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News & Tips: Next, Xaar, Enquest & more

A mixed bag for London's equities today
March 21, 2019

London's equity markets are mixed in morning trading with the blue chip FTSE100 kicking on with further gains while the more domestically focused FTSE350 has slipped back on political uncertainty. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES:

Overall, Next (NXT) shares have performed well since our 2017 buy call (4,314p, 11 May 2017), but the stock slipped this morning on a lack of upgrades following an in-line set of annual figures. Factor in the continued struggle on the UK high street and perhaps investors are losing interest in the clothing chain? Total group sales increased 2.5 per cent over the last year to £4.2bn, while full price sales increased 3.1 per cent. A commendable performance against a difficult market, prompting analysts at Liberum to highlight Next’s strong balance sheet, good cash generation and well-covered dividend as further evidence of its defensive position. For now, our recommendation is under review.

Xaar (XAR) shares fell as much as 9 per cent in morning trading as the inkjet printheads developer has said it will require external investment to maximise the potential of its thin film portfolio. The company made a pre-tax loss of £14.9m, and the dividend has been cut to 1p, from 10.2p last year. The loss was largely driven by a rapid decline in the ceramics end market. The shares are now down 25 per cent since our February tip, which we reiterate. Sell.

After Cairn Energy raised doubts about the performance of the Kraken oil field last week, EnQuest (ENQ) used its full-year numbers to defend its key asset. “FPSO [floating production, storage and offloading vessel] performance has been the main limiting factor in achieving Kraken's full production potential,” chief executive Amjad Bseisu told the market today. “As such, our clear operational priority is to improve Kraken's FPSO uptime and efficiency. We are working with the FPSO operator on a number of improvement initiatives.” Investors appear to have bought this, together with forecasts for production growth of 20 per cent to between 63,000 to 70,000 barrels of oil-equivalent per day, and have pushed the shares up by 14 per cent today. Under review.

Cello Health (CLL) has reported its annual numbers which, despite being well flagged by a January trading update, still beat analyst expectations on EPS, DPS and the year-end net cash position. Growth continues to be driven by the healthcare division, which delivered a 7 per cent increase in net revenues last year, while margins continued to expand from 17.7 per cent to 18.5 per cent year-on-year. As expected, the Signal division fared less well, reporting a slight net revenue decline and flat margins. We remain buyers.

Shares in Wynnstay (WYN) fell 20 per cent in early trading after the agricultural goods company warned that market conditions in the second quarter "significantly weakened" and the company is now trading behind seasonal norms. Management said this mainly reflects the abnormally warm winter months, which reduced the requirement for feed and other weather-related products. The recent weakening in farmgate prices, partly believed to be the result of Brexit and political uncertainties is also undermining farmer confidence. Our buy tip is under review.

Shares in Portmeirion (PMP) are up three per cent this morning on the back of strong performance in 2018. Revenue and profits have grown, while the operating margin has increased 40 basis points to 11.1 per cent. Crucially, the potential for recovery in Asia we pointed to in our December buy tip appears to be materialising. The South Korean business grew by 24.6 per cent in the year, clocking up sales of £8.2m. Buy.

LoopUp’s (LOOP) revenues rose by 96 per cent to £34.2m in 2018, with adjusted operating profits up more than 500 per cent to £4.5m. Statutory operating profits came in at £0.9m, against £0.7m, after the impact of the acquisition of MeetingZone, which completed last June. Since launching in Australia in March 2018, the group has won 55 new customers in the region. That said, the average number of total ‘quota-effective’ pods (sales teams) running during the year was below its expected level, partly because of building up the pipeline in Australia and partly because of its decision not to move any MeetingZone sales staff over to LoopUp pods during the period. The shares were up by around 7 per cent this morning. Buy.  

KEY STORIES:

Investors in both the UK and Israel can’t seem to get enough of Energean (ENOG) shares, which have outperformed the FTSE 350 Oil & Gas Index by more than 50 percentage points in the last nine months. Judging by today’s full-year numbers, it’s not hard to see why. A year on from its initial public offering, Energean remains on track to deliver first gas from Karish and Tanin in March 2021, and has now secured $13bn in future revenues through 12 gas sales agreements in Israel. Capital expenditure is ratcheting up, but the drawdown on borrowings has been softened by a 45 per cent boost to production offshore Greece, for 29 per cent lower costs per barrel.

Medco Energi Global has increased its final offer for Ophir Energy (OPHR) to 57.5p per share, in a bid to win over sceptical shareholders including hedge fund Petrus Advisers. Ophir today revealed that it was briefly in receipt of an unsolicited “and highly preliminary” indicative cash and shares offer from Aim minnow Coro Energy (CORO), though this was withdrawn by Coro and its financial backer Sand Grove Capital.

Shares in Renishaw (RSW) dropped 11 per cent in morning trading following a profit warning. At its half year results on 31 January, the metrology business had forecast an expected revenue range for the year of £635m to £665m and pre-tax profits of £146m to £166m. A slow down in demand in Asia for encoder products and from large end-user manufacturers of consumer electronic products has continued into the second half, and Renishaw now expects full year revenue to be in the range of £595m to £620m and pre-tax profits to be in the range of £123m to £141m.

OTHER COMPANY NEWS:

Oil rig engineer Lamprell (LAM) finally has a backlog to speak of. Outstanding orders picked up to $540m by the end of 2018, an increase of $478m since last June, thanks to progress in contract wins in the renewables market and the Middle East. However, the pain from the East Anglia One offshore windfarm project has crushed Lamprell’s net cash position, and a full-year revenue estimate range of $250-400m reflects the uncertainty in the group’s key markets.

Given its focus on drilling activities across its Morocco, full-year results for Sound Energy (SOU) tell investors little new beyond the £20.5m cash on the balance sheet at the end of December, up £5.8m since July’s $15m (£11.4m) equity raise.

With its Kwale mine in Kenya coming to the end of its life, Base Resources (BSE) is heavily reliant on support for its next project: the Toliara mineral sands development. Today, the miner has published a pre-feasibility study for the Madagascan project, which estimates average annual production of 806kt of ilmenite, 54kt of zircon and 8kt of rutile over 33 years. At 22 per cent, the internal rate of return looks a little light, while initial capital expenditure has been marked at $439m. Add a further $151m to that for working capital and VAT, and Base is going to need to raise a lot of cash (approximately $354m in debt, a further $100m in fresh equity, as much as it can from the fading Kwale, and $75m from its current revolving credit facility).

Strix (KETL) shares fell 4 per cent in morning trading, after the impact of currency rates caused by Brexit and other global challenges has softened the kettle safety controls manufacturer’s reported net sales growth. Nevertheless, Strix has maintained its global market share at around 38 per cent, with a slight decline in its share of the Chinese market. Net debt fell 40 per cent to £27.5m, while pre-tax profits grew modestly by 3.2 per cent.

Halma (HLMA) shares were flat on a trading update that disclosed strong revenue growth in the UK and USA, with more modest growth in mainland Europe and Asia Pacific. The manufacturer of products geared towards improving quality of life said that its safety sectors had performed in line with expectations, with strongest progress seen in infrastructure safety.

QinetiQ (QQ.) chairman Mark Elliott is to retire as chairman in July 2019. Mr Elliott will be succeeded by Neil Johnson, who will join the defence engineer’s board on 2 April before assuming his role as chairman upon Mr Elliott’s retirement. Shares were unmoved by the announcement.

Impellam (IPEL) has issued a correction to its annual results, released last week. The group amended the treatment of deferred tax in profit adjustments. As a result, adjusted basic EPS for 2018 was 60.8p, down from 75.2p in 2017, not 56.8p down from 74.6p as originally reported.