While the US markets set new record highs, London's indices are making more modest progress. Click here for The Trader Nicole Elliott's latest views on the global markets.
IC TIP UPDATES:
The coffee might be brewing nicely at Costa owner Whitbread (WTB) but its hotel chain Premier Inn isn’t so full of beans. Like-for-like sales at Costa for the 13 weeks to 1 December jumped 4.3 per cent with total sales zipping up a caffeine-infused 12.5 per cent. But the group’s shares are down roughly 5 per cent this morning and this could be because of its hotel business. Like-for-like sales were up 1.8 per cent but the performance of its restaurant business - which includes the likes of Beefeater and Brewers Fayre - dragged the division down. What’s potentially more concerning though is the revenue per available room (RevPAR) metric. This is a key figure for hotel groups and Premier Inn’s total RevPAR is down 1 per cent for the quarter under review, against a midscale and economy market drop of just 0.4 per cent. For the 39 weeks to 1 December, the figures are just as bad, if not slightly worse. It is growing UK market share, according to management, but its bullish expansion programme could be an issue if its occupancy rate doesn’t keep pace. Buy.
It was all hands to the pump over the Christmas period for publican Fuller, Smith & Turner (FSTA) as like-for-like sales in its largest managed pubs and hotels division jumped more than 7 per cent in the past 10 weeks. Its tenanted business also produced like-for-like profit growth of 2 per cent while total beer and cider volumes from its brewing company rose 1 per cent. But the performance has not been enough to create the same level of growth for the 43 weeks to 21 January. In this time frame, managed and hotels saw like-for-likes rise 3.7 per cent (5.3 per cent for the same period the prior year) while the tenanted division’s profit drop of 1 per cent contrasts poorly with the 3 per cent growth in the prior respective period. But there are clear cost issues to deal with this year - such as business rate rises and the apprenticeship levy - which is perhaps weighing on the numbers a little. Buy.
An Indian takeaway - or rather acquisition - has helped keep sales growth on track at transport hub food outlet company SSP Group (SSPG). The company, which runs brands at stations and airports such as M&S Food, Starbucks and Caffe Ritazza, has snapped up an initial stake in Indian business Travel Food Services. The purchase added 1.1 per cent to sales growth, bringing the total figure for the group to 5.4 per cent for its first trading quarter to 31 December. Its large amount of overseas earnings also helped revenue at actual exchange rates as dollar and Swedish krone proceeds translated well into the weaker sterling. The full year benefit on revenue of currency is expected to be 7 per cent - although this is translational only. Buy.
Increased property costs and the introduction of the national living wage put the spoils on a full house for bingo and casino operator Rank Group (RNK). Costs caused cash profits to drop by 5 per cent and while trading has improved at its Grosvenor Casino sites in the current trading half, more cost pressures are expected in 2017 thanks to factors such as rising business rates. Management has said it will achieve roughly £8m in cost savings in the second half of its financial year but more may be needed given the only slight upward tick in revenue evident in the period under review. On the plus side, debt has fallen by more than a third to £33m and the dice has been rolled on the dividend, leading it to rise 11 per cent to 2p. With the shares down a third in the past year, we put our buy recommendation under review.
As expected, trading at Euromoney Institutional Investor (ERM) has been challenging. Stripping out a currency boost and revenues fell 5 per cent in the first quarter of the current financial year. Management also pointed out that its asset management activities have been feeling the pressure from a downturn in spending in the sector. Advertising revenues down by 16 per cent is also concerning. We’re staying at sell.
Shares in shoe king Jimmy Choo (CHOO) are up marginally this morning following a full-year trading update, which revealed sales growth of 2 per cent - ahead of analysts’ expectations. The group is currently benefitting from a significant foreign exchange tailwind. At actual exchange rates, sales actually grew by 15 per cent. As retail outperformed wholesale and licensing, gross margins benefited, which prompted analysts at Liberum to upgrade profit forecasts for the current year by 2.7 per cent. We are moving our recommendation to hold.
Two big pieces of news from Card Factory (CARD) today: first, chief financial officer Darren Bryant has announced his retirement (although he will remain with the group until a replacement is found), and second, year-to-date like-for-like store sales growth has improved to 0.4 per cent. That still lags the prior year’s growth rate somewhat, but management seem confident they will deliver underlying pre-tax profits for the full-year slightly ahead of market expectations. Buy.
St James’s Place (STJ) ended its year in style after gaining £2.1bn in net inflows during the final three months of 2016 - up more than a quarter on the previous year. That took net inflows for the whole year to £6.8bn and funds under management to £75.3bn. It adviser numbers also grew 10 per cent to 3,415. Buy.
Carrying on the strong run for wealth managers, Brooks Macdonald (BRK) announced discretionary funds under management were up 12 per cent during the six months to the end of December to £9.33bn. This was thanks to net inflows of £162m and investment gains of £246m. Buy.
Brewin Dolphin (BRW) has reported £0.5bn in discretionary net inflows during the final three months of 2016. Coupled with £0.7bn in investment gains this took total discretionary funds under management to £30.1bn. Execution-only funds declined by £0.1bn to £3.4bn. This means advisory income declined. However, core fees and commission more than offset this. Buy.
Kier (KIE) expects trading for the full year to be much in line with expectations, with both the property division and the residential side performing well. The property division has a £1bn pipeline of work and continues to deliver a return on capital employed in excess of 15 per cent, while the residential side is being boosted by demand for more housing. As well as securing more social housing work, private sales remain solid, and Kier is on track to deliver over 2,200 homes by June 2017. Buy.
KAZ Minerals (KAZ) has been a huge climber in the last six months, as ramp-ups at its copper mines and balance sheet de-leveraging coincided with an improvement in prices. A full-year trading update, which showed production 140kt and in line with guidance, appears to have been priced in by the market, even if by-product credits from gold beat expectations. Our view on the copper price keeps us buyers.
KEY STORIES:
A drop in turnover at consumer goods giant Unilever (ULVR) has seen its shares almost lead the FTSE down this morning. The turnover drop of 1 per cent for 2016 (albeit largely due to a currency impact of 5.1 per cent) contrasts badly with the 10 per cent rise in 2015. Underlying sales did rise 3.7 per cent, thanks to price rises and an incremental 0.8 per cent rise in volumes. Its emerging markets business performed well in spite of economic issues in two of its key markets, India and Brazil. The greater focus on personal care as opposed to food is evident in its recent corporate activity, with purchases of Dollar Shave Club and Boston-based hair products brand Living Proof. The home care division, which makes brands such as Surf and Comfort, saw the largest percentage jump in underlying profit growth at 3.6 per cent, thanks partly to the significant 210 basis point rise in margins. In terms of geographies, the Americas, its second largest division by sales, stole the show with 6.3 per cent underlying profit growth.
Glasses are being raised at spirits behemoth Diageo (DGE) as benefits from foreign exchange were augmented by improved performance for some of its key brands. The company’s large percentage of overseas earnings saw the shares spike following the Brexit vote and they’re on a tear again this morning, up nearly 5 per cent at the time of writing. Its scotch brands such as Johnnie Walker and Buchanan’s were both up strongly while reserve versions of various spirits also played well in markets such as China. A key factor in the performance has been improved marketing with its Keep Walking campaign for Johnnie Walker being widely lauded. Net sales in US spirits were up 4 per cent, which is an improvement on last year and seems to be catching up with the wider market, while Europe, Russia and Turkey produced positive net sales too.
Interim results from broadcaster Sky (SKY) are upbeat, with reported revenue rising 12 per cent. The group’s wide range of content is clearly impressing customers both in the UK and overseas, with customer numbers exceeding 4m. Chief executive Jeremy Darroch spent this morning’s results call highlighting all the new content due in 2017, but stayed clear of mentioning the proposed acquisition by Twenty First Century Fox, something that is clearly playing on the minds of analysts .
Meanwhile, the problems at BT (BT.A) stepped up a gear after Italian prosecutors revealed they would be launching a criminal investigation into the activities in the division over the past few years. To rub salt into the wound, competitor Sky reported excellent growth in its Italian business in this morning's half year results.
Royal Bank of Scotland (RBS) has taken a £3.1bn provision for alleged mis-selling of mortgage-backed securities in the US. This takes the total the bank has set aside to meet these costs to £6.7bn. This further provision would have reduced RBS’s tangible net asset value (TNAV) per share at 30 September 2016 by 27p to 311p and RBS’s Q3 2016 CET1 capital ratio by 135bps to 13.6 per cent. Shares in the bank rose 4 per cent on the announcement.
Anglo American (AAL) has constructed its future strategy around copper, diamonds and platinum, so it was encouraging to see all three areas meet or exceed guidance in a full-year production update this morning. What’s more, Minas Rio, met coal and nickel output all came in as promised, while Kumba and thermal coal put in exceptional performances.
Miners regularly use words like “regrettably” and “committed” when speaking about workplace fatalities, though deaths can seem par for the course at some natural resources companies. This morning the market was informed that four workers’ lives were lost at Polymetal International (POLY) in 2016, though management “cannot view this result as satisfactory”. Fifteen deaths in the past four years leaves serious doubts about safety, though it is more likely that flat net debt, higher all-in sustaining costs and a $30m increase in capital expenditure for the year ahead were the cause of this morning’s 5 per cent share price decline.
Polymetal’s Russian peer Petropavlovsk (POG) sold around 400,000 ounces of gold in 2016, a year in which the miner set out a route to recovery with a major refinancing and the resumption of its pressure oxidation facility. That should complete in 2018, while this year gold production should rise to between 420-460,000 ounces at an all-in sustaining costs of $800-900.
A 12 per cent share price drop greeted Lonmin (LMI) after a full-year trading update indicated PGM production had declined by a fifth. Management also conceded that Lonmin is unable to make money at current spot prices. In fact, cost guidance for ZAR10,800-11,300 per ounce against a basket price of ZAR10,372 leaves the year-end net cash figure of $49m in a somewhat perilous position.
Countryside Properties (CSP) delivered a very strong trading update for the last quarter of 2016, with total completions up by 23 per cent and net reservations ahead by 20 per cent. Much of this is down to an increase by almost a half in the number of open sales outlets to 46. Analysts at Peel Hunt expect adjusted pre-tax profits for the year to September 2017 to be up over 50 per cent from the previous year at £138m.
Great Portland Estates (GPOR) secured 16 new lettings in the last quarter of 2016, generating annualised rent of £7.2m. A further £4.5m of lettings are under offer, and rents continue to exceed estimated rental values calculated in March 2016. There are five committed schemes, but these have been largely de-risked as they are 73 per cent pre-let or pre-sold. Demand for quality assets was highlighted by the sale of 73/89 Oxford Street for £276m, and with the development pipeline reined in, demand for remaining space will help to underpin rents. Great Portland is lightly geared and well positioned to weather the current uncertainty. However, with a very modest dividend on offer, there is better value elsewhere.
OTHER COMPANY NEWS:
EMIS (EMIS) continues to feel the pain of the struggling NHS. Although a year end trading update is in line with management expectations, comments on the market conditions are downcast, prompting broker Numis to downgrade earnings forecasts for the 2017 and 2018 financial years. Shares have dropped 6 per cent in early trading.
As Euromoney Institutional Investor (ERM) reports a tricky first quarter, Daily Mail and General Trust (DMGT) has revealed it has reduced its stake in the group from 67 per cent to 49 per cent. DMGT has also been struggling with falling advertising revenues and with net debt growing shareholders have been unimpressed. Shares dropped 8 per cent in early trading.
Small-scale gas-to-liquids specialist Velocys (VLS) is up 10 per cent in early trading this morning, after signing a memorandum of understanding for a strategic alliance with ThermoChem Recovery. The partnership covers the development of a 1,400 barrel a day biomass-to-liquids plant capable of producing renewable diesel and jet fuels from woody biomass.
It would appear that management at Constellation Healthcare Technologies (CHT) are in a strop. Chief executive Paul Parmar tried to buy out private and institutional shareholders towards the end of 2016, but shareholders were not impressed with the offer and rejected it. But now CHT has suspended its shares on Aim “pending confirmation of the timetable for satisfaction of the condition of the proposed merger”. More announcements are to follow “in due course”.
