Reckitt Benckiser Group PLC

Reckitt Benckiser Group PLC (LON: RKT) is a FTSE-100 listed Company, which develops, produces, acquires, and distributes consumer products. RKT’s brands fall into three categories – Hygiene, Health and Nutrition.

Investment Rationale – BUY at GBX 5,806.00

• Promising Prospects: RKT has increased penetration, gained market share, and continued geographic expansion for long-term growth. RKT is on track to meet its medium-term revenue and margin targets, supported by increasing operational excellence, strong demand for products, improved e-commerce sales and strong execution across key growth drivers.
• Upgraded Guidance: RKT raised its projections for LFL net revenue growth to 1-3% in FY21, with adjusted operating profit margins of between 22.7-23.2%.
• Higher Dividend Yield: On a forward 12-month basis – the Dividend Yield is higher than the median of Personal & Household Products & Services.
• Technical Indicator: From a technical standpoint, the current market price is trading above the 20-day EMA (GBX 5,615.00), reflecting a bullish price momentum.

Key Risks

• Margin Pressure: The cost inflation can offset the expected margin accretion from IFCN China’s disposal.
• Macroeconomic and Business Risk: RKT is exposed to uncertainties related to product safety, supply chain disruption, destructive cyber-attacks, missed growth opportunities arising with digital channels, strict product safety regulations, and global competition laws.
  

Q3 FY21 Trading Update (as on 26 October 2021)

 (Source: Company Website)

• Net Revenue: During Q3 FY21, RKT reported a decline of 6.8% in net revenue growth, since like-for-like (LFL) growth of 3.3% was offset by a negative net M&A impact of 5.0%.
• Health LFL growth: Due to sharp improvement in cold and flu sales trends, and continued positive momentum in Intimate Wellness, there was 3.6% year-on-year growth in health segment in Q3 FY21.
• Brand and Channel Growth: It delivered growth across business units, geographic regions, and brands across the portfolio.

One Year Share Price Chart

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

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

 Conclusion 

Following the stronger than expected trading in Q3 FY21, revenue growth guidance has been raised. Moreover, the demand for cold and flu relief products has been encouraging. Also, the industry mega-trends that can elevate Reckitt’s growth are amplified by the Covid-19 pandemic, including increased hygiene requirement, growing demand for self-care, rising demand for adult nutrition, and technology proliferation. The stock made a 52-week High and Low of GBX 7,192.00 and GBX 5,367.00, respectively. 

Based on the positive trading momentum, enhanced confidence in meeting medium-term goals, strong demand prospects, promising market dynamics, with support from the valuation as done using the above method, we have given a “BUY” recommendation on Reckitt Benckiser Group PLC at the current market price of GBX 5,806.00 (as on 28 October 2021, 8:03 AM GMT+1), with lower double-digit upside potential based on 23.31x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Associated British Foods PLC

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

On 9 November 2021, ABF expects to announce its annual results for FY21.

Investment Rationale – BUY at GBX 1,792.50

• Promising Outlook: Associated British Foods has raised its FY21 outlook as revenue for the Sugar division is likely to be 7% ahead of FY20. On the back of solid performance in Illovo, the Sugar business is expected to deliver a much-improved profit year-on-year in FY21.
• Enhanced Capability: The introduction of new digital capability (e.g., customer-facing website) shall improve the functionality of Primark’s website and strengthen the Company’s digital marketing capability.
• Technical Indicator: From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price.
• Undervalued Multiples: All major metrics (Price/Earnings, EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow) of ABF reflect an undervalued position against the median of the Consumer Non-Cyclicals sector.

Key Risks

• Subdued Retail Sales: Britain’s retail sales fell for a fifth month in a row last month, as the reduced footfall due to the 'pingdemic', fuel crisis, and lower consumer confidence have curbed sales.
• Supply Chain and Inflation Woes: The footfall of the UK Shoppers was hit by inflation and fuel crisis in September 2021, resulting into lower consumer confidence as well. Moreover, the supply crisis can exacerbate the problems of Primark stores, led by the Covid-19 pandemic.

Recent News

Primark Cares: On 15 September 2021, ABF announced the Primark’s sustainable strategy to ensure commitment across People, Product, and Planet.

Pre-Close Period Trading update (for the 53 weeks to 18 September 2021, as on 13 September 2021)

• Strong Trading and Outlook: In FY21, ABF demonstrated good working capital management and strong cash generating capability, underpinned by the improvement in net cash. Subsequently, it expects to report adjusted earnings per share for FY21 ahead of the last year and previous guidance.
• Solid Margin: Despite the lower than anticipated sales, the operating profit margin for Primark in FY21 was strong.
• Healthy Balance Sheet: The Group ended FY21 with approximately £1.9 billion in net cash before lease liabilities.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion 

ABF unveiled that adjusted operating profit in Q4 FY21 is likely to surpass the expectations for both the food businesses and Primark. Moreover, the global sugar demand shall continue to surpass the production in FY22 as well, which shall further generate pricing opportunities. With a promising environment for sugar prices, cash generation should also be boosted further. The stock made a 52-week high and low of GBX 2,528.00 and GBX 1,618.00, respectively. 

Based on the raised outlook, strong net cash position, reopening of Primark stores and favourable valuation conducted above, we have given a “BUY” recommendation on Associated British Foods PLC at the current price of GBX 1,792.50 (as on 28 October 2021, at 8:37 AM GMT+1), with lower double-digit upside potential based on 28.98x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

 Admiral Group PLC

Admiral Group PLC (LON: ADM) is an FTSE 100 listed company that provides insurance services in the UK, Spain, Italy, and France. It also has a price comparison business in the US.

Investment Rationale – BUY at GBX 2,860.00

• Strong Financial Performance: ADM had shown decent top-line revenue growth of around 30% and a stellar increase of around 76% in the profit before tax during H1 FY21.
• Robust Insurance Metrics: ADM had managed to keep the Loss Ratio and Combined Ratio lower than the industry median during H1 FY21.
• Technical Indicator: From a technical standpoint, 14-day RSI (~22.20) is in the oversold territory, indicating an upside potential in the stock price.
• Bollinger Bands: The stock price is hovering below the lower Bollinger band, supporting an upside momentum in the stock price.

Risk Assessments

• Market and Credit Risk: The impact of Covid-19 has jolted the economic environment and posed uncertainties related to inflation, premium rates, liquidity position, and supply chain.
• Reduction in Stock Price: The stock price declined yesterday as German reinsurer Munich Re sold 12.1 million shares or 4% of its holding.

Interim Results (for the six months ended 30 June 2021, as on 11 August 2021)

 (Source: Company Website)

• Financial Growth: During H1 FY21, the Group turnover and customer retention increased by 9% and 12% year-on-year, respectively.
• Robust Profitability: On the profitability front, the pre-tax profit surged by around 76% during H1 FY21.
• Increase in Return on Equity: The Return on Equity got improved from 50% during H1 FY20 to about 68% for H1 FY21.
  

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

ADM had accelerated the growth trajectory in H1 FY21, with a robust profitability growth. Moreover, the Company had returned the proceeds from the sale of the Penguin Portals comparison businesses to shareholders in the form of special dividends. Moreover, there was a significant increase in dividends on the back of higher profits. The stock made a 52-week high and low of GBX 3,631.31 and GBX 2,654.77, respectively.

Based on the increased dividend and support from the valuation conducted above, we have given a “BUY” recommendation on Admiral Group PLC at the current market price of GBX 2,860.00 (as on 28 October 2021 at 08:07 AM GMT+1), with lower double-digit upside potential based on 12.03x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Informa PLC

Informa PLC (LON: INF) is a FTSE 100 listed Media Company. It is engaged in events, exhibitions, scholarly publishing, and information services.

Investment Rationale – BUY at GBX 514.60

• Guidance Raised: INF now expects to report the baseline revenue of at least £1.8 billion in FY21, while adjusted operating profit expected to be £375 million.
• Promising Prospects: Informa has bright prospects with continued growth subscription led business, further expansion in B2B digital services, return of physical events, and digital acceleration trends.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, and Price/Book valuation multiples are quite undervalued against the industry median of Consumer Cyclicals sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (36.28) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.

Risk Assessments

• Covid-19 Impact: The resurgence in delta variant of the Coronavirus can lead to cancellation or postponement of events. Moreover, sales can be impacted by increased supply-chain disruptions and labour shortage.
• Macroeconomic Uncertainty: The ongoing economic instability with tightening of monetary policy, subdued consumer confidence, and currency fluctuations can also impact business performance.

Financial Highlights (for the six months ended 30 June 2021, as on 29 July 2021)

(Source: Company Website)

• Strong Performance: Informa delivered growth in Subscriptions-led businesses, reflecting the result of continued investment in product development.
• Revenue and Profits: The statutory revenues and Adjusted Operating Profit declined in H1 FY21 vs H1 FY20, due to pandemic-impacts on the Physical Events business.
• Strong Free Cash Flow: The Group demonstrated high cash conversion as a result of strong subscription renewals.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

Informa delivered robust free cash flow and shown positive forward bookings in H1 FY21. It also strengthened its balance sheet by reducing net debt significantly and maintained stable investment grade status from major credit rating agencies (Fitch, Moodys and Standard & Poors). In addition, the FBX business integration with Novantas should present additional opportunities for Informa to handle greater client challenges. The stock made a 52-week High and Low of GBX 659.00 and GBX 407.00, respectively.

Based on the raised revenue guidance, enhanced digital capabilities, reduced debt profit, business strength and resilience, supported by the valuation conducted above, we have given a “BUY” recommendation on Informa PLC at the current market price of GBX 514.60 (as on 28 October 2021 at 09:21 AM GMT+1), with lower double-digit upside potential based on 36.35x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Smiths Group PLC

Smiths Group PLC (LON: SMIN) is a FTSE 100 listed entity that develops, manufactures, and sells control systems and instrumentation for industrial applications.

Key Dates: SMIN’s ex-dividend date for the final dividend is 21 October 2021, while the dividend payment date is 19 November 2021.

Rationale for Valuation – BUY at GBX 1,381.50

• Solid Trading and Operational Progress: During FY21, SMIN recorded good order book momentum, and 7% year-on-year growth in operating profit.
• Strategic Growth and Margin Improvement: There was a margin improvement across all divisions, while restructuring programme was also completed. The Group has also strengthened the business by acquiring Royal Metal and focusing on organic growth.
• Stronger Margins: Smiths Group has maintained higher EBITDA margin than the industry median of 14.7% between H1 FY19 to H1 FY21. Similarly, the quick ratio and current ratios have remained above the industry median since H1 FY19.
• Technical: From a technical standpoint, the momentum oscillator 14-day RSI (~42.53) confirms the oversold position, while the price is hovering close to the lower Bollinger Band.

Key Risks

• Macroeconomic Risks: The constant surge in Consumers’ Price Index and Producer’s Price Index globally amid supply chain disruption, and inflationary concerns can dampen the investors’ sentiment and business prospects.
• Delta Variant of Coronavirus: Due to the resurgence of the pandemic, travel restrictions can have an impact on new business and pipeline opportunities.
  

Recent News 

Disposal: On 8 September 2021, Smiths Group agreed the disposal of ICU Medical Inc at an enterprise value of US$2.7 billion. 

Financial Highlights (for the year ended 31 July 2021, as on 28 September 2021)

 (Source: Company Website)

• Profitability: In FY21, SMIN demonstrated strong profit conversions and earnings growth.
• Cash Generation: FY21 was another year of excellent cash generation as operating cash conversion stood at 125%. It is well-positioned for accelerated growth in core industrial technology business.
• Dividend: Smiths Group recommended an 8% increase in final dividend, reflecting confidence in the outlook.

One Year Share Price Chart

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

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

Conclusion 

Going forward, the disposal of Smith Medical shall simply the business to focus resources on its core industrial technology business. Moreover, it has a strong order book momentum to capitalise on market opportunities once the market recovers. It showed business resilience in FY21 and sustained robust performance despite market disruption, reflecting strength of the business model to generate incremental growth for its shareholders. The stock made a 52-week High and Low of GBX 1,669.50 and GBX 1,314.00, respectively. 

Based on the restructuring benefits, improved market trends, robust cash generation, dividend increase, continued market recovery, and favourable valuation conducted above, we have given a “BUY” stance on Smiths Group PLC at the current price of GBX 1,381.50 (as on 28 October 2021, at 11:05 AM GMT+1), with lower double-digit upside potential based on 18.41x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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