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News & Tips: Tesco, Lloyds Banking, IQE & more

Markets have been pegged back
September 3, 2019

Shares in London are off a little after yesterday's gains on yet more dispiriting economic data. Click here for The Trader Nicole Elliott's latest thoughts on the global markets. 

IC TIP UPDATES: 

Where Tesco (TSCO) saw only “challenging market conditions” and “limited profitable growth opportunities”, Lloyds Banking Group (LLOY) clearly smells opportunity, judging by its acquisition of the supermarket’s £3.7bn prime UK residential mortgage portfolio. The deal, confirmed today, will add 23,000 customers to the UK’s largest mortgage lender, and a loan book which generated a pre-tax profit of £9m in the year to February. For this, Lloyds has paid a 2.5 per cent premium to book value, though the bank says the acquisition will generate returns above “current organic market opportunities”. Buy.

IQE (IQE) swung into a pre-tax loss at its first half, owing to a weak smartphone handset market, a slowing technology landscape, international trade tensions and fall in demand from a significant laser customer. Revenues of £66.7m sat in line with the semiconductor technology specialist’s June profit warning, when the company said that it envisaged turnover of between £65m and £68m. Sell.

Ferguson (FERG) shares edged up 3 per cent on the news that the distributor of plumbing and heating products will demerge its UK outfit, Wolseley UK, and focus solely on the North American market. Wolseley will become an independently-listed business. It was also announced that chief executive John Martin is to step down from his position, which he has held since 2016. Buy.

Belvoir (BLV) grew adjusted pre-tax profits by almost a quarter during the first-half, thanks to its fledgling financial services business and lettings revenue. Lettings managed service fees were up 4 per cent, as the portfolio of managed properties rose 6 per cent to 64,650. However, sales transactions declined by 2.2 per cent, with fees accounting for 19 per cent of overall revenue. We place our buy recommendation under review.  

Xaar (XAR) shares crashed 26 per cent in early trading following a sales warning that recognised lower sales volumes of its 1201 and 2001 printheads. The inkjet technology specialist said that first half revenues have come to £22.5m, which includes the impact of a £4.3m revenue reversal relating to 1201 Thin Film printhead inventory being returned to the business - a provision of £5.7m will be recognised in interim results following a review of the inventory’s realisable value. The board has said that it needs more time to carry out “strategic negotiations” and has delayed the release of its interim results to 26 September from 10 September. Sell.

Half year results from Johnson Service (JSG) indicate a 9.8 per cent increase in revenue to £167.1m for the six months to 30 June, with 7.5 per cent organic growth. On the back of a 0.4 percentage point increase in the margin to 13.5 per cent, adjusted operating profit has risen by 13.6 per cent to £22.6m. Capital investment to increase production capacity has continued and the new Leeds plant remains on track to open in the second quarter of 2020. Citing an encouraging performance in the two months since the period end, the group anticipates full year results will be slightly ahead of market expectations. Buy.

Ahead of its annual general meeting, shares in flooring manufacturer and distributor Victoria (VCP) were up 5 per cent in early trading after the company announced that the reorganisation to improve efficiency and increase manufacturing capacity completed earlier this calendar year, with “minimal” exceptional costs and benefits that have met the board’s expectations. It’s continued to pursue further acquisitions in Europe after it issued senior secured notes in July. We remain cautious of its increasing leverage, reliance on growth via acquisitions, and heavily adjusted results. Sell.

Wizz Air (WIZZ) reported a 15.3 per cent increase in capacity to 4.19m seats in August, with the number of passengers carried 16.2 per cent higher at 4.04m giving load factor 0.7 percentage points higher at 96.3 per cent. Over the rolling 12 months, Wizz Air’s capacity is up 13.5 per cent to 39.9m seats, carrying 15.4 per cent more passengers at 37.3m with load factor of 93.3 per cent. Its continued to expand its route network with the announcement of 23 new routes. Buy

Ryanair (RYA) reported an 8 per cent increase in group traffic to 14.9m customers in August, with load factor of 97 per cent. Over the rolling 12 months, traffic is up 10 per cent to 149m customers, with load factor of 96 per cent. Shares were down nearly 2 per cent in early trading, likely due to pilot strikes in the UK and Spain. Sell

Dalata Hotel Group (DAL) reported a 12.2 per cent increase in revenue to €202m (£m) during the first half of its financial year, with pre-tax profit up 6.7 per cent to €37.8m. Occupancy on a reported basis fell from 82.1 per cent last year to 80.2 per cent, with revenue per available room down from €89.39 to €88.48, despite an increase in average room rate from €108.88 to €110.30. Over 1,400 new rooms have been opened over the past 18 months, with a pipeline of a further 2,400 rooms to be delivered between 2020 and 2022. Buy.

KEY STORIES: 

Impact Healthcare Reit (IHR) grew contracted rent roll by almost half during the first half of the year, helping boost NAV per share by 3 per cent. The portfolio valuation was a fifth higher, mainly thanks to acquisitions, as well as a £5.2m valuation uplift. Meanwhile the loan-to-value ratio declined to just 7.7 per cent. 

Michelmersh Brick (MBH) reported a 41 per cent rise in pre-tax profits for the first-half, prompting management to announce that it expects to beat full-year market expectations. Like-for-like revenue for the UK business was up 8.6 per cent, while the brick manufacturer also completed its acquisition of Belgian business Floren for €9.4m. Net cash generation also propelled upwards to £6.1m, more than double the prior year. 

A US hedge fund is reportedly planning to vote against the proposed merger of Just Eat (JE.) and Takeaway.com. Eminence Capital will be the second shareholder to oppose the deal on the grounds it undervalues the food ordering service, after Aberdeen Standard Investments also raised concerns early last month. The shares have traded above the 731p per share offer price since the deal was announced, implying investors believe another bidder will emerge.

Shares in Restaurant Group (RTN) fell more than 12 per cent in early trading after the owner of Wagamama and Frankie & Benny’s reported a statutory loss before tax of £87.7m during the first half of its financial year, following exceptional pre-tax charges of £116mrelating to a £100m impairment charge and a £10.7m onerous lease provision on the leisure business. Debt increased dramatically to £317m, compared to £24.2m during the same period last year, while the dividend was cut to 2.1p, down from the 6.8p payment during the first half of 2018. The 4 per cent increase in like-for-like sales growth was driven by Wagamama and the concessions and pubs business. 

OTHER COMPANY NEWS: 

A rise in profits from associate venture Amati was the main reason for a 4.1 per cent boost in pre-tax profits for Mattioli Woods’ (MTW) May year-end. The wealth manager also managed to improve margins despite lowering client costs by £3.1m, though the group’s fee-based revenue model meant the top-line failed to track a 9.8 per cent climb in gross discretionary assets under management in the period. 

Back in June, Craneware’s (CRW) shares plummeted after it said that the timing and quantity of sales closed in the second half of the year had been lower than expected. Today, the shares are up by around 7 per cent. The group’s final results revealed revenue growth of 6 per cent to $71.4m – in keeping with its revised guidance – and an 11 per cent rise in adjusted cash profits to $24m. Pre-tax profits were down 3 per cent to $18.3m, after $1.2m in one-off costs tied to a proposed acquisition that management opted not to enter into. Craneware said that its outlook is confident, underpinned by a good sales pipeline. 

STV’s (STV) revenues dipped by 5 per cent during the first half, coming in at £54.9m. This was largely due to the phasing of its ‘STV Productions’ wing, and the closure of its loss-making STV2 offering. Sales for STV Productions declined from £3.7m to £2m, but this is expected to “substantially reverse” in the second half with the delivery of already commissioned series. Total advertising revenues edged down by 0.6 per cent to £48.8m, outperforming the wider TV market. Group operating profits landed at £11m, up from £1.4m, helped by the absence of any exceptional items. Despite Brexit uncertainty, the group anticipates “good momentum” over the rest of the year.

Convenience foods manufacturer Greencore (GNC) announced the acquisition of Freshtime, a supplier of food to go salads, chilled snacks and prepared produce in the UK, for £56m. This will be funded from existing debt facilities, and the group expects to remain within its medium-term leverage range following the acquisition. The deal is expected to enhance Greencore’s presence in food to go salads and chilled snacking, and is expected to be earnings neutral in the 2019 financial year and “modestly accretive” in the 2020 financial year. 

Shares in Gamma Communications (GAMA) have leapt up 9 per cent this morning thanks to its first-half results coming in ahead of expectations. Gross margins expanded 400 basis points to 49 per cent, thanks to an improvement in the profit mix. The group is getting ready to expand overseas, and has built up net cash of £44.8m in preparation.