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News & Tips: Diageo, Renishaw, Paragon Banking & more

Equities continue to suffer
January 30, 2020

Indices in London are in reverse again as concerns over the spread of the coronavirus remain heightened. Click here for The Trader Nicole Elliott's latest thoughts on the markets. 

IC TIP UPDATES: 

Diageo (DGE) revealed that full-year organic net sales growth will be towards the lower end of its mid-term guidance range, but the group still delivered a 4.6 per cent uptick in organic profit growth and a five per cent dividend hike at the half-year mark, while delivering another £1.1bn to shareholders via share buybacks. The booze giant admitted that it was not immune to “ongoing uncertainty in the global trade environment”, but shareholders will be reasonably pleased with a solid, if unspectacular, trading performance. Recommendation under review.

Renishaw (RSW) first half pre-tax profits slumped 84 per cent as management observed a difficult market backdrop, US-China trade tensions and a slowdown in the machine tool sector, along with the non-repeat of a number of large orders from the prior year period. There’s nevertheless been a recovery in the semiconductor market that has fed into the group’s metrology arm. The shares rose by around 1 per cent in early trading and we retain our rating. Buy.

Buy-to-let focused lender Paragon Banking Group (PAG) hit management expectations in the final three months of 2019; which is to say the net loan book rose 1.6 per cent to £12.4bn, and new business volumes rose. However, chief executive Nigel Terrington remains cautious, stating it is too early to tell whether reports of greater market confidence will lead to sustained improvements in economic activity. Buy.

A third-quarter trading update from discoverIE (DSCV) revealed a slump in its custom supply sales, which fell 10 per cent over the period owing to customer de-stocking, particularly in Germany and the UK. But overall, sales for the quarter rose 3 per cent, with orders ahead of sales for the electronics group. Buy.

A first quarter update from Avon Rubber (AVON) disclosed 12 per cent growth in orders for its protection business, with healthy pipelines elsewhere in the business too. Its milking point segment also experienced a 10 per cent boost to orders. Buy.

Renew (RNWH) has announced the £38m acquisition of Carnell Support Services, a provider of specialist engineering services to the strategic highway network. The group had previously announced a desire to expand into the regulated highways sector, seen as a key growth area. The purchase is expected to be immediately earnings enhancing with the return on investment exceeding Renew’s cost of capital. The group will also conduct a placing of 3.2m shares at a price of 475p, intending to raise £15m to refinance part of the acquisition. Buy

A full year trading update from Restore (RST) indicates double-digit growth in both revenue and adjusted pre-tax profit in the 12 months to 31 December, in line with market expectations. Records management has seen positive net box growth while datashred performance has been described as “stable” with operating efficiencies continuing to offset headwinds in recycled paper prices. Buy

Evraz’s (EVR) crude steel output increased by 2.1 per cent in the three months to 31 December, bolstered by higher production volumes at its Russian steel mill after scheduled repair work. Steel production across the whole of 2019 climbed by 6.1 per cent to 13.8m tonnes. Steel product sales rose by 10.4 per cent, with a 22.8 per cent jump from semi-finished products, but average selling prices dropped from $537 (£413) per tonne to $483 per tonne. Sell.   

Haynes (HYNS) – which announced a formal sale process last November – reported a 4 per cent rise in revenues to £19m for the half-year to November, with cash profits up 27 per cent to £19m. Pre-tax profits rose from £0.2m to £1.2m. Digital revenues were up 18 per cent at £11.4m, representing 60 per cent of the overall top line. The group is not declaring a dividend, in light of the sales process. Buy.

Kaz Minerals (KAZ) has seen copper production increase by 6 per cent to 311m tonnes in 2019, exceeding guidance of 300m tonnes thanks to outperformance at its Aktogay mine. Expansion of this open-pit mine will be completed in 2021 and is expected to provide additional volumes. Gold production rose by 10 per cent to 201.5m ounces due to high grades at the Bozshakol and Bozymchak mines in Kazakhstan and Kyrgyzstan respectively. Buy

Centamin (CEY) has reported a 51 per cent increase in gold production in the fourth quarter to 148,387 ounces. The full year total of 480,528 ounces was a more muted 2 per cent year-on-year increase, but the group has reiterated its 2020 guidance of 510,000-514,000 ounces. Cash costs of production are expected to be $630-680 (£484-522) per ounce produced. Gross revenue for 2019 came in at $658m, generated from 470,020 ounces of gold sales at an average price of $1,399 per ounce. Shares are up 5 per cent. Buy

Orsted’s (Copenhagen:ORSTED) cash profits (Ebitda), excluding new partnerships, rose by 17 per cent to DKr17.5bn (£1.98bn) in 2019, exceeding its most recent guidance of DKr16-17bn. Cash profits from offshore and onshore wind farms in operation jumped by 30 per cent to DKr14.8bn. Gross investment of DKr23.3m was slightly higher than guided due to high levels of construction activity and is projected to rise to DKr30-32bn this year. Looking to 2020, cash profits (excluding partnerships) are expected to fall to DKr15-16bn due to lower anticipated income from divesting stakes in its offshore wind projects. However, chief executive Henrik Poulsen believes the group’s target of DKr25-26bn of cash profits from wind farms in operation in 2023 “still feels comfortable to us”. Buy.

Ascential (ASCL.L) is selling its 35 per cent stake in data analytics business Jumpshot back to cyber-security group Avast (AVST) – with the latter agreeing to paying back the investment, plus original transaction expenses. This comes after an investigation published by PCMag and Motherboard, which alleged that Jumpshot has sold ‘de-identified’ browser history data onto third parties which could be linked back to users. Avast is terminating the provision of data to Jumpshot, and winding down Jumpshot’s operations with immediate effect. It notes that today’s decision has no impact on any other Avast businesses. Avast’s 2019 trading was in line with expectations. Excluding Jumpshot, it expects “healthy growth” during FY2020 with mid-single-digit organic revenue growth. The shares were down 8 per cent this morning. Under review. 

KEY STORIES: 

The Belgian tax authority has resolved most of their investigations into Frasers (FRAS) - formerly Sports Direct - and the retailer will not have to pay anything relating to €491m (£415m) of the €674m the authority had originally said it was owed. The group is continuing to work with the authority, and says it still believes “it is less than probable” that the audit will result in material VAT and tax liabilities. 

With the oil price down on renewed fears of coronavirus contagion, today was an inauspicious one for Royal Dutch Shell (RDSB) to publish full-year numbers. But judging by fourth quarter figures – in which basic earnings per share dropped 84 per cent on the prior period – today’s release was destined to hit investor sentiment. The oil and gas major now says the pace of its share buyback programme will slow, reflecting less certain macro conditions and the need to reduce gearing, which ticked up to 29.3 per cent in 2019.

OTHER COMPANY NEWS

Rank Group (RNK) increased underlying net gaming sales by a tenth in the six months to the end of December 2019. Growth was driven by a strong performance in the digital, Grosvenor venues and international venues divisions. Strong cash flow led net debt to come in lower than expected at £59m. The integration of Stride Gaming appears to be going well, too, with synergies epected to be in line with previous expectations of £13m.

Mitie (MTO) has increased its revenue by 6 per cent in the nine months to 31 December, driven by growth in its business and specialist services divisions. Organic growth was flat during the period thanks to lower discretionary spending on technical services and the planned rationalisation of its European footprint. It is expected to remain flat for the full year. With the proceeds from divesting the catering business, average daily net debt (excluding lease liabilities) fell by £69m in the third quarter. Earnings for the 2020 and 2021 financial years are expected to be in line with previous guidance. 

BT’s (BT.A) says the government’s news about “certain vendors in 5G” will cost it £500m over five years. Its third-quarter results were slightly below its expectations, but management says it remains on track to meet its full-year outlook. Revenues for the nine months to December were down 2 per cent at £17bn. Adjusted cash profits dipped 3 per cent to £5.9bn, after higher spectrum fees, investment in customer experience, and higher Openreach operating costs. It expects normalised free cash flow to be in the lower half of the £1.9bn-£2.1bn full-year guidance range. It sees Ofcom’s consultation on the Wholesale Fixed Telecoms Market Review as “an important step forward in incentivising investment in the UK's digital infrastructure and toward enabling BT to significantly increase its FTTP [fibre-to-the-premises] target”. The shares were down 6 per cent this morning. 

Fuller, Smith & Turner (FSTA) saw a 4.3 per cent rise in like-for-like sales over the six-week festive period, up on the 2.5 per cent climb for the 42 weeks to 18 January. Though tenanted like-for-like profits fell 3 per cent in the period, analysts at Numis suggested the shares remain a buying opportunity, as the pub group’s “investments mature and the premiumisation strategy continues”.

After five years, Ian Smith has handed in his notice as chief financial officer of Virgin Money UK (VMUK) to take up “an overseas opportunity”. The lender has kick-started the hunt to identify a successor.

Continuing its strong run of fund raises, Intermediate Capital Group (ICP) saw assets under management climb 4 per cent to €42.6bn in the final quarter of 2019, with a corresponding increase in third-party, fee-earning funds. However, performance fees remain subdued as a result of the timing of fundraisings.

Wealth management giant St James Place (STJ) recorded £2.44bn of net inflows in the final three months of December, as 2019 finished with financial adviser numbers up 8 per cent. Despite a 4 per cent year-on-year dip in net inflows, funds under management climbed 9.4 per cent to £117bn on an annualised basis, while the group’s fund retention rate ticked up 10 basis points. Andrew Croft expressed his encouragement at “improved investor sentiment and activity”.

Unilever’s (ULVR) full year results registered flat underlying sales growth after a slowdown in its final quarter, especially in West Africa, South Asia and the Middle East. The consumer goods powerhouse reported a fall in its net profit to €8,708 from €12,639. Management said in a statement that the British-Dutch group has initiated a strategic review of its tea business, which includes household brands Lipton and PG Tips.