After a circumspect start, London shares were up mid morning as traders try to assess lockdown easing. Our Trader writer Neil Wilson says: 'The S&P 500 rose yesterday but closed where it opened at 2868, some 30 points off the highs of the day. The lack of any real conviction has led to a mixed start to trading for European markets, where Monday’s rebound looks to be under threat.
Oil rallied strongly but pulled back from the highs as traders realised once again that storage is still a problem. Remind yourself of Michael Taylor's take on the oil storage story from last week. Whilst clearly there are signs of supply and demand rebalancing because lockdown measures are being lifted, but it’s going to be a slow process and it’s hard to see it righting itself before the June WTI contract is up.' For Neil's full article, click here.
IC TIP UPDATES:
The Competition and Markets Authority (CMA) has decided that JD Sports (JD.) must sell Footasylum, which it acquired for £90m last year. The watchdog has concluded that customers view the retailers’ products as close alternatives and that the deal “would leave shoppers with fewer discounts or receiving lower quality customer service”. JD Sports said that the CMA has “completely dismissed any evidence which goes against their prejudged and erroneous interpretation of our market” and is considering an appeal. Buy.
Metro Bank (MTRO) reported a 4 per cent reduction in lending and customer deposits over the first quarter, compared with the same time the prior year. The latter followed growth in retail savings accounts, which was offset by a decline in fixed-term deposits. That meant the loan-to-deposit ratio stayed flat on the end of December at 100 per cent, while moderation in lending growth kept risk-weighted assets under control and took the liquidity ratio 197 per cent above December’s level. Sell.
OneSavings Bank (OSB) said that while it is too early to predict how borrowers will behave once the three-month mortgage holiday term ends, credit loss provisions at the year-end could be double the £42.9m recorded at the end of 2019 following a decline in GDP and house price growth and rise in unemployment. The challenger bank has been attempting to boost liquidity by drawing an additional £645m through the Index Long-Term Repo scheme and has applied for the Bank of England’s Term Funding Scheme for SMEs. The cost of the additional liquidity the lender is holding, and delays in the retail savings market passing on the base rate cuts in full, may drag on the net interest margin, which was 2.66 per cent at the end of March. Buy.
Biffa (BIFF) has seen revenue from its ‘industrial and commercial’ (I&C) waste collection business drop 50 per cent from pre-Covid-19 levels, with a similar impact across ‘resources and energy’ thanks to its reliance on the construction industry. The municipal business has remained stable. The group is rightsizing its I&C operations by taking 40 per cent of the frontline fleet off of the road and furloughing 35 per cent of the division’s workers. As at 27 March – the end of its financial year – Biffa had over £150m of available liquidity. Its banks have agreed to lift the net debt-to-cash profits (Ebitda) covenant for the 2020 financial year from 3.5 times to 5.5 times. Buy.
Emis’s (EMIS) trading for the year to date is in line with management’s expectations. The group said in an AGM statement this morning that it maintains high levels of recurring revenues and has a strong financial position with the expected normal seasonal cash inflows lifting its cash position to £40m at the end of April. It has no bank debt and undrawn banking facilities of up to £60m. The 2019 final dividend payment of 15.6p is due to be paid on 11 May, subject to approval today. Buy.
Halfords (HFD) shares rose 10 per cent in early trading after the retailer, which has remained open during the coronavirus pandemic, said that its adjusted pre-tax profits will sit towards the upper end of its previously guided range of £50-55m. Under review.
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Hammerson (HMSN) has collected the £21m being held in escrow by private equity group Orion after it walked away from a deal to buy seven retail parks from the retail landlord. The group has been steadily selling off assets to help bring down its loan-to-value ratio amid declining retail property values.
Virgin Money UK (VMUK) has taken a further £232m in impairment losses over the first half, anticipating a rise in Covid-19-related bad loans. That resulted in the challenger bank reporting a £7m pre-tax loss during the period, but the group’s common equity tier one ratio held relatively steady at 13 per cent. However, management expects the reduction in the Bank of England base rate to result in a net interest margin of between 1.55 and 1.60 per cent this year, compared with 1.62 per cent at the end of March.
Empiric Student Property (ESP) expects a 12 per cent total reduction in income this year after students requested to be released from their leases, which could result in a decline in revenue of around £21m. The student landlord said it had received reservations for 47 per cent of rooms for the 2020/21 academic year, down on 54 per cent at the same point last year. Demand from international students has been more subdued although the group is starting to see an increase in bookings from domestic students, it said.
OTHER COMPANY NEWS:
Smith & Nephew (SN.) saw first-quarter revenues drop by 7.6 per cent to $1.1bn on an underlying basis, in keeping with its end-of-March trading update. The group has stepped up cost control measures to achieve up to $200m in savings, and it cited a strong balance sheet - with net debt of $1.8bn compared to committed facilities of $3.4bn at the quarter-end. But April revenue was down by nearly a half, reflecting the freezing of elective medical procedures in most markets. Second-quarter revenues and first-half trading margin are expected to be “substantially down” on the prior year. The group has kept its 2020 guidance withdrawn due to the ongoing uncertainty regarding the effects of Covid-19.
ITV (ITV) said that advertising revenue fell 42 per cent in April as the coronavirus crisis has forced companies to slash their marketing spend. Total external revenue was down 7 per cent in its first quarter, with turnover in its production wing ITV Studios down by more than a tenth due to coronavirus restrictions. The group has furloughed around 800 staff, 15 per cent of its UK workforce and said it would double its overhead savings to £60m this year.
Ocado (OCDO) recorded a 40.4 per cent jump in its second quarter retail revenues, following a 10.3 per cent first quarter rise. The online grocery retailer said that normal shopping behaviours were returning and that “the number of items per basket appears to have passed its peak but remains high”.
National Express (NEX) will conduct a share placing equating to up 19.99 per cent of its existing share capital, after the transport operator warned that under its worst case scenario its 2020 cash profits could fall 40 per cent below the prior year as a result of coronavirus.
