Equity markets are attempting to stabilise after the tech-led sell-off at the end of last week, but the lack of direction from the US on Monday means we are waiting on the Wall Street cash equity open to get a true feel for sentiment. European bourses traded a little lower on Tuesday morning after a strong bump up on Monday. US futures are a little bit positive, but the Nasdaq was weaker, pointing to ongoing concerns in the tech sector. We need to see whether yesterday’s European rally was something of a free pass thanks to the US holiday and whether there is another tech volatility bleed into the broader market.
Worries about rising case numbers are once again an area of concern. Whilst there is not any appetite for a general lockdown, if cases trend higher we can probably assume at least three things: local restrictions in hotspots, a choppier recovery nationally as a result and the ‘fear factor’ back in play limiting the amount people are willing to go out and about. Economic indicators seem to be pointing to a slow, uneven recovery and the speed at which things initially bounced back in the summer is not sustainable. There is a loss of momentum which may call for additional central bank and fiscal stimulus. A choppier economic recovery globally – the W-shape – is not good for oil prices. Saudi Arabia’s decision to discount remains the main driver of sentiment as WTI retreated back under $39, whilst Donald Trump’s comments about ‘decoupling’ from China is another weight. Whilst it may be too early to call the start of a new trend lower, my inclination is that demand will not come back as quickly as expected and this will force prices lower over the autumn, which may force OPEC+ into further action.
On that note, the capricious quarantine regime makes planning travel tricky enough for us punters, so imagine trying to run an airline in this world. EasyJet says the constantly evolving government restrictions across Europe and quarantine measures in the UK is negatively affecting customer confidence to make travel plans. In other words, demand is not as good as expected, and management now expect to fly slightly less than the 40 per cent of planned capacity for Q4 2020 which was highlighted at the Q3 trading update. There is no return to normal when are constantly changing, arbitrary restrictions on our movement. The longer this persists the slower the recovery for airlines and the great number of jobs may be lost. EasyJet shares fell 4 per cent.
One thing is for sure – the parcel business is booming. Royal Mail reported a massive surge in parcel volumes, whilst DS Smith, which makes the cardboard boxes that clog up our recycling bins, says it’s enjoying positive year-on-year growth again. Shares in RMG rose 14 per cent, whilst SMDS was up over 5 per cent on the open. Royal Mail delivered 177m more packages in the five months to the end of August compared to last year, as parcel volumes rose 34 per cent, with revenues up 33.1 per cent year on year. Addressed letter volumes were down 28 per cent as it delivered 1.1 billion fewer letters. Total revenue was up £139 million but Royal Mail is still set for a significant loss and it warns it cannot become profitable without substantial business change, which is management speak for more job cuts and more automation. Royal Mail is not fit for the job, but management knows what medicine is required and that is needs administering quickly: ‘Currently, too many parcels are sorted by hand and we are failing to adapt our business to fundamentally lower letter volumes and are holding on to outdated working practices and a delivery structure that no longer meets customer needs.’
UK Company Announcements
| FeverTree (FEVR) | First-half revenues declined by just over a tenth, as the effects of bar and pub closures were tempered by a good performance in the off-trade. At the same time, the gross margin was knocked 510 basis points by a Covid-related shift in sales mix. The interim dividend was raised by 4 per cent. |
| JD Sports Fashion (JD.) | JD Sports' half-year pre-tax profits were driven down by costs linked to the shift towards online shopping during the period, falling to £41.5m from £129.9m in the prior first half. JD closed the period in a mammoth net cash position of £764.9m, excluding lease liabilities, aided by supplier relief and rent deferrals. |
| Royal Mail (RMG) | Reflecting Covid-19-related expenses and the delivery of fewer letters and more parcels, costs in the ‘UK parcels, international and letters’ (UKPIL) business increased by £160m in the five months to 31 August. UKPIL is expected to make a material loss this year and the group says it “will not become profitable without substantial business change.” Looking to move away from sorting by hand, Royal Mail remains in talks with unions over adapting its business. |
| Travis Perkins (TPK) | Having run a “service-light” operating model during lockdown, revenue declined by 20 per cent year-on-year in the six months to 30 June to £2.8bn. With lower recovery of fixed costs and provisions for holiday pay, slow moving stock and slower customer payments, the group swung to a £92m statutory operating, versus a £62m profit a year earlier. Travis Perkins says its end markets are continuing to recover – especially DIY – but it has signalled a slower rebound in housebuilding and major commercial projects. |
| Vistry (VTY) | The weekly average sales rate has improved to 0.73 per active site since the start of July, ahead of 0.61 the same time last year, although a 56 per cent drop in completions - adjusted for last year's merger - meant adjusted pre-tax profits fell 86 per cent. However, the group said it intends to reinstate a dividend next year. |
| International Personal Finance (IPF) | As expected, interim results for the high-cost credit provider show a huge rise in impairments to £184.7m in the income statement - equivalent to just over half of revenue. Even before exceptional impairments, the impact of Covid-19 has pushed charges up to 37.5 per cent of the top-line. Risks, recently thought to be subsiding, appear to be on the rise. |
| Nucleus Financial (NUC) | Rising platform development costs and direct platform costs were cited for an uptick in operational gearing in the first half of 2020, as results out today show. Combine that with flat assets under administration, and you can see why Nucleus' pre-tax profit is down two-thirds. |
| IQE (IQE) | Shares nudged up 2 per cent on the news of an adjusted operating profit of £4.3m in the first half of 2020. On a reported basis, IQE made a £5m operating loss, partly because of non-cash write downs of some intangible assets. |
| Genus (GNS) | Full-year revenues and operating profits (including JVs) rose by 13 per cent and 17 per cent respectively, at constant currencies – with a particularly strong performance for the group’s porcine genetics business, helped by restocking in China after the spread of African Swine Fever. |
| Midwich (MIDW) | The audiovisual specialist fell into an interim pre-tax loss of £2.8m, down from first half profits of £9m last year. The global audiovisual market is expected to contract by around 8 per cent this year and only exceed 2019 levels in 2022. |
| Halfords (HFD) | Halfords revenues were up 5 per cent in its 20 weeks to 21 August, aided by a cycling boom, where sales rose 59 per cent. Its higher-margin motoring products revenues fell 29 per cent, however, while Halfords warned that its second half could fall significantly short of its first as cycling and staycation spend drops in the winter. |
| Luceco (LUCE) | The light and wiring maker will pay deferred final dividend as part of its interim payout after first half that saw lower sales but higher profits |
| easyJet (EZJ) | The airline now expects to operate at less than 40 per cent of its planned capacity for its fourth quarter owing to reduced demand and "the constantly evolving government restrictions across Europe and quarantine measures in the UK". |
| Gamma Communications (GAMA) | Pre-tax profits climbed up by a fifth to £26.2m in the six months ended in June. The group acquired two companies in the period: Exactive, a unified communications specialist, and Voz Telecom, a cloud communications service provider in Spain. |
| Meggitt (MGGT) | Reflecting the collapse in global air travel, revenue from civil aerospace plunged by 27 per cent year-on-year in the six months to 30 June, to £402m. With less revenue from higher margin aftermarket services and the under-recovery of fixed costs, underlying operating profit dropped by 37 per cent to £102m. On a statutory basis, the group swung to a £349m operating loss, versus a £91m profit a year earlier. |
| Signature Aviation (SIG) | Amid the decline in business and general aviation activity, revenue from continuing operations dropped by 38 per cent in the six months to 30 June, to $963m (£733m). The group registered a $52m pre-tax loss, versus a $36m profit in the first half of 2019. Net debt has remained steady since the December year-end at $2.2bn but there is no interim dividend. |
| Ashtead (AHT) | Rental revenue dipped by 8 per cent at constant currencies in the three months to 31 July, to £1.1bn. Assuming that there are no further widespread lockdowns, the group expects revenue will be fall by “mid to high single digits” for the full year. By reducing capital expenditure and operating costs, Ashtead saw record first quarter free cash flow of £447m and is guiding that this will top £1bn for the entire year. |
| Experian (EXPN) | The group had guided in July that organic revenue growth for the three months to 30 September would be somewhere between flat and a 5 per cent decline. But following strong trading in July and August, it has upgraded its expectations, now pointing to a 3-5 per cent increase. |
Sterling is under pressure on some Brexit-related headlines and is exposed to a further onslaught of negative news as round 8 of the formal negotiations gets underway. Boris Johnson says the withdrawal agreement never made sense and is drawing up legislation to bin parts of it should there be no deal on the table by October 15th. David Frost and Michel Barnier, the top negotiators on the UK and EU side respectively, have both said the other side needs to get real. Monday’s foreplay got both parties a bit hot under the collar, but the main event starts today. GBPUSD retreated to 1.3125 this morning to test the weekly multi-year descending trend line. Double rollover on the MACD as occurred in November indicates bearish momentum may build. The euro remains bottled up at the 1.18 level with the ECB meeting ahead on Thursday. The consensus remains firmly against the USD but it’s notched its highest close above its 21-day moving average since July and the crowded short dollar trade is at risk of reversals. An ECB that could surprise with additional easing this week is another risk to the anti-dollar consensus.
Neil Wilson is chief markets analyst at Markets.com
