Tag Archives: market price

Stocks in Focus: BT

This week I am looking at BT, following the announcement last week that Chief Executive Gavin Patterson will step down later this year. BT confirmed that his departure was driven by poor reaction to its latest results and loss of investor confidence.

Mr Patterson’s position has been in question for some time. The company has faced a number of challenges in recent years, which have resulted in the shares trading at a near six year low. Recent issues have included an Italian accounting scandal, a slowdown in public sector spending, and a record fine from Ofcom. Despite ongoing concerns from shareholders, the timing of the board’s decision came as a surprise – only a month ago, Patterson was publicly backed by the chairman Jan du Plessis after unveiling an ambitious new restructuring plan.

The restructuring strategy came after the company failed to hit profit and revenue targets in the last year. Mr Patterson revealed that management intend to cut 13,000 jobs as well as close its iconic 150 year old headquarters in London, in an attempt to reduce costs. The company promises that the cost savings will give them the opportunity to invest heavily into 5G, aiming for BT and its mobile division EE to become the first business in the UK and Europe to have a live 5G network in 2019 – an exciting opportunity for the company, despite fierce competition from rival networks.

Patterson will remain in the role until a replacement Chief Executive is found, and has reassured investors that he will remain committed to the business and his updated strategy until his departure. Patterson believes that BT is well positioned to thrive in the future, and with the strong restructuring strategy underway, it will be interesting to see what his successor’s first move will be.



Stocks in Focus: DS Smith

DS Smith, the international packaging company, announced its intention to purchase the Spanish based Papeles y Cartones de Europa, S.A (known as Europac) on Monday 4 June 2018. The deal, costing €1.9bn, follows a trend set by the company of continuing to consolidate the European market in packaging. Further news of the acquisition is expected in June along with the annual results.

The acquisition is at the higher end of valuations to other European deals; but comes with potential cost saving synergies of circa €50m. Management have a good track record and experience in integrating European businesses.  The company is planning to finance the transaction with a fully underwritten rights issue of approximately £1bn with the remainder funded by debt. This deal is expected to enhance earnings from year one and while debt will increase in the short term, the company is targeting a reduction over the longer term.

DS Smith has been on an aggressive acquisition path. This is the second purchase of 2018, and the company made two in 2017. The fragmented paper and packaging industry is still ripe for consolidation but even without acquisition growth, volumes are still predicted to rise.  In the company’s trading update on 1 May 2018 it stated strong performance with both volume growth and successful cost savings from earlier purchases.

Investor sentiment remains positive, endorsing management’s progress in carrying out their strategy to drive growth both organically and through acquisitions. The Europac deal does not come completely without risk as the cost synergies still have to be delivered and the extra debt does weigh on the balance sheet even if it is only intended for the short term. We will watch closely to see whether the company can consolidate the various new businesses without getting distracted.


Stocks in Focus: Pennon Group

This week I am looking at Pennon Group, which recently released its full year results to 31 March 2018. The group is split between two main functions, water and sewage services the South West of England and Viridor, the UK’s largest waste management recycling company.

Pennon’s results were met with a positive reaction from the market and shortly after the release the shares had risen by 5%. Pre-tax profits had risen by 25%, following strong performance from the Viridor and South West Water divisions, and the company confirmed another dividend rise of 7.3%.

Viridor accounts for 52% of the group’s revenues and within the results they announced that they have been encouraged by the ‘Blue Planet’ effect. Ever since the popular BBC program aired in late 2017, the country has gained focus on the need to control plastic consumption and to improve recycling efficiency. Viridor is at the forefront of this and are hoping that changes will be announced in the Resources & Waste Strategy later this year that will continue this momentum.

Despite these positive results, the sector still faces regulatory pressures and the utilities industry is set to see price controls from 2020. The price controls are based on the Regulatory Asset Base, this is a system designed primarily to encourage investment in the expansion and modernization of infrastructure.  However, these utility companies will work on an allowed rate of return in which they recoup the investment from consumers, therefore capping future income.

These pressures are affecting the whole industry but Pennon remains in a strong position. They have the best record of water quality and customer service in the sector and have less regulatory exposure than competitors due to the diversification offered by the Viridor business.


Points of View: US/China Trade

This week saw a step back from the brink of a US/China trade war.  The two countries announced that the US has halted plans to impose tariffs on up to $150bn of imports and China made pledges to significantly increase its purchases of US agriculture and energy exports.

President Trump’s administration has taken a strong stance against Chinese exports, stating that Beijing needs to pay the price for decades of unfairly acquiring US intellectual property.  Washington is also keen to rebalance the $337bn trade deficit it has with China.  Towards the end of March, Trump announced tariffs on up to $60bn of Chinese imports.  Beijing retaliated with tariffs on $3bn of US imports, with the threat of this escalating into a full trade war.

The market has reacted positively to the recent announcement; however hardliners on both sides are disappointed with the change of stance.  US critics are unhappy that the focus has shifted to reducing the trade deficit, rather than a harder push for reforms in China to prevent the acquisition of US intellectual property.  In the middle of the trade negotiations is the fate of ZTE, a Chinese telecoms company that has been handed a seven year ban on sourcing US components.  The ban came in last month, after the company admitting violating US sanctions on Iran and North Korea.  Chinese critics are unhappy that the fate of the company, and its 70,000 employees, has not been secured.

Whether the US can reduce their deficit with China and achieve real change in the country remains to be seen but neither will be easy.  In return China will expect a lifting of US restrictions on high-tech exports to China imposed in 1989 and a quick resolution for ZTE.  These negotiations are complex and the threat of them breaking down and a trade war re-emerging is still present.


Stocks in Focus: Reckitt Benckiser

This week I am looking at Reckitt Benckiser, a British multinational consumer goods company.  The company, known for brands such as Dettol, Nurofen and Durex, released its first quarter trading update on 20th April, quoting a 2 per cent like-for-like sales growth against the same period last year. Whilst the results appeared reasonable, they narrowly missed analyst expectations and the share price fell on the back of this.

Management has been enthusiastically engaging in M&A activity in an attempt to promote growth in the current economic environment. The purchase in February 2017 of Mead Johnson, an international baby formula manufacturer, continues to integrate well. There have been reported cost-saving synergies of $25m so far and an expectation of $300m over the next three years. Following the acquisition, 50% of group revenue now comes from higher margin consumer healthcare brands. In an attempt to streamline the business the company also restructured itself into two separate divisions in January: health and home hygiene. With health clearly the growth driver of the business, management are now reviewing the lower margin home hygiene division.

Furthermore, following a strategic review of its food businesses, Reckitt Benckiser finalised a deal in the summer to sell its “French’s Food” brands to McCormick & Company Inc. The deal was completed for a cash sum of $4.2 billion and received well by investors. The company stated the cash would be used to reduce debt from the aforementioned Mead Johnson acquisition and continue to consolidate the business into more defined divisions.

Despite the recent setbacks, management remain confident that the steps taken to focus the business will continue to drive long term growth.  With its portfolio of power brands enabling the company to enjoy comparably high operating margins, it will be important to see whether this can be maintained under growing pressures from global competitors.


Points of View: Schroder Asia Pacific

This week I am looking at Schroder Asia Pacific, an investment trust which invests in equities listed in the Asia Pacific region excluding Japan. The fund has been managed by Matthew Dobbs since inception in 1995 and has become the largest trust in the sector.

Performance of the fund has been very strong over the last 3 years, 51% vs 29% for the MSCI Asia ex Japan benchmark, which has been driven by large weightings to Chinese and technology based stocks.

Chinese equities make up around half of the portfolio (this is c3.7% overweight compared to the benchmark) and this has been steadily increasing over the last couple of years. Mr Dobbs gains exposure to these stocks through the Chinese and Hong Kong stock exchanges, traditionally preferring the Hong Kong listed companies due to tougher listing requirements and better corporate governance. Mr Dobbs feels that this weighting is justified due to favourable economic conditions and a shift towards services and the consumer.

Technology is the largest sector weighting in this fund at 34%. Over the last 18 months the technology sector has seen strong performance and those listed in Asia have been no different. Despite the strong rise in the share price of companies like Alibaba and Tencent (the Chinese equivalent of Amazon and Facebook respectively), Mr Dobbs feels that these companies will continue to be the key beneficiaries of the technological disruption going on in the region. Tencent already has around 320m users who spend more than 4 hours a day on the platform.

Arguably, the large weightings to China and technology increase the risk of the fund. However, over the 23 years since inception, Mr Dobbs and his team have established a great track-record of identifying drivers of growth for the fund to benefit from.


Stocks in Focus: Greene King

This week I am looking at Greene King, following a strong share performance at the end of last week after announcing its pre-close update.  The share price jumped over 10% on Thursday 12 April and, at the point of writing, has continued to rise since.

Recent snow and cold weather negatively impacted sales and contributed to an overall fall in sales when compared with last year.  Like-for-like sales were down 1.8% for the first 49 weeks of its financial year.   Accommodation and drinks had positive like-for-like sales, indicating that the food-led pubs were the weakest part of Greene King’s business.  The results were broadly in line with consensus, however the shares rose strongly following the announcement.  Sentiment has been low towards the stock and investors reacted positively to a lack of bad news.

Greene King continues to operate in a competitive industry, facing a number of challenges.  Food-led pubs in particular face significant competition, which is putting pressure on margins and issues with Greene King’s Fayre and Square brand have further impacted profits.  Looking forward, consumer spending remains an on-going question and real wage growth remains flat.  However, the shares look cheap on a valuation basis and pay a dividend yield of approximately 5.8%.  Greene King’s management would also point out that the dividend has increased for the last 64 years – an impressive record.  The recent share price movement may be an indication that sentiment towards the stock is changing and goes to show that for an out-of-favour stock, no bad news can sometimes be good news.