Pets at Home Group PLC – Overstretched amid macro-economic uncertainties. 

Pets at Home Group PLC (LON: PETS) is a retailer of pet food, pet products and pet-related services. The pet products are available on its 451 stores and online.

Investment Rationale – Expensive at GBX 406.20

• From trading multiples perspective (EV/EBITDA, EV/Sales, Price/Earnings, and Price/Cash Flow), the stock seems overvalued as compared to Specialty Retailers industry.
• From a technical perspective, 14-Day RSI (75.17), reflecting a short-term correction in price.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.
• The underlying gross margin declined by 136 basis points to 47.7% (H1 FY20: 49.0%).

Risk Assessment

• The potential next wave of the Covid-19 outbreak could be a catastrophe, especially for the non-essential and discretionary product retailers.
• Failure to achieve the anticipated cost-saving or difficulties in implementing supply chain investment could significantly impact margins.
• The foreign exchange fluctuations impacted the retail margin by 57 basis points in H1 FY21.

Interim Results for the 28-week period to 08 October 2020 (as on 24 November 2020)

(Source: Company Website)

• During H1 FY21, like-for-like (LFL) revenue grew 5.3%, Q2 FY20 LFL revenue surged by 12.7%.
• The underlying profit before tax fell 5.1% to £39.6 million.
• The underlying free cash flow of £60.5 million reflected decent cash generation.
• At the end of H1 FY21, balance sheet remained resilient with net debt of £50.9 million and leverage (net debt/EBITDA) of 0.4x. Adjacently, the total liquidity stood at £297.1 million.
• PETS maintained the interim dividend of 2.5 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Covid-19 pandemic continued to create material uncertainties around the near-term trading environment. Hence, the Company could not provide any financial guidance. It is challenging to predict the demand pattern post lockdown as the economic downturn has been unprecedented. Moreover, the disrupted supply chain can increase the operating cost of the business. Meanwhile, Brexit is also imposing uncertainties around recruitment and retention of employees. Post lifting its earnings outlook for FY21 after last trading update, the stock has already soared substantially, which is giving an attractive opportunity to book profit now. Stock 52 week High and Low were GBX 425.00 and GBX 174.90, respectively.

Given the heightened level of uncertainties, we recommend a “Expensive” stance on Pets at Home Group  PLC at the closing price of GBX 406.20 (as on 25 November 2020), while we look forward to reviewing the support from upcoming catalysts. 

AO World PLC – Overstrained and overbought without financial guidance.

AO World PLC (LON: AO) is an electrical retailer, which sells small and major domestic appliances and consumer electronics. The Company’s operations are differentiated in two segments, namely the United Kingdom and Europe.

Investment Rationale – Expensive at GBX 379.00

• All major trading multiples (Price/Earnings, EV/EBITDA, Price/Book, and Price/Cash Flow) are higher as compared to the Technology industry.
• From a technical standpoint, 14-day RSI (61.42) is in the overbought zone, and not supporting the upside move.
• Changing consumer behaviour can disrupt the UK electrical market with the impact of Covid-19 and Brexit on the wider economy.
• The German operations are still reporting a negative adjusted EBITDA.

Risk Assessment

• The Covid-19 pandemic can pose a significant risk to the supply chain.
• Moreover, the net debt has substantially increased in FY20, which can cause liquidity risk.
• Also, the increased cost in recycling and logistics operations can impact the profitability of the business.

Interim Results for Six Months Ended 30 September 2020 (as on 24 November 2020)

(Source: Company Website)

• With sustained growth in demand in the UK and Germany, total revenue increased 53.2% to £717.0 million.
• AO also reported Adjusted EBITDA £28.8 million (H1 FY20: £1.0 million) while the EBITDA margin increased to 4.0% (H1 FY20: 0.2%).
• Further, from the loss before tax of £5.9 million in H1 FY20, AO reported a profit before tax of £18.3 million in H1 FY21.
• The cash generated during the period was £78.4 million (H1 FY20: cash utilised of £5.3 million).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

AO has certainly been benefitted as UK electrical market moved online during the pandemic. However, the stock is trading close to a 52-week high while the technical indicator is unfavourable and outlook is uncertain, which raises doubts over the upside potential. Moreover, there is a risk of potential changes in customer behaviour with Covid-19 impact on the wider economy. Also, Brexit uncertainties creating disorder for supply chain, currency exposure, people, and consumer demand for UK electrical market. Stock 52 week High and Low were GBX 439.50 and GBX 46.67, respectively.

Given the heightened level of uncertainties, we recommend an “Expensive” stance on AO World PLC at the closing price of GBX 379.00 (as on 25 November 2020), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

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

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