TIP UPDATES:
Three of our tips have reached agreement to exit a PFI waste management contract with Greater Manchester. John Laing (JLG), Costain (COST) and Pennon (PNN), all announced the termination of the contract this morning. Pennon is anticipating a “one-off non-material impact to the income statement” as a result of the contract ending, while John Laing is expecting a reduction in the value of its Manchester Waste investments of £25.5m. Costain said the financial impact was “in line with the provisions we have previously taken for this project”.
Macfarlane (MACF) reported revenue growth of 10 per cent in the first half, and pre-tax profit growth of 27 per cent. Packaging distribution sales rose 12 per cent, with 3 per cent organic growth; the division’s gross margin stayed flat at 29 per cent. Within the manufacturing operations division, sales fell slightly while the labels business saw an improved gross margin. Net debt reduced by £1.5m to £14.6m. Buy.
CRH (CRH) reported 2 per cent revenue growth, improved pre-tax profits and “significant M&A activity” in the first half. The global materials group also simultaneously announced two transactions, subject to regulatory approval. First, CRH has agreed to sell its Americas Distribution business to Beacon Roofing Supply for $2.63bn. The proceeds from this divestment will be reallocated for further investments and acquisitions. In keeping with this strategy, CRH’s Europe Heavyside business has agreed to acquire a German lime and aggregates company, Fels, for €0.6bn. Buy.
Greencore (GNC) shares have been falling most of this week, down 4 per cent today in early trading. This prompted Greencore management to release a statement this morning stating that they are not aware of any developments since the third quarter trading update was released in July, which showed that the integration of the recently acquired Peacock business in the US is on track. But there has been a change to one of its factories in Florida. Its Jacksonville site will stop producing frozen products and instead focus on fresh product offerings. Management said that the transition is being “managed seamlessly” and anticipate that the impact on productivity will be minimal. Buy.
Buy-to-let mortgage lending continued to pay-off for OneSavings Bank (OSB) during the first six months of the year. Its overall loan book grew 10 per cent to £6.5bn, despite it pulling back from the second-charge residential mortgage market. The challenger bank also benefited from a lower cost of wholesale funding, which bumped its net interest margin up to 3.22 per cent, from 3.09 per cent in 2016. Buy.
Phoenix (PHNX) ratcheted-up its cash generation during the first-half to £360m, compared with £147m the same time in 2016. This helped increase its Solvency II coverage ratio - of capital held above the regulatory minimum – to 166 per cent. The Axa Wealth acquisition contributed £165m of this additional cash, which also meant management was able to increase the interim dividend by 5 per cent to 25.1p a share. Buy.
Much of the talk surrounding BHP’s full-year results this week focused on the possibility of a spin-off of the US onshore business. Two years ago, the commodities giant hived off a chunk of its assets into South32 (S32), which this morning posted its second set of full accounts. Like the company’s larger diversified peers, the numbers were strong: underlying cash profits more than doubled to $2.41bn, allowing South32 to increase the full-year dividend to 10c, up from 1c in 2016. Our buy call for the company, which now boasts $1.6bn in net cash, is under review.
Changes in environmental regulations have increased the onus on Chinese steel makers to find a reliable and high quality source of chrome ore. That’s great news for South Africa’s Tharisa (THS), which today announced a five-year strategic co-operation agreement to supply a joint venture involving Taiyuan Iron & Steel with a minimum of 240ktpa at market prices. News of the deal, which starts next month, pushed up Tharisa shares 7 per cent to 85p. Buy.
CRH (CRH) grew sales 2 per cent during the €13bn during the first half of the year, led by like-for-like growth of 3 per cent in Europe. This offset an 8 per cent decline in like-for-like sales in Asia. Margins also improved from 8.8 per cent to 9 per cent. Buy.
Playtech (PTEC) is set to expand its trading software division for $150m (£117m) as part of its aim to improve its financial business. In addition to the trading system the company will also buy a client portfolio from privately-owned ACM Group and rename is its financial division TradeTech Group. Revenue over the first six months was up by a third at constant currency to €422m (£388m) with cash profits up by a quarter to €171m. Shares fell nearly one per cent in early trading. Buy.
KEY STORIES:
A surprise profit-warning less than two months after an impressive set of interim results has sent shares in electricals retailer Dixons Carphone (DC.) down nearly 30 per cent this morning. Chief executive Seb James has blamed the UK mobile market, which has suffered as more consumers choose to hang onto their old handsets amid higher prices and smaller technological advances. We downgraded our view on Dixons in February of this year, when Mr James opted to sell 302,000 shares in the group to the tune of roughly £950,000.
Stonegate Pub Group is set to acquire Revolution Bars (RBG) for 203p per share, which values the company at £101.5m. This is a 62.4 per cent premium to the 125p closing price on 28 July when a possible offer was first announced, and better than the 200p per share that was first offered. Revolution Bars was also approached by Deltic Group but management shut down the proposal as not in the best interest of shareholders. Shares in Revolution Bars were up 12 per cent in early trading.
Hilton Food Group (HFG) has signed a long-term agreement with Tesco Central Europe to produce fresh foods, like sandwiches and pizzas. This will involve building a factory in Poland for around €6m (£5.5m). Production is expected to begin in the first quarter of 2019. Hilton has also come to a further five year agreement to continue supplying Tesco’s Central European stores with pre-packed meat. Shares were up one per cent in early trading.
Premier Oil’s (PMO) 2016 annual report, published in April, noted that the possibility of failure for the group to reach a refinancing agreement with its debtors presented a “material uncertainty that may cast significant doubt upon the use of the going concern basis of accounting”. That reference was mercifully absent in this morning’s half-year numbers, which even contained an inkling that Premier is starting to de-lever its balance sheet. Production guidance for 2017 has also stepped up from 75,000 barrels of oil equivalent per day (boepd) to as much as 80,000boepd, while operating expenditure is not expected to exceed $16 a barrel.
Gaming technology and betting company Sportech (SPO) saw revenue improve by five per cent during the six months of the year, but fall seven per cent at constant currency due to timing delays in completing some one-off system sales. This also affected its racing and digital division, where cash profits fell by £0.9m to £3.9m. Sportech won its £97m VAT legal case in the Supreme Court modernised and sold its football pools for £83m, repaid £60m in debt and returned £21m to shareholders. Management said that further returns to shareholders could be on the way from its £76m cash balance. Shares were up nearly one per cent in early trading.
OTHER COMPANY NEWS:
Although the previous period included an additional 22 weeks of trading, pre-tax profits at Laura Ashley (ALY) plunged by 72 per cent during the year ended 30 June 2017. Like-for-like retail sales dipped 3.1 per cent, although online sales rose more than 5 per cent on the same basis. The board has already paid an interim dividend worth 0.5p, but has decided not to declare a final instalment. The stock is down 62 per cent over the last 12 months.
Hunting (HTG) shares have been trending lower in recent weeks – little surprise given the nerves once again jangling in the US onshore industry. So will shale drilling be sustained? That is the question dominating the oil services company’s management, who guided their firm to a return to positive cash profits of $12.1m in the half-year to June. However, debt increased, operating losses hit $23.7m, and the group remains reliant on a pick-up in the oil price that would precipitate nimble shale players returning to the wellhead.
