Tag Archives: market volatility

Sector in Focus: The Energy Sector Price Cap

This week I am looking at the proposal by the energy regulator, Ofgem, to cap energy bills at £1,136 per year. The cap is based on a typical dual fuel customer (i.e. electricity and gas) paying by direct debit and is aimed at forcing energy companies to remove excess charges for people on poor value default deals known as standard variable tariffs (SVTs). Another reason for the cap is to encourage energy providers to actively engage with customers and offer the option to switch to a new fixed price bundle when their current fixed tariff contract ends.

Prices for bundles on SVTs fluctuate with wholesale energy prices. As such, customers can experience large variations in their bills and can end up paying far more in the future if energy prices rise steeply. Gas and electricity suppliers will have to cut their prices to the level of or below the cap when the price cap is introduced in early 2019. 11 million households on SVTs in England, Scotland and Wales are expected to be £75 better off on average per year after the cap is introduced. Consumer groups have welcomed the news but energy providers argue that competition in the market best serves the long-term interest of customers, not caps. They argue that capped prices will reduce competition in the industry, reduce choice for customers and potentially impact customer service. The cost to companies may also dampen innovation in the sector.

Centrica, the parent company of British Gas, will be one of the least affected by the cap. The company’s management stated that Ofgem had taken a balanced approach and this should reassure the market over Centrica’s dividend, earnings and credit rating going forward. The cap will only be temporary and will be in place until 2023 at the latest.




Stocks in Focus: Melrose

Earlier this year, Melrose acquired the much larger British manufacturing firm, GKN, in a controversial £8bn takeover. Some commentators described the hostile takeover as opportunistic, suggesting the deal materially undervalued GKN’s assets at a time when the management team were struggling to improve margins and encumbered by a glaring pension deficit. On the other hand, Melrose is renowned for buying struggling companies and turning them around before selling them on for a profit.

This buy-improve-sell strategy does not always sit well with long term investors. However, there is no denying that the Melrose management team have a good track record, having delivered total shareholder returns of around 3000 percent since listing in 2003. Critics of Melrose’s strategy argue that these returns have been delivered by improving margins rather than growing earnings. In turn, this margin improvement is often partly achieved via controversial measures such as cutting the workforce, which could generate significant backlash within GKN. Having said this, Melrose has promised to continue investment into the company at 2.2 percent of revenue per year, which will abate some concerns.

Melrose announced interim results on Thursday 6th September, which included 73 days of ownership of GKN and substantial costs involved in the transaction. The board was happy with progress and investors reacted positively to the news, reassured that Melrose had not found any cause for concern in the subsequent review since owning GKN’s assets. Looking forward, investors will be anticipating the first evidence that Melrose is starting to deliver the margin improvements that it has targeted for GKN’s assets.


Stocks in Focus: Vodafone

This week I am looking at Vodafone following the announcement that the Australian division (Vodafone-Hutchison Australia) will be merging with the broadband operator TPG Telecom to create a new £8.4bn company. The merger is expected to generate substantial cost savings and revenue synergies through cross-selling products across their corporate and consumer customer base.

Following several years of tough competition, management have focused on streamlining the business, improving customer service and growing the company’s global presence through a series of joint ventures, mergers and acquisitions. In order to achieve this, they have invested in three main projects: Project Spring, which completed in 2016 and targeted the modernisation of Vodafone’s infrastructure; Fit for Growth – a cost efficiency program designed to improve margins; and a third project aimed at improving customer service and experience.

Despite the seemingly good news, the company remains out-of-favour with investors. One concern is the sustainability of the dividend, which currently offers a yield of around 8%. The company has so far upheld its dividend, with management resorting to paying it entirely out of debt during the cost-saving initiatives in 2016. Since then, dividend cover has been recovering steadily and is expected to improve further as the projects complete and start delivering results.

The company also recently announced that the current CEO, Vittorio Calao, will be departing later this year.  Investors should be reassured that his replacement, Nick Read, has been with Vodafone for 17 years and has significant experience. However, there are the usual concerns that the new CEO’s priorities may differ from that of his predecessor.

Nonetheless, Vodafone continues to hold its position as the second biggest mobile operator in the world with an increasing presence across mobile and cable. With that in mind and with a new CEO taking over shortly, investors will be keen to see their concerns about leadership succession and dividend cover alleviated.


Stocks in Focus: CLS Holdings

This week I am writing on CLS Holdings, a FTSE 250 property company with a portfolio worth approximately £1.9bn.  CLS has a large historic family holding, with the Sten and Karin Morstedt Family and Charity Trust owning 51% of the company. It published its first half results on 15 August 2018.

CLS Holdings owns and manages property in the UK, Germany and France.  It is primarily (over 90%) office space and focusses on good non-prime locations close to major transport links.  They rent the properties to reliable tenants, with 28% of rents paid by governments and a further 28% by major corporations. A large proportion of these rents are index linked, so increase in line with inflation.

The first half results were broadly positive.  The value of CLS’s underlying properties increased by 3%, mainly driven by a 4.6% increase to their German property portfolio.  The company’s earnings increased by 15% and management announced an increase to the interim dividend of 7%.  CLS also redeemed a retail bond early at the end of July and thereby reduce its cost of debt.

Property companies have a number of dynamics to consider when deciding to invest.  They tend to have a higher amount of borrowing (as people understand with their own mortgages) so the cost and level of debt are important.  CLS maintain that the rental yield they receive is greater than their cost of borrowing and so the difference, or arbitrage, is a primary driver of returns.



The share price of a property company can deviate from the underlying value of the property assets held by that company.  This can give rise to a discount or premium, which gives an indication of how expensive the shares are.  Currently the shares of CLS trade on a 25% discount with a 2.7% yield.  This seems reasonable value considering the company’s proven track record of managing a diversified portfolio of assets.

Stocks in Focus: Centrica

This week I am looking at Centrica, owner of Britain’s biggest energy supplier British Gas, following its recent half year results.  The company saw its underlying earnings increase by 3% for the six months to 30th June, but the results were still disappointing for investors, with underlying operating profits falling by 4% to £782m.

Much of the fall in profits came from its consumer business that owns British Gas, with the biggest fall coming from the UK Home division. The “Beast from the East” cold weather snap resulted in increased energy consumption in the first quarter of 2018, but with it came an additional £15m in call-out costs. The company also announced a 5.5% price rise in April this year due to rising wholesale gas and electricity prices. Despite an initial fall in the share price following the results, the share price has slowly risen this year, suggesting that investor sentiment may be improving.

Centrica and its peers are also bracing themselves for the forthcoming price cap on Standard Variable Tariffs (SVT), which is expected to come into force later this year. The group has been working hard to reduce the number of customers on Standard Variable Tariffs, withdrawing SVT contracts from new business, and reducing the number of customers on SVTs from 4.3 million to 3.5 million this year.  Last week, management announced that the SVT would be increasing by 3.8% from October, a decision that may have been made to encourage customers onto fixed-term deals, and to help limit the financial impact when Ofgem implements the price cap. The regulator is expected to announce the composition of the tariff later this month, but the precise level will not be known until October.


Stocks in Focus: Diageo

This week I’m looking at Diageo, the world’s largest spirits company, following its recent preliminary results for the year ending 30 June 2018.

The results were better than expected following an increase in revenues and profits, despite growth being partially offset by adverse moves in currency exchange rates.  The company reported net sales of £12.2bn, an increase of 5%, slightly ahead of the 4.3% that had been forecast by management.

The company’s largest gin brands have been especially successful in the last year, with Tanqueray gin performing well and the launch of Gordon’s pink gin providing a boost. Sales of gin have been helped significantly by a gin boom in Western Europe, as well as increasing popularity of colourful drinks and cocktails among millennials. The 14% increase of gin sales was only outperformed by tequila, which saw sales soar by 56%, with much of the growth coming from the US and Mexico. Due to the success of tequila in recent years, the company has continued to expand its portfolio via the $1bn acquisition of George Clooney’s premium tequila brand ‘Casamigos’. Vodka was the only category to decline in the last year, with Smirnoff sales down 2%.

Although sales growth has been positive, management have forecast headwinds for the new financial year. Potential issues include exchanges rates, which management expect will reduce full year sales by up to £70m and operating profit by £10m. There is also the potential for higher interest rates, which would increase the cost of borrowing, and an increase in tax rate is also expected.

Despite the concerns, the board announced an additional share buyback programme of up to £2bn as a result of the strong cash flow figures. Having already returned £1.5bn to its shareholders over the last year, this move should reassure shareholders about the future prospects for the group.

Stocks in Focus: Reckitt Benckiser

This week I am looking at Reckitt Benckiser after it reported better-than-expected figures last week, helped by good performance in its consumer healthcare division. Profits for the first half of 2018 rose by 9% compared to the same period in 2017. Overall, management estimates that revenue growth will now be in the order of 14-15% this year, up from its previous 13-14% guidance.

A major contributor to the numbers was strong sales of infant nutrition products in China after the company expanded into baby formula last year with a $16.6 billion takeover of Mead Johnson. The acquisition increased sales by double digits in China as the country experienced high birth rates following the end of its one-child policy in 2016. However, growth for the region is expected to normalise as birth rates in China stabilise.

The group restructured into two standalone lines of business earlier this year. One division focusses on Reckitt’s better-performing consumer healthcare brands and the other on household consumer goods such as detergents and cleaning products. In the consumer goods industry, prices are being pushed down by a combination of Amazon’s rising prowess in selling household staples, a decline in brand loyalty as consumers shop around online, and the growing popularity of discount retailers. Consequently, Reckitt has joined rivals in warning that this very competitive retail marketplace is affecting profitability.

Broadly, the interim update brings a breath of fresh air to the group after a series of tough quarters that included a cyberattack and a failed product launch in the Scholl foot-care line. Reckitt now looks to be recovering its poise as synergies from the Mead Johnson acquisition start to materialise and earnings growth starts to improve. CEO, Rakesh Kapoor, stated that they are not on top of everything yet but are well on track.