This edition of the Market Review considers whether markets will continue to climb a “wall of worry”.
This week I am looking at property, residential, construction and services firm Kier Group, which announced preliminary full year results last week. The performance was in line with management expectations and the results showed a group pre-tax profit of £126m, compared with £116m last year, while revenues for the year have risen to £4.28bn, 3 per cent higher than the previous year.
The results were well received in a sector where a number of Kier’s competitors had experienced problems. Investors were reassured that management’s portfolio simplification programme has been a success since they made the decision to sell the Hong Kong and Caribbean businesses earlier this year. The simplification has resulted in increased focus on its three core markets; building, infrastructure and housing, which now represent 90 per cent of the group’s revenues and profits.
Management are confident that the business will remain relatively unaffected by Brexit and the firm is likely to benefit further from the increasing government focus on affordable housing, having already secured government funding over the last year to build new homes.
When writing about Kier last year, we explained that the contractor had laid out a “Vision 2020” plan of strategic targets to reach by 2020. The reassuring recent results along with the decision by the board to raise the full year dividend by 5 per cent, should help to increase investor belief that the group is on track to hit its ambitious target of £200m in annual operating profits by 2020. However, the economic environment remains challenging.
This week I am looking at Intertek Group Plc, the global inspection, testing and certification company. The specialist organization has more than 42,000 employees across 100 countries and provides quality and safety assurance to companies across several industries.
The company’s latest interim results were better than expected for the first six months of the year. Revenues were up nearly 14% compared to last year, while pre-tax profit jumped almost 28%. Management also upgraded their profit margin guidance from “moderate” to “robust”. Indeed, it has been a good couple of years for Intertek and this has been reflected in the share price, which has risen nearly 125% since the end of 2015 to its recent all time high of 4880p per share.
The global quality assurance industry has seen rapid growth in recent years as regulators are demanding stricter compliance measures and increased focus on risk management following several high-profile scandals that highlighted gross negligence by the companies involved. Intertek was well positioned to capitalise on the increase in demand.
That said, its resources division, which provides services to the oil, gas and mining sectors, suffered a dip in revenues. This was due to lower capital investment from its clients, but investors seem to have looked past this isolated weakness given the division’s relatively small contribution to overall revenue and the fact that the majority of its oil & gas exposure comes from fairly stable sources of operational expenditure and cargo inspection. The question for long term investors, however, is whether the strong performance and upbeat prospect still leave the stock as an attractively priced investment given the recent rise in the share price.
This week I am looking at HSBC, one of the world’s largest banks, which delivered promising half year results at the end of last month.
The results showed a pre-tax profit for the first half of 2017 of $10.2billion, an increase of over 5% on the same period last year. The better numbers were thanks to a boost from rising US interest rates, which generally enables it to make wider margins on loans, and an improved trading environment. In particular, the bank continues to see growth opportunities in Asia, where it makes three quarters of its profits.
Additionally, management announced a new $2billion share buyback, which will raise the amount of total stock that they have pledged to repurchase in the last year to $5.5billion. On the subject of management, investors are keeping a keen eye on the bank’s succession planning. Mark Tucker has recently been appointed as the new chairman and one of his first priorities will be to find a replacement for existing Chief Executive Stuart Gulliver, who is due to step down next year.
The shares have performed well of late and are currently trading close to a four year high following a rise of more than 50% over the last year. This leaves the shares trading on a relatively high valuation of 1.4x book value at a time of management uncertainty. Set against this, there are still plenty of positives. The bank is financially strong, offers an attractive dividend yield of over 5%, and is well placed to benefit from further normalisation of US interest rates.
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.
This week I am looking at the Perpetual Income & Growth Investment Trust (PLI) following the recent release of its 2017 annual results.
The £1bn investment trust, which is managed by Invesco Perpetual’s Mark Barnett, continues to focus on UK companies that can generate long-term returns irrespective of their position in the economic cycle. Dividends are a key driver of long-term returns for investors and in this respect the trust has a strong track record, having increased its aggregate dividend by 8% on an annualised basis over the last 10 years. The dividend yield currently stands at a relatively attractive 3.3%.
Unusually, PLI’s results were slightly disappointing over the 12 months to 31 March 2017 – its net asset value (NAV) rose 9.6% compared to a 22% rise in its FTSE All Share benchmark. This lacklustre performance was mainly due to the sector split, where PLI’s minimal exposure to recovering mining and banking stocks held the fund back. PLI has for some time been underweight the mining sector, which is very cyclical in nature and thus contradicts its strategy; however the rise in commodity prices and falling pound led to strong outperformance by the sector in the period in question.
Despite this latest set of results, our views on PLI have not changed. We remain confident in Mark Barnett’s abilities and experience. This is more than demonstrated by the long term performance of the fund, with the share price increasing 132% over the past 10 years compared to 70% for the FTSE All Share Index. In addition to this, the fund continues to trade at an attractive 7% discount to NAV.
This week I am looking at the Scottish Mortgage investment trust, which aims to achieve long-term capital growth through investing in global equities, focusing on the speed of technological advancements and how they can disrupt established business practices.
The trust recently published strong results for the 12 months to 31 March 2017, during which it returned an impressive 40.9% vs the FTSE World benchmark return of 33.1%, placing it in the top 10% for Global funds during that period. The main driver of these positive results was a strong US market and, in particular, outperformance of the technology sector.
The lead manager, James Anderson, has been in charge of the trust since 2000 and has seen his successful strategy lead it into the FTSE100 and become the largest investment trust in the UK. Over this time Mr Anderson has created a concentrated portfolio of around 40-80 holdings, with high weightings in US tech stocks including Amazon and Tesla. In recent years he has also looked to exploit the emergence of China by holding tech stocks such as Tencent and Alibaba.
This trust has been a consistently strong performer, gaining 219% over 5 years against the FTSE World benchmark return of 116%. This has gained it much attention from investors and the fund’s size (now at c£5.6bn) has allowed it to lead the way in reducing fees within the investment trust sector. The trust is clearly an attractive vehicle for investors looking to have diversified exposure to disruptive technologies. The fact that it is trading at a modest premium to the underlying value of its assets makes it less attractive from a value perspective, but reflects the returns generated by the manager.