Shares in London look set to end the week in positive territory despite some frankly shocking economic forecasts from the Bank of England this morning. Our Trader writer Neil Wilson says: 'The assessment of the economy from the Bank is grim. The BoE said indicators of UK demand have generally stabilised at “very low levels” with a reduction in the level of household consumption of around 30 per cent. “Consumer confidence has declined markedly, and housing market activity has practically ceased,” the MPC statement noted. Company sales are seen –45 per cent in Q2, with business investment –50 per cent.
In a ‘plausible illustrative economic scenario’, the BoE forecasts a fall in UK-weighted world growth from 2 per cent in 2019 to -13 per cent in 2020, before bouncing back 14 per cent in 2021 and 4 per cent in 2022. Andrew Bailey, the new governor, said there will be some long-term damage to the capacity of the economy, but in the illustrative scenario, these are judged to be relatively small. The Bank seems to be in the –V-shaped reovery camp.'
For Neil's full article, click here and For Chris Dillow's assessment of whether we are due a V or L shaped recovery, click here.
IC TIP UPDATES:
Superdry (SDRY) shares soared 10 per cent after revealing that the majority of its requests over three month rent deferrals, worth £20m, had been accepted. The retailer is moving ahead with a longer term rent renegotiation initiative, and has slashed its capital expenditure by around £7m compared with pre-coronavirus plans. Full-year revenues Superdry’s 2020 financial year are down 19.1 per cent as it shifts away from discounting. The retailer’s cash management, which leaves it in a net cash position of £39.8m, has been impressive, but the retail climate and Superdry’s vulnerability to discounting from clothing peers means we think it worth avoiding the shares. Sell.
Rolls-Royce (RR.) has seen widebody engine flying hours plummet 90 per cent in April as airlines have grounded their fleets. The group is guiding to a significant reduction in maintenance, repair and overhaul volumes. As airframe customers cut production rates, it expects to deliver 250 widebody engines this year, down from prior guidance of 450. Chief executive Warren East says the group must emerge from this crisis “with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover.” Rolls now believes it can implement up to £1bn of cash savings in 2020, up from its previous target of £750m. The group has increased its revolving credit facility from £1.5bn in April to £1.9bn. It expects a “significant” net cash outflow in the second quarter. Sell.
Morgan Sindall (MGNS) says 80 per cent of its construction sites are operational but productivity is being hampered by limited availability of building materials. It’s a similar story for the ‘Fit Out’ business. Partnership housing is getting back up and running but lower sales activity will hit returns from mixed-tenure developments. Some urban regeneration schemes have slowed or are being delayed. Net cash as at 5 May was £174m, including £55m held in joint ventures or reserved for supplier payments. With £180m of committed bank facilities, total liquidity is £345m. The group believes it has sufficient funding in the event of a “further significant deterioration” in market conditions. The total secured workload at the end of March was £7.6bn – in line with the December year-end – with more work still to be added to the order book. Buy.
Having received US regulatory approval, Chemring (CHG) has completed the $17m (£14m) of its ordnance business to Nammo Defence Systems. Expecting net proceeds of $15m following a working capital adjustment, this will be used for general corporate purposes. Buy.
Polypipe (PLP) has been operating at around 70 per cent below normal demand, supplying customers primarily from existing stock. Business has been driven by urgent NHS and care-related activity, ongoing infrastructure and commercial work and essential repair, maintenance and improvement projects. Excluding lease liabilities, net debt as at 31 March was £184m, up from £150m at the December year-end due to seasonal working capital flows. The group has secured an additional £50m revolving credit facility bringing the total to £350m for the next twelve months. Polypipe is looking to raise £120m from an equity placing to strengthen its balance sheet and ensure it does not breach its quarterly covenants through to June 2021. The proceeds will also be used to invest in product development to ensure long-term competitiveness. Under review.
Costain (COST) has unveiled the details of its previously announced £100m capital raise. It is looking to generate £80m through a firm placing and £20m from a placing and open offer. In aggregate it is offering 167m new shares at an issue price of 60p. The issue price is a 20 per cent discount to the 75.1p closing price on 6 May, the day before the announcement was made. ASGC, a leading construction group in the United Arab Emirates, has committed to purchasing £25m worth of shares which would bring its holding in Costain to 15.2 per cent. The capital raise is fully underwritten. The net proceeds will be used to demonstrate an increased financial capacity at a time when clients are scrutinising balance sheets, invest in required bid costs, innovation and technology and support joint venture delivery and project bank accounts. Sell.
Anglo American (AAL) has said it will demerge its South African thermal coal assets in two to three years, listing a new entity on the Johannesburg Stock Exchange. The major miner said it would consider alternatives but this was the “preferred exit option”. Investor pressure has seen Rio Tinto (RIO) sell off its coal assets and South32 (S32) find a buyer for its own South African coal mines, while Glencore (GLEN) has said it would not increase production from 2019 levels. Anglo already has its Kumba Iron Ore and Anglo American Platinum subsidiaries listed on the JSE, but a demerger would be closer to South32 splitting off from BHP (BHP) in 2015. Anglo also said in a published Q&A in place of its AGM it would aim to cut its scope 3 emissions but did not set a target for them, as BHP has said it would do. Buy.
Trainline (TRN) is confident that it can survive for “at least 12 months” with no cash inflows given its current liquidity position, with full-year results showing cash and equivalents of £92m on the balance sheet, £150m of liquidity headroom and monthly cash outflows from operating costs and capital expenditure lowered to £8-9m. Its pre-tax losses widened to £80.2m from £13.7m, however, and UK and European passenger volumes have fallen 95 per cent in the first quarter of 2020. Sell.
AA (AA.) reported a meagre return to roadside membership growth during 2019 at 0.2 per cent but after “variable” trading during lockdown means it expects membership levels to decline over the first half of 2020. The roadside services group also reported a 2 per cent rise in average income per member last year, which helped nudge up adjusted operating profit by 1 per cent. However, gearing remains worryingly high, with net debt at 7.6 times adjusted cash profits. Sell.
Impact Healthcare (IHR) has declared the first interim dividend of 1.5725p a share for 2020, which will be payable on 12 June 2020 to shareholders on the register at 22 May 2020. This is in line with the aggregate annual dividend target of 6.29p a share for 2020. Management said it had been in weekly discussions with its tenants in the wake of the Covid-19 outbreak. Over the eight weeks to 1 May 2020 the number of occupied beds reduced by 4 per cent. However, tenants are now reporting that pressure on staffing has eased to some extent as some staff that had been self-isolating, have been able to return to work. Buy.
Phoenix (PHNX) has confirmed its intention to recommend payment of the proposed 2019 final dividend of 23.4p a share, subject to approval at the 15 May AGM. The insurer said it continued to target cash generation of £800-900m this year and that it had an estimated life company free surplus of £1bn at the end of March. Buy.
Countryside Properties (CSP) confirmed that it intends to reopen 80 per cent of its sites from 11 May, after suspending work on 25 March. The housebuilder has also agreed certain financial covenant revisions with the banking group for its existing £300m revolving credit facility that will provide additional headroom and flexibility until 30 September 2022. Buy.
KEY STORIES:
BT (BT.A) has suspended its final dividend and all dividends for 2020/21, warning shareholders that future payouts will be lower. The decision sent shares down 7 per cent in morning trading. The telecoms giant expects to resume dividends in 2021/22 at an annual rate of 7.7 pence per share. The group said the suspension was to fund investment in FTTP and 5G, as well as deal with the potential consequences of coronavirus. Adjusted cash profits for the year were down 3 per cent to £7.9bn due to lower revenue and investment in customer experience, though this was partly offset by cost savings from its transformation programmes.
International Consolidated Airlines Group (IAG) is “planning a meaningful return to service in July” that could see an overall fall of around 50 per cent to passenger capacity in 2020, and does not expect demand to return before 2023. Accordingly, it expects to defer the delivery of 68 aircraft.
OTHER COMPANY NEWS:
IMI (IMI) says business disruption to date from the Covid-19 pandemic has been “modest” and it has 90 per cent plant availability. Organic revenue in the first three months of 2020 was 5 per cent lower year-on-year but profit, margins and operating cash flow all came in higher. The fall in organic sales was stronger in April, at 9 per cent, reflecting a steep decline in the precision business’ commercial vehicle segment and the impact of construction site restrictions on the hydronic division. At the end of April, IMI had immediately available liquidity of £381m, comprising £30m of cash, £269m of undrawn committed bank facilities and £82m of uncommitted facilities. Net debt including lease liabilities was £470m.
Publisher Reach (RCH) said that revenue in the four months from December was down by more than 10 per cent, led by a decline in print sales by 16 per cent. Since mid-March the group has grappled with a fall in circulation sales, print ad revenue, cancelled events and a reduction in digital yields due to lower advertising demand. It has secured a three-month deferral of monthly contributions to its pension funds.
