Royal Dutch Shell Plc

Royal Dutch Shell Plc (LON: RDSA) is an FTSE 100 listed petrochemical and energy Company which is involved in the exploring, producing, refining, and marketing of oil and natural gas.

The Company will announce FY2020 results on 4 February 2021.

Investment Highlights - Royal Dutch Shell Plc – Buy at GBX 901.90

• The Company has shown improvement in financial performance in the third quarter of the financial year with positive income for shareholders and higher cash flow from operating activities.
• As per valuation metrics, EV/Sales, EV/EBITDA and Price/Book Value multiples of the Royal Dutch Shell Plc are currently lower as compared to the corresponding multiples of the Oil & Gas industry. It reflects, shares are undervalued as compared to the industry.
• Over the course of 4 years (FY15 – FY19), the Company’s net profit surged from USD 2,200 million in FY2015 to USD 16,432 million in FY2019. Compounded annual growth rate (CAGR) stood at ~ 65.32%.
• From the technical standpoint, 14-day RSI is in oversold zone and supporting an upside move (around 38 level), which means the stock price could increase in the short term.

Key Risks

• The recent uncertainty in oil supply has caused volatility in commodity markets, which can affect the earnings and profitability of the Company.
• With the economic downturn, there is a risk of changes in fair value of financial assets and liabilities of the Company.

Financial Performance – Q3 FY2020 (30 September 2020) (released on 29 October 2020)

(Source: Quarterly Report, Company Website) 

• In the third quarter of the financial year 2020, the Company witnessed improvement in performance from all businesses, the revenue increased versus Q2 FY2020, while it remained below Q3 FY2019 data.
• The Company reported higher profitability margins in Q3 FY2020 as compared to Q2 FY2020 data, while remained significantly below Q3 FY2019 data.
• The Cash flow from operating activities improved significantly from Q2 FY2020 data, while remained below Q3 FY2019 data by 15%.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company showed improvement in the financial performance in the third quarter of the financial year 2020 as compared to Q2 FY2020, indicating a recovery in the trading environment. Despite the improved performance, the challenges presented by Covid-19 will keep impacting the demand for oil, gas, and related products in Q4 FY2020. The integrated gas production is expected to be nearly 830 - 870 thousand boe/d in Q4 FY2020 while LNG liquefaction volumes are projected to be around 7.9 - 8.5 million tonnes. The Company is confident that its integrated business model and high-quality assets will help them to overcome uncertain times. Stock 52 week High and Low were GBX 2,356.00 and GBX 878.10, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Royal Dutch Shell Plc at the current price of GBX 901.90 (as on 29 October 2020, before the market close at 1:45 PM GMT) with lower double-digit upside potential based 23.92xPrice/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

GlaxoSmithKline Plc

GlaxoSmithKline Plc (LON: GSK) is an FTSE 100 listed multinational Healthcare Company.

Investment Highlights - GlaxoSmithKline Plc – Buy at GBX 1,295.40

• The fundamentals of GSK's business remained strong, and it is maintaining good momentum in underlying demand for the major products.
• As per valuation metrics, EV/Sales, EV/EBITDA and Price/Cash Flow multiples of the GlaxoSmithKline Plc are currently lower as compared to the corresponding multiples of the Pharmaceuticals industry. It reflects, shares are undervalued as compared to the industry.
• Over the course of 4 years (FY15 – FY19), the Company’s revenue surged from GBP 23,923 million in FY2015 to GBP 33,754 million in FY2019. Compounded annual growth rate (CAGR) stood at ~ 8.99%.
• From the technical standpoint, 14-day RSI is in oversold zone and supporting an upside move (around 25 level), which means the stock price could increase in the short term.

Key Risks

• The Company is exposed to commercialisation risks such as competitive pressures, affordability, pricing and delays or failure in quality execution of commercial strategies.
• Global political uncertainty regarding trade policy also poses a risk for the Company.

Financial Highlights – Q3 FY2020 (released on 28 October 2020)

(Source: Quarterly Report, Company Website) 

• In the nine months for FY2020, the turnover increased by 2%, reflecting strong performance from Consumer Healthcare, oncology, respiratory and HIV. The turnover in Q3 FY2020 declined by 8%, due to disruption caused by covid-19.
• The Company managed to reduce SG&A expenses, reflecting active focus on cost management. The operating margin and adjusted Group operating margin stood at 21.5% and 30.8%, respectively.
• The net cash from operating activities increased significantly in Q3 and 9M period for FY2020.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown improvement in financial performance for nine months for FY2020. Both the revenue and profitability increased. The Company shown a significant increase in net cash from operating activities for Q3 and 9M period for FY2020.  GSK remained on track to deliver lower end of adjusted EPS guidance of -1% to -4% for FY2020 on constant exchange rate. The Company continue to make progress in biopharma pipeline and won 3 approvals in Q3. The Company entered into supply agreement with Canada, the UK, EU and the US for Sanofi-GSK vaccine. GlaxoSmithKline is committed to make investment in new products and R&D pipeline to support long-term growth. The stock made a 52-week low and high of GBX 1,302.60 and GBX 1,857.00, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for GlaxoSmithKline Plc at the current price of GBX 1,295.40 (as on 29 October 2020, before the market close at 1:50 PM GMT), with lower double-digit upside potential based on 12.83 Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

Anglo American Plc

Anglo American Plc (LON: AAL) is an FTSE 100 Mining Company engaged in the activities including mining, exploring, and minerals and metals at various geographies globally.

The Company will release Q4 production update on 28 January 2021.

Investment Highlights - Anglo American Plc – Buy at GBX 1,766.20

• The Company has shown strong operational recovery in the third quarter of the financial year 2020, with a 24% increase in production versus Q2 FY2020.
• In the last six months, the Company delivered a substantial return of ~ 27.01% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the Anglo American 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 oversold zone and supporting an upside move (around 24 level), which means the stock price could increase in the short term.

Key Risks

• The Company’s performance is subject to various risks, such as volatility in the process of metallurgical coal, iron ore, and copper.
• The ongoing COVID-19 disruption can delay commissioning and approval of certain projects.

Production Update for Q3 FY2020 (released on 22 October 2020)

• In the Q3 FY2020, driven by strong performance, the production in Chile-based Collahuasi increased by 17%, which resulted in higher copper production by 4%.
• Driven production from Mogalakwena mine remained strong, which resulted in a 12% increase in palladium production, while production from Amandelbult remained lower, the overall PGM production remained flat.
• In iron ore, the Company started operations at Minas-Rio in Brazil in early October after pipeline maintenance and inspection.
• The Company witnessed an improvement in sales of the rough diamond before holiday selling season in Q4.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown an improvement in the operational performance, with 24% higher production versus Q2 FY2020 and is operating at 95% capacity. AAL continued robust performance at Chile-based Collahuasi copper operation to mitigate lower production. The Company also experienced an encouraging improvement in rough diamonds demand ahead of the holiday selling season. Despite the strong operational recovery, the Company expects some uncertainty in the trading environment. In the longer-term, the Company is well-positioned to take benefits from growth trends across the energy and industrial markets. Stock 52 week High and Low were GBX 2,266.00 and GBX 1,018.20,respectively.

Based on the above rationale, we have given a “Buy” recommendation on Anglo American Plc at the current price of GBX 1,766.20 (as on 29 October 2020, before the market close at 8:17 AM GMT) with lower double-digit upside potential based 11.63xPrice/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Lloyds Banking Group Plc

Lloyds Banking Group Plc (LON: LLOY) is an FTSE 100 listed Banking Company, which is engaged in the business of financial and banking services.

Investment Highlights - Lloyds Banking Group Plc – Buy at GBX 27.48

• Despite the uncertain economic outlook, the Company has been performing strongly, supported by prudent balance sheet and leading efficiency position.
• In the last six months, the Company delivered a decent return of ~ 12.03% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the Lloyds Banking Group Plc are currently lower as compared to the corresponding multiples of the Banking industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, shares were trading above the support level of 20-day simple moving average prices (25.71), which reflects an uptrend in the stock and can move up further.

Key Risks

• The outlook remains uncertain, and the economic fragility will continue in the remaining financial year, which may impact financial performance.
• The business performance is subject to uncertainties related to change in consumer trends, regulatory requirements, rapid technical innovation, and cybersecurity risk.

Recent News

On 29 October 2020, Lloyds Banking Group announced that its Chairman, Lord Blackwell, will step down from his position on 1 January 2021 and will be replaced by Robin Budenberg.

Management Statement for Q3 FY2020 (released on 29 October 2020)

• In the Q3 FY2020, the Company returned to profitability, reflecting the resilience of the business model.
• Due to lower other income and lower interest rates, the net income declined by 17%.
• The Company has a strong balance sheet, while activity level picked up in Q3, particularly in consumer spending and mortgage applications.
• The Company witnessed an increase in retail current accounts and has a strong pipeline of open mortgage book.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company experienced improved trading performance in the third quarter of the financial year 2020, with increased in digital activity. The Company returns to profitability and Mortgage activity picking up strongly. The mortgage business further strengthened, and Retail current accounts increased, which offset yield curve pressure. LLOY’s loan to deposit ratio stood at 98%, providing the significant potential to lend into recovery and a strong liquidity position. Despite the uncertain market outlook, the Company is well-positioned to sustainable and superior for a long-term period. The stock made a 52-week low and high of GBX 23.59 and GBX 73.66, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Lloyds Banking Group Plc at the current price of GBX 27.48 (as on 29 October 2020, before the market close at 8:00 AM GMT) with lower double-digit upside potential based 0.52x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

BT Group Plc

BT Group Plc (LON: BT. A) is an FTSE 100 Company, which provides communication and connectivity services. It provides services related to broadband, fixed-voice, mobile and TV to the consumers in the United Kingdom.

Investment Highlights - BT Group Plc – Buy at GBX 100.20

• Despite the Covid-19 crisis, the Company delivered a strong operational performance and a relatively strong financial performance and reached a record level with 3.5m FTTP.
• In the last one month, the Company delivered a decent return of ~ 6.12% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the BT Group Plc are currently lower as compared to the corresponding multiples of the Telecommunication Services industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 90-day RSI is supporting an upside move (around 47 level), which means the stock price could increase in the short term.

Key Risks

• The Company’s financial performance is impacted by the risks related to foreign exchange, interest rates, funding and liquidity and counterparties risk.
• The confidence of investor and future strategy can be impacted by changing political conditions. 

Financial & Operational Highlights – H1 FY2021 (30 September 2020) (released on 29 October 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2021, the Company has a relatively resilient revenue. The revenue declined by 8%, due to the impact of covid-19.
• The adjusted EBITDA declined by 5%, due to lower revenue offset by savings from the modernisation programme, sports rights rebates and other cost initiatives.
• The Company has shown strong operational performance, despite the covid-19 pandemic, the 5G-ready customer base exceeds 1 million and is live in 112 cities and towns.
• The Company entered into a partnership with Belfast Harbour for the deployment of private 5G network.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite a decline in the financial performance in the first half of the financial year 2021, the Company delivered a strong operating performance and is committed to supporting colleagues and customers. The Company’s investment in the network has helped in doubling the number of Openreach's FTTP orders versus last year and the 5G network expanded to 112 cities and towns in the United Kingdom. Based on improved operational performance, the Company expect to reach the lower end of the range for EBITDA outlook for FY2021 and expects EBITDA of around £7.9 billion in FY2022/2023. The stock made a 52-week low and high of GBX 94.68 and GBX 209.20, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for BT Group Plc at the current price of GBX 100.20 (as on 29 October 2020, before the market close at 1:50 PM GMT), with lower double-digit upside potential based on 6.56 Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

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

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

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.