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News & Tips: Tesco, RBS, Patisserie & more

Equities continue to ignore political rumblings
February 15, 2019

Despite another Commons defeat for the government last night and more poor economic data - this time from the US, equities traders remain in a happy place. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES:

Tesco (TSCO) has presented changes to its financial reporting in response to the introduction of new accounting standard IFRS 16. Bosses say the standard has “no economic impact” or any effect on “how the business is run”, nor on group cash flows. But it does have a “significant” impact on the way assets, liabilities and the income statement are presented, “as well as the classification of cash flows relating to lease contracts”. The new standard affects all reporting periods from January 2019 and, in the company’s words, “seeks to align the presentation of leased assets more closely to owned assets”. Group sales and total cash flow are unaffected, while operating profit increases by £188m to £1.12bn “as rent is removed and only part-replaced by depreciation”. Pre-tax profit and diluted EPS will both decrease “due to the combination of depreciation and interest being higher than the rent they replace”, while net assets will fall by £1.4bn to £13bn, to reflect a 'new' lease liability of £10.6bn and 'new' right of use asset of £7.8bn coupled with the exclusion of “onerous” lease provisions and other working capital balances. We remain buyers.

A trading update from Mondi (MNDI) in advance of the release of its full-year results on 28 February indicated that underlying earnings before interest, taxation, depreciation and amortisation (Ebitda) are expected to exceed last year’s level of €1,482m (£1,305m). Basic earnings per share are forecast to sit between 167¢ and 173¢, which would represent an increase on the year of between 21 per cent and 25 per cent. The packaging group expects to recognise special item net charges after tax of around €92m, €81m of which were recognised in the first half. The full year total is up from last year’s level of €53m. Shares were unmoved by the trading update, and we retain our rating. Buy.

KEY STORIES:

Royal Bank of Scotland (RBS) has recommended a special dividend of 7.5p a share and final dividend of 3.5p alongside full-year results for 2018. The state-backed bank reported a 38 per cent rise in pre-tax profits, thanks to higher trading income, a reduction in operating expenses and a reduction in impairment losses. However, on the latter front management was cautious on the outlook for 2019, expecting bad loans to increase but remain below a loss rate assumption of between 30 and 40 basis points of the average loan book.

Premier Foods (PFD) has ditched previous plans to sell its Ambrosia custard business. The company stated that a number of parties expressed interest in the business, and since the New Year Premier Foods has been in “detailed discussions” with a small group of potential buyers, but ultimately offers were “not satisfactory”. Last month Gavin Darby, whose idea it was to sell Ambrosia, stepped down as chief executive. Shares fell 4 per cent in early trading.

OTHER COMPANY NEWS:

January retail sales in the UK were far better than expected. The Office for National Statistics (ONS) said the monthly growth rate in the quantity bought increased by 1 per cent, following a decline of 0.7 per cent in December 2018. Year-on-year growth in the quantity bought in January 2019 was 4.2 per cent - the highest growth rate since December 2016 - while year-on-year average store price growth slowed to 0.4 per cent - the lowest price increase since November 2016 - mirroring wider slowdowns in UK inflation. This followed news yesterday afternoon of significantly slower US retail sales growth in December - the sharpest rate of decline for nearly a decade.

Eddie Stobart Logistics (ESL) announced that Damien Harte will retire from his role as chief financial officer at the end of March. He will be replaced by Anoop Kang, who is currently CFO at Cambian Group, prior to which he held a series of senior financial roles at Balfour Beatty and Kier Group. Shares were flat in early trading. Buy.

Patisserie Holdings (CAKE) has sold Baker & Spice to the Department of Coffee & Social Affairs for £2.5m. This follows the sale of Patisserie Valerie to private equity firm Causeway Capital Partners for £13m. Steve Francis will continue in his role as chief executive of Patisserie Valerie, although Luke Johnson’s role at the chain remains unknown. Retail and distribution firm A.F. Blakemore & Son bought Patisserie Holdings's brand Philpotts.

Millennium & Copthorne Hotels (MLC) has cut its full year dividend from 6.5p to 4.23p as the hotel owner braces for another “challenging year”. Sales in 2018 fell 1.1 per cent to £997m, while pre-tax profits fell by nearly a third to £106m. Revenue per available room fell 1.5 per cent to £88.49 reflecting a stronger pound sterling against the group's main trading currencies, and at constant currency increased 0.7 per cent. Chairman Kwek Leng Beng said the hospitality industry faced a “range of geo-political and global economic headwinds in 2018”, many of which look set to continue in the current year. Shares were up 1 per cent in early trading.