Fundamental Review of Two Blue Chip FTSE Stocks: Lloyds Banking Group PLC & Reckitt Benckiser Group PLC

United Kingdom market surged for a fourth consecutive day on Thursday (30^th April 2020, before the market close) as investors cheered over progress in potential drug development for the Covid-19. Correspondingly, Companies dealing in pharmaceutical, health and hygiene products are getting benefitted amid the health emergency imposed by the Coronavirus pandemic. Meanwhile, the Financial Conduct Authority (FCA) has warned the banks not to put pressure over clients during the crisis. The provision against anticipated bad loans is massively affecting the profitability across the banking sector and hurting their balance sheet. Today, let’s ponder over two blue-chip stocks today - Lloyds Banking Group PLC (LON:LLOY) and Reckitt Benckiser Group PLC (LON:RB). They have released their business updates today (30^th April 2020). Subsequently, the price of LLOY plunged around 4.7 per cent, whereas RB surged over 4.4 per cent (at the time of writing, GMT 10.20 AM). It is imperative to take a glimpse fundamentally over their respective business model, financial position, and outlook to understand the magnitude of their latest trading statements.

Lloyds Banking Group PLC (LON:LLOY)

Lloyds Banking Group PLC is a FTSE 100 listed company. It provides financial and banking services in the United Kingdom and caters around 26 million customers, including both personal and commercial customers. It offers services through several brands including Bank of Scotland, Halifax, Lloyds Bank and Scottish Widows.

(Source: Company Website)

Key Performance Indicators - Signifying Solid Performance in 2019

• Cost to income ratio: Stood at 48.5% in 2019 against 49.3% in 2018.
• Common equity tier 1 ratio (CET1): Remained strong at 13.8% as compared to 13.9% in 2018.
• Customer satisfaction: Customer satisfaction increased in 2019 to 62.8 net promoter score (NPS) against 61.8 NPS in 2019.
• Digitally active customers: There has been a progressive pace of digital adoption among customers and the total count of active digital customers reached 16.4 million in 2019 from 15.7 million in 2018.
• Customer Complaints: FCA reportable complaints per 1,000 accounts reduced to 2.9 in H12019 from 3.9 in H12018.

(Source: Annual Report)

Significant Regulatory Updates of 2020:

• 28^th April 2020: Lloyds Banking Group has announced that Alan Dickinson will be leading as Deputy Chairman of the board from 21^st May 2020 when Anita Frew will retire.
• 7th April 2020: The Group announced a cash tender offer for all its 12 per cent Fixed-to-Floating Rate Perpetual Capital Securities.
• 31^st March 2020: Considering the challenges presented by the Coronavirus outbreak, the Group has decided to suspend share buybacks and interim or quarterly dividend payments on ordinary shares until the end of 2020. Moreover, the Group had also cancelled the 2019 final dividend.

Q1 FY20 Interim Management Statement - Actively Supporting Customers, Resilient Business Model, Solid Pre-Provision Profit, and Strong Balance Sheet

• On 30^th April 2020, the group announced its results for the three months ended 31^st March 2020. Despite the unprecedented crisis created by COVID-19, the company is actively supporting colleagues and customers, with flexible and sensitive treatment of retail customers (includes Covid Corporate Financing Facility (CCFF) and Coronavirus Business Interruption Loan Scheme (CBILS)), increased support for business clients, and approximately 90% of branches stay open and ATM availability exceeding 95%, In the difficult times, the company is using Multi-channel distribution model to serve customers throughout the lockdown.
• Statutory profit before tax decreased by 95% to £74 million in Q1 FY20 against the same period last year and was impacted after higher impairment charge.
• Pre-provision operating profit for the first quarter of 2020 was down by 19% to £2 billion.
• Net income decreased by 11% to £4 billion, impacted by rates and slowdown across key markets. This also drives the NIM (Net Interest Margin) down by 12bps to 2.79%, due to rates and asset markets; other income £1.2 billion impacted by LDC (Lloyds Development Capital) and activity levels; the impact of lower rates and slowdown to continue into Q2.
• For the current quarter, the impairment charge increased significantly to £1.4 billion, primarily driven by some charges relating to existing restructuring cases and revised economic outlook. Statutory RoTE (return on tangible equity) of 5.0% impacted by impairments in Q1.
• TNAV (Tangible net assets per share) rose by 4 pence to 57.4 pence, supported by increased pension surplus and driven by widening credit spreads.
• Loan to deposit ratio declined to 103%, with strong corporate loan growth and significantly increased deposits. CET1 ratio of 14.2%, up by 45bps in Q1, reflecting 56bps of pre-impairment build, (56) bps impact of impairments, (38) bps impact of RWAs/Other and 83bps benefit of cancelling dividend.

(Source: Q1 Results, Company Website)

Share Price Performance

Daily Chart as of April 30^th, 2020, before the market close (Source: Refinitiv, Thomson Reuters)

LLOY’s shares were trading at GBX 33.290 on 30th April 2020 (before the market close at 9:01 AM GMT+1). Stock's 52 weeks High is GBX 73.66 and Low is GBX 27.70.

Outlook – Reflecting Challenging Environment and Economic Uncertainties

The economic outlook is uncertain, and the final impact will depend on the severity and duration of the shock. Bank of England’s and Government actions will help to mitigate the impact, with banks an important part of the solution. The impact of lower levels of activity, lower rates, and higher impairment on the LLOY’s business will continue into Q2 FY20. As per the substantial change in the operating environment and economic anticipations, the company’s earlier guidance is no longer appropriate.

Reckitt Benckiser Group PLC (LON:RB)

Reckitt Benckiser Group PLC is a FTSE 100 listed, British consumer goods company, with global operations. The Group operates through two business segments - Health and Hygiene Home. Its major brands include Dettol, Harpic, Lysol, Mortein, among other hygiene and household products. It operates with a workforce of more than 42,000 people globally.

Company’s reach can be understood by the fact that its household brands are sold in around 190 countries, and globally, consumer buys around 20 million RB products in a day.

Geographically, RB is domiciled in the UK; however, the company generates most of its revenue from the US and Greater China.

(Source: Annual Report, Company Website)

Business Segments at a Glance

• Health:
  • Comprises portfolio of products relates to pain relief, protection, wellness and nutrition.
  • 2019 Revenue: GBP 7,815 million.
  • Category Profile as per 2019 revenue: Infant nutrition (38% of revenue), Over the counter (25% of revenue) and Wellness, health hygiene and VMS (37% of revenue).
• Hygiene Home:
  • Comprises a portfolio of solutions to households through products related to elimination of germs, pests and odour.
  • 2019 Revenue: GBP 5,031 million.

Significant Developments of Recent Past:

• 9^th April 2020: Jeff Carr held the position of Chief Financial Officer (CFO) in Reckitt Benckiser Group as Adrian Hennah had stepped down from CFO position.
• 27^th February 2020: Reckitt Benckiser announced that it would invest 2 billion pounds over a period of 3 years as a part of a strategic review to stimulate growth. The investment is expected to help the company to generate sales to mid-single-digit and 7-9% of earnings per share growth.
• 4^th December 2019: The Company appointed Harold van den Broek as Chief Operating Officer for its Hygiene Home division.

Q1 Trading Update (as on 30^th April 2020) – Reflecting Strong Consumer Demand and Showing Decent Progress

• The company is reflecting robust consumer demand in March and April, with investing in capacity to meet growing demand.
• Due to robust demand for many of the health and hygiene products, the company’s reported revenue increased by 12.3% (up 13.3% on LFL basis and down 1% on FX basis) to £3,544 million in the first quarter of 2020. This increase was also driven by improved market share trends in both businesses.
• Despite the challenging conditions in many markets, the company has seen strong demand in Q1 FY20 for Lysol, Nurofen, Dettol, VMS, and Mucinex.
• In e-Commerce, the net revenue was up by more than 50%, reflecting robust growth in both Health and Hygiene, mainly in March 2020 as consumers moved online during ‘stay at home’.
• RB Fight for Access Fund has allocated more than GBP 40 million to benefit communities consistent with the Group’s Purpose. Strategies to rejuvenate sustainable progress at the company underway with new structure expected to be in place by 1^st July 2020.

(Source: Q1 Results, Company Website)

Share Price Performance

Daily Chart as of April 30^th, 2020, before the market close (Source: Refinitiv, Thomson Reuters)

RB’s shares were trading at GBX 6,710 on 30th April 2020 (before the market close at 9:03 AM GMT+1). Stock's 52 weeks High is GBX 6,744.00 and Low is GBX 5,130.00.

Short- and Medium-Term Outlook Scenario

Despite the COVID-19 outbreak, the company has an encouraging start to the new financial year. The company now expects the performance to be better than the original anticipations. Considering the health emergency amid the of Coronavirus contagion, the company is likely to benefit since they cater to both hygiene and health market. Presently, its supply chain is also flexible and resilient to meet the increasing demand. Looking to the medium-term period, the outlook is sustained with mid-single-digit growth in organic revenue and mid 20’s margins by 2025. Moreover, Coronavirus pandemic is set to drive the market for hand sanitizer, masks, and other hygiene and personal care products in FY20. At the same time, the group has seen demand surge for their Dettol and Lysol products.