Whitbread Plc

Whitbread Plc (LON: WTB) is a Dunstable, the United Kingdom-headquartered hotel operator. The Company also owns and operates the Premier Inn business.

Investment Highlights - Whitbread Plc – Sell at GBX 2,174.00

• The Company has shown a significant decline in revenue in H1 FY2020, despite the improvement in performance, the activity level remained below pre-covid-19 level.
• In the last one year, the Company delivered a negative return of ~ 39.01% and delivered significantly lower returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales and EV/EBITDA multiples of the Whitbread Plc are currently higher as compared to the corresponding multiples of the Hotels & Entertainment Services industry, reflecting overstretched valuations.
• From the technical standpoint, shares were trading below the support level of 20-day simple moving average prices (2,256.75), which reflects a downtrend in the stock and can move down further.

Key Risks

• The Company might face a challenge due to changing consumer spending behaviour.
• The UK restaurant sector is currently exposed to a variety of risks ranging from distorted demand for their product, contracting economy, and declining disposable income.

Recent News

On 27 October 2020, Whitbread announced that its HR Director, Louise Smalley, has decided to retire in 2021 Spring.

Financial & Operational Update – H1 FY2021 (27 August 2020) (released on 27 October 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2021, the total sales declined significantly, reflecting the closure of restaurants and hotels globally.
• The Company performed well since the reopening and performance stood ahead of the market.
• Despite the significant disruption, the customer scores remained strong in the H1 FY2021.
• The Company expanded its business in Germany and opened 21 hotels till October.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2021. Both the top-line and the bottom-line performance declined, while profitability margins remained in the negative zone. As the Company reopened, the performance improved drastically, but still remained below pre-covid-19 level. Meanwhile, the Company is focusing on expanding operations in Germany. Recent lockdown in the UK will significantly impact the Company’s performance as pubs and restaurants will remain closed for 4 weeks till December 2. The stock made a 52-week low and high of GBX 1,551.14 and GBX 4,462.28, respectively.

Based on the risks associated and support from valuation done using the above method, we have given a “Sell” recommendation for Whitbread Plc at the current price of GBX 2,174.00 (as on 2 November 2020, before the market close at 10:58 AM GMT) based on 7.70x EV/NTM Sales (approx.) on FY21E sales (approx.).

Horizon Discovery Group Plc

Horizon Discovery Group Plc (LON: HZD) is a cell engineering Company, which is focused on biopharmaceutical drug developments and commercialising the application of gene modulation and gene editing.

Investment Highlights - Horizon Discovery Group Plc – Sell at GBX 187.50

• The Company’s financial performance was impacted due to the rapid reduction in research work due to covid-19 pandemic.
• As per valuation metrics, Price/Cash Flow multiple of the Horizon Discovery Group Plc is currently higher as compared to the corresponding multiples of the Pharmaceuticals industry, reflecting overstretched valuations.
• The Company’s profitability margins remained in the negative zone from last 5 years and Return on Equity of negative 7.3% for H1 FY2020, remained significantly below the industry median of 6.4%.
• From the technical standpoint, 14-day RSI is in the overbought zone and is supporting downward movement (around 94 level), which means the stock price could decline in the short term.

Key Risks

• Global political uncertainty regarding trade policy also poses a risk for the Company, including protectionist measures and regulation or legalisation in local markets.
• The business must adhere to the stringent regulatory requirements.

Recent News

On 2 November 2020, Horizon Discovery Group announced that they had reached an agreement with PerkinElmer Inc. As per the agreement, PerkinElmer Holdings Limited will acquire entire share capital (issued and to be issued) of Horizon. The acquisition values of share capital are around £296 million, with an enterprise value of around £284 million. As per the acquisition agreement, each shareholder of Horizon Discovery Group is eligible to get 185 pence in cash for each Horizon share, representing 108.30% premium to the previous day closing price of GBX 88.80.

Financial Highlights – H1 FY2020 (30 June 2020) (released on 17 August 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the revenue declined but remained within the range of the expectations.
• On 30 June 2020, the order backlog increased by 59% year-on-year, reflecting good revenue in relation to the unearned portion of customer contracts.
• The Company witnessed a strong balance sheet, with cash and cash equivalents of £23.6 million on 30 June 2020 and solid cash control measures implemented in April 2020.
• At the end of the first quarter of 2020, the Company achieved the planned five-fold increase in capacity in CLE (Cell Line Engineering) (as compared to the start of FY19), with a new value proposition, pricing and go-to-market strategy.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, with negative profitability margins. The demand for the Company’s product and services remained strong, and it expects to improve financial performance in H2 FY2020. The Company expects the market to remain impacted due to covid-19 pandemic. HZD has also reached an agreement to sell entire share capital to PerkinElmer Holdings Limited. Moreover, the Company’s share price is trading near its 52-week high, which raises doubt over its upside potential.

Based on the risks associated and support from valuation done using the above method, we have given a “Sell” recommendation for Horizon Discovery Group Plc at the current price of GBX 187.50 (as on 2 November 2020, before the market close at 10:34 AM GMT) based on 4.36x EV/NTM Sales (approx.) on FY20E Sales (approx.).

 

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

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