GlaxoSmithKline Plc - Positive regulatory reviews to treat HIV and Oncology

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

Rationale for Valuation – Buy at GBX 1,472.00

• The Company has shown strong fundamentals, maintained good momentum, good underlying demand for the major products and positive regulatory reviews for new speciality pipeline medicines.
• GSK has entered the final stage of clinical trials with the 5-in-1, MenABCWY vaccine. ROE was considerably above the peer’s average.
• EV/Sales, EV/EBITDA, P/E and P/CF multiples of the GSK are currently lower than industry. It reflects that shares are undervalued against the industry.

On 28 October 2020, the Company will announce the Q3 FY2020 results.

Recent News

On 28 August 2020, the Company announced that GSK’836 (GSK3228836) witnessed marked reductions in hepatitis B virus DNA and hepatitis B surface antigen (HBsAg) compared with placebo after four weeks of treatment in people.

On 26 August 2020, GSK stated that the European Commission approved BLENREP (belantamab mafodotin), which is for the treatment of patients with relapsed and refractory multiple myeloma.

On 19 August 2020, the Company stated that it had entered the final stage of clinical trials with 5-in-1 meningitis (MenABCWY) vaccine candidate.

Q2 FY20 Trading Update (for the three months ended 30 June 2020 as on 29 July 2020)

(Source: Company Website)

• The fundamentals of the Company’s business remain strong, and it is maintaining good momentum.
• In this quarter, it has seen a positive regulatory review for new speciality pipeline medicines to treat Oncology and HIV; and made further progress with the Future Ready programmes and Consumer Healthcare integration.
• The total EPS increased to 45.5 pence, reflecting profit on disposal of Horlicks and other Consumer Healthcare brands.

One Year Share Price Chart

1-Year Chart as of 28 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The increasingly complex regulatory environment poses tremendous pressure regarding data and cybersecurity. Excessive competition in the industry could affect the revenue and profitability of the Group.

Technical Analysis

From the technical standpoint, 90-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Conclusion

Overall, the Company is maintaining good momentum on the strategic priorities, and the fundamentals of GSK’s business stay strong. Recently, the Company has entered into two agreements for the COVID-19 vaccine development, first with Medicago of Canada and the second with Sanofi. Also, the Company has entered the final stage of clinical trials with the 5-in-1, MenABCWY vaccine.

The return on equity (ROE) recorded by the Company in the past several years was considerably above the peer’s average. According to the S&P Long-term Issuer Rating (May 2020), the Company’s debt rating was A, with a stable outlook. EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of the GSK are currently lower than industry, which shows that shares are undervalued against the industry. The stock made a 52-week low and high of GBX 1,328.19 and GBX 1,857.00, respectively.

Considering the strong fundamentals, sustainable growth momentum, and support from the valuation as done using the above method, we have given a “BUY” stance on GlaxoSmithKline at the closing market price of GBX 1,472.00 (as on 28 August 2020), with lower double-digit upside potential based on 14.54x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Anglo American PLC – Continued to invest in high-quality growth

Anglo American (LON: AAL) is an International Mining Group, which is having operations in Australia, Southern Africa, South America, and North America, and is headquartered in London, United Kingdom. The Company’s primary activities include mining, exploring, and processing of minerals and metals at various geographies globally.

Investment Rationale – Buy at GBX 1,832.60

• The major trading multiples of AAL (Price/Cash Flow, Price/Book, Price/Earnings, EV/EBITDA, and EV/Sales) are lower than the corresponding multiples of the Basic Materials industry.
• The reported EBITDA margin in FY19 was 31.40 per cent against the industry median of 17 per cent, reflecting significant operational improvement. Net margin stood at 15.30 per cent for the fiscal year 2019, higher than the industry median of 3.6 per cent.
• Liquidity Position (as of 30 June 2020): Net debt decreased to US$7.6 billion (21% gearing) while cash and cash equivalents remained flat at US$6.3 billion against the balance reported at 31 December 2019.
• On 12 May 2020, Standard and Poor's reaffirmed the stable outlook with BBB rating.

Recent News

10 June 2020: The Company announced the stoppage of the ACP (Anglo Converter Plant) Phase B due to water leak; however, it would not affect the production guidance for the full year.

Interim Results (for the six months to 30 June 2020)

(Source: Company Website)

The key highlights of the H1 FY20 results released on 30 July 2020 were as follows:

• The Covid-19 pandemic led to 11% (year-on-year) reduction in output and 16% (year-on-year) decrease in revenue. However, the reductions were partially offset by robust performance Chilean copper and Brazilian iron ore operations.
• Interim dividend stayed consistent with the 40% payout policy at $0.28 per share.
• It is targeting carbon neutrality by 2040 across operations.

One Year Share Price Chart

1-Year Chart as of 28 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Risk Assessments

The ongoing COVID-19 disruption can delay commissioning and approval of certain projects. Moreover, the subdued outlook for global economic growth coupled with geopolitical issues, increasing environmental regulations, volatility in metal prices, and failure to achieve operational targets due to supply chain issues could also pose a financial and operational risk to the Company.

Valuation Methodology

Conclusion

Due to the possibility of a second wave of Covid-19 infections, the current market outlook is highly uncertain. The Company is well-positioned to take benefits from growth trends across the energy and industrial markets. Moreover, the completion of Sirius Minerals acquisition and UK Woodsmith polyhalite project should generate synergy in future. AAL has taken several effective measures to help safeguard against the spread of COVID-19 pandemic. AAL is cautious about the outlook for the key commodities in the short term but expects positive demand in the long-term. Most of the Company’s sites across the world are operating with appropriate safety measures. The Company benefits from a range of high margin, high return and fast payback options within the existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. Also, the longer-term outlook for the diamond market remains positive.

Stock 52 week High and Low were GBX 2,266.00 and GBX 1,018.20, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from USD 20,455 million in FY15 to USD 29,870 million in FY2019. Compounded annual growth rate (CAGR) stood at 9.93 per cent.

Based on the factors discussed above, we have given a “Buy” recommendation on Anglo American PLC at the closing market price of GBX 1,832.60 (as on 28 August 2020) with lower double-digit upside potential based 16.00x Price/Earnings (approx.) on FY20E Earnings Per Share (approx.).

Smith & Nephew Plc - Operating with a strong balance sheet and good liquidity position

Smith & Nephew Plc (LON: SN.) is a FTSE 100 listed medical technology company with global operations. It has manufacturing facilities in several countries.

Rationale for Valuation – Buy at GBX 1,521.50

• The Company has launched new products lately which are giving positive results.
• The Company has a robust balance sheet with sound liquidity profile.
• P/E, EV/Sales, EV/EBITDA and P/CF multiples of the SN are currently lower against the industry, reflecting shares are undervalued as compared to the industry.

On 29 October 2020, the Company will publish the Q3 trading report.

Financial Highlights (H1 FY2020, as on 29 July 2020)

(Source: Company Website)

• The first-half performance was in line with 1 July 2020 update. The decrease in performance was driven by government-led restrictions to control COVID-19.
• Recently, the Company has launched new products including EVOS◊ in Trauma and OR3O◊ Dual Mobility Hip System.
• Smith & Nephew witnessed a strong balance sheet and sound liquidity, with $3.4 billion of committed facilities and net debt (excluding lease liabilities) of $2.1 billion.
• The interim dividend per share stood at 14.4 cents and was in line with 2019.
• The Company has maintained the investment in R&D, with a new robotics platform and other new product introductions.

One Year Share Price Chart

Daily Chart as of August 28, 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The UK healthcare industry is exposed to a variety of risks, including regulatory changes and regulatory scrutiny, disruptive business models, innovations triggered by emerging technologies and changes in the geopolitical landscape. Further, the potential risk could be an inability to keep pace with significant product innovation and technical advances in the commercially viable products.

Technical Analysis

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Conclusion

The Company mentioned that performance improved across Q2 as elective surgeries restarted. The Company paid an interim dividend of 14.4 cents per share amid the challenging time. It has shown a strong balance sheet and good liquidity position. Looking at the medium-term outlook, the Company will consistently outgrow the markets at the same time as delivering ongoing improvements to the trading profit margin. It will also take advantage when markets recover. Further, the Company’s current ratio is higher than the industry, which shows SN has enough cash to recover the short-term obligations.

The Company has shown encouraging signs of activity rebuilding in the core markets. As per the valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, and Price/ Cash Flow multiples of the SN are currently lower as compared to the corresponding multiples of the Healthcare Equipment & Supplies industry. It reflects, shares are undervalued as compared to the industry. The stock made a 52-week low and high of GBX 1,055.01 and GBX 2,023.00, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation on Smith & Nephew at the closing market price of GBX 1,521.50 (as on 28 August 2020), with lower-double digit upside potential based on 33.50x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Centrica Plc – Operating with Strong Balance Sheet

Centrica Plc (LON: CNA) is a FTSE 250-listed global energy solutions and services provider Company.

Rationale for Valuation – Buy at GBX 46.04

• The Company has a strong market position in the UK & Ireland and witnessed robust cash flows and liquidity.
• EV/Sales, EV/EBITDA, P/E and P/CF multiples of the CNA are currently lower than the industry median. It reflects that shares are undervalued against the industry.
• It witnessed a recovery in demand for energy and normal sales level of services and solutions in the core market. It has also delivered a positive return of around 21.22% in the last three months.

Recent News

On 27 August 2020, the Company stated that British Gas makes payments of £1.73 million. This payment is for the handling of changes to prepayment meter top-up arrangements.

On 7 August 2020, it announced the appointment of Scott Wheway as a Chairman.

Financial Highlights – H1 Financial Year 2020 (for the period ended 30 June 2020, as on 24 July 2020)

(Source: Company Website)

• Overall, it has delivered a resilient performance against the backdrop of Covid-19.
• The Company has maintained good customer service levels, with continued high customer retention.
• It witnessed robust cash flows and liquidity, with a decrease in net debt of £0.4 billion.
• Further, CNA has shown strong trading performance in Energy Marketing & Trading and robust performance in proprietary and LNG trading.
• It has strong market positions, with improved underlying gross margins in North America Business.

One Year Share Price Chart

1-Year Chart as of 28 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The deteriorated demand in gas amid the COVID-19 restrictions has led to commodity or gas price slump, which can affect the profitability in FY20. Liquidity and interest rate risks could affect the operations of the Company. Any change in regulations and government policies could affect the overall business of the Company.

Technical Analysis

From the technical standpoint, shares were trading slightly above the short-term support level of the 50-day simple moving average price (SMA), which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Conclusion

Overall, Centrica has a strong market position in the UK & Ireland and is focused on creating simple, leaner and modern Company. With the ease in lockdown, CNA witnessed a recovery in demand for energy and normal sales level of services and solutions in the core market. It assumes an increasing trend in the second half of the financial year 2020.

The Company’s stock has delivered a positive return of around 21.22% in the last three months. EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of the CNA are currently lower than industry, which shows that shares are undervalued against the industry. The stock made a 52-week low and high of GBX 95.32 and GBX 29.10, respectively. Moreover, the stock has outperformed the index (FTSE Mid 250) during the last three months.

Based on the decent growth and support from the valuation as done using the above method, we have given a “Buy” recommendation on Centrica at the closing market price of GBX 46.04 (as on 28 August 2020), with lower-double digit upside potential based on 11.00x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Hochschild Mining PLC – Expecting a rebound in profitability in H2 FY20 with high commodity prices.

Hochschild PLC (LON: HOC) is a FTSE 250 listed Mining Company, which focusses on the premium quality of gold and silver deposits. The Company has operations in the regions of Argentina, Chile, and Peru.

Investment Rationale – Buy at GBX 240.60

• The major trading multiples of HOC (Price/Cash Flow, Price/Book, Price/Earnings, EV/EBITDA, and EV/Sales) are lesser than the corresponding multiples of the Basic Materials industry.
• The Company’s EBITDA margin and current ratio are better than the industry median, which reflects that the Company is managing the operations and short-term obligations well as compared to peers.
• Liquidity Position (as of 30 June 2020): Net debt increased to US$58.4 million (31 December 2019: US$33.2 million). Adjacently, cash and cash equivalent balance slightly reduced to US$162.1 million (31 December 2019: $166.4 million).

Recent News

23 July 2020: HOC announced the appointment of Jill Gardiner as an Independent Non-Executive Director, which came in effect from 1 August 2020.

Interim Results (for the six months to 30 June 2020)

(Source: Company Website)

The key highlights of the H1 FY20 results released on 19 August 2020 were as follows:

• Revenue and EBITDA decreased to US$$232.0 million (H1 FY19: US$354.5 million) and US$80.6 million (H1 FY19: $153.7 million), respectively. The output in the first half was impacted due to Covid-19 related stoppages.
• However, 28% rise in gold prices and 8% rise in silver prices somehow offset the impact of declined production.
• The balance sheet remained strong despite Covid-19 crisis.
• Full brownfield exploration plan is projected to be completed by the end of FY20.

One Year Share Price Chart

1-Year Chart as of 28 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Risk Assessments

There is a financial risk with fluctuating commodity prices. Also, there is operational risks arising from Covid-19 disruption and cyber-attacks. The volatile macro-economic factors are also posing a political and regulatory risk. Moreover, the suspension of port operations can disrupt supply chains.

Valuation Methodology

Conclusion

Both top-line and bottom-line financial items declined in H1 FY20. However, the significant rise in metal prices coupled with monetary stimulus initiated by governments has kept the trading resilient. As gold and silver prices have topped all-time high and sever-year high, respectively, the Company would rebound to profitability in H2 FY20. Moreover, the Company is set to add reserves and resources with planned brownfield and greenfield activity.

Stock 52 week High and Low were GBX 326.80 and GBX 80.40, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Over the past four years (FY16 – FY20), the Company’s revenue surged from USD 688.24 million in FY16 to USD 755.68 million in FY20. Compounded annual growth rate (CAGR) stood at 2.36 percent.

Based on the factors discussed above, we have given a “Buy” recommendation on Hochschild Mining PLC at the closing market price of GBX 240.60 (as on 28 August 2020) with lower double-digit upside potential based 12.00x Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

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