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News & Tips: Superdry, Sainsbury, Marshalls & more

London shares have shrugged off political uncertainty to kick on
December 12, 2018

London's blue chips are in demand despite growing political uncertainty as Theresa May faces a no confidence vote this evening. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES:

Superdry (SDRY) shares have lost a third of their value this morning following yet another profit warning. On the release of interim numbers today - which was “much worse than expected” according to brokerage Liberum - managers revealed that profits could fall by as much as 40 per cent by the financial year-end next April. The confession has prompted a series of downgrades from City analysts. There’s also no mention of Julian Dunkerton - one of the group’s original co-founders - who was on a mission to rejoin the company and get it back on track. We remain sellers.

Strong revenue growth in the second half means that the full-year performance at Marshalls (MSLH) is likely to exceed earlier expectations. Revenue in the first 11 months of the year has risen 14 per cent, boosted by a self-help programme to support organic growth as well as the acquisition of Edenhall Holdings. Buy

Shares in Fulham Shore (FUL) were up 15 per cent in early trading after the company announced its interim results. Sales were up by a fifth to £33m with operating profit up by a third to £1.6m. An improvement in cash flow was used to pay down debt from £12m to £8.9m. The company opened two new Franco Manca sites during the reported period, and another post period end. Our sell tip is under review.

KEY STORIES:

Sainsbury’s (SBRY) and Asda are challenging the Competition and Markets Authority (CMA) over its probe into the two companies’ proposed merger. Both are seeking a judicial review, because they believe they haven’t been given sufficient time to present their case for the tie-up to regulators. At the moment, the CMA wants the current in-depth stage of the investigation to complete by the start of March, but neither company sees this as an adequate timetable.

Wood Group (WG.) has landed what it describes as "one of the largest contracts in [its] Americas business": the engineering, procurement and construction of a "world-class plastics manufacturing facility along the US Gulf Coast". No financial details were provided on the construction of the plant, which is contingent on the receipt of environmental permits. However, shares are off 6 per cent this morning, after the services group said "recent volatility in commodity prices may impact confidence and the pace of contract awards in 2019. And while revenue for 2018 is expected to come in ahead of expectations, operating profit guidance is unchanged, suggesting some margin erosion this year.

DNO is upping the ante in its takeover approach for North Sea outfit Faroe Petroleum (FPM). This morning, the Norwegian explorer-producer used the publication of its all-cash offer to remind investors of a comment Faroe chief executive Graham Stewart gave to Dow Jones 15 years ago, on the need "to be attractive (to buyers) - otherwise, where's our exit?"

A rotten first half for Cohort (CHRT) delivered a £2m pre-tax loss, caused by delivery slippage and order delays. Contributions across the divisions were down, although over £100m worth of “key order opportunities” for the second half, on top of the £45m of orders won in the first half, places the company on track for a record order intake for the full-year. The company announced the acquisition of an 81.84 per cent stake in Chess Technologies, a technology supplier to the defence and security sectors, for a total cash consideration of £41.9m. Cohort will acquire the remaining shares after 30 April 2021. Shares were unmoved in morning trading.

Shares in Huntsworth (HNT) were up more than a tenth this morning after the healthcare and communications group said it expects to reach at least market consensus profit estimates for the year to December (cited as £29.4m). Trading has been buoyed by the company’s medical and immersive businesses, with both seeing double-digit annual revenue growth. Meanwhile, the marketing business, driven by Evoke, returned to like-for-like revenue growth in the second half, up 2 per cent, but – as anticipated – annualised revenues will decline by around 3 per cent on a like-for-like basis. Turning to the balance sheet, Huntsworth said it is operating well within its £115m facility and expects to see a year-end net position of around two times net debt to pro-forma cash profits.

Shares in Dixons Carphone (DC.) were down nearly a tenth this morning after the group said it would cut its full-year dividend by around 40 per cent, and reported half-year pre-tax losses of £440m (down from £54m profits). The losses stemmed from £490m in “non-headline charges”, primarily relating to non-cash impairments. These included a material non-cash impairment charge of £225m recorded over the goodwill of the UK & Ireland mobile business, together with the impairment of related assets of £113m and onerous lease charges of £6m against individual stores. Management said the transformation plan is underway to deliver a more valuable business. But amidst broader uncertainty for UK consumer businesses, “we've had our own challenges, and our plan will take time”.

British American Tobacco (BATS) expects to deliver 6 per cent EPS growth during the first half of its financial year at current exchange rates. The company has continued to grow its market share in combustible products, driven primarily by the “strategic portfolio”. It also reported “strong growth” in its alternative products like THP, vapour, and oral categories. The US has been a concern for some analysts lately, given the increasing regulation on nicotine. But BATS stated that the US business is “performing well” with volume in line with expectations. Shares were up 2 per cent in early trading.

OTHER COMPANY NEWS:

Our recent sector focus on nickel focused on the the largest producers of the metal, a clique which could soon be joined by Aim-listed Horizonte Minerals (HZM), which has today published its feasibility study into its Araguaia project in Brazil. Based on exploration and project-scoping work to date, Horizonte believes Araguaia could be a 'tier-one' development, "with a large high-grade scalable resource, a long mine life and a low-cost source of ferronickel for the stainless-steel industry". Assuming a long-run price forecast of $14,000 per tonne, the feasibility study puts the project's estimated post-tax net present value (NPV) at $401m, with an internal rate of return of 20.1 per cent. Doubling annual production would result in a post-tax NPV of $741m.

Ophir Energy (OPHR) has increased and extended its reserve-based lending facility by $100m to $350m, and restored its original seven-year maturity. Proceeds from the increase will be used to repay an 18 month bridge loan Ophir signed four months ago, which was partly used to fund the Santos acquisition.

A trading update from Rolls-Royce (RR.) disclosed bullish management expectations for the full year, with profits and cash flow expected to sit towards the upper end of the engine manufacturer’s target range. The company’s restructuring programme remains on track, with a 4,600 headcount reduction planned the next two years, while Rolls-Royce continues to tackle “large engine OE unit losses”. Shares were up 3 per cent in morning trading.

Shares in Taptica (TAP) were up more than a tenth this morning after the mobile advertising group announced a share buyback programme, for an aggregate value of up to $10m. The company said it had actively continued to evaluate a number of strategic acquisitions and held conversations with various targets, but there are currently no conversations ongoing. Management “feels that the best use of available capital is to commence a buy back funded from the Company's current net cash balance”. The buyback period will start on 12 December and continue until 28 February next year or when Taptica enters a closed period. This announcement follows the news last week that chief executive Hagai Tal had resigned.

Shares in Indivior (INDV) fell another 6 per cent this morning, as the opioid addiction specialist revealed it will petition for a re-hearing of its litigation battle against a generic launch of its main product Suboxone. A ruling by a US appeals court last month allowed Indian firm Dr. Reddy’s Laboratories to sell its copy of the drug, and sent Indivior shares crashing. Now Indivior has won an injunction on the launch until its petition for a potential re-hearing is admitted. The petition is expected to be filed on 20 December 2018.

Go-Ahead Group (GOG) announced that it has been awarded its fifth rail network in Germany. The contract will consist of 56 electrical trains, which will run on a network of 7.4m train kilometres per year.  The deal will commence in 2023 and span for 12 years. Shares were up 2 per cent in early trading.