3 Consumer Discretionary and Staples Stocks to Look at - TWE, 3PL, MCP

Stocks’ Details
 

Treasury Wine Estates Limited

Flexible and Efficient Capital Structure:Treasury Wine Estates Limited (ASX: TWE) is an international wine business offering a portfolio of luxury, premium and commercial wines to consumers. The company has recently announced about its intention for the demerger of the Penfolds business and associated assets into a different entity by CY21. The company also stated it will ensure that the business continues to operate through the recent COVID-19 related tensions and is also well positioned to navigate to a stronger position once the pandemic subsides. Currently, the company is unable to predict any financial guidance for FY20 with the ongoing uncertainties due to coronavirus outbreak.

Business Update: The company updated that its staff in China have recently returned to working in the office, as have most of its partnership network. The company is closely working the partners to resume operations through the remainder of FY20. In each geography, the company’s supply chain operations have continued, with no material interruptions so far.

During the half-year ended 31^st December 2019, the company reported a decline of 0.7% in revenue, majorly due to volume declines. The business witnessed strong performance across Asia, ANZ and EMEA regions, led by Luxury and Masstige growth. EBITS for the period increased by 2.9% to $366.7 million and NPAT before material items and Self-Generating and Regenerating Assets (SGARA) increased by 5.1% to $229.2 million.


1HFY20 Revenue (Source: Company Reports)

Valuation Methodology:Price to Earnings Based Market Multiple Approach


Price to Earnings Based Market Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation:The stock of the company gave positive returns of 9.12% in the last one month and is currently inclined towards its 52-week low level of $8.4. The company would remain a globally integrated wine platform in the world, with a diversified sourcing footprint, diversified end markets and significant opportunities to grow its brand portfolio across all markets. The company has a flexible and efficient capital structure, with cash and undrawn debt facilities as on 31^st March 2020 amounting to ~$1.1 billion.We have valued the stock using an average P/E multiple of 21.29 x (~10x discounted to five year average assuming qualitative earnings scenario due to covid-19) to FY20E EPS of $0.51 and have arrived at a target price upside of lower double-digit growth (in %). Considering the performance in 1HFY20, a resilient business, long-term growth prospects, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.8, down 2.488% on 23^rd April 2020.
 

3P Learning Limited

Demand Continues to Rise Amid COVID-19 Crisis:3P Learning Limited (ASX: 3PL) is involved in the development, sales and marketing of online educational programs to schools and parents of school-aged students.

Q3FY20 Business Update: The company has seen no interruption to its operations including sales, marketing and product development, with its technology suite scaling well with increased usage and demand. While the company finds it difficult to assess the long-term impact of COVID-19 on the business and the sector it operates in, it has seen increased demand for its products and services. Moreover, it expects an increase in deferred revenue for FY20 as compared to pcp, which indicates a good result for FY21. Group license revenue and EBITDA growth for the second half is expected to grow on pcp, with full year EBITDA to be down on FY19 due to the outlined revenue and cost recognition factors.

1HFY20 Highlights:During the six months ended 31^st December 2019, revenue, EBITDA and NPAT were down on the prior corresponding half, due to sales execution issues in APAC in H2-FY19 that resulted in licence loss. The company’s decision to restructure the business to support scalable and profitable sales growth has placed it well for accelerated sales growth. Its FY20:22 Accelerated Growth Plan has shown positive signs, with increased new business billings on current products and ARR in all regions.


1HFY20 Results (Source: Company Reports)

Valuation Methodology:EV/Sales Multiple based Relative Valuation

EV/Sales Multiple based Relative Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation:The stock of the company gave positive returns of 10.96% in the last one month and is currently trading below the average of its 52-week low and high level of $0.6 - $1.1. Despite the impact of COVID-19 on the business, the company expects to report positive operating cash flows for the full year FY20. The rise in demand for its services is a positive indicator of the success of the business and its resilience to the current challenges. We have valued the stock using EV/Sales based illustrative relative valuation method and arrived at a target price with high single-digit upside in percentage terms. Hence, we give a “Speculative Buy” recommendation on the stock at the current market price $0.815, up 0.617% on 23^rd April 2020.

McPherson’s Limited

Demand for Household Items on a Rise: McPherson’s Limited (ASX: MCP) is a leading supplier of health, wellness and beauty products in Australasia and China, with operations in Australia, New Zealand and Asia.

Trading Update: The company recently announced that its core six brands are tracking 20% above FY19, with majority of the brands benefitting from increased baking, freezing and cleaning and greater focus on hygiene, as people stay home. The company has been proactively engaged in managing the outbreak and has demonstrated a rapid response by launching sanitation and immunity products including the first ever hand sanitiser product.

Results Highlights: During the half year ended 31^st December 2019, underlying and statutory profit before tax stood at $8.5 million, representing a 9% increase on pcp. Sales revenue was in line with pcp, with robust growth in the domestic market with sales up 49% to $11.2 million.


1HFY20 Results (Source: Company Reports)

Stock Recommendation:The stock of the company gave positive returns of 77.08% in the last one month and is inclined towards its 52-week high level of $3.130. As per the latest operation update, the company’s core brands have been performing well on track. Moreover, the company possesses a strong balance sheet with low gearing of 13% and is on track to report PBT growth of 10% in FY19, subject to material uncertainty. On TTM basis, the stock has an EV/EBITDA multiple of 12.3x, as compared to the industry median (Personal & Household Products & Services) of 8.4x. P/E multiple for the company stands at 19.47x, as compared to the industry median (Personal & Household Products & Services of 16.1x. Considering the backdrop of the above factors, we have a watch stance on the stock at the current market price of $2.7, up 5.882% on 23^rd April 2020.

 
 
Comparative Price Chart (Source: Thomson Reuters)

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