IC TIP UPDATES:
Ratings agency Moody’s has downgraded its rating of Rolls-Royce (RR.) to Baa1 from A3, citing the aerospace engineer’s high leverage and low free cash flow generation, and describing “unsustainable” expected working capital gains. At its first half, Rolls reported a negative free cash flow, posting a £391m outflow for its core business. It maintained its full-year guidance of around £700m and £1bn adjusted FCF for 2019 and 2020 respectively, but for 2019 this will be supported by working capital gains. Moody's expects around £600m-£800m of favourable working capital movements largely from inventory reductions and defence contract advance payments, adding that 2020 target cash flows will likely necessitate further inventory reductions. Moody’s did, however, upgrade its outlook from ‘negative’ to ‘stable’, citing improving performance and the long-term stability of Rolls’ engine programmes. Sell.
Half year results from Mears (MER) indicate a 10 per cent revenue increase to £481m for the six months to 30 June whilst statutory pre-tax profit has declined by 3 per cent to £12.5m. With 60 per cent of the value of contract opportunities bid on secured, the order book has expanded by 43 per cent to £3bn. But margin dilution from the newly acquired MPS business and reduced profitability from the capital-intensive development division (which is being scaled back) has seen adjusted operating profit fall by 6 per cent to £19.3m. Net debt has come down by 15 per cent to £63.6m. Under review.
KEY STORIES:
As many expected, Muddy Waters has published its counter-response to the rebuttal and accusations issued by Burford Capital (BUR) in the last week. In a new 13-page report, the short-seller said the litigation funder’s responses had failed to dispel its original views, and doubled down on claims that Burford aggressively marks its cases up to generate non-cash profits, manipulates its cash-based financial metrics to justify fair value gains, deliberately confuses investors about the timing of its fair value gains, and possesses a fragile balance sheet and standards of corporate governance. Analysts at Numis, which have stuck with their 1,866p price target for the stock throughout the past week, argue that Burford’s stake in the Petersen case against Argentina is “a very good example” of why the group’s use of fair value accounting gives investors a better impression than cash accounting, pointing to recent developments in the case and a sale in the secondary market for evidence. Separately, chief investment officer Jonathan Molot continues to buy stock in the open market, and yesterday acquired a further 250,000 shares at an average price of £7.65 each, bringing his total stake to 4.34 per cent.
Shares in travel company Tui (TUI) were up nearly 4 per cent in early trading, suggesting the market was relieved that its third quarter trading update was not as bad as expected, after its peer Thomas Cook (TCG) announced it required additional liquidity for the winter season, and travel website On The Beach (OTB) warned on profits. Tui reported a 3.7 per cent increase in revenue to €4.75bn (£4.41bn) during the third quarter, and a 52.2 per cent decline in operating profit to €84.1m. The decline was led by a €104m loss in its airline, as well as losses in travel to western and northern Europe. Meanwhile, hotels and resorts, cruises, and holiday experiences reported strong sales growth. The third quarter was also negatively impacted by the grounding of the Boeing 737 Max plane, and Tui expects €300m of related costs for the current financial year.
OTHER COMPANY NEWS:
Half year results from John Menzies (MNZS) indicate a 4 per cent increase in revenue to £650m for the six months to 30 June and a swing to statutory pre-tax loss of £4.4m (versus the £8.3m profit at the same point last year). Impacted by the loss of exclusive licences in the second half of 2018, weak cargo volumes and the grounding of the Boeing 737 Max aircraft, underlying operating profit has fallen by 14 per cent to £17.9m. Shares are down almost 4 per cent this morning.
Chief executive John Pettigrew says that National Grid (NG.) will report its initial findings on the cause of last Friday’s power outage to the government and regulator Ofgem by the end of the week. Posting on LinkedIn yesterday, Mr. Pettigrew defended both his own and the company’s response and said that the group would “reflect seriously on to what degree these issues sit with National Grid, either with our electricity transmission business or the independent electricity system operator”. He also said that other players such as local distribution companies, generators and Network Rail should “be equally forensic” in examining their own role. Meanwhile, The Guardian is reporting that National Grid experienced three blackout “near-misses” in the past three months with industry sources suggesting the group was aware of the growing potential for a wide-scale power outage.
“A strengthening gold price is good for our business,” says John Nichols, chief executive of pawnbrokers H&T (HAT). And with the sterling-denominated price of the yellow metal at an all-time high, half-year results could not have come at a better time. In the first six months of 2019, pre-tax profit climbed 8 per cent to £6.8m, ahead of the uptick in the net pledge book. The personal loan book’s risk-adjusted margin again climbed, while net debt fell, though these figures have been aged by the equity-financed post-period acquisition of 65 trading stores and bought 29 pledge books from the Money Shop.
Subdued markets and client activity have conspired to hammer the share price of spread-better Plus500 (PLUS) so far this year. But the stock is up 16 per cent on the publication of half-year results, which show that trading picked up in the second quarter, customer numbers rose. Investors will also be cheering an announcement that the company is to purchase up to $50m-worth of shares.
The Financial Conduct Authority has given its blessing to the takeover of wealth manager and investment platform provider IFG Group (IFG), by private equity outfit Epiris. The deal, which already has backing from IFG shareholders, remains subject to court sanction, anticipated on 27 August.
Online bingo operator JPJ Group (JPJ) reported a 14 per cent increase in gaming revenue to £170m during the first half, with adjusted cash profits up 2 per cent to £54m. The company attributed revenue growth to strong organic growth at through the Vera&John brand, while profits were impacted by higher UK gaming taxes during the period. The average number of active customers per month increased 7 per cent year-on-year to 245,893, with monthly real money gaming revenue per average active user improved 5 per cent to £108. Shares fell just over 1 per cent in early trading.
