Following on from yesterday's equity market surge, London shares rose in early trading although the FTSE100 was showing signs of running out of puff mid morning. Our Trader writer Neil Wilson says: 'Stock markets rose this morning. To be a little more descriptive, it’s a sea of green on the boards with investors lapping up the $2tn stimulus package finally agreed by the United States Congress last night. Ahead of this the Dow Jones surged over 11 per cent, notching its best day since 1933. The DAX in Germany also climbed 11 per cent higher to breach the 9200 resistance. The FTSE 100 climbed 9 per cent. Japan’s Nikkei rose 8 per cent.
This morning shows more progress for equity markets although gains are more modest as it looks like the market found bid chiefly on expectations of the deal – buy the rumour, buy the fact more carefully at this point. The FTSE 100 rallied again through last Friday’s peak at 5428. The next step forward is to the previous Friday’s peaks at 5700.' For Neil's full Market Outlook, click here.
IC TIP UPDATES:
Rentokil (RTO) now expects a “much more significant” impact on its operations from the Covid-19 outbreak than previously anticipated. It is therefore withdrawing the final dividend declared for 2019 and suspending acquisitions activity to preserve around £300m of cash. Capital expenditure this year will be reduced by at least £75m to below £200m while cost reduction measures should produce £100m of savings. While trading to mid-March was not materially impacted, the last ten days have seen a more pronounced effect on its global businesses. Some customer sectors such as ‘hotels, restaurants and catering’ have seen substantial closures, but others such as food production and retailing have seen higher demand for hygiene services. The long-term outlook should still hold up. Buy.
Morgan Sindall (MGNS) has scrapped the final 38p payout declared for 2019. It says a second interim dividend is possible depending on how the Covid-19 outbreak plays out. While performance in the first 10 weeks of this year was in line with expectations, the group is now experiencing disruption as construction sites close and activity slows amid the UK’s new lockdown measures. This is expected to have a material impact on full year earnings, but the group says it is too early to provide guidance. It has drawn on its £180m of committed banking facilities to preserve cash. Net cash of £102m as at 20 March includes £60m tied up in joint operations. Morgan Sindall is likely to be one of the more resilient construction players. Buy.
Halfords (HFD) suspended its dividend in a move that will yield a cash saving of around £24m for its 2021 financial year. The government’s 12-month business rates holiday will provide a further £26m in relief while the retailer is set for a capital outlay of £10m to £15m, well short of guidance of £40m to £60m. Sell.
Biffa (BIFF) foresees significantly reduced demand for its industrial and commercial collection services as many clients cease or limit trading in response to the Covid-19 outbreak. Volumes into some processing facilities in the resources and energy division are expected to fall. The group anticipates the cumulative impact on earnings will not be material for the current year ending on 27 March, but will hit next year. It says it is too early to provide guidance. In order to preserve cash, all acquisitions activity has been halted, non-essential capital expenditure deferred, and no final dividend will be recommended for the 2020 financial year. We’re still optimistic about the long-term outlook for the UK’s waste management industry. Buy.
Avon Rubber (AVON) has been awarded a fixed price contract to supply the US Defence Logistics Agency with enhanced small arms protective inserts body armor plates. These are a legacy product from Ceradyne’s ballistic-protection business which was acquired at the beginning of January. The contract has a minimum value of $19m (£16m) and is part of a framework with a maximum value of $333m over three-and-a-half years. The first order is anticipated shortly with delivery commencing in 2021. The group will invest $5m of capital expenditure across 2020 and 2021 to obtain product approvals and expand production capacity. Buy.
Sirius Real Estate (SRE) has experienced a 50 per cent reduction in new enquiries from potential new tenants, which it expects to translate into a 10 per cent reduction in new lettings in March and a reduction of between 35 per cent and 40 per cent in monthly new lettings throughout April and into May. That would translate to a 1 per cent reduction in underlying occupancy. However, the group has seen increased interest in self-storage space, which accounts for 35 per cent of space in the portfolio, from new and existing customers. The industrial landlord has €110m in cash on its balance sheet and €39.3m in undrawn facilities. Buy.
Mears (MER) will not be paying a final dividend for the year ending 31 December 2019 to preserve cash amid the Covid-19 crisis. Net debt was £51m last year with average daily net debt coming in at £114m. The group is in discussion with its lenders to increase its debt facilities and expects an agreement over the next month. Over 90 per cent of its revenue is sourced through contracts with local and central government, reducing the risk of customer defaults. But it is guiding that revenue from services where it is paid per activity – which account for around half of total sales – is expected to fall as clients cut back on non-discretionary spending. Sell.
Volution (FAN) has suspended payment of the 1.71p interim dividend declared for the six months to 31 January. At the end of February, it had £10m of available cash and of its £120m revolving credit facility, £44m was undrawn. The group has since drawn down an additional £15m. Government lockdowns in response to Covid-19 are expected to impact demand across its operations. However, our tip is based on the long-term picture benefitting from regulation to make buildings more energy efficient and reduce carbon emissions. Buy.
St Modwen (SMP) has delayed the payment of its 5.1p a share final dividend, after adjourning the annual general meeting that was set to take place on 27 March. The payment will be adjourned until passed at the reconvened AGM, details of which will be announced shortly. The group said after stress-testing its interest cover covenants for a prolonged downturn, which would place housebuilding profits and retail rents at most risk, it would have sufficient headroom for the next 12 months. In industrial and logistics, the group now expects to complete 1.2m sq/ft of new space in 2020, instead of 1-5-1.7m sq/ft, and retain 1.1m sq/ft, in order to conserve cash. Buy.
Countryside Properties (CSP) has closed its construction and sales sites in line with government advice, a move that will inevitably impact sales. The housebuilder has available cash of £110m and £300m revolving credit facility in place until 2023, but said that it was in discussion to acquire additional debt facilities. Buy.
SolGold (SOLG) has suspended site work in Ecuador, where it is developing the Alpala gold and copper project to try and limit the spread of Covid-19. The company said work would continue on the Alpala prefeasibility study, which was expected to be done by September. In an update earlier this month, SolGold said it was trying to raise $150m (£126m) to cover its costs for the next two years. Despite the relative strength of the gold price, the company’s valuation has plunged in the past 12 months from around 40p to a low of 13p this month. The update this morning boosted its share price to 16p. Last year, we picked SolGold as a speculative buy when it was still above 30p on the size of the Alpala resource and the prospects of a takeover. These factors have not gone away, despite the valuation plunging. Buy.
KEY STORIES:
Persimmon (PSN) has followed peers in shutting its sales offices in response to government advice and anticipates a significant delay in the timing of legal completions, a rise in cancellation rates and a material slowdown in new sales. In an attempt to conserve cash, the housebuilder has announced that it will be scrapping the planned 125p a share interim dividend, which was due to be paid on 2 April, and the proposed 110p a share final dividend, which would have been paid on 6 July. Management said it would reassess whether to make the payment later this year. At 20 March, the group had cash of £610m, deferred land commitments of around £195m and access to a £300m revolving credit facility.
Headlam (HEAD) has suspended its final ordinary dividend of 17.45p per share and closed all of its UK sites with the exception of its Coleshill depot, although management said that it would consider means to boost its 2020 interim dividend depending on trading conditions at the time.
DFS (DFS) has cancelled its 3.7p interim dividend, which will save the retailer over £8m in cash. DFS said that it has access to £250m in committed bank facilities, with £70m in unused cash resources, and it intends to secure additional financing to protect against an unwind in negative working capital.
Bellway (BWY) bucked the prevailing move by peers to delay issuing its results, announcing a 6 per cent rise in completions during the six months to the end of January. However, like other housebuilders, the group revealed that it would be pausing new site acquisitions and suspending its interim dividend. While reservations rose 7 per cent during the six weeks since 1 February, they have declined over the past two weeks after the introduction of measures to stop the spread of COVID-19.
Retirement home provider McCarthy & Stone (MCS) has announced that it will pause development activity across its sites - except those that are very close to completion - and halted spending on new land. Sales sites have also been closed and members of the board and wider leadership team have taken a 20 per cent pay cut from 1 April. The group estimated this would save around £230m in 2020, compared to its pre-COVID-19 guidance.
Unite (UTG) has offered to forgo the rent of students who choose to return home for the remainder of the 2019/20 academic year, which would result in a reduction in group cashflow of between £90m and £125m this year. Management said it was implementing a number of cost savings measures, including deferring development and non-essential capital expenditure, which should retain between £95m and £105m of cash in the business.
OTHER COMPANY NEWS:
Logistics company Wincanton (WIN) says activity levels in recent weeks have been high in grocery, consumer and general haulage with record levels of demand from many of its leading customers. The group is guiding that underlying profit for 2019 will be in line with market expectations with 4 per cent revenue growth slightly ahead of forecasts. Net debt is expected to come down by £10m-15m. Full year results are expected to be reported on 20 May.
VP (VP.) says it experienced lower construction-related demand in the run up to the December election and this has continued into the final quarter of the year. The infrastructure and house building sectors are said to have held up well. The Covid-19 outbreak has seen revenue fall towards the end of March, a trend the group expects will persist. With lockdown measures also impacting international markets, VP anticipates full year results will be “marginally” behind market expectations. Net debt is guided at around £165m and total committed facilities of £200m includes a new £65m loan note which matures in 2027.
Stock Spirits Group (STCK) has started manufacturing hand sanitiser at its production facility in the Czech Republic. This facility has made 90,000 bottles so far, which have been donated to the Czech government for distribution to medical personnel and the emergency services, and to the retail sector for use by staff working in food stores. The group has also donated raw spirit to municipalities to help with their own disinfectant making efforts. It is in advanced planning to do the same at its production facility in Lublin Poland.
Clipper Logistics (CLG) says it has received “notable” additional requests from several grocery-related customers to support their logistics infrastructure during the Covid-19 outbreak and fill gaps in the supply chain. The group is actively engaging all major food retailers to provide services like warehousing, picking and transportation. Net debt (excluding lease liabilities) for the year ending 30 April is expected to come in at around £42m, equivalent to just over 1 times cash profits versus a banking covenant of 2.5 times.
United Utilities (UU.) says allowed regulatory revenue changes will see revenue increase for the year ending 31 March, driving underlying operating profit growth. Reported operating profit will be adversely impacted by an accelerated £80m depreciation charge relating to its bioresources assets. The severe winter storms are expected to reduce its anticipated outcome delivery incentives for AMP6 to a net reward of £40m versus £50m previously. Net debt is expected to be broadly flat on the first half of the year – net debt came in at £7.3bn in the six months to 30 September.
Keller (KLR) says trading in the first two months of the year was largely unaffected by the Covid-19 outbreak but market conditions “deteriorated swiftly” in late March, especially in the ‘Europe, Middle East and Africa’ (EMEA) region. However, it still expects first quarter performance will be in line with expectations. Looking ahead, North America is becoming more challenging as more states impose lockdown measures. The group is now cutting costs and freezing capital expenditure.
Meggitt (MGGT) has said that in light of the Covid-19 outbreak, Sir Nigel Rudd will stay on as chairman until further notice. It was announced in February that Sir Nigel would be stepping down “to spend more time on his businesses and other interests”, only remaining until a successor was appointed. But the board believes that during this crisis there is “significant benefit in continuity at this time”.
