Tag Archives: invesmtent

Stocks in Focus: McColl’s


This week I am looking at McColl’s following the announcement of its interim results on Monday 24 July.  McColl’s is a leading neighbourhood retailer with 1,650 stores across the UK and the results mark one year since it announced the acquisition of 298 convenience stores from the Co-Op; a deal that has accelerated its shift away from being a traditional newsagent towards being a full-blooded convenience store retailer.

On the plus side, results show that like-for-like sales were up 0.2% for the first half of the year and 1.4% in the second quarter – a good result considering that like-for-like sales had hitherto been in negative territory for an extended period.  The Chief Executive, Jonathan Miller, highlighted McColl’s focus on the relatively robust convenience market and the IGD forecasts that the UK convenience market will grow by 12% between 2016 and 2021.  McColl’s hopes to benefit from this growth while continuing to grow its footprint and improve its in-store offering through better product ranges and the addition of more services (such as post offices and online shopping collection points that help drive customer footfall). On the downside, the food retail market remains very competitive and larger supermarkets also remain focussed on improving their convenience store offering. This competitive market may at some point drive negative like-for-like sales again, which can in turn hurt margins.

At the current valuation the shares do not look expensive and successful integration of the Co-Op stores should deliver attractive earnings growth.  However, the increased debt as a result of the store purchases does leave the company more vulnerable in the short term should the UK economy suffer a downturn.




Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.


Stocks in Focus: Next

This week Oliver Phillips looks at Next plc, a former stock market darling that has recently fallen out of favour with investors.

Next is divided into two divisions, Retail and Directory. The Retail division represents the bricks & mortar side of the business which sells to consumers on the high street and in retail parks. The retail sector as a whole is under strain and this division has seen a modest decline in recent years – management have attempted to cushion this by focussing on their retail park offerings and increasing average store size. The Directory division, the online business which has evolved from a mail-catalogue offering, has been the main driver of growth in recent years and has enjoyed a reputation for setting industry standards for logistics infrastructure and delivery capabilities.

Having reached a high of £80 last October on the back of consistently strong growth within Directory, the share price has since slumped to around £54 – so why have investors decided to take such a different view on the business? First and foremost, growth has been beginning to slow in the Directory division and there is a fear that the business has reached maturity in the UK market. Trends in the retail sector are also uncertain, and some predict the polarisation of consumers towards either premium or value products, away from the middle ground that Next currently occupies.

Looking forward, investors need to consider whether or not the business can continue to drive profitable growth. On the one hand, management has a strong track record of delivering, even in tricky circumstances. On the other hand, the fate of BHS shows that failure is punished hard in the retail sector.


Stocks in Focus: Intertek

This week I am writing about Intertek following the announcement that Chief Executive, André Lacroix has purchased a further 100,000 shares, costing approximately £3.27m.  This effectively doubles his investment in the company.

Intertek is a global testing, inspection and certification company.  They are one of three major players in an otherwise fragmented market and have a breadth of skills and knowledge which provides opportunities in a number of different sectors.  The markets that Intertek operates in include testing children’s toys as well as electrical testing and certification and checking oil shipments.

The fall in the oil price at the end of 2014 sparked fears that Intertek’s profits would be hit by a number of contracts being cut due to their exposure to this sector.  However the company’s profits remained more robust than investors feared and consequently the share price has rallied.  With the share price up 23% over one year investors may start to worry that the shares look expensive.

The announcement that the Chief Executive is willing to increase his holding suggests that the board is confident that the current price still offers value, despite its recent strong performance.   Since taking the Chief Executive role a year ago Mr Lacroix has indicated that he will continue to make bolt-on acquisitions focussing on the higher margin and higher quality parts of the business.  Clearly he feels confident that this will continue to add value for shareholders.


Emerging markets – Is the return to favour sustainable?

For the last several years the emerging markets story has been one of frustration and disappointment, with the sector under-performing its counterparts in the developed world by a wide margin. In January all of that changed and the sector has been one of the best performers so far this year. To put some numbers on this, the broad EMG sector has delivered a total return of around 8%, against which the developed markets have struggled to produce returns of 2-4%.

The main driving force behind this has been the sharp upward spike in oil and commodities prices. No surprise there but it is interesting to note the very high degree of correlation – around 92% – that has prevailed. Much of the fortunes of the emerging markets are also tied up in currency movements, with the strength or weakness of their currencies relative to the US$ having a huge influence on their ability to make progress. A third influence, but one that varies from country to country, is the political climate. This is underlined by the turmoil presently occurring in Brazil which is attracting nervous sellers and opportunistic buyers in equal measure

It remains to be seen whether the rally will continue and the dramatic upturn in emerging markets suggests that investors may be taking much on trust. For markets to progress from here it will take continuing currency strength, lower inflation and a sustained improvement in company earnings.

For more information, contact Alastair MacDougall on 01223 720255 or visit http://www.nwbrown.co.uk/investment-management/

Stocks in Focus: Tate & Lyle

This week I am looking at Tate & Lyle following a Capital Markets Day it hosted last week for investors and analysts. Management used the day to shed greater light on the “in-transition” state of the business. Historically, Tate & Lyle has derived the majority of its revenue from the processing of corn into bulk ingredients (BI), including sweeteners and cattle feed.  However, management are transitioning the business such that it has an ever greater focus on its specialised food ingredients (SFI) division, which develops sweeteners, texturants and health ingredients that help its customers to produce distinctive products.

The BI division has lower barriers to entry, lower margins and is not growing as fast as SFI.  It is also more commoditised and therefore a lower quality contributor to Tate & Lyle’s earnings.  Recently Tate & Lyle sold its European based sweetener joint venture Eaststarch.  Since this sale, 90% of its bulk ingredients will be based in North America, where it has stronger market positions.  However, beyond optimising the less attractive BI business, management also needs to push growth in the SFI business.

Globally, SFI market volume is growing at 4-5% annually.  Tate & Lyle aim to beat this benchmark through innovative new product development.  As the SFI division grows, overall margins expand and the quality of income improves.  Thus far, the company has transitioned from SFI contributing 32% of earnings in the 2009/10 financial year to 47% last financial year. Looking forward, the company targets 70% by 2020 – an ambitious target that would surely be well-received by investors if achieved.


Stocks in Focus: Greene King

In its first reporting period since acquiring rival pub company,  Spirit, Greene King has announced that its revenue and profits increased by nearly 50% for the six months to 18 October.  The results, which were announced on 2 December, comfortably beat analyst’s forecasts and led to the share price rising approximately 17% over last week.

Greene King completed the acquisition of Spirit on 23 June 2015 to become the UK’s largest managed pub company.  The strategy is to create a larger company (with obvious synergies) that can compete with restaurants.  Indeed growth of the business is being driven by increasing food sales amid falling alcohol consumption.

Two recent changes in legislation will affect the business going forward.  First the introduction of a “living wage” is estimated to cost Greene King £6m a year as approximately 35% of their staff will see their wage increased.  This starts coming into force from April 2016.  Second the end of the “beer-tie” where pub companies could previously force tenants to buy drinks from them at a premium, in exchange for a reduced rent.  Over recent years, the company has reduced the number of tenanted pubs in anticipation of the end of the beer-tie, increasing the percentage of pubs that are managed directly.

Greene King is committed to improving their food offering, investing between £40m and £50m per year in their various restaurant brands.  It also owns a large percentage of its pubs.  This compares to Wetherspoons which owns none and Marstons which owns fewer in percentage terms.  Owning its pubs gives Greene King exposure to the property market and gives it opportunities to raise cash by selling non-core assets.  Furthermore, its base in the relatively affluent South East of the UK is helpful. The question for investors is whether these qualities justify the premium that the shares currently trade at over the sector.