Vodafone Group PLC

Vodafone Group PLC (LON: VOD) is a FTSE 100 listed Telecommunication Company, providing a range of services including mobile communication, fixed communication, unified communication, internet of things (IoT), cloud hosting and security & carrier services.

On 16 November 2021, Vodafone expects to release H1 FY22 results.

Rationale for Valuation – BUY at GBX 113.88

• Vodafone demonstrated resilient performance in FY21 with recovery in H2 FY21 and solid strategic deliveries.
• The accelerating service revenue growth, share gain in broadband subscriptions, digital transformation initiatives and increased investment shall grow revenues and cash flow over the medium-term.
• On 22 July 2021, Vodafone Spain acquired 2x10 MHz of spectrum in the 700 MHz band for €350 million from the MINECO (Spanish Ministry of Economic Affairs and Digital Transformation).
• Vodafone is on track to report Adjusted EBITDA for FY22 to be in the range of €15.0 - €15.4 billion, while adjusted free cash flow is projected to be at least €5.2 billion.
• Over the next eight months, Vodafone intends to introduce additional share buy-back programmes to reduce the issued share capital.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow, Price/Book, and Price/Earnings multiples are currently lower than the Telecommunications Services industry. Adjacently, Vodafone has higher dividend yield than the industry median.
• From a technical standpoint, 14-day RSI (~33.85) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.

Key Risks

• In Europe, the retail footfall remained 40% lower than the pre-pandemic levels. The commercial activity is yet to return to a normal level, and thus, Europe mobile contract churn was 1.6% lower in Q1 FY22 than Q1 FY21.
• Tight supplies of semiconductors, global shipping problems, and rising inflation can create short-term uncertainties.
• A slowdown in telecommunications and mobile money services growth could adversely affect the demand for communication sites and tower space.

Recent News

Sustainable Development: On 20 September 2021, a major new initiative has been launched by Vodafone Group Plc and ITU, with the aim that an additional 3.4 billion people use the internet through a smartphone by 2030.

Q1 FY22 Trading Update (for the quarter ended 30 June 2021, as on 23 July 2021)

(Source: Company Website)

• Vodafone demonstrated growth in Europe and Africa. During Q1 FY22, service revenue grew 3.3% year-on-year, supported by both Consumer and Business segments.
• As M-Pesa transaction volumes surged 45% year-on-year in Q1 FY22, there was strong growth in Africa.
• The easing of lockdown restrictions also supported the revenue growth in South Africa, and other international markets.

One Year Share Price Chart

(Source: Refinitiv, Analysis conducted by Kalkine Group)

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

 Conclusion

Vodafone reported strong service growth in Europe and Africa during Q1 FY22, driven by a strategic transformation in building commercial and operating momentum built over the past 3 years. Moreover, the increased demand during the pandemic shall support the revenue and cash flow growth over the medium term. As given in the image below, Vodafone has issued its adjusted EBITDA and free cash flow guidance following a resilient performance in FY21. It remained focused for its next phase of strategy (including simplification of the Group, successful IPO of Vantage Towers, the rollout of next generation mobile and fixed networks, and continued reduction in customer churn). The stock made a 52-week high and low of GBX 142.74 and GBX 100.54, respectively.

(Source: Company Website)

Based on the share buyback programme, resilient financial performance, reduced net debt, digital transformation and support from the valuation as done using the above method, we have given a “BUY” recommendation on Vodafone Group PLC at the current Market Price of GBX 113.88 (as on 27 September 2021, at 8:35 AM GMT+1) with lower double-digit upside potential based on 16.66x Price/NTM Earnings (approx.) on FY22E 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 1,884.50

• Associated British Foods has raised its FY21 outlook as revenue for the Sugar division is likely to be 7% ahead of FY20.
• 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.
• The Company demonstrated good working capital management and strong cash generating capability in FY21, underpinned by the improvement in net cash.
• The global sugar demand shall continue to surpass the production in FY22 as well, which shall further generate pricing opportunities.
• From a technical standpoint, 14-day RSI (~38.13) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• 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

• The UK’s slow growth amid inflationary market conditions is likely to impact the Composite Purchasing Managers' Index in September 2021.
• The strengthening of sterling against most of its trading currencies incurred £35 million as a loss on translation in FY21.
• The economic recovery is derailed with the spread of new variants of Covid-19. Moreover, food producers can face labor shortages with mounting Delta variant cases of the Covid-19.

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)

• ABF unveiled that adjusted operating profit in Q4 FY21 is likely to surpass the expectations for both the food businesses and Primark.
• On the back of solid performance in Illovo, the Sugar business is expected to deliver a much-improved profit year-on-year.
• Despite the lower than anticipated sales, the operating profit margin for Primark in FY21 was strong.
• 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 expects to report adjusted earnings per share for FY21 ahead of the last year and previous guidance. However, reduced footfall due to the ‘pingdemic’ has reduced footfall and curbed sales. Notwithstanding, the cash generation in the last quarter was ahead of the management guidance and was stronger than in prior years. With a promising environment for sugar prices, cash generation should 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 1,884.50 (as on 27 September 2021, at 8:40 AM GMT+1), with lower double-digit upside potential based on 31.38x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Ferrexpo PLC

Ferrexpo PLC (LON: FXPO) is an FTSE 250 Index listed iron ore pellet producer with mines in Ukraine (Poltava region) and sales operations internationally.

On 06 October 2021, FXPO will release the Q3 FY21 production report.

FXPO had paid an interim dividend of 39.60 US cents per share on 26 August 2021, while the ex-dividend date was 12 August 2021.

Investment Rationale for Valuation – Buy at GBX 313.60

• FXPO’s top-line revenue and bottom-line profitability demonstrated significant year-on-year growth during H1 FY21.
• With regards to the shareholders, the Company had managed to triple the interim dividend during H1 FY21 when compared with the prior-year levels.
• On the efficiency front, FXPO’s asset turnover ratio of 0.65x remained significantly ahead of the industry median of 0.33x during H1 FY21.
• From a technical standpoint, FXPO is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.
• Moreover, the 14-days RSI of ~29.49 is also indicating an upside momentum in the stock price.

Key Risks

• FXPO’s sales volume dropped by approximately 9% during H1 FY21.
• The turmoil in the Chinese real estate sector had caused a slump in iron ore prices.
• The Company’s performance can be impacted by equipment failures and production stoppages.
  

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021, as of 04 August 2021)

(Source: LSE Website)

• On the profitability front, the Company’s profit after tax surged by around 165% during the period,
• With regards to the balance sheet, FXPO had shown tremendous improvement in net cash position from USD 4 million as of 31 December 2020 to USD 213 million as of 30 June 2021.
• Driven by the positive market dynamics, the total revenue jumped by around 74% to USD 1.35 billion.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company seems confident in replicating excellent performance shown during H1 FY21 in the second half as well. Looking forward, the Company had expected additional demand for high grade low impurity pellets, boosted by the tighter emissions controls and government regulation, mainly in the EU. However, the Company reported a drop in production volumes during H1 FY21. The stock made a 52-week low and high of GBX 147.41 and GBX 513.00, respectively.

Based on the improvement in net cash position, strong top-line & bottom-line business performance, and valuation as done using the above method, we have given a “Buy” recommendation on Ferrexpo PLC at the current market price of GBX 313.60 (as on 27 September 2021 at 08:51 AM GMT+1), with lower-double digit upside potential based on 2.58x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Central Asia Metals PLC

Central Asia Metals PLC (LON: CAML) is a FTSE AIM UK 50 index listed Company that owns 100% of the Sasa zinc-lead mine in North Macedonia and 100% of the Kounrad SX-EW copper project in central Kazakhstan.

Rationale for Valuation – SPECULATIVE BUY at GBX 239.00

• CAML demonstrated robust financial performance in H1 FY21, driven by strong commodity prices. The Group free cash flow increased to US$48.9 million in H1 FY21 (H1 FY20: US$21.2 million).
• The Group is close to a debt-free milestone following the additional debt repayment in H1 FY21, reflecting the continued focus on delivering value to its shareholders.
• CAML is on track to meet its production guidance from Sasa and Kounrad.
• From a technical standpoint, the stock price is trading above the 20-day EMA (GBX 236.50), reflecting a bullish price momentum.
• On a forward 12-month basis –EV/EBITDA, Price/Earnings, and Price/Cash Flow, valuation multiples are quite undervalued against the corresponding multiples of the Basic Materials sector.

Key Risks

• The rising Covid-19 cases due to the Delta variant has dampened the prospects of swift economic recovery. Moreover, inflationary concerns and volatile commodity prices can suppress investor sentiments.
• The copper prices can face consolidation amid rising concerns over production levels, subdued demand, and the reversal of quantitative easing policies.
• The resurgence of Covid-19 cases can halt operations, and thus, it can affect the production guidance.

Financial Highlights (for the six months ended 30 June 2021, as on 15 September 2021)

 (Source: Company Website)

• In H1 FY21, CAML increased dividend to 8 pence per share, representing 40% of free cash flow (FCF).
• The Group also made early repayment of US$10 million of corporate debt facility.
• The net revenue surged to US$100.8 million (H1 FY20: US$70.8 million), while the EBITDA margin rose to 61% in H1 FY21 (H1 FY20: 56%).
• As on 30 June 2021, cash in the back stood at US$54.3 million, while there was a net debt of US$10.1 million.

One Year Share Price Chart

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

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

Conclusion 

CAML reported excellent financial results in H1 FY21 with FCP and EBITDA up by 51% and 131%, respectively. The Group accelerated its debt repayment and increased its dividend. The outlook for the remainder of FY21 is positive on the back of strong demand outlook. Moreover, the Company has strengthened its balance sheet and in stronger position to pursue potential acquisition opportunities. The stock made a 52-week High and Low of GBX 298.00 and GBX 148.20, respectively.

Based on the increased dividend, strong financial performance, strengthened balance sheet, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” stance on Central Asia Metals PLC at the current price of GBX 239.00 (as on 27 September 2021, at 9:35 AM GMT+1), with lower double-digit upside potential based on 8.57x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Eckoh PLC

Eckoh PLC (LON: ECK) provides Secure Payment products and Customer Contact solutions and support its client base from its offices in the UK and US.

Rationale for Valuation – SPECULATIVE BUY at GBX 53.60

• Eckoh reported solid revenue growth and order momentum in the US Secure Payments division in FY21, while the performance in the UK looked resilient.
• The Company expects material growth in FY23 and was trading in line with the market expectations.
• The demand for Eckoh's products and model is likely to increase with a shift to remote working driving opportunities.
• At the end of FY21, the Company maintained a strong cash position and robust balance sheet with a net cash position of £11.7 million (FY20: £11.6 million).
• ECK has stronger profitability margins than the industry median as gross margin and net margin have remained above the industry median of 67.2% and 4.5% since FY17, respectively.
• From a technical standpoint, the momentum oscillator RSI (~13.06) is in the oversold zone, while the stock price is hovering close to the lower Bollinger Band.

Key Risks

• The short-term outlook remained uncertain due to the macroeconomic instabilities induced by the Covid-19 pandemic.
• The remote working conditions has also increased the incidents of data breach and fraud, which can cause regulation tightening and the financial impact.

Recent News

Equity Issuance: On 22 July 2021, ECK bought 200,000 ordinary shares at an average price of 62.5 pence to be held in Treasury.

Financial Highlights (for the half year ended 31 March 2021, as on 15 June 2021)

(Source: Company Website)

• During FY21, revenue declined 8% year-on-year due to the disruption caused by the Covid-19 pandemic.
• However, US Secure Payments' revenue rose by 57% year-on-year to US$12.8 million in FY21.
• The profit before taxation increased by 6% to £3.5 million (FY20 £3.3 million).
• The Company proposed a final dividend of 0.61 pence per share (FY20: 0.61 pence).

One Year Share Price Chart

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

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

Conclusion 

Eckoh continued to trade in line with the market expectations, and thus, it expects revenue and profit for FY22 to be comparable to FY21. Moreover, the Company has a resilient business model and highly relevant products to deliver significant revenue and profit growth in FY23. Also, a remote working environment shall create new strategic opportunities for the Company. Furthermore, the lifting of lockdown restrictions shall continue to support the strong momentum of the US Secure Payments business. Adjacently, the balance remained robust with a strong net cash position, reflecting the Company's ability to pursue acquisition opportunities and capitalize on untapped market opportunities. The stock made a 52-week High and Low of GBX 83.00 and GBX 52.00, respectively.

Based on the strong order momentum, expected growth in FY23, robust balance sheet, increased market opportunities, and favourable valuation conducted above, we have given a “SPECULATIVE BUY” stance on Eckoh PLC at the current market price of GBX 53.60 (as on 27 September 2021, at 11:08 AM GMT+1), with lower double-digit upside potential based on 45.52x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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