News & Tips: Centrica, BAE Systems, BT & more

IC TIP UPDATES:

Shares in Centrica (CNA) were down more than 8 per cent this morning as the shares went ex-dividend, a fall which was likely compounded by EDF Energy’s announcement of a further delay in the outage at the Hunterston B-8 nuclear reactor. Centrica currently holds a 20 per cent stake in the eight nuclear power stations owned and operated by EDF, stating its intention to divest this holding back in February 2018. With the cumulative impact of all extended delays in nuclear outages, record levels of customer switching in UK retail and a mild winter, RBC Capital markets believes this could result in “yet another downgrade” to guidance when the group publishes its latest trading statement on Monday. Pending Monday's update, we place our recommendation under review..

BAE Systems (BA.) is making improvements in the US to the production schedule for its M109A7 Paladin Integrated Management offering, which experienced disruption last year. In a first quarter trading update, the group said that a revised production schedule will ramp up to eight vehicles per month by the end of the year. It is applying its new thinking to the other combat vehicle programmes, made up of the Armored Multi-Purpose Vehicle, the Bradley A4 and the Amphibious Combat Vehicle. The group retains its guidance and expects 2019 operating cash flow to be significantly weighted towards the second half. Buy.

BT (BT.A) has decided to hold the full-year dividend steady at 15.4p for 2018/19. In its results for the year to March 2019, the telecoms giant also said it has lifted its FTTP (fibre-to-the-premises) targets from 3m to 4m premises passed by March 2021, and from 10m to 15m by the mid-2020s, “subject to conditions being right”. Meanwhile, EE is set to launch 5G “imminently”. In terms of performance, revenues were down 1 per cent at £23.4bn – after growth in consumer was tempered by regulated price reductions in Openreach and declines in the enterprise business. Pre-tax profits were up 2 per cent at £2.67bn, reflecting the cost of settling one-off EE acquisition warranty claims in the previous year. We remain positive; buy.

National Express (NEX) shares were flat on a first quarter trading update that revealed growth in all of its divisions. Group revenue grew 11.3 per cent on a statutory basis, with its Spanish coach operator, ALSA, faring particularly well, where revenues were up on 11.8 per cent on constant currency terms. Revenues in North America rose in spite of the impact of school closures after severe snow. Here, the incremental year-on-year profit impact from the school disruption is currently about $4.5m, although National Express anticipates a “sizeable proportion” of the lost schools days to be made up within its first half. Buy.

Versarien (VRS) has announced a slew of collaborative agreements with North American companies for the purpose of exploring the use of its graphene products, along with the news that its Houston facility is now fully operational. The engineering group now has relationships with over 25 companies in the US - these include, according to today’s announcement, an agreement with NovoCarbon Corporation, a clean technology minerals processing company, which “covers the establishment of graphene supply chain components to facilitate the use of the company's graphene products in the consumer goods and other sectors”. Sell.

Tyman (TYMN) reported weaker than expected activity during the first four months of the year, due to a decline in construction activity in the US and Canada. That meant like-forlike revenue was flat on the same time in the prior year, although up 15 per cent overall due to acquisitions. Shares were down 7 per cent in early trading. We place our buy recommendation under review.

Packaging and paper group Mondi (MNDI) has updated that its like-for-like sales volumes were marginally lower than last year’s comparable period, but above the previous quarter. Selling prices for the group’s paper grades are up on average. Underlying cash profits for the first quarter were €471m, up 16 per cent on the prior year, driven by a mix of higher average selling prices, operational performance, contribution from acquisitions and capital expenditure projects, and lower planned maintenance shut costs, the group says. The €335m modernisation project at its Steti mill, in the Czech Republic, commissioned in Q42018, is running according to plan. Buy.

Ahead of its AGM later today, Huntsworth (HNT) has said that trading for the four months to April 2019 was in line with expectations. Acquisitions from 2018 have been “successfully integrated” and are “performing well”, while working capital is improving with net debt lower than anticipated. Management is confident about achieving its full-year expectations. The shares were down by around 2 per cent this morning. Buy.

For the quarter ending March 2019, Elecosoft (ELCO) saw revenues rise 20 per cent and pre-tax profits “higher than” the pre-tax profits a year earlier, in line with market expectations. The group had net debt of £0.9m, against net debt of £2.1m as at December 2018. The shares were up 7 per cent this morning. Buy.

Time Out’s (TMO) Time Out Market Miami opens to the public today. The venue occupies 18,000 sq. ft. and has 18 eateries, a demonstration kitchen, three bars and an area for showcasing local culture. Buy.

It is unusual to see shares rise 3 per cent following a profit warning, but the situation at Superdry (SDRY) has been fairly unusual for a while now. Since his dramatic return last month, Cofounder Julian Dunkerton has wasted no time in scrapping a footwear licensing deal with Pentland Brands and cutting “unnecessary promotional activity”. However, he is still new enough that weak wholesale and ecommerce performance, which will lead 2019 pre-tax profits to fall below expectations, can be laid at the feet of the old management. We see today’s share price movement as a vote of confidence in Dunkerton’s plan to make Superdry into a “design-led business with a strong brand identity”, but would like to see concrete progress before vacating our sell recommendation.

In a bid to “future proof its customer-centric approach and improve operational efficiency”, Charles Stanley (CAY) has today launched a restructuring of its strategy and operating model. The investment management group will create “a single back and middle office”, simplify and standardise processes for its investment professionals, and re-jig its management structure. No details have been provided on the costs of re-structuring, or the potential annual savings, though the initiatives are said to support a goal of achieving a 15 per cent net margin. Shares are up five per cent in early trading, and are under review.

Morgan Sindall’s (MGNS) infrastructure division has been awarded a £1.6bn contract for civils construction management by Sellafield Ltd. This is lot three of a total of four lots comprising Sellafield’s programme and project partnership which is valued at £5bn over the next 20 years. Buy.

KEY STORIES:

Barratt Developments (BDEV) reported a 2.4 per cent rise in forward sales during the year to date. However, net private reservations per active outlet a week were down to 0.79 from 0.80 the prior year. The board’s outlook for the full-year is “modestly” above expectations, although volumes are expected to grow at the lower-end of the medium-term target range of 3-5 per cent.

Shares in engineering company IMI (IMI) fell as much as 4 per cent in morning trading upon news of first-quarter performance that reflected “a continuation of the mixed trading conditions experienced in the final quarter of 2018”. Organic revenues were 2 per cent lower than in last year’s comparable period. Management retains its expectation that first half organic revenues will be lower than in Q12018 owing to the phasing of the critical engineering division's order book, and weakening demand in the industrial automation sector for precision engineering.

Beazley (BEZ) announced a 16 per cent rise in gross written premiums for the first quarter, driven by political, accident and contingency and specialty lines. However, marine, property and reinsurance businesses continued to be impacted by higher than usual claims, with the insurer strengthening the reserves in some areas of short tail business, notably in relation to typhoon Jebi, the Woolsey fire and a portfolio of US trucking business within the marine accounts.

RSA International (RSA) revealed flat gross written premiums on an adjusted basis during the first quarter, after taking into account planned exits, currency movements and reinsurance changes. In the UK and international segment premium income fell 5 per cent due to the impact of pricing and underwriting actions.

The long-running fight between Acacia Mining (ACA) and its major shareholder Barrick Gold against the government of Tanzania has split into a three-way after Barrick chief executive Mark Bristow said Acacia was getting in the way of a resolution. He told Miningmx yesterday Acacia was “not cooperating” and was against Barrick voting its 63.9 per cent shareholding to put through the 2017 deal that would see a 50-50 economic benefits split and a $300m (£230m) payment to resolve tax claims. Acacia said Bristow’s comments did not fit with “its own understanding of the situation” and would ask for clarification. The $300m plan was set to go to Acacia’s independent directors in February. Hold.

Warm weather in February and an acceleration in the education business has led Findel (FDL) to announce full-year profits are likely to beat current market expectations of £27-28m. Pleasant weather helped trading for the garden ranges, while homeware sold well throughout. Shares were up 5 per cent following the announcement.

WM Morrison (MRW) has reported like-for-like sales up 2.3 per cent for the 13 weeks to 5th May, made up of 0.2 per cent growth in retail and 2.1 per cent in wholesale. Next quarter faces a tough comparator against last year’s favourable summer weather and the World Cup. Alongside the trading update, the supermarket has announced that Ocado (OCDO) will have sole use of the new customer fulfilment centre in Erith until Januar 2021, giving it extra capacity following the fire at its Andover facility. Ocado will, however, no longer be Morrison’s exclusive digital partner. Morrison’s shares are flat, but shares in Ocado were up 1 per cent this morning.

Wood Group (WG.) has joined the Sellafield nuclear power cleanup project in a deal worth $1bn (£770m) over 20 years, as the design and engineering partner. Sellafield Limited, the 100-year project’s managing body, said it would finish reprocessing stored waste next year and move solely to “high hazard and risk reduction”. Wood did not break down how the $1bn in payments would be distributed over the 20 years, but told shareholders in a separate announcement it was confident in a 5 per cent revenue uptick this year, as forecast before the Sellafield deal. The group also announced senior non-executive director Roy Franklin would become chairman in September, replacing Ian Marchant. The oil and gas veteran also serves as chairman of Cuadrilla and Premier Oil (PMO).

OTHER COMPANY NEWS:

Visa International Service Association said yesterday that its offer for Earthport (EPO) has become unconditional in all respects. It has received notification from the Competition and Markets Authority (CMA) that the acquisition does not qualify for investigation. It said the offer would remain open for acceptance until further notice, and Earthport shareholders who have not accepted the offer “are urged to do so as soon as possible”. Today, Earthport said its board has applied to the London Stock Exchange for the cancellation of the admission to trading of Earthport shares on Aim – with cancellation expected to take effect on or shortly after 7am on 7 June 2019. Following this cancellation, Visa plans to re-register Earthport as a private limited company.

Despite a year-on-year drop in portfolio purchases, debt buyer Arrow Global (ARW) saw a 23 per cent rise in core collections in the first three months of 2019. That in turn boosted free cash flow by 32 per cent, while the underlying 12-month return on equity stood at 34.5 per cent. Perhaps most reassuringly, though, was a drop in the debt from four to 3.4 times equity.

Rathbone Brothers (RAT) posted a 13.1 per cent rise in operating income in the first quarter of 2019, as the personalised investment and wealth management group weighed the benefits of a 10.7 per cent rise in the FTSE 100 Index, and recent acquisitions. In particular, the integration of Speirs & Jeffrey is “proceeding well”, with attendant operating performance in sight and ahead of schedule.

KCOM (KCOM) said this morning that the scheme document relating to its cash acquisition by ‘Humber Bidco Limited’ – a wholly-owned subsidiary of Universities Superannuation Scheme Limited (USSL) – is being published and posted today to shareholders. On 24 April 2019, KCOM said that it and Humber Bidco had reached agreement on the terms of the recommended cash acquisition, valuing each KCOM share at 97p.