Tag Archives: investment management

Stocks in Focus: Marks & Spencer

This week I have been looking at retailer Marks & Spencer.  The high street continues to evolve and is going through a serious period of upheaval.  Disruption is being driven by the online shopping revolution, led by Amazon, which is changing consumers’ purchasing habits.

The internet has been a deflationary influence on pricing, which has been beneficial to the “squeezed” consumer.  However, with the headwinds from an increase in business rates and the National Living Wage together with inflationary pressures of increased input costs driven by both currency and the cost of raw materials, profit margins of traditional bricks and mortar stores continue to shrink.

Marks and Spencer reported its 3rd quarter earnings in early January, which included its Christmas trading statement.  Sales at the company’s Simply Food business underperformed, previously viewed as one of the strongest growing divisions.  This was particularly disappointing versus its food peers who reported strong Christmas figures.

At the end of January the company announced the closure of 14 stores nationally, which meets with its 2016 programme of repositioning around 25% of the company’s Clothing & Home space.  This forms part of the company’s cost saving strategy which also includes the reduction in the pace of openings for its Simply Food stores.

Not only does the company need to continue with constructively cutting costs, but it also needs to demonstrate how it is innovating within Clothing & Home and Simply Food in order for the company to remain relevant in an increasingly competitive marketplace.  Marks & Spencer has a reputation for delivering good quality products, however ensuring that these products reach consumers in as efficient manner as possible will define how the company succeeds in the future.

Marks & Spencer will update the market with full year results at the end of March.



Stocks in Focus: Rolls-Royce

This week I am looking at the British engineering giant Rolls-Royce, following its annual results last week. I last wrote about Rolls-Royce in January, after it made the announcement that it would restructure its five divisions into three core operating units – a decision that was welcomed by investors. The annual results have come as further good news, with the cost-cutting drive that included the restructure helping the company to return to profit, following its largest ever pre-tax loss in 2016.

The results came in ahead of prior expectations, with the company making £4.9bn in pre-tax profits in 2017.  £2.6bn of this came from non-cash gains on its foreign exchange hedging strategy, thanks to a strengthening sterling. The operating performance was also positive, with underlying revenues increasing by 6% to £15.1bn.

Despite the encouraging results, the year has not been without difficulties for the company. Technical problems were found with its Trent 1000 jet engines, used to power Boeing’s 787 Dreamliner, and some of its Trent 900 engines, resulting in them wearing out more quickly than expected. The issues cost the company £170m in 2017, with management forecasting an increase in cost to a peak of £340m in the coming year. However, CEO Warren East has reassured investors that the problems will be fully resolved by 2021-22.

Although the engine fault issues will continue to be costly for the company over the next 5 years, Mr East continues to look for opportunities to cut costs in other areas. Two years after making initial cuts to management, a further restructure is under way that should result in significant cost savings. Mr East has also reassured investors that the ambitious promise of £1bn free cash flow by 2020 is still possible, which will be impressive if achieved.


Stocks in Focus: Reckitt Benckiser

This week I’m looking at Reckitt Benckiser, the consumer goods company known for its health, hygiene and home products, following its full year results last week.  The results were disappointing after a turbulent 2017 with the company reporting flat net revenue growth and a decline in profit margins.

The results did not come as a surprise to investors as the company suffered a series of “one-off” problems during the first 3 quarters of 2017. Reckitt was one of several multinational companies to be affected by the global cyber attack in June last year, which disrupted its ability to manufacture and distribute products to customers in multiple markets.  The company has also struggled with the failed product launch of a new Scholl pedicure product, ongoing fallout from a South Korean safety scandal, and volatility in India due to the implementation of goods and services tax.

Despite the poor performance, Chief Executive Rakesh Kapoor is determined that the business can recover, and this was shown in Q4, reporting 2% net revenue growth. The recent acquisition of Mead Johnson, the global baby formula company, has contributed to Reckitt becoming a major player in the consumer healthcare segment, and as a result Kapoor has made the decision split the company into two units – one focused on healthcare and the other on home and hygiene products.  However, the new organisation structure is likely to be costly and the company has declined to give a margin target for 2018, admitting that it will be affected by the reorganisation.

Kapoor remains confident that the company can make a comeback after a difficult year, and strong performance of previous years stands him in good stead. However, only time will tell if the reorganisation within the company has come at the right time and if management are more prepared for any future issues that may occur.


Stocks in Focus: Centrica

This week I am looking at Centrica, the parent company of British Gas and the biggest energy supplier in the UK. The company announced its full-year 2017 results last week, which reported a 3% rise in group revenue, but a 17% fall in operating profit due to the poor performance of its business energy supply unit. These results were broadly in line with expectations following the company’s profit warning in November 2017 where concerns were raised about the struggling business energy supply division and the impending price cap on standard variable tariffs (SVTs). What the market did not expect however was that the group would announce its intention to hold full year dividends steady at 12p per share this year and out to 2020 subject to cash flow and net debt targets being met. Shares reacted positively on the news.

Centrica is one of a number of energy suppliers that will be affected by the introduction of the price cap on SVTs. In response to this, the chief executive has announced plans to cut 4,000 jobs on top of the 5,500 he has already axed. He explained that greater digitisation in the industry as customers move online and intense industry competition are also part of the reason for the job cuts. He also added that cost cuttings programmes involving investment in technology and the simplification of core business processes would result in cost savings of £1.25bn per year by 2020 and the creation of 1,000 jobs.

With the price cap looming, cash generation seems to be heading in the right direction and debt reduction is on track. However, cost cutting cannot continue forever. Centrica has around 25 million existing customers as well as strong, recognisable brands. It will be interesting to see whether it can play to these strengths to drive future growth.


Stocks in Focus: Tesco Plc

At the beginning of last year, Tesco announced a proposed merger with Booker Group Plc, the UK’s largest food wholesaler, in hope of strengthening the retailer’s UK offering. After many months of consideration and despite concerns from competitors, the Competition authorities finally confirmed their approval in December 2017, which was welcomed by both groups and their shareholders.

With the merger expected to complete in March 2018, Tesco has now confirmed that Charles Wilson, the current CEO of Booker Group will be appointed as CEO of Tesco’s retail and wholesale operations in the UK and Republic of Ireland. Mr Wilson has been with Booker Group for 20 years, where he was credited with driving the group’s successful turnaround following near collapse in 2007. His knowledge and long term experience in the sector should prove beneficial for the business, where he could be seen as a prime candidate for succession of Dave Lewis, the current CEO of Tesco.

Tesco has also announced that it intends to pay a final dividend of 2.0p per share for the current financial year, which brings the total dividends paid for the year to 3.0p per share.  The decision to pay a dividend demonstrates management’s confidence in the business and is reassuring for shareholders, who had not received a dividend since the accounting and operational issues that forced it to be cancelled in 2014.

Despite the encouraging steps that management are taking to turn the business around, Tesco still faces strong competition from the Limited Assortment Discounters (LADs); Aldi and Lidl. With the “big 4” supermarkets continuing to lose market share to the LADs, only time will tell whether the new approach is enough to restore the company to its former glory.


Points of View: Current Market

Over the past month the FTSE 100 has fallen approximately 700 points, or 8.8%.  This has come as investors comprehend an environment of rising interest rates and potentially higher global inflation, following a sustained period of loose monetary policy.

The Monetary Policy Committee of the Bank of England met on 7 February 2018 and voted to keep interest rates at 0.5, however also suggested that rates may rise more quickly than previously anticipated.  Interest rates can have an impact on nearly all asset prices.  All other things being equal, a quicker than anticipated rise in interest rates means that bond yields rise, causing bond prices to fall and that in turn causes equity prices to fall.

This is broadly what has been observed in the US market recently.  Wage growth inflation has been higher than expected.  Interest rates are one of the tools used to control inflation; therefore a higher than expected inflation figure may lead to the US Federal Reserve raising interest rates faster.  This fear of rate hikes sparked a bond sell-off, which caused US equity markets to fall.  The effect was exacerbated by an outflow from investors of low volatility strategies, causing a raft of forced selling.  The US market tends to lead the way for equity markets across the globe and the fall in US stocks was a precursor for the UK market falling back.

In the short term, rising inflation and interest rates remain a headwind for UK equities, however historically companies have been able to pass rising costs on to consumers and grow earnings faster than inflation over the long term.  Our opinion remains that equities remain the best asset class to outperform inflation over the long term.  In the short term markets may be more volatile, as evident this year so far, but for investors taking a long term view short term volatility eventually becomes insignificant.


Stocks in Focus: Templeton Emerging Markets

This week I am reviewing Templeton Emerging Markets (TEM), which is the largest investment trust within the Emerging Markets sector. The Trust has recently seen an unexpected change, with lead manager, Carlos Hardenberg, handing in his resignation.

Last September I wrote an article reviewing the Trust and Mr Hardenberg’s first two years as lead manager. During this time Mr Hardenberg outperformed his benchmark (96% vs 67%) and transformed the Trust into quite a different beast than the one he took over. One of the more significant changes was his push into the technology sector. At the end of December 2017 the technology sector was the largest weighting within the Trust at 31% (vs 6% in mid 2015), with giants such as Samsung, Alibaba and Tencent featuring in the top 10 holdings.

Effective immediately, Chetan Sehgal will be taking over as lead manager. Our early understanding is that he will look to keep the Trust running with the same investment process. Mr Sehgal has been with Franklin Templeton since 1995 and is a senior Managing Director and Director of the Global Emerging Markets and Small Cap Strategies. He should be capable of maintaining the process as he has been working closely with Mr Hardenberg during his tenure and was a part of the previous team under emerging market veteran Mark Mobius.

Given how much Mr Hardenberg had turned the Trust around and developed the existing strategy, this is quite a large disruption and causes some concern. We will monitor developments closely and expect to meet with Mr Sehgal in the near future to hear his plans for the Trust’s portfolio.