British American Tobacco PLC

British American Tobacco PLC (LON: BATS) is the FTSE 100 listed global holding Company, which deals in tobacco and nicotine products.

BATS will pay a second interim dividend of 53.9 pence per share on 19 August 2021, with an ex-dividend date of 08 July 2021.

On 08 June 2021, BATS expects to release a pre-close trading statement for the six months ending 30 June 2021.

Investment Highlights – British American Tobacco PLC – Buy at GBX 2,730.00

• The Company had delivered a top-line business growth of around 3.3% at constant currency during FY20, more than the revised guidance.
• BATS remained committed to maximizing cash by reducing leverage as it reported an adjusted operating cash conversion of 103% during FY20.
• On a profitability front, the operating margin and net margin have remained above the respective industry median of 17.7% and 8.5% since FY16.
• From a technical standpoint, the stock price of BATS is trading above the 100-day simple moving average price of GBX 2,728.80.

Key Risks

• The Company is exposed to health-related risks, and it is putting strenuous efforts through its strategy to reduce the health impact on the business.
• BATS is also exposed to regulatory norms and higher taxes related to tobacco sales.
• It is cognizant that combustible products pose a significant health risk, and thus, from a social aspect, it states that the only way to avoid these risks is not to start or quit.

AGM Statement (as of 28 April 2021)

• The profit from operations rose by 4.8% on a constant currency adjusted basis during FY20. Moreover, the operating margin was increased by 100 basis points to 44.1%.
• BATS had declared an interim dividend of 215.6 pence per share to be paid in four quarterly instalments of 53.9 pence per share each. Moreover, the first instalment was paid on 12 May 2021.
• The Company had generated £1.4 billion of the revenues from low-risk new category products during FY20, illustrating around 15% growth when compared with FY19.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

The Company is on track to achieve a £5 billion New Category revenue target by 2025. Moreover, BATS had managed to provide proper financial guidance for FY21. It had anticipated revenue growth ranging from 3% to 5% at constant currency and the adjusted EPS growth of mid-single-digit at constant currency during FY21. Furthermore, the Company would aim to achieve operating cash flow conversion of more than 90% and net debt to adjusted EBITDA multiple of around 3.0x during FY21. The stock made a 52-week low and high of GBX 2,422.50 and GBX 3,308.50, respectively.

Based on the strong financial guidance, consistent dividend payments, and the valuation method discussed above, we have given a "BUY" stance on British American Tobacco at the current market price of GBX 2,730.00 (as of 28 May 2021 at 2:20 PM GMT), with lower-double digit upside potential based on 10.22x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

National Grid PLC

National Grid PLC (LON: NG) is an FTSE-100 listed London, United Kingdom-based electricity, and gas utility company. It operates in the United Kingdom and the United States, focusing on transmission and distribution activities.

The Company will pay a final dividend of 32.16 per share on 18 August 2021, while the ex-dividend date will be 03 June 2021.

Investment Highlights – National Grid PLC – Buy at GBX 940.80

• The Company expects to complete the acquisition of Western Power Distribution (WPD) by Q1 FY22 for a total consideration of £7.8 billion.
• NG had shown significant improvements in liquidity profile as the current ratio and quick ratio remained higher during FY21 as compared to FY20.
• The Company had shown an increase of 1.2% in final dividend for FY21 as compared to the prior year.
• From a technical standpoint, 20-day SMA (GBX 932.53) is supporting the upside potential in the stock price.

Key Risks

• The Company is exposed to a fundamental change to the regulatory framework, which can have an adverse impact on the business and economic model.
• The Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations.

Recent Developments

On 20 May 2021, NG announced that Nicola Shaw would step down from the position of the UK Executive Director after the Annual General Meeting (AGM) on 26 July 2021.

Financial Highlights (for 12 months ended 31 March 2021, as of 20 May 2021)

 (Source: Company result)

• On the profitability front, the statutory operating profit grew by 4%, and statutory profit before tax rose by approximately 19% during FY21, driven by exceptional environmental charges made in the prior year.
• The Company had shown a significant reduction of £306 million in Capital investment during FY21 as compared to the prior year.
• NG had achieved a regulatory milestone with the RIIO-2 Final Determination and Joint Proposal for KEDNY-KEDLI.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

NG would aim to strengthen the UK’s electricity business with the acquisition of the UK’s biggest electricity distributor, WPD. Moreover, NG would continue to make lucrative investments in critical energy infrastructure. Meanwhile, the Company had anticipated investment ranging from £30 billion to £35 billion over the period of the next five years till FY26. Furthermore, NG would expect to complete the sale of NECO (Rhode Island) during the first quarter of 2022 and the sale of a majority stake of Gas Transmission to be completed by FY23. The stock made a 52-week low and high of GBX 805.40 and GBX 998.80, respectively.

Based on the lucrative capital investments, dividend growth in line with the policy and the valuation method discussed above, we have given a "BUY" stance on National Grid at the current market price of GBX 940.80 (as of 28 May 2021 at 01:38 PM GMT), with lower-double digit upside potential based on 19.52x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

Associated British Foods PLC

Associated British Foods PLC (LON: ABF) is an FTSE 100 listed Company, which is engaged in the food processing and retailing business.

The Company will pay an interim dividend of 6.2 pence per share on 09 July 2021, with an ex-dividend date of 03 June 2021.

On 01 July 2021, ABF will release a trading update.

Investment Highlights – Associated British Foods PLC – Buy at GBX 2,323.00

• On the liquidity front, the current ratio of ABF remained more than the industry median of 1.55x since H1 FY19.
• ABF had achieved record business in the first week after reopening of stores in England and Wales on 12 April 2021. The complete reopening of the UK economy scheduled from 23 June 2021 will further boost the business.
• ABF had reinstated dividend payments from H1 FY21, while it had not paid any dividend during FY20.
• From a technical standpoint, the stock price of ABF is currently trading above the 20-day simple moving average price of GBX 2,308.00, supporting the upside potential in the stock.

Key Risks

• The Company is facing an extremely volatile trading environment, which is leading to an increased cost to operate the business.
• ABF operation was affected by the COVID-19 pandemic as Primark stores were closed due to the restriction measures put in place.
• Failure to achieve the anticipated cost-saving measures could put pressure on margins.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.

Financial Highlights (for 24 weeks ended 27 February 2021, as of 20 April 2021)

 (Source: Company result)

• The statutory operating profit went down by 8% during H1 FY21.
• The group's net cash before lease liabilities stood at £705 million as of 27 February 2021 as compared to £801 million at the same time last year.
• ABF would intend to repay £121 million claims from government job retention schemes, including the repayment of £72 million to the UK government.

One Year Share Price Chart

(Analysis done by Kalkine Group)

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

Conclusion

On an encouraging note, ABF had witnessed the successful reopening of Primark's English and Welsh stores from 12 April 2021, which represents 40% of the total retail selling space. Moreover, the long-term confidence of ABF is illustrated in the decision of repayment of the job retention scheme monies and resumption of dividend payments. The Company had anticipated annual profit at AB Sugar to remain more during FY21 as compared to FY20. Meanwhile, the Company had planned to expand the retail selling space with an additional nine stores opening during H2 FY21. The stock made a 52-week low and high of GBX 1,618.00 and GBX 2,528.00, respectively.

Based on the reopening of the UK economy, significant cash-generative opportunities, and the valuation method discussed above, we have given a "BUY" stance on Associated British Foods at the current market price of GBX 2,323.00 (as of 28 May 2021 at 2:30 PM GMT), with lower-double digit upside potential based on 20.36x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

SSE PLC

SSE PLC (LON: SSE) is an FTSE 100 listed UK based energy group that is engaged in the business of regulated electricity networks and renewable sources of electricity.

SSE will pay a final dividend of 56.6 pence per share on 23 September 2021, with an ex-dividend of 29 July 2021.

Investment Highlights – SSE PLC – Buy at GBX 1,532.17

• The major profitability metrics such as EBITDA margin, operating margin and the net margin remained significantly higher than the respective industry median during FY21.
• The Return on Equity of 38.7% during FY21 is more than the industry median of 9.9%, indicating higher returns to shareholders as compared to the industry.
• SSE remained on track to invest £7.5 billion in low-carbon projects till 2025.
• From the technical standpoint, the 20-day SMA of GBX 1,501.9 is supporting the upside potential in the stock price.

Key Risks

• SSE is exposed to the risk of a fundamental change to the regulatory framework, which can have an adverse impact on the business and economic model.
• The Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations. 

Financial Highlights (for 12 months ended 31 March 2021, as of 26 May 2021)

 (Source: Company result)

• SSE had managed to bring down the net debt and hybrid capital by 15% to £8.9 billion as of 31 March 2021.
• The adjusted profit grew by 1%, while the adjusted profit before tax rose by around 4% during FY21.
• SSE had incurred adjusted investment and capital expenditure of £912.0 million during FY21.
• The full-year FY21 dividend stood at 81.0 pence per share, illustrating an average annual RPI (Retail Price Index) rate of 1.2%.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

SPI remained committed to a progressive five-year dividend plan till March 2023. Moreover, SSE expects to complete the disposal of non-core assets in SSE's Contracting and Rail business by Q1 FY22 and the sale of SSE's Gas Production assets by the end of 2022. Furthermore, the Company had anticipated a Capital expenditure and investment of around £2 billion for FY22. Meanwhile, SSE would aim to maintain net debt to EBITDA at the lower end between 4.5x to 5.0x from FY22 to FY25. The stock made a 52-week low and high of GBX 1,068.51 and GBX 1,621.50, respectively.

Based on the profitability growth, capital expansion plans, and the valuation method discussed above, we have given a "BUY" stance on SSE PLC at the current market price of GBX 1,532.17 (as of 28 May 2021 at 8:02 AM GMT), with a lower-double digit upside potential based on 20.78x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

Dunelm Group PLC

Dunelm Group PLC (LON: DNLM) operates in the UK Homewares market with nearly 174 stores. The Company employs around 10,000 colleagues and deals in approximately 50,000 product lines. It is listed on the FTSE 250 index.

DNLM had paid an interim dividend of 12.0 pence per share on 09 April 2021, while the ex-dividend date was 18 March 2021.

Investment Highlights – Dunelm Group PLC – Buy at GBX 1,468.00

• On the profitability aspect, the EBITDA margin and net margin remained more than the industry median of 16.15 and 4.0%, respectively, during H1 FY21.
• DNLM has reinstated dividends with an interim dividend of 12 pence per share, reflecting confidence in the medium-term outlook.
• The Company had upgraded the profit expectations as sales soared since the reopening of the UK economy from 12 April 2021.
• From a technical standpoint, 20-day SMA is supporting the upside potential.

Key Risks

• The Company operates in a strict regulatory environment; any change in regulations or government policies could affect its overall business.
• The widening demand-supply gap of skilled professionals can have detrimental consequences in FY21.
• There is a financial risk associated with fluctuation in currency rates, interest rates, liquidity, and leverage.

Trading Update (for seven weeks of Q4 FY21 since 28 March 2021, as of 19 May 2021)

• The total sales had shown an increase of around 59% during the period against the similar period of FY19.
• DNLM is witnessing good digital growth from the home delivery and Click & Collect channels.
• DNLM had demonstrated strong trading performance as the majority of the stores reopened on 12 April 2021.
• Paula Vennells had stepped down from the position of Non-Executive Director effective 25 April 2021.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

Dunelm is a market leader and consistently growing active customers to meet its long-term objectives. The recent growth in market share against competitors and resumption of the interim dividend reflects confidence in the medium-term outlook. Furthermore, the Company had uplifted the full-year profit before tax and expected it to remain more than £148 million during FY21, driven by the improved trading performance since the reopening of the UK economy. The stock made a 52-week low and high of GBX 1,023.00 and GBX 1,601.48, respectively.

Based on the improved trading performance, robust profitability, and the valuation method discussed above, we have given a "BUY" stance on Dunelm Group at the current market price of GBX 1,468.00 (as of 28 May 2021 at 01:10 PM GMT), with a lower-double digit upside potential based on 27.10x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

*All forecasted figures and Peer 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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