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. 

On 24 November 2020, the Company will announce the FY21 interim results.

Investment Rationale – Sell at GBX 405.20

• 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 (59.02), reflecting a significant downward trend.
• Over the past three years (H1 FY17 to H1 FY20), PETS’ gross margin has remained below the industry median. In H1 FY20, gross margin was 49.0%.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.

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.

Recent News

1 October 2020: HSBC Bank PLC appointed as joint corporate broker alongside Numis Securities Limited, with immediate effect.

Trading Update (as on 24 September 2020)

• As earlier highlighted on 31 July 2020, the last eight weeks of Q1 FY21 had seen sales momentum returning across all regions.
• The positive momentum experienced in Q1 FY21 has continued into the second quarter of 2021, with a double-digit LFL growth in customer sales (the eight weeks to 10 September 2020).
• However, COVID-19 has created several uncertainties around the trading environment, due to the potential risk of second round of lockdown.
• The balance sheet and liquidity remained strong.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

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 FY20 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 “Sell” stance on Pets at Home Group  PLC at the current price of GBX 405.20 (as on 15 October 2020, before the market close at 9:10 AM GMT+1), while we look forward to reviewing the support from upcoming catalysts.  

MC Mining Ltd – Revenue and production declined significantly during FY20.

MC Mining Limited (LON: MCM), earlier known as Coal of Africa Limited, is an Australia-based coal development, exploration, and mining Company.

Investment Rationale – Sell at GBX 6.50

• The Price/Earnings multiple is quite overvalued as compared to the Energy industry.
• From a technical perspective, 20-Day SMA (6.68) indicating a downward trend.
• Since 2013, all profitability margins have remained in the negative territory while the industry median of gross margin, EBITDA margin and net margin are positive.
• Moreover, the Company’s current ratio was at 0.18x in H1 FY20 against the industry median of 0.52x, it has remained lower than the industry median for the past seven years.
• The unrealised foreign exchange loss for FY20 was US$399 thousand (FY19: gain of $244 thousand).

Risk Assessment

• The business model of the Company requires substantial funds to operate, and hence, the prolonged suspension of activities at major projects can pose a major risk to the liquidity position.
• Macroeconomic conditions, political uncertainty, and currency fluctuations can impact commodity prices, and thus, the cash flows and profitability. Recent News:

Recent News

1 October 2020: Strand Hanson Limited has been appointed as Nominated Adviser, with immediate effect.

Financial Highlights - for the year ended 30 June 2020 (as on 30 September 2020)

 (Source: Company Website)

• During FY20, the Company generated US$1,114 thousand in operating cash flow by the Uitkomst Colliery.
• At the end of FY20, total unrestricted cash balance was stood at US$2,678 thousand (FY19: US$8,811 thousand).
• MCM is still in losses, and thus, no dividend was proposed for FY20.
• Uitkomst's average revenue per tonne decreased to US$65/t (FY19: US$81/t), reflecting 20% decline year-on-year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The ZAR against USD continues to be volatile with the Covid-19 impact, which can translate into significant financial impact. Moreover, its financial liabilities are sensitive to fluctuating interest rate movements while there is a liquidity risk after significant losses. Furthermore, Uitkomst production continues to be at risk with the pandemic. The hard-coking coal prices declined by 32% due to economic slowdown while the thermal coal prices declined 22% year-on-year in FY20, and it is likely to impact the cash flows in the short-term. Stock 52 week High and Low were GBX 31.50 and GBX 5.20, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on MC Mining Ltd at the current price of GBX 6.50 (as on 15 October 2020, before the market close at 10.05 AM GMT+1), while we look forward to reviewing the upcoming catalysts and reinvest at the right price for value investing. 

 

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

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