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News & Tips: Mid caps bounce, Barclays, Next, AstraZeneca & more

Equities are in positive territory with the FTSE250 leading the way
April 29, 2020

Shares in London were mixed in early trading with the FTSE100 and FTSE250 pushing ahead and small caps more muted. Our Trader writer Neil Wilson says: 'Barclays CEO Jes Staley reckons that after Covid-19 the idea of sticking thousands of people in a building may be a thing of the past. I heartily agree. Working from home is clearly working rather well. Also, banks are no doubt looking at this and thinking they can cut costs by closing offices, call centres and branches. Nevertheless, it highlights how bosses and government have a very hard task in exiting lockdown. Moreover, what about the Pret or the pub that depends on lunch trade from the City workers filling up these offices every day? The impact on the economy will be permanent.

Shares in Barclays popped over 5 per cent despite the lender taking a £2.1bn credit impairment charge, five times the level of a year before. Like its US peers, trading revenues soared by 77 per cent but this offset may be a one-off for banks as volatility returns to more normal levels. Shares were due a rally - they’ve been beaten down so much and haven’t really participated in the upturn. Investors may need to wait for dividends but UK banks could be in much better shape their share prices indicate.' For Neil's full article, click here. 

IC TIP UPDATES: 

Next (NXT) warned that its drop off in sales has exceeded expectations set out in the retailer’s March stress tests, and now expects lower sales for both halves of the year. Its most extreme scenario, which models a 40 per cent decline in sales, forecasts a 62 per cent contraction in its second quarter which then lifts to 33 per cent and 28 per cent falls for Next’s subsequent two quarters. In response, Next has taken measures including saving around £290m on stock purchases and carried £330m of Spring Summer 2020 stock into next year. Buy.

Dalata Hotel Group (DAL) completed the sale and leaseback of its Clayton Hotel Charlemont in Dublin for €65m on 24 April. The group has recorded a 24.3 per cent revenue per available room (RevPar) drop in its Dublin hotels, with falls of 14 per cent and 18.6 per cent in its regional Irish and UK sites respectively. Buy.

Trainline’s (TRN) lenders have agreed to waive covenant testing on its £350m revolving credit facility until August 2021 as the ticketing operator negotiates the impact of coronavirus on travel. Sell.

Orsted (Copenhagen:ORSTED) has seen cash profits (Ebitda) from offshore and onshore wind farms surge 25 per cent year-on-year to DKr5.2bn (£610m) in the first quarter of 2020. This came amid the ramp-up of power generation from newer projects, including Hornsea 1, and high wind speeds in Europe. In the face of Covid-19, the asset base remains fully operational and forward hedging protects it from recent power price volatility. Full year guidance of DKr16-17bn of cash profits (excluding new partnerships) is being maintained. While supplier disruption increases the risk of component and service delays, Orsted sees a limited impact on its construction projects. Buy.

KEY STORIES: 

Shares in Barclays (BARC) are up 5 per cent in early trading, despite the lender booking a pre-tax profit of just £913m and an “initial” £2.1bn credit impairment charge for bad loans in first quarter results. This charge comprises £405m in related to wholesale loan charges for the past three months, as well as a forecast £1.2bn net impact from an updated ‘Covid-19 scenario’ – which includes a £300m charge related to ‘lower-for-longer’ oil prices. The apparent market bullishness might also be traced to chief executive Jes Staley’s comments that while 2020 will be challenging, “a RoTE (return on tangible equity) of greater than 10 per cent remains the right target for the bank over time”.

AstraZeneca’s (AZN) revenues climbed by 16 per cent to $6.4bn over the first quarter, with product sales up 15 per cent to $6.3bn and collaboration revenue up by more than two-thirds to $43m. Astra estimated a low-to-mid single digit percentage benefit from short-term inventory increases in the distribution channel, longer prescriptions and improved treatment-regimen adherence as indirect effects of the coronavirus pandemic. It expects this to reverse “in the coming months”. The group noted that the impact of Covid-19 on its operations is “highly uncertain”. But it has retained its full-year guidance, expecting revenues to rise by a high-single-digit to low-double-digit percentage and core EPS to rise by a mid-to-high-teens percentage.

A first quarter update from International Consolidated Airlines Group (IAG) revealed a 13 per cent drop in revenue to €4.6bn, driving the parent of British Airways into an pre-exceptional operating loss of €535m compared with a profit of €135m last year. Pre-tax profits were hit by a €1.3bn exceptional charge relating to fuel and foreign currency hedges after the oil price collapse. Coronavirus may prompt IAG to make up to 12,000 BA staff redundant, as it operates with the expectation that “the recovery of passenger demand to 2019 levels will take several years”.

Persimmon (PSN) has declined by £300m to £2.4bn, compared with the same time last year following the shut-down of construction and sales sites, although work on the former has now begun to recommence. The housebuilder secured 962 gross private sales reservations, with a total of 948 legal completions being made in the same period after suffering a significant reduction in sales during the lockdown. During the initial 11 weeks of the year the average private sales rate was around 10 per cent higher than the same time last year. The group has cash of £600m, deferred land commitments of £163m and extended the term of its £300m revolving credit facility to 2025. 

Responding to press speculation, Hiscox (HSX) confirmed it “is evaluating possible sources of capital…which could include raising new equity”, despite assurances that its capital, liquidity and funding positions are robust. No decision has been made on when and whether to proceed with a raise, though the news comes as a group of Hiscox business interruption policyholders have banded together to launch a class action against the group. Yesterday, the Hiscox Action Group said that Harbour Litigation Funding has agreed to cover its legal fees.

James Benamor, the founder and majority owner of Amigo Holdings (AMGO), has called an extraordinary general meeting in a bid to remove the entire board of the guarantor loans company. Amigo said it that Mr Benamor’s shareholding vehicle, Richmond Group, will propose a replacement chairman and chief executive, and that it “is consulting with its regulators and its advisors about the implications of this notification and the appropriate next steps”. Mr Benamor is still pressing for a formal sale of the company.

OTHER COMPANY NEWS: 

Caledonia Mining (CMCL) will pay its quarterly dividend for the first three months 2019, after deferring the decision because of Covid-19. The Zimbabwe-based gold miner said continuing the 7.5¢ payout made sense because operations had continued under the government’s lockdown, which is ongoing. Production this month has been at 93 per cent of expected output because of new health and safety procedures. Caledonia upped its quarterly dividend from 6.875¢ in January. 

Dixons Carphone (DC.) has scrapped its dividend and secured an additional £266m revolving credit facility, taking its total committed borrowing facilities above £1.35bn. The company’s UK and Ireland electrical sales have recovered around two-thirds of its lost store sales, with these plus its Greek outlets having been expected to contribute around £400m in sales this financial year.

Standard Chartered (STAN) expects “a gradual recovery from the Covid-19 pandemic, with major contraction in economic growth rates across most of the world in the second quarter, before the global economy moves out of recession in the latter part of 2020”. Before then, the bank and its customers are in for a lot of pain, as first quarter results show: while income rose 13 per cent to $4.3bn, risk-weighted assets climbed 3 per cent, the return on tangible equity dropped, and credit impairment rose “significantly” to $956m from just $78m a year ago.

Legacy insurance portfolio manager and consolidator Randall & Quilter (RQIH) has tapped two large investors for $100m of new equity, for use in the group’s acquisition-led strategy. An $80m tranche will comprise a “new series of preferred stock” issued to 777 Partners and exchangeable at a price of £1.35 per share, with the balance made up of a more conventional equity placing of 11.9 million new shares, again at £1.35 each with Hudson Structured, which represents a discount of 7.2 per cent to yesterday’s closing price.

Specialist information, data and analytics company Ascential (ASCL) has refinanced its debt facilities in January 2020 and expects to operate within its covenants at the next testing date at the end of June. The new facilities comprise a £450m RCF maturing in January 2025. The company said that it has identified a further £20-40m cost saving measures. Management provided an update on trading in the first quarter, with revenue growth of 5 per cent weighted to January and February before the full impact of coronavirus was felt. Its Advisory business suffered, with a 16 per cent decline year on year. 

Advertising giant WPP (WPP) has seen a 5 per cent slump in revenue in its first quarter, as companies scramble to cut their marketing spend. The group said sectors such as automotive, travel and leisure and luxury and premium, which account for almost a quarter of its top 200 clients’ spend, have seen ‘the most significant cuts’. While its pipeline remains ‘encouraging’, it estimates a fifth of pitches have been on hold. The group has already suspended its final dividend and share buyback programme.