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News & Tips: Royal Mail, BHP Billiton, Whitbread & more

Equities are off colour again
January 18, 2018

After their storming start to the year, London shares are facing a fourth successive day of reverses as sentiment cools. Click here for The Trader Nicole Elliott's latest thoughts. 

IC TIP UPDATES:

Royal Mail (RMG) reported a 2 per cent increase in revenue in the nine months to December, including the all important Christmas period. The volume of letters sent fell 5 per cent, but this was “better than expected”. Parcels and the international GLS service made up for fewer people sending snail mail, with volumes up 6 per cent and 10 per cent respectively. Management said they’ve made progress in talks with the union over pay and pensions, optimistic that they can reach an “affordable and sustainable solution”. We’re still bearish until real progress is made. Shares fell nearly 2 per cent in early trading. Sell.

BHP Billiton (BLT) has revised down guidance for its coking coal division, due to “geotechnical issues” at its Broadmeadow and Blackwater mines in Australia. Nonetheless, incremental production projects from latent capacity in the iron ore and copper divisions means volumes should grow 6 per cent in the year to June 2018, though guidance for both segments, as well as the energy coal and petroleum divisions, remains the same. Our buy call is under review.

Shares in Whitbread (WTB) are up 2 per cent this morning after the group reported total sales growth of 6.8 per cent year-to-date, with third quarter revenue up 5.8 per cent. This quarter sales at Premier Inn improved by 5 per cent thanks to new hotel capacity, and or up 2 per cent comparably year-to-date. New Costa locations helped to boost sales by 7.2 per cent during the third quarter, though strip out newly opened shops and sales were flat on a like-for-like basis. We think the focus on Costa Express locations looks like a good one. Buy.

Support services group Babcock (BAB) has won a contract to provide fully outsourced firefighting services in Italy. The contract is due to start next month and last for four years, with a value of around £160m over that period. The contract includes an option for an extension of four years, potentially doubling the value. The shares haven’t moved on the news. Buy.

Analysts aren’t exactly bowled over by the third quarter trading statement from Halfords (HFD) this morning. The group announced an acceleration in like-for-like sales from the preceding quarter, and beat consensus expectations for a 1 per cent growth rate comfortably. However, the 2.9 per cent uplift in underlying sales was driven largely by the lowert margin cycling division, which certain analysts fear could put further pressure on profit growth for the year as a whole. New chief executive Graham Stapleton only joined the group on 15 January, so investors have yet to fully see his stamp on these numbers. Sell.

EMIS’ (EMIS) strategy to separate its good and bad news into two different announcements has not fooled investors. Shares in the healthcare software provider fell 17 per cent in early trading on the revelation that its Web product for GPs in England has failed to meet certain services levels and reporting obligations. The financial impact of this problem is expected to be “in the order of upper digits of millions of pounds”, according to management, who are working with NHS Digital to assess the full scale of the impact and attempt to resolve the matter. The group’s second update - an inline trading statement - made for much more pleasant reading, but after taking into account the one-off charge broker Numis has slashed its 2018 guidance. If the problems with Web products can be restricted to one off costs this morning’s share price fall presents an excellent buying opportunity, but we place our recommendation under review for now as we await more details on the extent of the damage.

SafeCharge (SCH) gave an encouraging trading update this morning. The payments specialist achieved record revenues and transaction processing volumes in the fourth quarter of 2017; these volumes exceeded $1bn for the first time in December. 2017 full-year results are expected to be in line with market expectations, with revenues between $111m-$112m and adjusted cash profits between $33m-$34m. Management says the full-year dividend will equal three-quarters of adjusted cash profits for the period. They are confident about 2018, thanks to “robust” trading and new business lined up. Buy.

Small business office space provider Workspace (WKP) saw strong customer demand in October and November, although enquiries in December were predictably lower. The strong demand returned in the first two weeks of January. Over 483,000 sq ft of space is currently being refurbished and is due for completion this year. Buy

Shares in NewRiver REIT (NRR) rose by 4 per cent after the convenience store and residential landlord delivered a strong quarterly trading report. Operating in the convenience type of shopping store, NewRiver saw footfall up by 0.5 per cent, significantly outperforming the national benchmark by 270 basis points. Occupancy remained high at 97 per cent, while 66 leases were secured at 0.1 per cent up from September 2017 estimated rental value. NewRiver is also building more residential units, typically utilising existing space within  retail outlets. So, 36 flats are planned to be built above the existing Sainsbury store in East Ham, while outline planning consent has been secured for 100 residential units in Stamford. Buy

Ibstock (IBST) expects to see brick output expand by around 13 per cent when its new plant in Leicestershire achieves full output later this year. This is good news for Ibstock because demand for bricks has been so strong that domestic suppliers have been unable to cope, leading to a rise in imports. The shares fell 4 per cent however, after the company revealed that revenue in the US (around a fifth of group turnover) fell by 2 per cent, reflecting increased competition. Buy

Shares in beleaguered estate agent Countrywide (CWD) fell over 15 per cent as the squeeze on transactional volumes in the housing market continued to bite. Revenue from sales and lettings is expected to be down around 14 per cent after a disappointing fourth quarter of 2017. Lettings income is expected to be 4 per cent lower following an 8 per cent decline in London. Cash profits for 2017 are expected to be around £65m, down from £83.5m a year earlier. Sell

After a tough year, Shanta Gold (SHG) appears to be turning a corner. The Tanzanian gold miner is rapidly repairing its financial and operating position, as shown by fourth quarter results, published today. Despite higher royalties, fourth quarter all-in sustaining costs were held at $784 an ounce, while pared back capital expenditure, the recovery of VAT receipts, and an 88 per cent surge in underground ore mined kept the group walking along a financial tightrope. In fact, the position is much better than that now, as the year finished with a cash balance of $13.5m, and a $5.6m drop in net debt. We remain buyers of Shanta, which is up 5 per cent this morning.

Finsbury Foods (FIF) reported that 0.7 per cent during the first half to £158m, but strip out the now discontinued Grain D'Or business and revenue increased 2.5 per cent at group level to £145m. The UK bakery business saw sales growth of 3.2 per cent, which helped make up for a 2.1 per cent decline in the overseas division. Shares fell 1 per cent in early trading. Buy.

KEY STORIES:

Draper Esprit (GROW) has invested £18m in cryptocurrency and blockchain security company Ledger. Management said its investment would allow the Paris-based group to scale-up in response to increased demand. The £56m funding round led by Draper Esprit was oversubscribed. Shares in the group were up 7 per cent in early morning trading.  

Lifting quotas on EU sugar production did not produce a sweet result for Associated British Foods (ABF). Revenue from sugar fell 12 per cent on last year in the 16 weeks to January as the increase in supply pushed down prices. Sugar production at Illovo for the full financial year is expected to be over 1.7m tonnes compared to 1.65m tonnes last year. But a good period for Primark helped make up for the tough time in sugar, with group revenue up 4 per cent. Sales at Primark were up 7 per cent on last year, mainly thanks to more selling space. Shares fell 3 per cent in early trading.

What started off as a positive morning for defence technology company Chemring (CHG), with year end results edging ahead of estimates, quickly turned sour when the Serious Fraud Office announced it had opened an investigation into the group and its subsidiary Chemring Technology Solutions Limited following a self-report from the latter. The investigation is looking at “bribery, corruption and money laundering”

Newly listed prepared food business Bakkavor (BAKK) reported in a pre-close update that sales for the year were up 4.6 per cent compared to the previous year, confirming the preliminary results should be in line with expectations. Shares fell 1 per cent in early trading but are up almost 4 per cent since the November IPO.

OTHER COMPANY NEWS:

Shares in FairFX (FFX) were up by 3 per cent this morning, after the e-banking and payments group said it saw strong growth in the year ending 31 December with revenues exceeding £1.1bn. This represented an increase of 39 per cent on the previous year, in line with management’s expectations. The company achieved organic growth of 17.3 per cent to £936m, excluding the impact of the CardOne acquisition (completed in August last year). The company attributes this growth to its focus on international payments products and prepaid cards. During the year, usage of its corporate card platform rose by 61.9 per cent. FairFx’s board now expects 2017 full-year revenues and profits to be ahead of market expectations.

In a trading update this morning, Microgen (MCGN) said it had made “excellent progress in 2017”. The group’s aptitude software business saw strong organic growth, while RevStream - acquired in August last year - achieved its first sales under the aptitude software business’s ownership. Aptitude’s on-going recurring revenue base is now £19.3m versus £12.6m in 2016, up 53 per cent. Meanwhile, Microgen’s financial systems business increased its focus on the trust and fund administration (T&FA) market. T&FA revenues contributed more than 60 per cent of financial systems’ overall revenues, up from 54 per cent a year earlier. Shares in Microgen were down slightly at the time of writing. This may be partly due to a lack of information about profits growth. Some investors may simply be taking profits after significant share price growth in the past year.

Science in Sport (SIS) announced this morning that it has become an official sports nutrition partner of Manchester United football club. This agreement runs from January 2018 to May 2021, and gives the group exclusive sports nutrition marketing rights for Europe. Shares were up by 4 per cent at the time of writing.

Shares in small cap Cloudcall (CALL) were up 7 per cent this morning, thanks to a positive full-year trading update. Total revenues for the 12 months ending December were up 41 per cent to around £6.9m, while recurring revenues rose by 55 per cent year-on-year. This revenue growth was buoyed largely by the group’s relationship with the company Bullhorn.  Cloudcall’s user numbers were up 45 per cent to over 23,500 as at 31 December; the group expects revenues, gross margin and operating expenditure to be in line with market expectations.

Quarto (QRT), the illustrated book publishing group, has appointed Carolyn Bresh as chief financial officer. She will take up her role on 9 April this year. She is currently a partner at Everymind, and was previously deputy chief financial officer and group financial controller at Reuters Group. Interim chief financial officer Brian Porritt will stay with the company to facilitate a handover period.

In November last year, we learnt that certain Gibraltar regulated subsidiaries of the company STM (STM) were appealing a decision by the Gibraltar Financial Services Commission (GFSC) to appoint inspectors to review certain aspects of their businesses. Yesterday, STM gave a further update. The respective Gibraltar regulated companies “have agreed a collaborative way forward with the GFSC for a third-party review (a Skilled Person Review)” to be undertaken on certain aspects of the companies. The third party to carry out this review will be Deloitte, with the scope covering - among other areas - the effectiveness and oversight of the companies’ internal compliance function, corporate governance and controls, and any potential conflicts of interest arising across the business. The review will also cover specific areas relating to the pensions and life assurance business regarding take-on and monitoring procedures for intermediaries, clients and investments advised by intermediaries.The hearing of the aforementioned appeals - which had been scheduled for 22 January - will thus no longer take place. STM has also confirmed that its trading subsidiaries haven’t experienced adverse effects to trading because of these issues - despite costs incurred - and is confident of meeting management’s expectations for the years to December 2017 and 2018.

Ladbrokes Coral (LCL) is planning to send around the scheme document with details on the recommended offer from GVC Holdings (GVC) to shareholders sometime in early to mid-February. The bookie will also release a trading update around this time.