Tips of the Year Review 2019

The tips got off to a strong start, riding on the back of a broad market recovery that followed a sharp sell-off at the end of 2018. However, it was also the market’s hunger for shares in “quality” companies at the start of 2019 that aided our picks, as a number of the stocks selected fell into this category. This includes InterContinental Hotels, WH Smith, and the best performing Tip of the Year, London Stock Exchange, which delivered a stunning 82 per cent total return. 

There was only one real disappointment from the eight Tips of the Year, which was BT. We thought a revival in the telecom giant’s fortunes could be on the cards, but it failed to materialise. In particular, as 2019 has progressed, we’ve felt dubious about the company’s decision to maintain its dividend despite balance sheet strain. That said, we have not closed out any of our BT tip or any of the other Tips of the Year over the last, which requires us to move our recommendation to a “sell”. BT was moved to a “hold” in July, though. Some of the other tips were also moved to holds after noteworthy gains. 

The scores are in

We measure the performance of the tips of the year from the day the tip was published rather than the price quoted in the article. We do this to try to give a better indication of the potential value of each recommendation to readers.

Despite the good run in 2019, on a three year cumulative basis the tips are still underperforming the market, which reflects the very sub-standard showing in 2017 and non-event of 2018. On a five-year basis the tips are beating the market by a decent margin, though. The table below show the total returns from the tips on a cumulative basis both with and without a notional annual dealing charge of 1 per cent.

Where are they now

What follows is a rundown of what happened with last year’s tips as well as our most recent recommendations on the stocks, one of which we’ve re-tipped in the last few weeks (WH Smith).

London Stock Exchange

The trading performance of London Stock Exchange’s (LSE) was strong in 2019, but it was corporate action that really set performance alight. Having already been on a strong run early in the year, LSE shares shot up 15 per cent in late July on news of its $27bn bid for Refinitiv. 

Refinitiv was spun out of Reuters in 2018 and is a challenger to the Bloomberg terminals that are ubiquitous on trading desks. Refinitiv has 40,000 institution clients and daily FX trades of $400bn and fixed income trades of $600bn. The acquisition of has been branded as “transformational” for LSE, if it goes ahead. The combination of the two businesses would give LSE the potential to squeeze even more value out of the vast amounts of trading data from its exchanges and indices businesses. If regulators give the deal thumbs up it should be completed in the second half of this year. While the tie-up is expected to leave LSE with net debt of 3.5 times cash profits (Ebitda), management sees the potential for $350m of cost savings and believes net debt will be back down below two times cash profits within 30 months.

However, 2019’s takeover fun-and-games was not over for LSE with its Refinitiv bid. LSE found itself on the other side of the table in September when rival exchange group Hong Kong Exchanges and Clearing (HKEX) approached it with a cash and stock offer valuing LSE shares at 8,361p a pop, which represented a 22 per cent premium to the share price  at the time. The deal was conditional on LSE dropping the planned tie-up with Refinitiv. However, a month later, having made little progress convincing the LSE board, HKEX withdrew. 

The Refinitiv deal does look like a very exciting prospect. Meanwhile, the company’s information and clearing businesses continue to go from strength to strength. The increase in debt is a risk, as is the potential for the bid to run into regulatory strife. With these considerations in mind, and an eye on the high valuation attached to the shares, we moved our recommendation to hold during the year, but remain keen on the investment case. 

Last IC View: Hold, 7,158p, 10 Oct 2019

Forterra

Brick making is cyclical (sales are very sensitive to movements in the economy) and operationally-geared (profits are very sensitive to movements in sales). As such, share in brick maker Forterra (FORT) were a big beneficiary of the sharp improvement in investor sentiment at the start of 2019. The share tore higher for two months, but then struggled to make further progress until the general election result  sent them off to the races again. 

Indeed, political uncertainty dogged Forterra’s progress during the year. While orders from the new-build residential sector held up well, non-residential business and orders from distributors slowed as commercial developers put projects on ice. This led to a third quarter warning and cuts to earnings forecasts in the region of 10 per cent. There were some spots of good news. The company’s £95m development of a new plant in Desford is going to plan with full production scheduled for 2022. Forterra has also said  it will be increasing the proportion of earnings it pays out as dividends. 

However, it took news of a fat Conservative majority to get the shares moving again. The prospect that an end to Brexit uncertainty will spur construction activity, and that a majority Conservative government  will prove a boon for house builders, put a rocket under the shares in the final month of the year.

We’ve stuck with our buy recommendation during 2019. The company should continue to benefit from operating in an industry where there are major restrictions on new domestic supply, stock levels are low and the cost of importing bricks provides a barrier to overseas competition.

Last IC View: Buy, 265p, 30 Jul 2019

WH Smith 

It’s been a very interesting 12 months for the evolution of WH Smith (SMWH) growth strategy. For several years the retailer’s story was one of investing in its highly profitable and growing travel business while managing the decline for its high street stores. The travel business operates shops in places where footfall is high and price-sensitivity is low, such as airports, train stations and hospitals. 

In November last  year, the company began to increase its focus on growing the travel division’s presence in the US with the $92m acquisition of airport-located electronics retailer InMotion. With the integration of InMotion going well, WH Smith stepped up the US expansion in October by announcing the $400m purchase of Marshall Retail Group from private-equity owners. 

Marshall operates a number of very successful retail formats in tourist resorts and airports. Significantly, the group appears to have excellent relationships with US airport landlords, which are the gatekeepers to growth in this $3bn retail market. WH Smith has had to pay top dollar (13.7 times cash profits) for such a high quality business, but the growth potential that Marshall brings, as well as the potential for cost savings, means it could well prove a price worth paying. WH Smith has already used InMotion’s relationships with landlords to help it launch WH Smith branded stores in US airports. A £155m placing at 2,150p to fund the Marshall deal should also keep debt at relatively manageable levels.

Acquisitions aside, the group continues to do a good job of managing  the decline of the high street business while keeping profits high at travel stores. We are excited by the Marshall acquisition and recently re-tipped WH Smith’s shares in our Tips of the Week section. 

Last IC View: Buy, 2,388p, 12 Dec 2019

easyJet

The strong performance of easyJet (EZJ) shares over the 12 months under review only tells part of a rather nail-biting story. The turbulence encountered on the way to a rather lovely destination was jarring. easyJet is a first-rate airline with good planes, a very competitive cost base and excellent slots at airports. However, like all airlines, it is a hostage to the fortunes of the wider industry. Having started the year well, the shares soon lurched downwards as investors began to worry about the economic outlook and its implications for ticket prices and demand. This exacerbated fears that the industry had been overoptimistic in plans to add new plane capacity.

Around mid-way through the year, these forces were at their most pronounced. easyJet’s shares hit a low 840p in early June, not long after a torrid set of half-year results. The results included a warning for the full-year, news of rising costs, a 7.4 per cent drop in revenue-per-seat, and a drop-off in third-quarter bookings against the backdrop of Brexit uncertainty.  However, in the airline industry blue sky often quickly emerges from dark clouds, and so it was in 2019.

Airlines have since pulled back their plans for new planes. This includes easyJet’s decision to limit 2020 capacity growth to the lower end of its 3 to 8 per cent guidance range. Meanwhile the grounding of the catastrophe-prone Boeing Max 737 has severely delayed the delivery of aircraft to many of easyJet’s rivals. Competitors have also been hit by strikes, with both Ryanair and BA-owner International Consolidated Airlines suffering. Meanwhile, the collapse of holiday company Thomas Cook, which owned an airline, has allowed easyJet to swoop on its assets and make a determined push to grow its own holiday business. 

A positive note was also struck by easyJet’s full-year results, with it reporting a small uptick in revenue-per-seat of 0.8 per cent in the second half. And while the group cut the dividend by a quarter, this has been done to fund carbon offset for its flights which could help give easyJet with a competitive advantage given the probability that tougher climate-change regulation is coming. While it has not been a pleasant journey, we remained buyers for most of the year, moving to hold at the time of the full-year results in November. It’s hard not to be pleased with the ultimate destination after the bumpy ride.

Last IC View: Hold, 1,333p, 10 Nov 2019

Hollywood Bowl

While the share price  performance of Hollywood Bowl (BOWL) was unremarkable for much of 2019, progress delivering on its well-defined growth strategy was very impressive. And much of the payoff for backing the shares came right at the end of the year. Indeed, at the time of writing, the shares have rallied 22 per cent since the company announced full-year results, which coincided with the market-rousing general election result on 13 December. 

The investment case for Hollywood Bowl remains little changed from when we tipped the shares 12 months ago. The company continues to open new bowling centres at a steady pace while achieving returns on investment of over 33 per cent on refurbishments. The company has also recently been opening indoor minigolf centres which target a similar customer demographic but lend themselves to different types of sites. One bowling centre and three PuttStar minigolf centres are planned for next year along with seven to 10 refurbishments. The performance of the business also continues to benefit from making a range of operational improvements. Key areas of focus are digital engagement with customers, improved food and drink and better amusement machines. 

The combination of all these factors helped drive a 7.8 per cent increase in sales last year, 5.5 per cent like-for-like growth and a 14.3 per cent rise in underlying operating profit. Cash generation also remains impressive and the end of 2019 saw the company announce a special dividend for a third year in a row. We continue to recommend the shares as a buy.

Last IC View: Buy, 256p, 14 Dec 2019

InterContinental Hotels

The first-half of 2019 saw shares in InterContinental Hotels (IHG) put in a strong performance as  investors got behind the market’s quality plays. Despite operating in a notoriously cyclical sector, IHG fits the “quality” billing because it earns money by using its brand strength and operational know-how to manage hotels for their owners rather than owning the actual assets. This makes its business far less sensitive to the sector’s ups and downs and more dependent for growth on attracting hotel-owners to its network. 

The business model helps explain why the market has not been more perturbed by the modest fall off in revenue per available room witnessed during 2019. Indeed, despite some weakening in market conditions, system growth has been impressive  coming in at 5.7 per cent during the first six months of the financial year and 4.7 percent in the third quarter. Meanwhile the group signed 73,000 new rooms in the first nine months of 2019. 

While there are well-founded fears about the outlook for the global economy, any resolution to the US China trade dispute could help sentiment towards InterContinental Hotel's shares, which remain some way off 2019 highs of 5,770p. We continue to rate the shares a buy. 

Last IC View: Buy, 5,188p, 7 August 2019

Britvic

We thought 2019 looked like it would shape up to be a good year for soft drinks company Britvic (BVIC) following a number of years of investment to improve the efficiency of its UK operations. We also thought it might avoid the kind one-off challenges that had afflicted recent trading periods, such as the introduction of the sugar tax and a carbon-dioxide shortage. While it would be unfair to go so far as describing the year as a disappointment, it’s fair to say Britvic didn’t quite live up to our best hopes.

Trading during 2019 was dampened due to the weather paling in comparison with the hot summer the year before. But it was the impact of the group’s decision to sell off several of its French assets and exit a US business that caused the biggest hit to its results. Underlying  profits of £214m took a £85m hit from writedowns and one-off charges related to restructuring.

Still, key brands, such as Tango and Pepsi, which the company produces under licence in the UK, continued to sell well, and underlying margins moved ahead as the company benefited from previous investment. The exit from certain French and US operations also looks well conceived. Brokers  continue to forecast good growth and the shares do not look expensive priced at 15 times forecast earnings and promising a yield of over 3 per cent. Maybe 2020 will be the year when the hard work really pays off for shareholders. We think the shares are still a buy. 

Last IC View: Buy, 990p, 28 Nov 2019

BT

As 2019 rolled into view, we felt it may be the year when telecoms group BT (BT.A) finally started to get its house in order. While the group was - and still is - swamped by debt, a huge pension deficit and significant capex requirements, we saw reasons for optimism in the prospect of a new chief executive with a reputation for restructuring struggling companies and the potential for an improved relationship with the regulator. Sadly, as 2020 gets under way, many of the group’s key problems remain and the company has yet to do enough to convince investors it is countering them.

In the first half of its financial year, heavy capital spending requirements contributed to an 11 per cent increase in net debt at BT to £12.2bn. To an extent this was countered by a 15 per cent drop in the pension deficit to £5.1bn. Pressure to invest in 5G and to provide more homes and businesses with direct fibre internet connection are expected to keep capital spending requirements high. Competition in these areas could also put pressure on returns. 

Despite the strain on BT’s balance sheet, the company decided to maintain its dividend at the half-year stage. Increasingly, we feel the payment looks unaffordable. Indeed, there are reasons to think resetting the dividend lower, as Vodafone did during 2019, could actually reinvigorate investor enthusiasm. The company has also stuck with its expensive BT Sports operation, which some had hoped the group would rid itself of to save money. 

We moved BT to a hold in July when it became clear that things were not going the way we had hoped. We’ve held off moving our advice to sell, though, and the shares have regained momentum in the second half. The shares were also a beneficiary of December’s election result given nationalisation pledges from the Labour Party, which got a ballot-box battering. 

Last  IC View: Hold, 190p, 20 Nov 2019