Reckitt Benckiser Group Plc

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 5,882.00

• The Company delivered strong growth led by robust execution, while it has shown a record investment.
• In 2021, RB expects continued growth across brands, geographies, and channels.
• It also increased its medium-term revenue and margin targets.
• From the technical standpoint, 14-day RSI stood at around 38.86, 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.

Recent News

On 24 February 2021, the Company has entered into a definitive agreement to acquire the Biofreeze brand from Performance Health.

On 24 February 2021, the Company has proposed Scholl's sale to Yellow Wood Partners, which bring greater focus to its portfolio.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 24 February 2021)

(Source: Company Website)

• Group LFL net revenue increased by 11.8% YoY, with strong Dettol growth in all major markets and robust growth, particularly from Lysol and Finish.
• Moreover, the e-Commerce division has recorded full-year channel growth of 56%, and Nutrition LFL net revenue was unchanged (against the previous year).
• Full-year adjusted operating margin was in line with mid-year guidance, while the reported operating profit for FY20 was £2,160 million.
• The free cash flow generation increased to £3,052 million as compared with the previous year, with net debt reduced to £9.0 billion.
• The Board has proposed a final dividend per share of 101.6 pence, reflecting a full-year dividend per share of 174.6 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For FY21, the Company expects LFL revenue performance to be in the range of flat to +2%, continued underlying progress towards the mid-single-digit sustainable growth target and growth in margins between 40-90bps (which is lower than 2020 levels). It also expects a strong first-quarter performance. Further, RB will deliver growth for hygiene and germ protection. In the medium-term, the average free cash flow conversion is expected to stay strong. Meanwhile, it made a strong start in implementing the new strategy and invested £745 million in building capabilities. Overall, the performance was decent, and the Company remains confident that they will meet the medium-term targets. 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 5,882.00 (as on 25 February 2021, before the market close at 8:04 AM GMT), with lower double-digit upside potential based on 22.20x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

National Grid Plc

National Grid PLC (LON: NG) is a London, United Kingdom-based electricity and gas utility Company. It operates in the United Kingdom and the United States.

On 20 May 2021, the Company will announce the full-year results for the financial year 2021.

Rationale for Valuation – Buy at GBX 821.20

• In H1 FY21, the Company had decent fundamental metrics as it has maintained a profitability margin above the industry median.
• As per valuation metrics, Price/Cash Flow multiple is currently lower than the Multiline Utilities industry multiple.
• In October 2020, S&P affirmed “BBB+” issuer debt rating, with a stable outlook on NG.
• From the technical standpoint, 14-day RSI stood at around 34.38, which is supporting the upside movement.

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.

Financial Highlights (for the period ended 30 September 2020 (H1 FY21), as on 12 November 2020)

(Source: Company Website)

• In H1 FY21, the underlying performance has shown a decline in H1 FY21 results. Still, the statutory results showed a performance improvement, with an increase in operating profit of 13% year-on-year, profit before tax of 78% year-on-year and earnings per share of 51% year-on-year.
• In H1 FY21, the Company continued to make a significant investment in energy infrastructure, with capital investment across the Group of £2.6 billion.
• The Board has declared an interim dividend per share of 17 pence and was in line with the dividend policy.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Looking ahead, the Company assumed Covid-19 underlying operating profit impact of around £400 million in FY21. It has also maintained the dividend policy and shown an increase of 2.6% year-on-year in dividend per share. Overall, the business remained financially strong and has made good progress, with NG continuing to deliver strong and predictable cash flow generation. The stock made a 52-week low and high of GBX 789.13 and GBX 1,068.60, 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 National Grid at the current market price of GBX 821.20 (as on 25 February 2021, before the market close at 9:02 AM GMT), with lower double-digit upside potential based on 9.37x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Croda International Plc

Croda International Plc (LON: CRDA) is an FTSE 100 listed diversified chemicals Company. The Company’s operations are differentiated into four segments: Performance Technologies, Personal Care, Industrial Chemicals, and Life Sciences.

The Company will release full-year 2020 results on 2 March 2021.

Investment Highlights - Croda International Plc – Buy at GBX 6,218.00

• The Company continues to make an investment in R&D and digital platform, which is supported by healthy cash generation and a strong balance sheet.
• In the last one year, the Company delivered a substantial return of ~30.43 and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales and Price/Book Value multiples of Croda International Plc are currently lower as compared to the corresponding multiples of the Chemicals industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is in the oversold zone and is supporting an upside move (around 26 level), which means the stock price could increase in the short term.

Key Risks

• The emergence of the Covid-19 pandemic has significantly impacted global markets and presented major challenges for the chemical industry.
• Fluctuations in exchange rates could impact the profitability and balance sheet position.

Financial Highlights – H1 FY2020 (30 June 2020) (released on 23 July 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, the Company has delivered a resilient performance, with a modest reduction in sales, healthy cash generation and a resilient margin.
• On a year-on-year basis, adjusted profit before tax was down by 10.6%, and adjusted basic earnings per share declined by 9.6%.
• The Company witnessed a strong balance sheet, and the Board maintained an interim dividend per share of 39.5 pence.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has faced several challenges in the second quarter of 2020 due to the lockdown restrictions, but trading has stabilised. The Company witnessed a modest decline in sales, while margins remained strong. CRDA expects cash generation and gross margin to remain robust; however, the guidance remains unclear. The Company has continued opportunities in the Health Care division, and Life Sciences will benefit from the phasing of Crop Care sales. Croda International has shown a decent business model, robust liquidity and low leverage. The stock made a 52-week low and high of GBX 3,814.00 and GBX 6,884.00, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on Croda International Plc at the current price of GBX 6,218.00 (as on 25 February 2021, before the market close at 9:05 AM GMT) with a lower double-digit upside potential based on 40.09x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Polymetal International Plc

Polymetal International Plc (LON: POLY) is an FTSE-100 index listed Company, which has a portfolio of nine producing gold and silver mines.

The Company will release full-year results on 3 March 2021.

Investment Highlights - Polymetal International Plc – Buy at GBX 1,472.50

• The Company’s production of GE (gold equivalent) in FY2020 stood higher than the original production guidance and revenue during the period increased significantly by 28%.
• In the last one year, the Company delivered a decent return of ~13.98% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/EBITDA and Price/Book Value multiples of the Polymetal International Plc are currently lower as compared to the corresponding multiples of the Metals & Mining industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is in the oversold zone and is supporting an upside move (around 26 level), which means the stock price could increase in the short term.

Key Risks

• The Covid-19 pandemic can disrupt the supply chain, and planned production might not be achieved.
• Moreover, exploration and development are capital-intensive activities, failure to discover substantial reserves could adversely affect the POLY’s future performance.

Production Results for Q4 & FY2020 (31 December 2020) (released on 22 January 2021)

• The Company’s production of GE increased by 4% to 1,559 Koz on a year-on-year basis, reflecting the strong contribution from Albazino, Varvara and Kyzyl.
• Driven by higher metal prices and higher gold sales, the revenue in Q4 and FY2020 surged by 31% and 28%, respectively.
• Due to the sharp devaluation of domestic currencies, additional COVID-related costs and price-driven increase in royalties, the Company’s TCC (Total Cash Costs) for FY2020 remained below the original guidance of US$ 650-700/GE oz.
• The Company generated strong free cash flow in Q4 FY2020, driven by a reduction in the Net Debt.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company witnessed an increase in revenue for Q4 FY2020 and FY 2020 period and generated strong free cash flow in Q4 FY2020. Despite the covid-19 pandemic, the Company delivered higher GE output by 4% compared to the original production guidance of 1.5 Moz for FY2020. POLY expects guidance for TCC (Total cash costs) and AISC (All-in sustaining costs) at US$ 700-750/GE oz and US$ 925-975/GE, respectively, which is higher than FY2020 guidance. The Company expects its production guidance to be 1.5 Moz GE in FY2021 and 1.6 Moz GE in FY2022. The Company closed the lag between gold production and sales. The stock made a 52-week low and high of GBX 990.20 and GBX 2,085.00, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on Polymetal International Plc at the current price of GBX 1,472.50 (as on 25 February 2021, before the market close at 11:50 AM GMT) with a lower double-digit upside potential based on 10.82x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

United Utilities Group Plc

United Utilities Group Plc (LON: UU.) manages electricity distribution, water distribution and wastewater network in the North West region of England.

On 25 March 2021, the Company will release its pre-close trading update.

Rationale for Valuation – Buy at GBX 884.20

• Over the past three years (H1 FY18 to H1 FY21), EBITDA margin has remained above 57%, reflecting a decent operational performance.
• The Company has given a strong start to the new regulatory period (AMP7) and maintained a progressive dividend policy, by delivering a resilient operational performance.
• As per valuation metrics, Price/Cash Flow multiple is currently in line with the industry multiple.
• From the technical standpoint, 14-day RSI stood at around 35.60, which is supporting the upside movement.

Key Risks

• The performance can be impacted with ongoing Covid-19 challenges which can disturb the cash collection, operational delivery, and supply chain for water and wastewater services.
• The business is also exposed to the risks pertinent to the failure of wastewater network, unfavourable price outcome, credit rating downgrades, unfunded projects, lower inflation, and competition in the bioresource market.

Recent News

On 3 February 2021, the Company announced that it has agreed to sell its stake in Tallinn Water.

Financial Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 25 November 2020)

(Source: Company Website)

• The Company witnessed a strong operational performance during Covid-19, with robust cash collection, enhanced social tariff, confident in adequacy of 2019/20 provision, service levels maintained against higher domestic demand.
• It saw a strong and confident start of AMP7, with accelerating £500 million of AMP7 capex and extended by approximately £150 million through additional enhancement projects at Vyrnwy and Bolton.
• United Utilities announced the interim dividend of 14.41 pence per share for FY21, which was up by 1.5 year-on-year.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company expects revenue in the range of £1.75-£1.80 billion, which will be affected by a fall in non-household consumption partly offset by increased household consumption. The underlying operating cost is expected to increase due to a higher IRE alongside a small inflationary increase in core cost. The capital expenditure is expected to be £590-£640 million following the AMP7 capital expenditure profile's acceleration. United Utilities Group has given a solid start to a new regulatory period, and It has invested £130 million in the last year of AMP6 to meet the targets set against AMP7. Overall, it has a strong balance sheet and a fully-funded pension scheme. The stock made a 52-week low and high of GBX 743.00 and GBX 1,053.00, 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 United Utilities Group at the current market price of GBX 884.20 (as on 25 February 2021, before the market close at 8:59 AM GMT), with lower double-digit upside potential based on 9.37x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.). 

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

*The dividend yield is subject to change as per the stock price movement.

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