M&A activity, the latest being Sainsbury's proposed tie-up with Walmart-owned Asda, has helped drive the FTSE100 higher in morning trading. Click here for The Trader Nicole Elliott's latest views on the markets.
IC TIP UPDATES:
The reported drop in WPP’s (WPP) first quarter revenue was not as bad as many had feared. Those numbers, alongside the news that private equity firm CVC has approached management over the sale of the group’s market research arm, Kantar Media, sent shares up 7 per cent in early trading. But the group’s co-chief operating officers - who have taken over the running of the business following Sir Martin Sorrell’s sudden departure - have sought to dismiss speculation of a group split. Sell
Following its controversial proposal to cancel four classes of preference shares, Aviva (AV.) has announced plans to make a discretionary goodwill payment to those shareholders that sold their preference shares between 8 and 22 March. The payment will be made to those that sold their shares - between the time of the life assurer’s full-year results and the date it announced it was scrapping the plan - at a price lower than that the shares returned to on 23 April. The total cost of the payment should not exceed £14m. Affected shareholders may also claim back third-party costs related to the sale of the shares. We keep ordinary Aviva shares on a buy.
Shares in Interserve (IRV) were down 11 per cent this morning after pre tax losses more than doubled to £244m in 2017. Net debt climbed to £503m and adjusted EPS was fell more than half to 29p. Chairman Glyn Barker acknowledged the role of “self-inflicted mistakes” in the group’s troubles, but added work to reduce debt, drive growth and improve overall performance was underway. Sell.
The capital structure and operational reach of Diversified Gas & Oil (DGOC) has transformed at least twice in the last year, rendering a year-on-year comparison between 2016 and 2017 meaningless. Still, several important metrics – the average operating lease expense, cash profit margins, and the final dividend – are all trending in the right direction, and as a result we remain buyers.
At the beginning of this month, we suggested “a return to the dividend list might prove to the market that [Nigerian producer] Seplat (SEPL) is once again investment grade”. Today, in an operational update highlighting a record quarter for the gas business, chief executive Austin Avuru said the board had agreed to reinstate a first-quarter interim dividend of 5 cents a share, equivalent to a yield of 2.5 per cent at the stock’s current price of 142p. Buy.
KEY STORIES:
Sainsbury (SBRY) and Asda have confirmed they plan to merge in a deal that would hand Asda’s current owner Walmart around £2.98bn in cash and a 41 per cent stake in the combined business. A tie-up would leave a combined entity with sales of around £51bn, and a network of over 2,800 outlets. Separately, Sainsbury announced an encouraging set of full-year figures, with underlying pre-tax profits of £589m, complete with an 11 per cent increase in the second quarter. Free cash flow improved by £113m to £432m, while net debt reduced to £1.36bn. The proposed tie-up – and the improved full-year showing - was well received by the market, sending Sainsbury’s shares up by around a fifth in early trading – now comes to the tricky bit: the regulators.
Glencore’s (GLEN) travails in the Democratic Republic of Congo are going from bad to worse. Shares in the commodities group are off 3 per cent this morning, after it received freezing orders were filed on its two copper assets: Kamaoto and Mutanda. The orders were made by Dan Gertler-affiliated group Ventora, which alleges that both subsidiaries have breached an agreement by failing to pay Ventora royalties. In reality, Glencore is unable to deal with Mr Gertler, following his designation by the US as a specially-designated national, though the mining giant has acknowledged that the freezing orders “may materially adversely affect such operations”.
OTHER COMPANY NEWS:
It wasn’t full year results from Sinclair Pharma (SPH) which spooked investors, but news that the company has taken on a €23m (£20m) loan with a 9 per cent interest rate and decided to bring its US distribution network in house. True, the US does present a big market opportunity for the group - which specialises in aesthetics products - but taking on the operations there is likely to be expensive and highly risky. Full year numbers were decent, with strong growth in the Brazilian subsidiary and the group’s first adjusted cash profits for several years. But the profit outlook has been dampened now that the group has taken on expensive debt.
As detailed in the February trading update, UP Global Sourcing (UPGS) - which trades as Ultimate Products - saw half-year revenues to January fall 28.9 per cent to £48.4m. This stemmed from a difficult trading environment for general merchandise in the UK, along with the one-off impact of deferred revenue from a change in supply arrangements for a European customer. Pre-tax profits fell 41.2 per cent to £3.9m. While the UK continues to look tough, management points to progress made in Germany – where the group opened its 10,000 sq ft showroom this month. The company’s shares were up 5 per cent in morning trading.
Telit Communications (TCM) reported revenues of $375m for the year to December 2017, up 1.1 per cent year-on-year. The gross margin declined from 40.3 per cent to 35.1 per cent, while the company – which is an enabler of the internet of things – reported a pre-tax loss of $56.8m against a profit of $17.9m in 2016. Drivers of this weaker performance included declining sales and margins within the module business, slower-than-expected growth within the Internet of Things business and higher operating expenses. Still, management points to a strong first quarter of 2018, with double-digit growth planned for the full year. Telit’s shares were up 5 per cent this morning.
Further good news for the Premier Oil (PMO) balance sheet today. The North Sea explorer-producer has agreed to sell its interests in the Babbage gas field and Cobra discovery to Verus Petroleum, in a deal expected to generate over $70m. Premier said it would put the proceeds towards debt repayments.
Shares in lighting company Luceco (LUCE) are down 5 per cent this morning after the release of the group’s full year results. The group’s share price has plummeted in recent months as the UK consumer facing business has struggled, though the group’s statutory operating profit was up 19.3 per cent to £14.2m in these numbers.
