All of London's indices are in the red this morning. Click here for The Trader Nicole Elliott's latest thoughts on the markets.
IC TIP UPDATES:
Broker Liberum has argued that shareholders are watching a “worst case scenario” play out at retail chain Superdry (SDRY). That’s largely because - as part of the company third quarter statement issued this morning - e-commerce sales are now contracting, down 0.7 per cent in the period. That pales in comparison to an 8.5 per cent fall in store-based sales, but indicates that even online, the clothing chain is struggling to find a way to grow. Bosses are blaming “legacy product issues” and warm weather during the period, forcing Liberum to cut current year pre-tax profit forecasts by 14 per cent. We remain sellers.
Smith & Nephew (SN.) results are largely in line with expectations, although EPS of nearly 101¢ (78.2p) did beat consensus estimates of 94.5¢. FY 2019 guidance is for 1.8-2.8 per cent growth in revenues (consensus currently sits around 2 per cent) and for trading profit margins to land somewhere in the region of 22.8-23.2 per cent (consensus: 22.6 per cent). Broker Shore Capital also reckons there’s room for M&A activity this year, although competition will likely be fierce. We remain buyers.
Bellway (BWY) expects revenue to have risen by 12 per cent in the six months to January 2019, while housing completions will have risen by 5.6 per cent. Average selling prices and weekly reservation rates have also risen, although there was a small uptick in the number of cancellations. Margins are expected to moderate a little as house price inflation lessens, although output for the full year is expected to beat last year’s record 10,307 new homes. Buy
Polymetal International (POLY) has reported an increase in its reserves at its Mayskoye deposit in Russia, extending the mine’s life by 5 years. The updated reserves estimate adds 780,000 ounces of gold, representing a 5 per cent increase improvement in average grade to 6.9g per tonne and a 55 per cent hike in gold contained. Buy.
AA (AA.) has won a roadside assistance contract from Lloyds (LLOY), supplying breakdown cover to 2.4m customers. The contract will become effective from 1 April. Sell.
Against a tough market backdrop, Allied Minds (ALM) has outlined plans to cut cash operating expenses by 40 per cent or £5.6m a year. Chief executive Jill Smith also agreed in December to materially reduce her cash salary for 24 months, commencing with calendar year 2019, and to defer payment of the balance of her salary into 2021. The investment group said Spin Memory, HawkEye 360 and Federated Wireless were on track to deliver commercial revenue in 2019. However, we place our buy recommendation under review.
FDM (FDM) has appointed David Lister as non-executive chairman with effect from 5 March 2019. He will replace Ivan Martin, who will retire from the board on the same day. Ivan has been non-executive chairman at FDM since October 2006. Mr Lister has worked for over 39 years in technology and operations roles across various industries, at companies including Diageo, GlaxoSmithKline, Boots and Reuters. His current roles include chairman of HSBC Private Bank UK. Shares in FDM were down by around 1 per cent this morning. Buy.
Shares in Cranswick (CWK) fell 18 per cent in early trading after the food producer warned that full year operating margin would decline in 2020. Management said this was due to the “challenging commercial landscape” with lower pig prices, together with start-up and commissioning costs associated with the new Eye Facility for poultry product production. Long-term the outlook is more positive, with management believing that the poultry facility will drive future growth in the expanding protein category. Our buy tip is under review.
At today’s AGM, shareholders in Ei Group (EIG) will vote on the sale of 370 pubs to Tavern Propco Limited for £348m. If the motion is approved, the first tranche of the disposal, comprising 348 of the properties to be sold, is expected to occur in early March 2019. The group is continuing to convert some of its tenanted and leased pubs to the managed estate, aiming for 460 managed pubs by the September financial year end compared to 398 at present. Shares fell more than 1 per cent in early trading. Buy.
Shares in WPP (WPP) were down over 7 per cent this morning, after French rival Publicis Groupe reported a 0.3 per cent drop in fourth-quarter organic revenues. It suffered from higher-than-expected attrition in traditional advertising, largely from fast-moving consumer goods (FMCG) clients in the US. Publicis, whose shares were down by more than a tenth, said that it has begun 2019 “with optimism” despite expecting a “bumpy ride” in the first quarter because of prolonged effects of the FMCG cuts in the last quarter of 2018. It confirmed its 2020 objective of 4 per cent organic growth. WPP’s full-year results are due on 1 March. For now, we maintain our speculative buy.
Tate & Lyle (TATE) announced that adjusted pre-tax profit at constant currency was ahead of the comparative period during the three months to December. Volume growth was reported in the food and beverage category, with strong momentum in North America and Asia Pacific and Latin America. Volumes of sucralose was higher thanks to the programme to optimise production at Tate’s facility in Alabama. The company still expects growth in earnings per share at constant currency to be in the mid-single digit range for the full year to March, albeit towards the lower end due to energy and transport cost inflation in North America and a year of strong commodities performance in fiscal 2018. Shares were up 1 per cent in early trading. Buy.
Holiday retailer On The Beach (OTB) announced revenue growth of 20 per cent after marketing costs during the first four months of its financial year, with strong growth in mobile traffic and repeat purchases thanks to spending on online marketing. The company made “significant progress” towards the aim to expand long haul sales, completing the full build of a direct technical integration into the Emirates flights systems in January. More long-haul destinations, carriers, and hotels will be added later in the financial year. Shares were up 2 per cent in early trading. Buy.
KEY STORIES:
Shares in Interserve (IRV) have fallen 5 per cent this morning, hot on the heels of yesterday’s 10 per cent increase. There have been no new announcements on the rescue plan, but The Times newspaper is characterising major shareholder Coltrane Asset Management’s proposals to sack the entire board of directors - except for chief executive Debbie White - as an attempt to derail the group’s deleveraging plan. The plan would drastically reduce the debt from its current £625-£650m level to £275m, but would secure £350m of debt against RMD Kwikform, believed by many to be the most valuable part of the business, handing control of the division to lenders should things go bad.
Having fallen considerably in recent months, shares in Accesso Technology (ACSO) plunged over 30 per cent this morning. FY2018’s results will be hit by around $1.7m in exceptional costs relating to professional fees tied to a “well-advanced” acquisition opportunity, which was terminated by Accesso’s board last October. Excluding these costs, the results are expected to be “broadly in line” with market expectations. The company has initiated a review of its investment priorities “in the context of the significant future opportunities available to it and the current areas of business momentum”. An update on this, and Accesso’s outlook, will be included within March’s full-year results. And, executive chairman Tom Burnet is moving into a non-executive director position. His replacement Bill Russell will join as non-executive chairman, who has held various roles on public and private tech company boards.
Shares in Petrofac (PFC) are off more than a fifth this morning, after the oil and gas services group’s former head of sales David Lufkin pleaded guilty to eleven counts of bribery. The Serious Fraud Office, which brought the charges, alleges corrupt offers involving Mr Lufkin helped Petrofac to secure contracts “in excess of $730m in Iraq and in excess of $3.5bn in Saudi Arabia”. The stunning list of charges state that Petrofac made a total of $51.2m of payments to secure the deals, and the fraud agency said that its investigation into Petrofac’s “use of agents in multiple jurisdictions, including Iraq and Saudi Arabia, is ongoing”. In response, chairman René Médori said that “in the absence of any charge or credible evidence, Petrofac intends as a matter of policy to stand by its employees”.
Shares in Thomas Cook Group (TCG) were up more than 12 per cent in early trading after the holiday company announced a strategic review of its airline business. Chief executive Peter Fankhauser said the group needs “greater financial flexibility” and increased resources to accelerate the execution of its core strategy, which includes investment in strengthening the own-brand hotel portfolio, digitising sales channels, and driving greater efficiencies across the business. Group like-for-like sale were up 1 per cent over the first quarter to £1.66bn, led by strong customer demand for Turkey and North African destinations, offsetting weaker demand for Spain. Still, gross margins were lower due to the highly competitive environment, and so the underlying loss from operations increased by £14m to £60m.
Shares in Tui (TUI) fell 16 per cent after the company reported that slow summer sales, weak sterling, and shifts in customer preferences for holiday locations meant that earnings had been stagnant. Underlying cash profits for the year to September are expected to be “broadly stable”, but management said that previous guidance of at least 10 per cent compound annual growth rate in underlying cash profits for the three years to 2020 would not be reiterated.
OTHER COMPANY NEWS:
Lesotho-based miner Gem Diamonds (GEMD) continues to do less with more, as a fourth quarter production update published today indicates. A further three 100-plus carat diamonds were recovered in the final three months of 2018, taking the group’s haul to 15 for the year, and driving a13 per cent recovery in carats to 126,875. All this was done despite a 13 per cent drop in in waste tonnes stripped. What’s more – and bucking the trend seen at De Beers – Gem’s first auction of the new year also benefited from strong pricing.
Strix (KETL), which designs and manufactures kettle safety controls, has made an offer of $1.3m (£1m) in cash to acquire the majority of US and Chinese assets owned by AIM-listed clean water technology company HaloSource (HAL). Shares were unmoved upon the news that Strix hopes the assets will help the company to “expand and grow its water filtration division”. HaloSource confirmed that it had received the offer.
Ahead of its AGM, Compass Group (CPG) announced that revenue over the three months to December was up 6.9 per cent thanks to new business wins, continued good retention rates, the impact of the new UK Defence contracts, and a positive sporting events calendar. North America experienced the strongest growth at 8 per cent, followed by Europe at 6.4 per cent. Around £197m was spent on acquisitions in North America over the period. Shares were up 5 per cent in early trading.
Flooring maker Victoria (VCP) announced that it has sold its former sports ground in Kidderminster that had remained unutilised for more than 20 years. Victoria said the site had a net book value of £100,000, and was sold for £2m with planning permission for housing.
