CYBG PLC

CYBG PLC (CYBG) is a provider of personal and commercial banking and related financial solutions. It operates through Clydesdale Bank, Virgin Money, Yorkshire Bank, and B brands. The company offers a range of accounts and deposits services; loans and mortgages; credit and debit cards; corporate financing; life and non-life insurance; foreign exchange services; treasury solutions; and digital banking solutions. It provides investment and pension products, ISAs, wealth management, and private banking solutions. The company serves individual, corporate, wealthy, and SME clients through a network of branches, ATMs, and online portals in the UK.

1Q FY2019 Trading Update
NIM (Net Interest Margin) for 1Q FY19 was 172bps and loan growth stood at 1.4% during the first quarter. Net cost of risk reported at 22bps with sound asset quality. The CET1 ratio stood at 14.5%,which was 60bps lower than the proforma level given at the end of Sept 2018, mainly due to AT1 distributions and higher exceptional charges. The bank suffered £161 million of exceptional charges in Q1 FY19. £48 million of transaction costs incurred by Virgin Money (VM), acquisition of £8 million connected to stamp duty, £77 million in relation to the closing of VMDB project and initial integration spending of £17 million.

The company now expects NIM for the year to be in between 165bps and 170bps. A further integration, rebranding and restructuring costs of £100 million to be incurred during the remainder of the financial year 2019. The company expects to produce annual net run-rate cost synergies with a minimum amount of £150 million by the end of FY 2021, vs. £120 million previously announced. Loan growth is expected to remain robust for SME and unsecured lending, but net mortgage lending growth is expected to be lower due to the highly competitive environment.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)

The company’s net interest income surged from £844 million in 2017 to £851 million in 2018.  Reported total operating income declined by 2.8 per cent to £1,007 millionagainst the £1,036 million in FY17. Operating loss before impairment losses stood at £123 million.The group reported a loss after tax of £145 million (FY17: profit of £182 million), reflecting the legacy conduct costs of £396 million in 2018. The reported basic earnings per share declined from 17.3 pence to negative 19.7 pence.

Share Price Performance

Daily Chart as at May-02-19, before the market closed (Source: Thomson Reuters)

On 2^nd May 2019, at the time of writing (before the market close, GMT 9:50 PM), CYBG shares were trading at GBX 204.10, up by 0.34 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 367/GBX 172.10. The company’s stock beta was 0.88, reflecting lower volatility as compared to the benchmark index.

Valuation Methodology


Growth Perspective
The bank continued to introduce various products and services to enhance its offerings and diversify and improve its product and services portfolio. The bank could benefit from venturing into FinTech arena as it is fast changing the way banking is done and challenging the regulatory structure.

Conclusion
Good volume growth, better than expected net interest margins, in line loan losses, and an uplift in expected cost savings will help to improve business operations. Management confirmed good progress with the merger integration and boosted expected annual run rate cost synergies to GBP 150 million from the previous forecast of GBP 120 million per year. Despite the Brexit debacle, the regional bank is doing well with modestly improved margin guidance for the fiscal year 2019 of 165-170 basis points from the previous guidance of 160-170 basis points. The U.K. political and economic outlook is uncertain, but the group is heavily focused on Virgin Money integration. Based on above factors and supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 203.40 (as on 1^st May 2019) with single-digit upside potential based on 9.02x NTM Price/Earnings multiple (approx.) on FY19E earnings per share (approx.).
 

Hurricane Energy PLC

Hurricane Energy Plc (HUR) is an oil and gas exploration and development company that discovers and develops oil from fractured basement reservoirs. The company provides exploration properties such as Lancaster basement prospect, whirlwind basement discovery, lincoln basement prospect, and others. It offers exploration services such as typhoon basement prospect, Halifax basement prospect, Warwick basement prospect and among others. The outstanding market capitalisation was around £912.66 million.

Financial Highlight (FY 2018, $’000)

(Source: Annual Report, Company Website)

The other operating expenses declined from $14.6 million in FY17 to$12.7 million in FY18, driven by the lower level of corporate activity in the financial year 2018 as compared to the previous year. The company’s reported operating loss decreased from $25 million in FY17 to$12.7 million in FY18. The Group’s loss after tax for the year 2018 stood at $60.9 million, an increase against the $7.0 millionreported in 2017,due to an increase in non-cash fair value loss on derivative financial instruments of $42.4 million associated with Hurricane’s convertible bonds. The total comprehensive loss for the year surged from $7 million in 2017 to $59.1 million in 2018. The basic and diluted loss per share rose from 0.46 cents in the financial year 2017 to 3.11 cents in FY2018. The net cash position stood at $123.2 million at the end of FY2018.

Share Price Performance

Daily Chart as at May-02-19, before the market closed (Source: Thomson Reuters)

On May 02, 2019, at the time of writing (before the market closed, at 9:10 am GMT), HUR shares were trading at GBX 46.679, up by 0.13% against its previous day closing price. Stock's 52 weeks High and Low is GBX 60.75/GBX 38. At the time of writing, the share was trading 23.16 per cent lower than its 52w High and 22.83 per cent higher than its 52w low. Stock's average traded volume for 5 days was 9,562,886.40; 30 days – 8,048,913.30 and 90 days – 7,725,827.30. The average traded volume for 5 days was up by 18.81 per cent as compared to 30 days average traded volume. The company's stock beta was 1.46, reflecting high volatility as compared to the benchmark index.

Key Risks
Risks include volatility in commodity prices, and a stronger US Dollar relative to GBP Sterling.Operational risks lie in reservoir uncertainty and the potential impact on future production and for new development success. Rising operational cost pressure may impact longer-term profitability along with generic company risks including project delays and the unexpected departure of key management and senior personnel. Some additional risks are: Negative results from the Lancaster EPS, Operational issues with the Aoka Mizu FPSO and leading to a fall in the processing capacity of the FPSO, a fall in oil prices and a less favourable M&A environment.

Conclusion
“Fractured basement” developments are uncommon globally, and perceived risk is potential early water break-through, which has been seen in some fields due to poor reservoir management. However, Hurricane's technical work has demonstrated that most of the risks have been mitigated.  On the basis of above headwinds, we recommend investors to keep a cautious “Watch” approach on the stock at the closing price of GBX 46.62 (as on 1st May 2019), given the trading levels and other challenges at hand.
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The buy recommendation is also valid for the current price as covered in the report (as on May-02-19).

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