The week has started with further losses among London's mid and small cap indices with the blue chip FTSE100 just about holding above the water line. Click here for The Trader Nicole Elliott's latest thoughts on the markets.
IC TIP UPDATES:
Shares in Metro Bank (MTRO) are down again this morning, after reports emerged over the weekend of queues of concerned customers at a number of the lender’s West London branches. A message to the market this morning – titled ‘Statement re Press Speculation’ – suggested that plans to raise £350m of equity capital is “well-advanced”, and backed by new and existing shareholders. Complicating matters are comments from chief executive Craig Donaldson, which we have confirmed this morning, suggesting the company might securitise or sell £1bn of loans – amounting to more than 10 per cent of the group’s loan book. Sell.
Diploma (DPLM) has started the year well, with revenue growth ahead of expectations and a 20 basis point expansion in the operating margin. Pre-tax profits were up 13 per cent. Free cash flow fell in the period, due in large part to working capital investments that included a £5m build up on inventories as a contingency in the case of a no deal Brexit. Management said the group was on track to meet full-year expectations, and also to acquire some “quality businesses” in the course of the year, though it warned the environment remained competitive and there were some signs of a slowdown in the industrial seals market. Buy.
Ricardo (RCDO) has announced the acquisition of railway technical engineering firm Transport Engineering for a total maximum cash consideration of AUD$53.6 million (£28.9 million). Amidst challenging conditions and a suppressed performance in the automotive market, the group is aiming to diversify its portfolio, increasing the proportion of its business in the rail sector. This latest move expands the group’s footprint in the sizeable and rapidly growing Australian rail market. Buy.
A trading update from Centrica (CNA) has noted operational performance is largely in line with expectations with cash flow and net debt expected to remain on target for 2019. However, the trading environment remains challenging with a number of factors placing pressure on full year earnings – the UK default tariff cap, warmer than expected weather, falling natural gas prices and extended nuclear power station outages. Despite growth in North America, Ireland and connected home, total consumer customer accounts have declined by 20,000. As a negative but perhaps mostly anticipated announcement, shares are up over 2 per cent. However, with RBC Capital Markets seeing “limited future growth prospects” and significant challenges in the group’s core retail business, we remain sellers.
KEY STORIES:
Coast Capital - which has a 10 per cent stake in First Group (FGP) - has requisitioned for the transport group to call an extraordinary general meeting, in the hope of removing chairman Wolfhart Hauser and five other board members. “The existing leadership team has a track record of value destruction and under-performance which is partly due to their inexperience in the surface transport industry,” said founding partner at Coast Capital James Rasteh. The board of First Group said it had attempted to engage “constructively for more than a year” and that its correspondence had “included detailed responses to several proposals and has involved a number of meetings with the chairman and with senior management”.
Victrex (VCT) increased its inventory by 23 per cent since its September year-end, providing a temporary bulwark in the event of Brexit-linked disruption to the supply chain. Weakness in the automotive and consumer electronics divisions fed through to a 12 per cent revenue decline at constant currencies, while gross profit of £87.4m and a 380 basis point reduction in the related margin point to tight trading conditions. Hold.
Good news for most is bad news for Dignity (DTY), as a 12 per cent reduction in funerals weighed on the undertaker. Management now expects deaths to be down 3 per cent in the year overall which, coupled with price reductions, forced broker Peel Hunt to revise pre-tax profit expectations down 8 per cent for the year. The death rate is expected to normalise, but with the CMA’s market study of the funerals industry also coming down the pipe, we think it wise to maintain our sell recommendation.
OTHER COMPANY NEWS:
Caledonia Mining (CMCL) has been given a handy $86 (£66) extra per ounce of gold above the London Bullion Market Association’s price by its refinery in Zimbabwe. The company said the ‘gold support price’ had been brought in to boost gold production in the country. Caledonia did not give an estimate on how this might affect cash flow but it should be a welcome boost as electricity outages and grade issues have hampered production in recent months. Caledonia said it was looking for clarification from the Reserve Bank of Zimbabwe-controlled refinery on how long the 6.7-per-cent higher price would last.
FTSE 250 lender TBC Bank (TBCG) is out with first quarter figures this morning, covering a period mired by an investigation by Georgia’s central bank. Though changes in lending rules caused the risk-adjusted net interest margin to decline to 4.7 per cent, the return on equity rose year-on-year to 23.8 per cent, net profits were up, and the cost-to-income ratio has now declined to 37.7 per cent.
