After a strong couple of sessions, traders are consolidating today with London's blue chips off marginally in morning trading. Click here for The Trader Nicole Elliott's latest thoughts on the markets.
IC TIP UPDATES:
Tesco (TSCO) has been declared the strongest performer of the ‘Big Four’ supermarkets over Christmas by analysts this morning, as the group revealed a strong performance across all categories, including clothing, food and home. Like-for-like sales rose by 2.6 per cent in the UK and Ireland over Christmas, and by 1.9 per cent over the entire third quarter. Weakness in Central Europe and Asia offset some of this progress, muting the overall group growth rate to just 0.5 per cent for the quarter. The grocer also has its latest acquisition to thank: third quarter sales at wholesaler Booker rose by a staggering 10.7 per cent excluding tobacco and by 8.2 per cent over the festive period. We remain buyers.
A profit warning from Halfords (HFD) this morning has us re-thinking whether new chief executive Graham Stapleton has what it takes to turn the bicycle and motoring retailer around. Mr Stapleton blamed mild weather and weak consumer confidence for a lacklustre third quarter performance, although he insisted that costs have been managed well and that free cash flow remains strong. Even so, FY2019 profits are now expected to land between £58m and £62m, while FY2020 profits will likely be flat year-on-year. Our recommendation is under review.
Our prolonged sell call on Debenhams (DEB) is proving to be correct as the stock continued to lose value this morning. Although the department store chain said it was still on track to meet full-year expectations following its Christmas update this morning, the market was clearly spooked by Debenhams confession that it needs to refinance its banking facilities within the next 12 months. As “constructive” discussions with lenders continue, further asset disposals have been put on hold, until new sources of funding can be agreed on. Over the six weeks ended 5 January 2019, group like-for-like sales fell 3.4 per cent, with a 3.6 per cent slump in the UK blamed on lower footfall to stores. Sell.
Polar Capital (POLR) suffered £236m in net outflows during the final three months of the year, which together with negative market movements of £1.77bn, took assets under management down to £12.7bn, from £14.7bn at the end of September. Assets under management over the nine month period to December rose 5 per cent, while net inflows over that period were 524m. We remain buyers.
Brooks Macdonald (BRK) has announced plans to cut around 50 jobs as part of an IT and administration efficiency programme. The wealth manager said it had identified ways to streamline certain core processes, including centralising client account opening and client reporting. The measures will save around £4m annually, with the group incurring a one-off £3m expense. Buy.
Prudential (PRU) has renewed its bancassurance partnership with United Overseas Bank to 2034, extending it to Vietnam alongside existing coverage in Singapore, Malaysia, Thailand and Indonesia. Under the agreement, Prudential's life insurance products will be distributed through UOB's network of more than 400 branches. Prudential will pay an initial fee of £662m, funded through internal resources. Buy.
Shares in Premier Asset Management (PAM) were up 7 per cent in early trading after the asset manager reported a respectable £65m in net inflows during the final three months of last year. However, £486m in losses from market movements meant assets under management were down 6 per cent on the end of September. Buy.
Shares in StatPro (SOG) were up 4 per cent in morning trading on the news that the company, which provides cloud-based portfolio analytics to the asset management industry, has won a five-year contract with a UK investment manager. The deal entails the manager moving from the ‘StatPro Seven’ platform to ‘StatPro Revolution’, and has a minimum contract value of £1.45m with a “a significant uplift in annual value”. Buy.
Kenmare Resources’ (KMR) share price might tell a different tale, but the mineral sands miner saw higher average prices for all of its products in 2018, and expects stronger average received prices in the first half of this year. Production also exceed guidance for all products last year, and December’s output of ilmenite hit a monthly record, all of which helped the Mozambique-focused group swing to a net cash position in the period. Buy.
Scisys (SSY), a supplier of software and IT services to the space, media and broadcast, government, defence and commercial sectors, has won a contract with ESA-ESOC (the European Space Agency and European Space Operations Centre) for monitoring and control system-tailoring services for the ESA Tracking Network (ESTRACK). ESTRACK’s network of ground stations support various ESA spacecraft missions. The contract is expected to be valued at €2.8m, lasting from 2019 to 2023, with an option to extend by five years. It is funded by the ESA, and is including in current market guidance. Shares in Scisys were up by around 3 per cent this morning. Buy.
Card Factory (CARD) shares crashed another 8 per cent in early trading after the group blamed the “challenging consumer environment” for a less than stellar year-to-date performance and a cautious outlook for the year ahead. Like-for-like sales at Card Factory are tracking pretty much flat, while total revenue growth of 3.4 per cent reflects a not-insignificant 51 new openings. Over Christmas, like-for-like sales fell 0.5 per cent - in line with expectations - but bosses have warned that FY2020 will continue to be another difficult year, particularly as costs continue to climb. We remain sellers.
B&M European Value Retail (BME) has revealed total sales growth of 12.1 per cent over its third quarter - enough to send the shares up in early trading. Like-for-like sales across the UK dipped 1.5 per cent, although this was to be expected given last year’s tough comparative figure and a difficult November for all retailers. Pleasingly, things improved in December, with like-for-like sales across the UK rising by 1.2 per cent, and cash gross margins up 3.2 per cent. Strong control over inventory levels likely gave rise to a 30 basis point improvement in gross margins by the end of the period too. As far as New Year is concerned, January is said to have seen good sales momentum. We remain buyers.
SafeCharge (SCH) saw record revenues and transaction processing volumes in the fourth quarter of 2018. Its processed volume for 2018 grew by 45 per cent to $13.9bn, and it expects full-year revenues to be at the top-end of management’s expectations, in the range of $137.5-138.5m. Adjusted cash profits are anticipated to be in line with management’s expectations, in the range of $36.5-37.5m. Management continues to expect the full-year dividend to total three-quarters of adjusted cash profits. Buy.
Shares in Mitchell & Butlers (MAB) were up 5 per cent after the pub group announced a 9.8 per cent increase in like-for-like sales over the three-week festive period. Sales were more evenly split between food and drinks and diners opt for a festive pub meal. During the 14 weeks to 5th January food sales were up 4.6 per cent while drink sales improved 4.8 per cent. Chief executive Phil Urban said he was “delighted” about Christmas trading, but said the group now enters its “toughest quarter” and expects trading to be quiet until people get paid again. Mr Urban also reiterated caution around Brexit. Sell.
Food packaging business Hilton Food Group (HFG) stated that trading was “in line with expectations” during 2018, with strong year-on-year sales growth driven by seafood business Seachill and its operations in Australia. The group reported higher turnover in the UK and Ireland thanks to higher red meat sales and the success of Seachill. Hilton plans to go ahead with expansion plans in Australia, Central Europe, and New Zealand. Shares were up 1 per cent in early trading. Buy.
Drinks maker C&C Group (CCR) reported that trading during the four months to December was in line with expectations. Revenue is expected to grow by “mid-single digits” ahead of last year’s figures. Chief executive Stephen Glancey said the company is “poised to provide enhanced shareholder returns” with a strong balance sheet and normalised cash flow conversion of 60-70 per cent of cash profits. Shares were up 1 per cent in early trading. Buy.
KEY STORIES:
Marks and Spencer (MKS) shares found modest support this morning in the wake of a third quarter update from the high street chain. Total UK sales fell 2.2 per cent, reflecting a 2.1 per cent contraction in food sales and a 2.4 per cent slump in clothing and home sales. But analysts at Shore Capital praised this performance in what remains a difficult retail market, particularly as the group progresses its wider transformation plan. As the group prioritises full price sales and continues to close stores, full year guidance remains unchanged for now. Basically, the market’s just glad it isn’t a profit warning.
Jupiter Fund Management (JUP) suffered £1.5bn in net outflows during the final quarter of 2018, which together with £3.5bn in negative market movements took funds under management down 11 per cent to £42.7bn by the end of December.
The board of Faroe Petroleum (FPM) has decided to recommend shareholders accept the final 160p-a-share offer from DNO, after the acquirer passed the threshold for acceptances. “Whilst the board does not believe the final offer represents fair value, the Board recognises that…the offer will be declared wholly unconditional upon settlement of the further share purchases made by DNO and DNO will therefore acquire statutory control of Faroe.” In other words, Faroe ultimately had little choice.
OTHER COMPANY NEWS:
Premier Oil (PMO) reduced its borrowings faster than it previously guided in 2018, bringing its net debt down $390m to $2.33bn in the period, and below previous guidance of $2.4bn. That was helped by a 7 per cent rise in year-on-year production to 80,500 barrels of oil-equivalent per day, which despite a series of asset sales was a record for Premier. The FTSE 350 group says its portfolio mix, higher-margin output and hedging programme leave it “well placed to deliver further debt reduction in 2019”, though no target was set in this morning’s trading update.
Quartix (QTX) expects revenues, profits and free cash flows for the year ending December to be in line with its previous guidance from 4 December, and with current market forecasts. It believes consensus market expectations for 2018, prior to today’s trading statement, were for revenues of £25.3m, adjusted cash profits of £8.3m and free cash flow of £5.5m. While Quartix had said at the interim stage that the UK subscription base’s growth had slowed, changes made since then “are beginning to take effect”. In keeping with its policy, the group anticipates paying a supplementary dividend alongside the final dividend. And it expects 2019’s results to be in line with recent market forecasts.
Rathbone Brothers (RAT) put in a robust performance during the final quarter of last year, gaining net inflows of £591m. However, that was offset by £3.4bn in negative market adjustments, which took funds under management down 7 per cent to £38.5bn. However, that was still a slight improvement on the MSCI WMA Private Investor Balanced Index, which declined 8 per cent during the period.
Ocean Outdoor (OOUT), which provides premium digital out-of-home advertising in the UK, has had its shares re-admitted to the main market this morning. In March 2018, the company Ocelot bought Ocean Outdoor for an enterprise value of £200m, and was subsequently renamed Ocean Outdoor. In June, the group then acquired Forrest Media, a provider of large format outdoor media services in Scotland, for an enterprise value of £32m. Chief executive Tim Bleakley said the enlarged group has a “strong pipeline of new locations set to launch in the near term”, and is “positive on the outlook for 2019”.
Analysts at Peel Hunt seemed pleased with what they call the “cost picture” at household goods specialist McBride (MCB). A half-year trading update this morning revealed accelerating like-for-like sales growth between the first and second quarters, predominantly the result of improved volumes and a slight contribution from price inflation. While first half costs - specifically those associated with raw materials, packaging and logistics - have been higher than expected, management says lowering overheads has helped mitigate the damage. Prices have also started to moderate of late, which means full-year numbers are on track to meet expectations, although the majority of profit is still expected to be delivered in the second half.
