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OPINION

FTSE 100 comings and goings

FTSE 100 comings and goings
September 6, 2017
FTSE 100 comings and goings

We picked NMC as one of the stocks in our own portfolio of ‘Brexit-proof’ stocks back in our late June feature, when the shares were trading at around 2,186p; they are testing new highs at 2,725p. The rationale was that the company is protected from a weaker pound, earning its revenue in a currency pegged to the dollar, while its operations are insulated from a tortuous UK-EU divorce. Acquisition-led growth in an expanding private healthcare market is feeding an upgrade cycle.

What can go wrong? Well, the company’s recent half-year results reflected some of the stress of that growth. Net debt has broken the billion-dollar mark, equating to three times expected full-year cash profit. In the first half, $609m of net cash went on acquisitions compared with $98m generated from operations. Analysts see balance sheet room for further acquisitions, but the risk – simply, if starkly put – is that operational problems, perhaps caused by regulatory change, threaten the company’s ability to continue as a going concern.

Readers won’t need much of a recap on Berkeley’s current fortunes. Its shares are reaching all-time highs at more than 3,700p, as selling prices keep rising and a programme of dividends and share buybacks are returning a big chunk of its market value to shareholders. Valuation does present a threat, though. The shares are valued at 2.5 times the housebuilder’s book value per share, against a sector average of 2.1 times, and a historical average of 1.4 times running back to the late 1990s. If the market is working effectively then all that shareholder return is in the price, and new buyers will find it tricky to make a buy case; especially given uncertainty over the housing market and mounting political discomfort on the sector’s Help to Buy-assisted profitability. Forgive me if you’ve heard that one before.

Leaving the party are Royal Mail (RMG) and Provident Financial (PFG). Both businesses are suffering from industry change: the former’s high profile, the latter’s abrupt. Five hundred and one years since the first Master of the Posts was appointed by Henry VIII, what makes Royal Mail unique is also what makes it unprofitable: an obligation to deliver letters, whether profitable or not. The higher-margin parcels delivery service has Amazonian-sized challenges. Not to mention a long-running dispute over pensions.

It is hard to make the bull case for Royal Mail. Still, on almost every valuation it looks cheap against its recent history as a listed company and its international peers. Its enterprise value is 0.4 times sales: if the company can manage any kind of earnings growth (broker Liberum analysts forecast nothing in the next two years), its fortunes could change.

When it comes to the Provvy, the buy call is a little easier to countenance, as reflected by the shares’ bounce from their nadir last month. If the regulatory investigation into its Vanquis credit card does not turn out to be a redress issue, then much certainty will return to the forecast profitability. And returning home credit managing director Chris Gillespie could stop the rot in the doorstep loans business. The underlying credit quality of Provident’s customers has not deteriorated, which would support a recovery take.

There’s a few fairly big variables there, and this column, like much of the market, had argued after the first warning that there was “little point in Provident turning back” (‘Are you listening carefully?’, 28 Jul 2017). Perhaps there was a point, although the damage may have already been done. The Provvy had been a case study in reshaping an analogue business for the digital age. The latest chapter reminds us of the risks of top-down reorganisations.