This edition of the Market Review considers whether markets will continue to climb a “wall of worry”.
This week I have been looking at the unfolding 2017 hurricane season and the effects that Harvey, Irma and Maria could have on the US economy and the broader insurance sector. These events have caused devastation across the Caribbean, Texas and Florida. The financial impact that they will have is difficult to judge this early on. However, total losses are expected to be between $80 and $125 billion. Over the short term there will be a negative impact to the US economy. US jobs data has already shown that the number of jobs created by the economy has contracted for the first time since 2010 and the hurricanes have been seen as a large contributor. However, economic activity is expected to return as insurance policies pay out, property is rebuilt and damaged items such as cars are replaced.
Closer to home the impact will be felt by Lloyd’s Insurers, the London based, global insurance market. They have estimated that Harvey and Irma will cause around $4.5bn in losses to their members. This is expected to lead to an underwriting loss for the year but CEO, Inga Beale, has stated that this is to be expected in such events and that “this is what we are here for”.
Natural disasters are both good and bad for those insurers covering this market. On one hand, they will suffer some large capital pay-outs in the short term. On the other hand, such events inevitably help push future premiums up. This is especially relevant at the moment given that the lack of disasters in recent years has driven premiums down to a level that has caused problems in the market.
I am once again looking at GlaxoSmithKline (GSK) following the announcement of its first set of results since the appointment of Emma Walmsley as Chief Executive. Ms Walmsley has been with GSK for seven years, having previously worked at L’Oreal in a variety of marketing and management roles. With Pharmaceuticals being the core of GSK’s business, it is unusual to have a CEO whose experience lies outside the core division – although the ability to review the division from a fresh perspective could well be advantageous.
The second quarter results were slightly ahead of consensus, giving Ms Walmsley a solid start to her tenure. Alongside the results she set out her key objectives for the first time, highlighting the need to prioritise improvement of the core Pharmaceutical division. In short, GSK needs to become better at developing and commercialising lucrative drugs. Despite launching high volumes of new drugs, the company has not seen many of these lead to huge sales. Indeed, GSK’s last “blockbuster” product release was the asthma treatment, Advair, which at its 2013 peak made up one-fifth of the group’s revenues.
Ms Walmsley therefore plans to strengthen the pipeline by a) increasing the amount spent on research & development, and b) channelling 80% of this spend on a narrower set of four therapy areas (Respiratory, HIV, Immuno-inflammatory and Oncology). She also plans to bring about a more dynamic/accountable commercial model to help the business make the most of its innovations.
With an enthusiastic, fresh CEO at the helm and a credible plan in place to increase productivity over the long term, GSK looks well set. However, it is fair to say that previous attempts to increase productivity and commercial success have not been entirely successful – and investors may therefore want to wait for some evidence of success before buying into Ms Walmsley’s vision.
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 Smith & Nephew, a leading UK-based global manufacturer of medical devices, following a transitional year bringing the business back to growth. The company operates across three specialist divisions: Reconstruction (hips and knees), Advanced Wound Management and Sports Medicine & Trauma.
The group has faced a number of setbacks in recent years, many of which stemmed from a flawed corporate structure of separately operated ‘silo’ divisions, which led to restricted innovation. This allowed competitors to catch up and take market share, although the company still enjoys a top 5 position across all the categories it operates in.
Management was then put in to question last year with the announcement that the CEO, Olivier Bouhon, had been diagnosed with cancer and would require treatment across much of the year. In addition to this, it was revealed that the CFO, Julie Brown, would be leaving to join Burberry after 3 ½ years with the company.
Despite these challenges, Smith & Nephew recently published positive full year results, demonstrating a return to growth and an encouraging outlook for the future, particularly within Sports Medicine. The internal restructuring of the business is now complete, which promises improved execution across the divisions and a stronger pipeline of new products. Olivier Bouhon (CEO) is now back at the helm and has recently announced the appointment of a new CFO, Graham Baker, who has 20 years’ experience at AstraZeneca and is expected to be a good addition to the board.
With a better structure in place and strong management team behind it, Smith & Nephew should now be well positioned to take advantage of an era where an ageing population and active younger generation mean health solutions are more essential than ever. Nevertheless, competition remains fierce and management will need to continue to drive innovation within key growth areas to keep ahead in this market.
This week I am looking into Hilton Food Group further to its recently published full year results for 2016. Hilton was established as a meat packing facility in Huntingdon in 1994. Since then it has grown to build processing and packing facilities and factories across Europe, with the business focusing on helping customers improve processes and become more efficient. More recently they have expanded further overseas through joint ventures with supermarket group Woolworths in Australia and food retail group Sonae in Portugal.
Following the results, which were above expectations thanks to strong volume growth in the UK, Ireland and Australia, I spoke with Robert Watson (CEO) and Nigel Majewski (CFO). The model for expanding into new territories is interesting. To develop the relationship with Sonae, Hilton initially sent a consultancy team to Portugal to review their current processes and systems. The consultancy period gave Hilton the opportunity to demonstrate their business case and as with the arrangement with Woolworths in Australia, Sonae went on to sign a full joint venture to redevelop its production facilities. While the core business is focussed on the processing and packing of meat, Hilton have been able to respond to their customers’ needs in wide range of fresh food preparation and packaging solutions, as shown with their fresh pizza range in Sweden.
Hilton now operates as a more diverse business geographically, with the ability to offer customers a more extensive range of solutions. Expanding too far from the core business could create some challenges, but management remain optimistic that Hilton will be able to steer through these challenges and remain in a strong market position.
This week I am looking at GlaxoSmithKline (GSK) following the appointment of a new Chief Executive, Emma Walmsley, on Monday 3 April. She takes over from Sir Andrew Whitty, who steps down after nearly 10 years in the role, and inherits a business that has recently diversified away from its core Pharmaceuticals division and towards its Consumer Health and Vaccine divisions (following an asset swap with Novartis). Nonetheless, Pharmaceuticals remains the largest division and the focus of this article.
The pharmaceuticals industry relies on heavy investment in research and development to create new treatments. This pipeline is essential as older products lose their patent protections and generic alternatives come into the market, driving down pricing. The development process is expensive, as a drug needs to go through a rigorous process to gain approval. The skill of the new Chief Executive will be to select at an early stage those drugs with a strong likelihood of gaining approval and thereby recouping the development costs and to avoid those that have a low possibility of succeeding.
The UK’s exit from the EU will throw up further uncertainties as the European Medicines Agency currently approves drugs across all 28 member states. It is possible that a new UK regulator could drive companies away from developing drugs in the UK, forcing them instead to focus on Europe.
The long-term prospects for pharmaceutical companies remains their ability to develop successful new drugs and to get those drugs through expensive clinical trials. GSK has a strong pipeline with a number of drugs expected to gain FDA approval this year. Ms Walmsley’s role as Chief Executive will be to guide the company through the aforementioned uncertainties and focus on the specific treatments and markets that will generate growth over the long term.