2022, at 12:05 PM GMT).

Lenta IPJSC

Lenta IPJSC (LON: LNTA) is a multi-format food and FMCG retailer based in Russia. It operates supermarkets, hypermarkets, and has a proximity store, called “Mini Lenta”.

It expects to provide the next trading update on 25 January 2021.

Rationale for Valuation – BUY at USD 2.145

• New Addition: It opened 376 new stores and increased the total selling space to 1,755 k sqm (representing 15.6% y-o-y growth) in FY21.
• Acquisition: On 16 December 2021, Lenta acquired the online-retailer Utkonos, to become one of Russia's Leading E-grocery Platforms. It also has recently completed the acquisitions of Semya Group business and Billa Russia supermarket business. Both the acquisitions likely to generate multiple synergies going forward.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~35.50) is still close to the oversold zone, while the stock price is hovering around the lower Bollinger Band.
• Undervalued Multiples: In terms of valuation multiples on a forward 12-month basis – Price/Earnings, EV/Sales, and EV/EBITDA multiples are undervalued against the median of the Consumer Non-cyclical sector.

Key Risks

• Coronavirus: The new Omicron variant can impact shopper behaviour or footfall.
• Sluggish Retail Growth: The persistent supply shortage is topping new records and capping the growth of the retail sector.

Q4 FY21 Operational and Financial Highlights (for the quarter ended 31 December 2021, as of 27 January 2022)

 (Source: Company Website)

• Top-line Growth: During Q4 FY21, the retail sales surged by 8.6% year-on-year to RUB 483.6 billion.
• Selling Space: With the opening of new stores, selling space grew by 15.6% year-on-year in Q4 FY21.
• Online Sales: The online sales jumped 208% year-on-year in Q4 FY21, following the 221% jump in online orders.

One Year Share Price Chart

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

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

Conclusion 

On 30 November 2021, Lenta announced that it will commence the trading of Ordinary shares on Moscow Exchange (MOEX) from 1 December 2021. The global depositary receipts (GDRs) will be delisted from MOEX in the first half of 2022. However, GDRs will continue to be listed and traded on the London Stock Exchange.

Adjacently, the acquisition of Utkonos will enable Lenta unique competencies and competitive advantages in the Moscow online market. Furthermore, Fitch Ratings upgraded Lenta's credit rating to 'BB+' with a Stable Outlook. As the stock is still trading close to its 52-week low with decent fundamentals, it is giving a lucrative opportunity for value investing. The stock made a 52-week High and Low of USD 3.71 and USD 1.92, respectively. 

Based on the robust online sales growth, strategic acquisitions, and favourable valuation conducted above, we have given a “BUY” stance on Lenta IPJSC at the current market price of around USD 2.145 (as of 31 January 2022, at 8:00 AM GMT), with lower double-digit upside potential based on 7.027x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

NCC Group PLC

NCC Group PLC (LON: NCC) is an FTSE 250 Index listed leading independent global cyber security and resilience adviser that serves over 1,500 clients worldwide.

Rationale for Valuation – SPECULATIVE BUY at GBX 189.85

• Acquisition Benefits: The acquisition of Intellectual Property Management for £157 million had progressed well and transformed NCC’s global Software Resilience business in the USA.
• Decent Financial Performance: The Company’s top-line revenue and gross profit witnessed a decent rise during H1FY22. In line with this, Adjusted EBITDA and Adjusted operating profit reported positive momentum in H1FY22.
• Solid Sales Order: The trading update for H2FY22 is currently in line with the forecast following an uptick in sales order momentum in December 2021 and January 2022, with Software Resilience returning to revenue growth over H2FY21.
• The expectation on Global Market Recovery: The company expects revenue acceleration in the remaining H2FY22, driven by global markets recovery for which the company made relevant recruitment.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~28.27) is still close to the oversold zone, while the stock price is hovering around the lower Bollinger Band.
• Interim Dividend: The company retained an interim dividend of 1.50 pence (H1FY21: 1.50 pence) per ordinary share.

Key Risks

• Customer Risk: The failure to maintain control over the customer, colleague, commercial and operational data could lead to financial loss and reputational damage.
• Macroeconomic Challenges: The deterioration of economic conditions and operational disruption caused by the Omicron Covid-19 variant can hamper the Company’s prospects.

Recent Developments

• Directorate Change: On 27 January 2022, the company advised that Jonathan Brooks, independent non-executive director, would retire and step down from the company's board with immediate effect.

Financial Highlights (for the first half ended 30 November 2021, as on 27 January 2022)

 (Source: LSE Website)

• Decent Cash Position: Free cashflow before acquisition costs of £6.4 million stood at £20.0 million, versus £15.1 million in the prior period, realizing cash flow conversion prior acquisition costs of 99.2%.
• Top-Line Business: The Company reported revenue growth of 14.2% YoY at constant currency (+10.7% actual rates), led by the acquisition of IPM. Revenues excluding IPM acquisition reported a growth of 7.2% YoY on a constancy currency.

One Year Share Price Chart

 (Source: Refinitiv)

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

*Peers: Made Tech Group PLC, PLC, Computacenter PLC, and iomart group PLC, among others.

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

Conclusion

NCC delivered a decent performance in H1FY22, with expectations of modest revenue growth in H2FY22, resultantly projected to generate full-year financial performance in line with management expectations. This is also backed by a 37-fold rise on the prior period in Sentinel and Remediation propositions to £5.5 million in H1FY22.

Based on the acquisition benefits, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on NCC Group PLC at the current market price of GBX 189.85 (as of 31 January 2022, at 10:09 AM GMT),

Kin and Carta PLC

Kin and Carta PLC (LON: KCT) is an FTSE All-Share index-listed United Kingdom-based entity that offers digital transformation services.

Rationale for Valuation – SPECULATIVE BUY at GBX 229.69

• Strengthening of Balance Sheet: With regards to the balance sheet, the Company had shown a significant reduction in the net debt to £19.20 million as of 31 July 2021, while it had reported a net debt of £31.60 million at the end of FY20.
• Growth Drivers: The Company managed to increase the number of clients having more than £1 million of annual net revenue from 19 during FY20 to 30 in FY21. Meanwhile, the Company had shown strong growth of around 50% in the year-end backlog for FY21 when compared with the prior-year levels.
• Responsible Business: On 1 December 2021, KCT announced that it has become the first business on the LSE to achieve global B Corp Certification.
• Technical Indicator: From a technical standpoint, the 14-day RSI (~27.70) is in the oversold zone, while the price has gone below the lower Bollinger Band.
• Outperformance Against Benchmarks: The stock price of KCT had delivered around 58% returns over the last year, and it has outperformed the FTSE All-Share index.
  

Key Risks

• Federal Reserve Meeting: The latest Federal Reserve Meeting indicated an interest rate hike by March 2022. Thus, it may cause a significant decline in Global Equities.
• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.

Financial and Operational Highlights (for twelve months ended 31 July 2021 as of 26 October 2021)

 (Source: LSE Website)

• Decent Revenue Growth: The adjusted net revenue from continuing operations grew by around 12.50% from £125.7 million during FY20 to £141.40 million for FY21.
• Robust Growth in Profitability: On the profitability front, the adjusted profit before tax rose by around 61% to £13.0 million during FY21.

One Year Share Price Chart

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

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

Conclusion 

KCT had raised FY22 organic net revenue growth guidance from 20% year-on-year growth to approximately 30%. Moreover, the Company expects to switch into net cash position during FY22 to fund further acquisitions. Moreover, the Company had shown a robust year-on-year growth of 31% in the backlog value to £78 million at the end of September 2021. The stock made a 52-week High and Low of GBX 359.00 and GBX 133.28, respectively.

Based on the strong 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 price of GBX 229.69 (as on 31 January 2022, at 8:00 AM GMT), with lower-double digit upside potential based on 41.86x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

Note 2: Investment decision should be made depending on the investors’ appetite on 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 subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which 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. 

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 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 unfavorable movement in the stock prices.

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