Smiths Group PLC

Smiths Group PLC is an FTSE-100 listed multinational technology company engaged in manufacturing and selling of control systems and instrumentation for industrial applications to customers based in over 200 countries and territories around the world.

SMIN had paid an interim dividend of 11.70 pence per share on 14 May 2021, while the ex-dividend date was 08 April 2021.

On 28 September 2021, the Company will release the full-year FY21 results.

Investment Rationale for Valuation – BUY at GBX 1,438.50

• The proposed sale of Smiths Medical by the 2021-year end would enable SMIN to position itself as an industrial technology company.
• SMIN had completed around 11 disposals activities worth around £540 million and 12 acquisitions of approximately £1 billion since 2016.
• The Company had managed to increase the cash conversion ratio from 98% during H1 FY20 to 129% for H1 FY21.
• On the liquidity front, the current ratio of 2.94x remained more than the industry median of 1.61x during H1 FY21.
• In terms of technical indicators, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Key Risks

• The Company works on complex and potentially hazardous projects, which require continuous monitoring of health and safety risks.
• SMIN may fail to integrate new acquisitions, which will impact financial and operational performance.
  

Recent Developments

On 02 August 2021, SMIN had announced the sale of Smiths Medical at the enterprise value of USD 2.30 billion. Moreover, the transaction is expected to be completed by the end of 2021.

H1 FY21 Financial Highlights (for the six months ended 31 January 2021, as of 26 March 2021)

 (Source: Company result)

• The top-line revenue from continuing operations went down by about 5% on an underlying basis and dropped by around 7% on a reported basis during H1 FY21.
• SMIN had witnessed a significant proportion of Aftermarket revenues as it represented around 49% of the underlying revenue during the period.
• With regards to the shareholders, the Company had shown a decent growth of around 6% in the interim dividend with respect to H1 FY21.

One Year Share Price Chart

(Source: Refinitiv; Analysis done by Kalkine Group)

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

Conclusion

The Company has a positive belief in achieving long-term growth by bringing rapid innovation in electronics, software, and services. Moreover, the Company expected to generate net proceeds of approximately USD 1.80 billion from the disposal of medical business and utilize the proceeds to support further investments towards the growth trajectory. Looking ahead, the Company would prioritize positioning itself as an industrial technology company. The stock made a 52-week low and high of GBX 1,287.50 and GBX 1,669.50, respectively. 

Based on the lucrative deal regarding the sale of medical business, growth in dividend payments, and valuation as done using the above method, we have given a “BUY” recommendation on Smiths Group PLC at the current market price of GBX 1,438.50 (as on 31 August 2021 at 11:02 AM GMT), with lower-double digit upside potential based on 19.57x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

ASOS Plc

ASOS Plc (LON: ASC) is listed on the FTSE AIM All-Share index. It is a UK listed fashion retailer. The Company caters to over 24 million active global customers with a product portfolio consisting of roughly 850 brands.

On 13 October 2021, ASC would announce its FY2021 results.

Investment Rationale for Valuation – Speculative Buy at GBX 3,905.00

• The second-hand clothing market is expected to double in size in the next five years. As ASC has already established its own second-hand marketplace, it has the edge over its competitors.
• ASC has recently announced a new strategic partnership with US-based multi-channel retailer Nordstrom. It could attract young customers and drive the growth of the brands in North America.
• On the profitability front, ASC’s EBITDA margin in H1 FY2021 outperformed the industry median of 3.8%.
• In the last two years, the stock has outperformed the benchmark FTSE AIM All-Share index.
• On the technical front, the 14-day RSI at about 41.67 is moving towards the oversold zone. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• ASC could face supply chain issues as the majority of its products are manufactured overseas, increasing costs.
• The fashion retail market in the UK has intense competition. Hence, there could be impacts on ASC’s market share.
• The weak consumer confidence and muted disposable income could impact consumer spending. Hence, ASC’s financials could be affected.
  

Recent Developments 

On 17 August 2021, it came to light that Adam Crozier would be stepping down as Chairman of ASC. He would join BT Group as Chairman.

Four months ended 30 June 2021 Trading Statement (released on 15 July 2021)

(Source: LSE Website)

• Due to accelerated demand in the US and solid growth in the UK, sales were up 21% YoY in the four-month period till 30 June 2021.
• Also, ASC increased its active customer base by 1.2 million since H1 FY2021.
• On the downside, due to elevated freight costs and FX headwinds, gross margins fell by 150 bps.
• The management continues to invest to be well-positioned to utilise the long-term opportunity. ASC’s strong liquidity position could boost these investments.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The management anticipates FY2021 performance to be in line with expectations with rising long-term opportunities. The management also wants to focus on investments to drive growth globally and is helped by the Company’s solid liquidity position. Hence, the Company is well-positioned to capture the expanding online fashion market. Meanwhile, the stock made a 52-week low and high of GBX 3,652.00 and GBX 5,994.95, respectively.

Based on the bright prospect in the second-hand clothing market, the new partnership with Nordstrom to drive growth, continuous investment by the Company, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on ASOS Plc at the current market price of GBX 3,905.00 (as on 31 August 2021 at 11:00 AM GMT), with a lower double-digit upside potential based on 30.52x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Tate & Lyle PLC

Tate & Lyle PLC is an FTSE 250 listed Company, which is the global provider of food and beverage ingredients and solutions.

The Company had paid a final dividend of 22.0 pence per share on 06 August 2021, while the ex-dividend date was 24 June 2021

Investment Rationale for Valuation – BUY at GBX 704.60

• On the leverage front, the Company had managed to reduce the net debt from £451 million as of 31 March 2020 to £417 million as of 31 March 2021.
• The new products revenue had shown robust growth of 21% in constant currency during FY21, benefitted by the strong performance of texturant and sweeteners platforms.
• The acquisition of stevia and tapioca businesses would consolidate TATE’s presence in Asia.
• From a technical standpoint, TATE is hovering between the lower Bollinger band and middle Bollinger band, indicating an upside potential in the stock price.
• Moreover, the 14-days RSI of ~37.35 is supporting an upside potential in the stock price.

Key Risks

• The disposal of primary products business might adversely impact the revenue and profitability of TATE.
• The failure to promote health-related products might create reputational damage resulting in loss of customers.
  

Recent News 

On 12 July 2021, TATE had decided to sell a controlling stake in NewCo to KPS Capital Partners. Moreover, the Company expects to receive net cash proceeds of approximately USD 1.20 billion upon the completion of the sale. 

FY21 Financial & Operational Highlights (for the twelve months ended 31 March 2021, as of 27 May 2021)

(Source: Company result)

• The total revenue had shown a marginal growth of almost 1% to £2.81 billion during FY21.
• TATE had declared around 5.8% growth in the final dividend paid for FY21 when compared with FY20.
• On the profitability front, the Company had shown a robust growth of around 6% in the profit before tax during FY21.
  

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company will return approximately USD 700 million to shareholders in the form of a special dividend and share consolidation received from the net sale proceeds upon the completion of the disposal of the primary products business. TATE had anticipated the food & beverages solutions division to show accelerated progress during FY22. Furthermore, TATE expects to complete the sale of the controlling stake in NewCo by the first quarter of 2022. The stock made a 52-week low and high of GBX 587.20 and GBX 821.20, respectively.

Based on the dividend growth, bright prospects, and valuation as done using the above method, we have given a “BUY” recommendation on Tate & Lyle PLC at the current market price of GBX 704.60 (as on 31 August 2021 at 10:55 AM GMT), with lower-double digit upside potential based on 16.42x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Halfords Group Plc

Halfords Group Plc (LON: HFD) is listed on the FTSE All-Share index. It is involved in retailing of motoring, cycling and leisure products.

On 8 September 2021, HFD would release its FY2022 twenty-week trading update.

The next dividend of GBX 5.00 per share would be paid on 17 September 2021 (final dividend).

Investment Rationale for Valuation – Speculative Buy at GBX 364.00

• HFD recently entered the B2B software market after its launch of Avayler.
• HFD’s Autocentres business gained significant market share in FY2021.
• On the profitability front, HFD’s EBITDA margin in H2 FY2021 outperformed the industry median of 18.3%.
• On the leverage front, HFD’s debt/equity ratio in H2 FY2021 was lower than the industry median of 1.07x.
• In the last six months, the stock has outperformed the benchmark FTSE All-Share index.
• On the technical front, the 14-day RSI at about 42.18 is moving towards the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• HFD faces heavy competition from discounters and online retailers. It could affect its margins.
• The rising cases of the delta-variant in the UK could affect the supply chain of HFD, increasing its costs.
• The payment of dividends could affect the liquidity of the Company.

Financial Highlights (for the year ended 2 April 2021 (FY2021), as of 17 June 2021)

(Source: LSE Website)

• Driven by the refreshment of over ~50% of Adult bikes, cycling revenue was up ~54.1% YoY on a like-for-like basis in FY2021. It led to like-for-like retail sales growth of ~14.6% YoY in FY2021.
• Driven by a solid ~200% YoY growth in Halfords Mobile Expert vans business, Autocentres revenue surged ~31.6% YoY in FY2021.
• The strong performance in both Retail and Autocentres led to overall revenue rising ~13.1% YoY in FY2021.
• It resulted in underlying EBITDA rising ~46.7% YoY and underlying basic EPS surging ~67.5% YoY in FY2021..

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The management is confident of the motoring and cycling markets outlook. It is also confident about HFD’s ability to compete in both the markets in the long term. The Company would launch more exclusive and new products. It strives to become a market leader in electric mobility in the UK. Meanwhile, the stock made a 52-week low and high of GBX 163.80 and GBX 441.80, respectively.

Based on the bright prospects of the Company in the motoring and cycling markets, its launch of exclusive products to drive growth, the better profitability and leverage of the Company than the industry, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Halfords Group Plc at the current market price of GBX 364.00 (as on 31 August 2021 at 7:15 AM GMT), with a lower double-digit upside potential based on 14.25x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

AB Dynamics Plc

AB Dynamics Plc (LON: ABDP) is listed on the FTSE AIM All-Share index. It designs, manufactures and supplies advanced testing systems and measurement products to the automotive market.

The last dividend of GBX 1.60 per share was paid on 14 May 2021 (interim dividend).

Investment Rationale for Valuation – Speculative Buy at GBX 1,800.00

• The Company has built a new engineering design centre and aggressively invests in systems and processes.
• ABDP is expected to further realise acquisition synergies from Vadotech Group, which was acquired on 4 March 2021.
• The Company has maintained almost zero average debt. Hence, its net finance costs were nil in H1 FY2021.
• ABDP’s order intake trend is positive. It would drive the positive momentum in H2 FY2021.
• On the profitability front, ABDP’s net margin in H1 FY2021 outperformed the industry median of 3.0%.
• On the liquidity front, ABDP’s current ratio since H1 FY2019 has been higher than the industry median of 1.03x.
• In the last five years, the stock has outperformed the benchmark FTSE AIM All-Share index.
• On the technical front, the 14-day RSI at about 32.61 is sustaining above the oversold zone. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• Due to semiconductor shortage, automakers’ volumes could get affected. Hence, the demand for ABDP’s offerings also could suffer.
• There could be delays in the supply chain due to more complicated customs and excise arrangements.
• The payment of dividends could affect the liquidity of the Company.

Financial Highlights (for six months ended 28 February 2021 (H1 FY2021), as of 28 April 2021)

(Source: LSE Website)

• Due to the Covid-19 disruptions to customer testing activities, track testing revenue declined 6% from the H2 FY2020 level.
• However, strong order intake drove laboratory testing and simulation related revenue to rise 38% in H1 FY2021 from the H2 FY2020 level.
• The operating margin of 12.8% in H1 FY2021 was consistent with the H2 FY2020 margin of 12.2%. It was achieved due to a reduced level of activity and strategic investment for long term growth.
• Driven by its cash-accretive operations, ABDP delivered a solid operating cash flow of £8 million. It led to a net cash position of £33.1 million at H1 FY2021.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

ABDP delivered a resilient performance in H1 FY2021 with an improved order intake compared to H2 FY2020. It also has a positive book to bill ratio. The Company has a promising acquisition pipeline, which could drive further growth. Meanwhile, the stock made a 52-week low and high of GBX 1,700.00 and GBX 2,470.00, respectively.

Based on the improved order intake, the Company’s acquisition pipeline, the impressive leverage position of the Company, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on AB Dynamics Plc at the current market price of GBX 1,800.00 (as on 31 August 2021 at 8:55 AM GMT), with a lower double-digit upside potential based on 45.55x 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.

*The dividend yield is subject to change 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. The recommended targets for Smiths Group Plc and Tate & Lyle Plc are above the Resistance level 2 and if Smiths Group PLC and Tate & Lyle Plc attain momentum or breach it, then target prices as per valuation tables could be seen in the near term as per technical chart analysis.

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