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News & Tips: Barclays, BAE, Standard Chartered & more

Blue chip results have hit sentiment
February 21, 2019

Results season is underway and disappointments among the heavyweights are weighing on investor sentiment in the FTSE100 especially. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES:

Barclays (BARC) outperformed European investment banking rivals during the fourth quarter, with its equities trading unit managing a 3.4 per cent year on year increase in revenues, which were up a quarter over 2018. While banking revenue was lower, its corporate and investment banking operations posted a 26 per cent rise in pre-tax profits and a 6.9 per cent return on tangible equity, up from just 1.1 per cent in 2017. At a group level pre-tax profits were weighed down by increased litigation and conduct costs, relating to its settlement with the US Department of Justice over the sale of residential mortgage-backed securities. Stripping out those costs, adjusted pre-tax profits were up a fifth. Buy.

BAE Systems (BA.) shares fell 6 per cent in morning trading on the news that full-year revenues had fallen 1 per cent on a constant currencies basis, amid a fall in production of the Eurofighter Typhoon and general uncertainty surrounding the programme, linked to Germany’s self-imposed ban on arms sales to Saudi Arabia. The company did, however, secure a record order intake for the year of £28.3bn, an £8bn rise, with the order backlog up £9.7bn to £48.4bn. While some investors are clearly uneasy about recent geopolitical events and their impact on BAE, the company remains the go-to military supplier for governments across the world, and it continues to do business with the Saudi government, one of its largest markets. We understand the reasons for investors’ concerns over the medium-term outlook of BAE, but we stick with our rating. Buy.

Arbuthnot Banking (ARBB) expects pre-tax profits for 2018 to be in line with market forecasts. Renaissance Asset Finance grew customer loan balances by just over a fifth, while its Arbuthnot Specialist Lending business is also due for a soft launch and has had credit committee approval for its first customer loan. Buy.

Many things were on the rise for KAZ Minerals (KAZ) last year: volatility, copper output, gold production, cash flow, dividends, gross cash costs and revenues. Even copper prices were 7 per cent up on 2017, despite wild fluctuations. The flipside to this was a loss of investors’ trust following the Baimskaya acquisition, which kept net debt stubbornly high. However, chief executive Andrew Southam sounded a positive note, stating that investing in “significant growth in copper production in both the near and long term”, was justified by a positive outlook for the copper price. Buy.

Keywords Studios (KWS) has bought the assets and business of GetSocial B.V. a company which is based in The Hague, Netherlands. GetSocial – a cloud-based software platform – allows games developers to manage social interactions between their games, players and players’ friends’ networks. Keywords said that GetSocial expands its existing range of cloud-based services. Buy.

Vitec’s (VTC) revenues rose 9.1 per cent to £385m over the year to December 2018, or 10.8 per cent at constant currencies. The operating margin increased from 8.5 per cent to 10.4 per cent, with operating profits improving across all three divisions. Overall, pre-tax profits rose 38.3 per cent to £37.9m – helped by lower charges associated with business acquisitions and material non-operating events.  The company noted that political developments in the US and Europe might have “implications” for “several” areas of regulation. Higher tariffs on imports from China to the US have begun to negatively impact the purchase price for some of its raw materials product codes. But management’s outlook for 2019 is unchanged. The shares were up 8 per cent at the time of writing; buy.

Relx’s (REL) revenues grew by 2 per cent to £7.49bn for the year to December 2018, or 4 per cent underlying. Reported operating profits edged up by 3 per cent to £1.96bn, while EPS slipped from 81.6p to 71.9p – with the prior year including an exceptional non-cash credit tied to US tax reforms. While the media giant’s net debt rose to £6.2bn from £5bn, the adjusted cash-flow conversion rate of 96 per cent was flat year-on-year. The group has proposed a full-year dividend hike of 7 per cent to 42.1p, noting that its long-term dividend policy hasn’t changed. Last year, Relx spent £700m on buying back its shares; this year, it plans to spend £600m. Buy.

Shares in RPS (RPS) were flat on the news that key metrics were up in its full-year results. The consultancy group has delivered a £41m pre-tax profit, compared with a £1.6m loss in the full-year to 2017, while revenues and earnings per share have also risen. The energy division delivered rising profits, while consulting services suffered from “the impact of retention and recruitment challenges in the year”. RPS is in a transition period under new chief executive John Douglas, and it could be some time before strategic changes and acquisitions like Australian transport advisory consultancy Corview, which was acquired post-year end, begin to yield growth. But we stick with our call. Buy.

Macfarlane Group (MACF) shares were flat on a 17 per cent rise in pre-tax profits for the packaging company’s full-year results. An 11 per cent increase in packaging distribution sales was composed of 4 per cent organic growth and a 7 per cent contribution from acquisitions completed in 2018 and 2017. Macfarlane has delivered its ninth consecutive year of profit growth. Buy.

KEY STORIES:

Standard Chartered (STAN) has announced that it will take a $900m provision during the fourth quarter for potential penalties relating to “historical violations of US sanctions laws and regulations”. Part of that provision would be used to pay a potential £102.2m fine from the Financial Conduct Authority (FCA), after the banking group received a notice from the FCA’s Regulatory Decisions Committee over the group's historical financial crime controls. The lender also agreed to pay $40m in fines in January to settle claims from US authorities related to the manipulation of emerging markets currency pricing.

Despite a rocky end to the year, Rathbone Brothers (RAT) reported organic net inflows of £1.1bn during 2018, supplementing £6.8bn in acquired funds from its acquisition of Speirs and Jeffrey. That offset negative market movements of £3.2bn for the core investment management business, meaning funds under management were up almost a quarter over 2018. However, an underlying net organic growth rate of 3.4 per cent was still behind management’s 5 per cent target.   

In 2018, the world of commodities saw trade war fears rock prices and pause a three-year rebound in mining equities. Against this backdrop, shareholders in Anglo American (AAL) have reason for cheer, as shareholder profits edged up 12 per cent, net debt fell again to $2.8bn, and volume and cost improvements kept the return on capital employed at 19 per cent. Unlike BHP, where a productivity drive is behind schedule, Anglo resisted the temptation to sweeten these results with an outsize dividend.

Shares in Acacia Mining (ACA) closed up 11 per cent yesterday, after majority shareholder Barrick Gold said there had been progress in discussions to resolve the long-running dispute between the Tanzanian government and the FTSE 350 miner. The proposals echo a framework agreement proposed at the end of 2017, and include the creation of a local operating company in the country, a 50:50 share of “economic benefits”, a payment of $300m and a combination of royalties, taxes and “a 16 per cent free carry interest”. Acacia is yet to receive a formal proposal from Barrick, which said it would present the proposal to Acacia’s directors.

Purplebricks (PURP) expects to deliver a 15-20 per cent increase in revenue for the year to April 2019 despite a rather depressed housing market. It also expects to maintain its market share of the online estate agency business at 75 per cent. However, trading in Australia and the US remains difficult, and investors reacted by driving the share price down by 30 per cent. Finances remain in good shape with £75m in cash. 

Recruiter Hays’ (HAS) shares have dropped 8 per cent this morning after the group’s interim results showed slowing growth in Germany. The group posted a good set of results overall, with net fee growth across all of its divisions. However, headcount growth in Germany slowed to a net change of just 55 people in the six months to December 2018, compared with an addition of 410 in the same period the previous year. Management has been investing heavily in the country, citing “structural growth opportunities”.

Shares in Centrica (CNA) have plunged by a tenth after the group warned its adjusted operating cash flows would be damaged by the energy price cap, leading to EPS guidance well below consensus. The proposed full-year dividend of 12p is the same as it has been since 2015, and net debt is expected to rise to £3-3.5bn in the next year, up from £2.66bn currently. Sell.

Shares in Playtech (PTEC) were up 5 per cent in early trading after the online gaming software company reported a 55 per cent increase in revenue to €1.24bn over 2018 and announced a €40m share buyback. The company reiterated its focus on regulated markets after it had been burned in the past by unregulated regions, with 80 per cent of sales now coming from regulated markets compared to 54 per cent last year.

Serco’s (SRP) turnaround story looks to be building up steam. The outsourcer’s 2018 full year results show a 40 per cent jump in underlying trading profit on a constant currency basis, driven by cost efficiencies. More importantly, the group finally turned cash flow positive after years of outflows, posting £25m in the year. The order book has strengthened to £12bn, from £10.7bn last year, thanks to two large contract wins in the year.

Go-Ahead Group (GOG) reported a 5 per cent increase in revenue to £1.92bnduring the first six months of its financial year, but pre-tax profits fell 44.5 per cent to £44.2m due to lower operating profit from rail after the end of the London Midland franchise, and charges from exceptional items. Chief executive David Brown said full-year expectations have increased, “especially due to rail” after it added more services from GTR and bid for the South Eastern franchise. Shares were up 2 per cent in early trading.

OTHER COMPANY NEWS:

Buried deep in yesterday’s full-year results, Glencore (GLEN) told the market that it faces a surprise $680m tax bill from the UK government. The demand, which landed in December, relates to “formal transfer pricing, permanent establishment and diverted profits tax assessments for the 2008—2017 tax years”, which the commodities giant intends to appeal.

Wilmington’s (WIL) revenues were flat at £58.3m for the six months to December 2018. Adjusted pre-tax profits were down 26 per cent at £6.7m – though this was expected, stemming from cost increases such as investments in infrastructure last year and cost inflation. Reported pre-tax profits rose 164 per cent to £5.8m – reflecting proceeds from the sale of Wilmington’s specialist credit reporting business ICP, and one-off costs in the comparative period. Wilmington’s healthcare business is “recovering” from the previous year’s challenges, though the US healthcare segment continues to be affected by the rationalisation of its events programme. Wilmington is “on track” to meet full-year expectations. Its shares were down 2 per cent this morning.

Telit Communications (TCM) announced yesterday afternoon that final discussions regarding the completion of the proposed sale of its automotive division to TUS International Limited are ongoing. A further announcement will be made today.

McBride (MCB) shares held up on the release of half-year numbers this morning - mainly thanks to a last minute profit warning yesterday, which wiped 30 per cent off the share price. As expected, costs continue to rise for the manufacturing business, which explains why a 10 per cent improvement in total group sales over the six months ended 31 December 2018 failed to generate any meaningful growth in profitability. Yesterday, bosses said lack of improvement in raw material prices and higher distribution and logistics costs would result in full-year adjusted pre-tax profits before tax falling between 10 and 15 per cent short of the prior financial year.