Join our community of smart investors

News & Tips: UBM/Informa, Secure Trust Bank, Pearson & more

London shares continue to struggle for direction
January 17, 2018

Shares in London dipped in morning trading as multiple external factors cloud investor sentiment. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES:

UBM (UBM) and Informa (INF) are set to combine to create a “leading B2B information services group”. The two companies have undergone major strategic overhauls in the last few years to deal with the challenges in the print publishing industry. While UBM has focused on events, Informa has turned digital and now produces the majority of its B2B publications online. Management at both companies now think the two portfolios are complimentary, but Informa’s shareholders seem unsure, sending the share price down 9 per cent in early trading. UBM’s investors are set to receive 1.083 old Informa shares and 163p in cash for every current UBM share and will own 35 per cent of the new enlarged business. We place both of our buy recommendations under review while we assess the merits of this merger.  

A cocktail of chemotherapy and Keytruda - the innovative immunotherapy developed by US pharma giant Merck (MRK) - has been approved as the first choice of drug for most patients with lung cancer in the US. With shares up 6 per cent on the news, the group has redeemed itself (slightly) for a very disappointing end to 2017: shares are now flat on our 2017 international tip of the year. Analysts think this approval will help Keytruda reach its annual sales target of $8.2bn by 2020. Buy

Secure Trust Bank (STB) continued to reposition its loan book away from higher risk areas of consumer lending during the fourth quarter of last year, selling the residual unsecured personal loan book. Overall customer numbers and balances at its retail finance, motor finance, mortgages and SME loans all grew during the period. Results for 2017 - which wil be released on 22 March - are in line with expectations. Buy.   

Donald Trump’s new tax regime has been a boon for Pearson (PSON). The improved tax rate in the US has allowed the group to report earnings per share for the year to December 2017, above current expectations. Favourable currency movements mean adjusted operating profits will come in between £600m and £605m - the upper end of management guidance. But investors weren’t fooled that these improved financial metrics are any reflection of a healthier business. Shares dropped 6 per cent in early trading due to a 2 per cent decline in underlying revenues and continued difficulties in the US. Meanwhile the portfolio trimming strategy - seen by some as a desperate attempt to raise cash - means 2018 financial guidance has been trimmed. That said, Pearson’s balance sheet does look in much better shape and from this lowly position, there may be an opportunity for recovery. We place our recommendation under review.

XLMedia (XLM) has filled up the tank to ready itself for its next round of acquisitions. The marketing company, which specialises in the gambling market has raised £32m via the placing of new shares which it intends to spend on the “opportunities we have identified in key verticals”. Buy

The allure of an attractive exchange rate is wearing off when it comes to tourists looking to exercise their newfound spending power in the UK. According to luxury fashion house Burberry (BRBY) sales in its home territory fell by “a high single digit percentage” as customers chose to spend their money outside of Britain. As such, both Asia Pacific and the Americas reported modest sales growth during the third quarter. Encouragingly, like-for-like store sales rose by 2 per cent, while overall group sales rose by 1 per cent. New chief executive Marco Gobbetti is sticking to his plan: he wants to invest in better stores and try to elevate the brand, whilst also clawing back £60m in cost savings this year. Our recommendation is under review.

Having forecast that profits would be well ahead of previous estimates, Henry Boot (BOOT) followed this up with another statement to the effect that these revised estimates are now likely to be exceeded. A number of developments have been delivered ahead of schedule, while its housebuilding joint venture has already delivered nearly half the full year’s planned output. Buy.

Timing is everything for commodities stocks, and Eland Oil & Gas (ELA) has got its timing right. With Brent at $69 a barrel, he onshore Nigeria producer’s infill programme has drilled and completed the Opuama-8 well, and spudded Opuama-9. Together with the first three wells in the programme, gross production from all five could reach 31,000 barrels a day by the end of the current quarter. Shares, up 2 per cent this morning, are up 38 per cent on our tip, but remain lowly rated against operational cash flow. Buy.

South32 (S32) chief executive Graham Kerr used today’s quarterly production update to focus on an increase in South Africa manganese output, but the real story was buried further down. Dollar weakness, higher commodity prices and Chinese environmental policy changes are leading to higher industry cost curves (and with them unit costs), particularly in the mining group’s smelting and refinery businesses. Elsewhere, timing differences for receivables and commodity prices have resulted in higher working capital since a January strategy update, though this is expected to unwind during the quarter. We are buyers of South32.

Shares in Ricardo (RCDO) were on the rise after it revealed a 30 per cent increase in its first half order intake. Total order book was in excess of £290m at the end of December, compared with £244m at the same time last year. Orders have been generated from a range of sectors including the development of electric vehicle battery systems from a customer in China and a European car battery testing programme. Buy

KEY STORIES:

GKN (GKN) has now received a formal offer from Melrose Industries (MRO). The cash and scrip combination values GKN at 430p a share, entailing a cash component of 81p plus 1.49 new Melrose shares for each GKN share. The board of GKN reiterated its opposition to the bid, pointing out the offer is "virtually unchanged" from the previous proposal, which "fundamentally undervalued" the business. 

Cineworld (CINE) reported in a pre-close update that revenue in the year to December was up 11.6 per cent, with growth in the UK and Ireland as well as rest of world. The cinema operator made progress on its expansion plans, opening nine new sites in 2017 to bring the total to 232. As announced in December, Cineworld is set to acquire US movie theatre chain Regal Entertainment Group for $3.6bn (£2.6bn). To help fund the acquisition Cineworld will undergo a £1.7m rights issue, at four new ordinary shares at 157p per new ordinary share for every one existing share. Shares fell more than 4 per cent in early trading. 

Back in August 2017, payments giants Worldpay and Vantiv announced they had reached the terms of a recommended merger. Yesterday, we learnt that all conditions set out in the merger’s scheme document had been satisfied or waived, and the scheme had become effective. Following this news, yesterday afternoon Vantiv and Worldpay announced the admission of around 300m shares to the UK’s main market under the new ticker ‘WPY’. Worldpay’s old ticker was WPG. In the US, Worldpay trades as ‘WP’ on the New York Stock Exchange.

OTHER COMPANY NEWS:

Shares in Interserve (IRV) plunged 15 per cent in early trading today, before rallying and ending up down just 2 per cent. The swing was prompted by a story in the Financial Times saying the government was watching the company with fears for its financial health. The Cabinet Office, however, released a statement saying they “monitor the financial health of all of our strategic suppliers, including Interserve” and that they “do not believe that any of our strategic suppliers are in a comparable position to Carillion”.

Earthport’s (EPO) Simon Adamiyatt will step down from his role as chief financial officer and executive director on 31st January. The cross-border payments company is looking for a replacement for Mr Adamiyatt. For now, Asif Ali - who is finance director and company secretary - will act as interim chief financial officer. The group’s shares had slipped around 2 per cent at the time of writing.

Good news for Gulf Keystone Petroleum (GKP). The Shaikan-focused producer has signed a crude oil sales agreement with the Kurdistan Regional Government, guaranteeing the supplier the average monthly Brent oil price, less domestic and international transportation costs and a $22 per barrel quality discount. Money owed by the KRG will also be backdated to October.

Drax (DRX) this morning welcomed proposals from the UK goverment not to impose a cap on renewable obligation contract support for future biomass conversions, instead proposing to introduce a cap at the power station level across renewable obligation contract units. The company is now working to convert its fourth unit to biomass, and says the proposals will allow it to “optimise its power generation from biomass across its three ROC units under the cap, whilst supporting the government’s objective of controlling costs under the renewable obligation certificate”.