Melrose Industries Plc (LON: MRO)

Business Overview
Melrose Industries Plc is an investment company that specialises in buying strong fundamental manufacturing business which can be further improved in terms of performance.

Financial Highlights – Financial Year 2019
For the financial year 2019, the adjusted revenue from continuing operations increased to £11,592 million as compared with the previous year (2018: £8,645 million), driven by an increase in all the segments but a slight decrease in other industrial segments. The adjusted results for the year ended 31 December 2019 show an operating profit of £1,102 million (2018: £813 million), a profit before tax of £889 million (2018: £672 million), and diluted EPS (earnings per share) of 14.3 pence (2018: 12.7 pence).

In the financial year 2019, the statutory results show revenue of £10,967 million (2018: £8,152 million), an operating profit of £318 million (2018: loss of £387 million), a profit before tax of £106 million (2018: loss of £542 million), and diluted EPS of 0.9 pence (2018: loss of 11.8 pence).

The Board has proposed a final dividend per share of 3.4 pence (2018: 3.05 pence) which reflects a full-year dividend per share of 5.1 pence (2018: 4.6 pence), an increase of 11%.

Share Price Performance

Daily Chart as on 13^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 13, 2020, at the time of writing (before the market close, at 11:10 AM GMT), Melrose shares were trading at GBX 146.30, up by 3.65 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 309.40/GBX 140.70. 

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology


Conclusion
In the financial year 2019, the company has delivered significant progress and the substantial value that is being unlocked. As such, the group anticipate 2020 to be another year of good progress due to each of the main businesses with a dual emphasis on efficiency programmes, record investment in R&D to maintain technological market leadership as well as to deliver operational improvements. The company model has also been focussed on performance enhancement rather than end market progress. While it is too early to be precise on the impact of China coronavirus (COVID-19) on the businesses or wider economic conditions.
Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 141.15 (as on 12th March 2020) with single-digit upside potential based on 10.72x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Hastings Group Holdings Plc (LON: HSTG)

Business Overview
Hastings Group Holdings Plc is a Bexhill, United Kingdom-based agile, data and digitally focused general insurance company.

Financial Highlights – Financial Year 2019
For the financial year ending 31st December 2019, the net revenue declined to GBP 741.3 million as against GBP 756.4 million in FY2018. The group’s adjusted operating profit stood at GBP 109.7 million in the financial year 2019 versus an adjusted operating profit of GBP 190.6 million in the financial year 2018. The underlying PBT (Profit before tax) declined to GBP 84.3 million in FY2019 from an underlying PBT (Profit before tax) of GBP 174.6 million in the financial year 2018. The reported PBT stood at GBP 82.1 million in FY2019 versus a reported PBT of GBP 152.9 million in FY2018. The reported profit (attributable to the shareholders) was at GBP 69.7 million in FY2019 versus a reported profit (attributable to the shareholders) of GBP 130.6 million in FY2018. The basic earnings per share stood at 10.6 pence in the financial year 2019 versus 19.9 pence in the financial year 2018.

Share Price Performance

Daily Chart as on 13^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 13, 2020, at the time of writing (before the market close, at 9:16 AM GMT), HSTG shares were trading at GBX 151.80, up by 1.20 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 235.45/GBX 136.50. 

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology


Growth Catalysts
Investment in future businesshelps in achieving further sales growth and operational efficiencies. The company is in an excellent position to profit from the customers’ push towards online sources, especially primarily price comparison websites, to buy insurance.

Conclusion
During 2019, the company has also continued to make progress on the operational, technology, and strategic initiatives. The group’s board stays confident in the ability to capitalise on its long-term profitable growth opportunities and therefore predicts to pay a total dividend above the company's stated 65%-75% target pay-out ratio range. The company’s trading operations in 2020 were in line as expected. While the market environment has been challenging, with elevated claims inflation in Q4 FY19, the company stayed focused on the strategy of retaining pricing discipline, applying rate rises ahead of the market.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from £480.20 million in FY15 to £739.6 million in FY19. Compounded annual growth rate (CAGR) stood at 11.40 per cent.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the current price of GBX 149.80 (as on 13th March 2020 at 9:00 AM GMT) with single-digit upside potential based on 11.02x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures have been taken from Thomson Reuters.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 13th March 2020.

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