Geopolitical concerns remain at the forefront of investors' minds after the Trump-Kim summit broke up unexpectedly early. Click here for The Trader Nicole Elliott's latest take on the markets.
IC TIP UPDATES:
Ricardo (RCDO) reported slightly depressed pre-tax profit figures for its first half, which were weighed down by adjustments for amortised intangibles and restructuring costs. Shares were flat during morning trading following the publishing of its results. The automotive engineering group has signed a long-term extension to an engine deal it has with McLaren, while it has commenced delivery of its anti-lock braking systems to the defence sector. Brexit uncertainty and a weak diesel market have put investors off the automotive sector for a while now, but the company’s move towards electrification should provide a platform for long-term growth. With the shares trading at ten times forward earnings, we maintain our buy call.
Mondi (MNDI) shares fell 3 per cent during morning trading, despite underlying cash profits rising 19 per cent to €1.8bn (£1.5bn) and underlying operating profits growing 28 per cent to €1.3bn. While the company is confident of its structural growth drives, its pricing outlook for 2019 is “mixed”, owing to falls in containerboard grades and market pulp and stronger pricing in its kraft paper markets. The business is also planning “longer maintenance and project related shuts”. But the drive to substitute plastic bags with more sustainable solutions, something that Mondi is well-positioned for, isn’t going away, and we stick with our buy call.
Arrow Global (ARW) reported a 21 per cent drop in pre-tax profits for 2018 after raised acquisition-related expenses and costs associated with its ‘One Arrow’ programme. On an underlying basis, that metric was up on the prior year, while core collections were up a fifth. The distressed debt purchasing specialist also reported an increase in net operating cashflow prior to portfolio investments of almost a quarter. Net debt was also further reduced to 3.7 times adjusted cash profits. However, with concerns we may be nearing the top of the credit cycle, we place our buy recommendation under review.
Morses Club (MCL) revealed a 2.6 per cent rise in customer numbers for the year to 23 February, which produced a 2.4 per cent increase in credit issued to £179m. Morses Club Card continued its growth, with customers standing at 30,000 and balances at £15.5m. Buy.
Vesuvius (VSVS) shares were flat on the release of its full-year results and the news that the molten engineering group has acquired specialist refractory company CCPI for $43.4m (£33.1m) in cash. Based in Ohio, CCPI generates 65 per cent of its sales from steel continuous castings and 35 per cent from aluminium. Vesuvius results revealed record performance across its business units, with overall revenues growing 6.8 per cent on a year-on-year basis and pre-tax profits up 23.5 per cent. Buy.
Shares in Shanta Gold (SHG) are up 6 per cent in early trading, after the precious metals minnow full-year results revealed a near-doubling in post-tax profit on a slightly lower gold price. Given the group’s ongoing precarity, investors will likely cheer the $8m reduction in net debt, to its lowest level in six years, powered in part by all-in sustaining costs of $730 an ounce, below guidance. From an operational perspective, production came in above guidance and sales improved, though there was a slight dip in recoveries. This year, the group has set annual production guidance of 80,000-84,000 ounces, at an all-in sustaining cost of $740 to $800 an ounce. We remain buyers.
Genel Energy (GENL) has received approval from the Kurdistan Regional Govermnent for its acquisition of stakes in two of Chevron’s development fields, Sarta and Qara Dagh. The oil and gas explorer-producer expects first oil from Sarta in 2020, for $60m of start-up costs, and has booked an initial 10 million barrels of net 2P reserves “relating solely to this preliminary phase of the project”. Under review.
SThree (STHR) has appointed Mark Dorman as chief executive from 18th March this year. Mr Dorman was previously president of higher education, international and professional for McGraw Hill Education. He will take over for Gary Elden, the long-serving chief who will be leaving the company following its AGM in April. Mr Elden has been in the group since 1990. Shares are flat on the news. Buy.
National Express (NEX) reported a 5.6 per cent increase in revenue to £2.45bn, with group operating profit up 8.8 per cent to £215m. The transport group reported revenue growth across every division over the year, most notably the 8 per cent increase in North America to $1.42bn., and carried 2.7 per cent more passengers. National Express made 11 acquisitions in 2018: seven in North America, three in ALSA and one in the UK. Shares fell 1 per cent in early trading. Buy.
KEY STORIES:
Shares in Telford Homes (TEF) fell 15 per cent after the London focused housebuilder warned that planning delays and other factors beyond its control will mean that pre-tax profits for the year ending March 2020 will be lower than in 2019. Thereafter, profits are expected to recover as more and more of the business model is focused on the build to rent market, which is expected to make up more than half the group’s development pipeline. The business model, concentrating more on the capital light build to rent sector suggests that the price drop is overdone, and the dividend is being maintained.
Hastings (HSTG) reported a 3 per cent rise in gross written premiums last year, but adjusted operating profits were flat - after stripping out £14.5m in VAT recoveries - following adverse weather conditions, which pushed up the loss ratio to 75 per cent, from 73 per cent. That pushed the combined operating ratio to 89.4 per cent, from 87 per cent.
RSA Insurance (RSA) was hit by higher weather costs and heavy underwriting losses in its London Markets business, which pushed up the group combined ratio to 96.2 per cent last year, from 94 per cent. Underwriting profits were down a a third at constant currencies, with the insurer implementing changes in underwriting appetite in its London Markets that reduce its activity by around 50 per cent versus 2017 levels, with a strategic review is ongoing to identify any further portfolio exits.
Rolls-Royce (RR.) shares fell by as much as 4 per cent in morning trading, following full-year results and the news that the engine manufacturer has withdrawn from a competition to power Boeing’s ‘New Midsize Airplane’ (NMA). Rolls-Royce said that it is “unable to commit to the proposed timetable to ensure we have a sufficiently mature product which supports Boeing's ambition for the aircraft and satisfies our own internal requirements for technical maturity at entry into service”. The company’s results revealed a statutory operating loss of £1.2bn, although revenues and free cash flow grew.
Proactis’s (PHD) shares plummeted by around a half this morning, on the news that it has “experienced a lower level of retention and a deterioration of the pipeline in the Group's US and European operations” in January and February 2019. While trading for the UK and Esize businesses is expected to be “robust”, management thinks it unlikely that the broader group will see “significant growth” for the rest of the year ending July 2019. Former chief executive Hamp Wall departed in January, and new boss Tim Sykes has started a review of the US and European operations. For the half-year to January, Proactis expects to report total contract value won of £5.8m (from £5.5m), revenues of around £27.7m (against £26.4m) and adjusted cash profits of around £8m (against £8.5m).
Aston Martin Lagonda (AML) shares dropped 14 per cent in morning trading following the release of its first full-year results as a public company, and are now 38 per cent of its £19 October listing price. Statutory operating profits fell 51 per cent, but strip out IPO costs of £74m and you’re left with an 18 per cent rise, with a smaller margin than the prior year. Wholesale volumes were up 26 per cent while revenues passed the £1bn mark with a 25 per cent increase. Aston Martin has approved a £30m Brexit contingency fund “of advanced working capital and/or operating expenses”.
Shares in Rentokil Initial (RTO) are up 5 per cent this morning, after the 2018 numbers came in two per cent ahead of expectations. Adjusted operating profits were up 13.3 per cent at actual exchange rates, to £329m. The group has continued to be highly acquisitive, buying 47 businesses during the year for £298m, primarily in pest control.
Were shares in Petrofac (PFC) over-sold on this month’s SFO development? The reaction to full-year numbers – a 1 per cent drop to 411p – suggests not. That’s despite a swing to net cash of $90m at the year-end, and what chief executive Ayman Asfari characterised as “healthy new order intake”. However, net profits were down 21 per cent in the core engineering and construction division, a further $82m of exceptional items were booked, the group backlog continued to thin, and Mr Asfari acknowledged “a higher degree of uncertainty in the level of awards in the near-term”.
International Consolidated Airlines (IAG) reported a 9.5 per cent increase in operating profit to €3.23bn during 2018, with passenger unit revenue up 2.4 per cent at constant currency. The owner of British Airways saw fuel costs increase 8 per cent, or 12.5 per cent at constant currency, while non-fuel costs fell 2.2 per cent. Chief executive Willie Walsh called this a “very good performance” despite three significant challenges caused by fuel prices increasing 30 per cent, Air Traffic Control disruption, and an adverse foreign exchange impact of €129m. Shares were up more than 1 per cent in early trading.
British American Tobacco (BATS) reported outperformance in its combustible products, with market share up 40 basis points and strategic cigarette brand volume up 4.8 per cent. The company also made progress in its alternative products, with adjusted revenue from tobacco heating products and vapor up 95 per cent to £901m. Operating cash flow conversion of 113 per cent helped to pay down some debt and increase the dividend by 4 per cent. The company also announced that finance director Ben Stevens will retire in August and will be succeeded by Tadeu Marroco, currently director of group transformation.
OTHER COMPANY NEWS:
Bakkavor (BAKK), which floated in November 2017, saw revenues for the year to 29 December 2018 rise 2.2 per cent to £1.86bn. The provider of fresh-prepared food said positive performance in the UK came despite a “tough market”, while the US and China saw “accelerated growth” with like-for-like growth of 16 per cent. Group pre-tax profits rose from £39m to £77.9m. But chief executive Agust Gudmundsson said “Subdued consumer confidence and inflationary pressures have continued into 2019 [...]”. The company anticipates limited UK growth and a decline in its cash-profit margin in the first half of the year, though the second half should see a rise in UK revenues thanks to recently-secured new business. The shares were down by around a tenth this morning.
GoCompare’s (GOCO) revenues rose 2.3 per cent to £153m in 2018. While sales for its price comparison segment fell 3.3 per cent to £144m, the top line also constituted an £8.2m contribution from the rewards segment – established following the acquisition of The Global Voucher Group last January. Total pre-tax profits rose 10 per cent to £33.8m. In October 2018, GoCompare launched ‘weflip’, a switching service that switches people automatically to better deals. It will invest in scaling weflip during 2019, with planned expenditure of around £10m on marketing, funded by operational cash flow. A final dividend of 0.8p takes the full-year total to 1.6p. GoCompare’s shares were down 5 per cent this morning.
Late yesterday morning, Telit Communications (TCM) announced that it had completed the sale of Telit Automotive Solutions (‘Telit Belgium’) to TUS for $105m. Telit has received $67.5m in cash. This includes $1m on account of the sold automotive business’s cash and working capital position. Telit has granted TUS a short-term vendor loan of $38.5m. Under the terms of this loan, Telit has been given a pledge over all the shares of Telit Belgium; TUS “proposes to repay the loan in full upon completion of certain bank financing that is currently in the final stages of being negotiated”. Shares in Telit climbed on the news. They were up by just under 1 per cent this morning.
Oxford Genetics, a portfolio company of Mercia Technologies (MERC), has negotiated six licensing deals for its gene therapy manufacturing technologies in the last year. These include confidential licensing arrangements with large pharmaceutical companies. Mercia has a 40.5 per cent direct equity stake in the business. Its shares were up by around 2 per cent this morning.
Spire Healthcare (SPI) has revealed flat revenues of £931m for 2018, along with a 20 per cent fall in cash profits to £119m, with adjusted EPS halving to 6.9p. The group has found revenues from the NHS have been under pressure, while costs continue to climb. Much of this was revealed in a trading update in January - hence the shares minimal movement in early trading. Management is now guiding to a slight top line improvement this year, although analysts appear concerned by what they call “ambiguous” guidance around costs, which leaves margin growth still in doubt.
Analysts at Peel Hunt have commended genetics specialist Genus (GNS) for a resilient set of half-year numbers this morning. While a 2 per cent rise in adjusted pre-tax profits (at constant currency) to £29.2m might not sound like the most dramatic of movements, this was achieved in spite of African Swine Fever, tough comparative figures and higher research and development (R&D) costs. Instead, healthy volume growth, good progress on acquisitions and a helpful court ruling in the US have all worked in the group’s favour.
What’s this, an operating profit that exceeds a resources company’s top-line? That’ll be Diversified Gas & Oil (DGOC), which recognised a $173.5m “gain on bargain purchase” of the assets it acquired in 2018, which in turn pushed up its operating profit to $295m, just ahead of the step-change in revenues. The low-cost Appalachian operators also said it net debt had softened to 1.8 times’ adjusted cash profits “as of 28 February 2019”, while production stood at 70,000 barrels of oil equivalent at the end of December, almost seven times’ the rate a year prior.
Vertically-integrated steel and mining firm Evraz (EVR) saw earnings per share triple in 2018 as favourable market conditions combined with a cost efficiency programme and lower capital expenditure to boost margins. Net debt also fell 10 per cent, in line with the drop in the value of Evraz’s net assets, while the interim dividend was held at a generous 40 cents a share.
Perhaps with one eye on his company’s whipsawing share price, Hunting (HTG) chief executive Jim Johnson no longer pretends to “know what the investment world thinks now”. On the surface, this morning’s negative reaction to full-year results – highlights of which included a doubling in net cash, a 9 per cent return on capital employed, and a sharp swing to reported profit – underline Mr Johnson’s predicament. But trading this year is “conditional on activity levels improving” against a backdrop of “ongoing commodity price and geopolitical volatility”, which sort of backs up investors’ reservations.
Shares in Howden Joinery (HWDN) have dipped more than seven per cent in early trading, after the group’s full-year results fell short of expectations. Headline profits missed Numis forecasts by 2 per cent, coming in at £283.5m. Management is cautious about the potential impact of a no-deal Brexit, and has purchased an additional £15m in inventory as a result.
