Tag Archives: stock exchange

Stocks in Focus: Aberforth Smaller Companies Trust Plc

This week I am looking at Aberforth Smaller Companies, a UK-focused investment trust that invests predominantly in smaller quoted companies. The fund is run by a team of six experienced investment managers, including Alistair Whyte and Richard Newbury, who have both been with Aberforth since the fund was launched in 1990.

Each manager specialises in a group of sectors, and picks stocks based on the Trust’s value style of investing. This approach focuses on companies that are undervalued and often out of favour with investors, offering the opportunity for greater returns when the company returns to favour.

As a company grows and transitions from a value stock to a growth one, the managers take profits in order to reinvest in other value opportunities, starting the process again. Following this process, the levels of turnover seen recently have been higher than usual (22%) due to the disparity of valuations between stocks and the increased volatility the market has seen since the beginning of the year.

The management style has remained consistent and this strategy has proven successful over the long term, achieving annualised returns of over 13% since it launched. Reassuringly, the fund has maintained this strong performance over the last 12 months, gaining 10% in Net Asset Value (NAV) against 7% for its benchmark.

Over the last few years, some company valuations have become somewhat stretched despite market uncertainties spanning the UK and US.  In addition, there has been a significant amount of corporate activity as companies look to grow through acquisition rather than purely organic means. These factors make it increasingly difficult to identify undervalued smaller companies with reasonable prospects and it is common for investors to use a collective fund such as Aberforth Smaller Companies for exposure to this part of the market.

https://www.nwbrown.co.uk/news/company-report-library/

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Stocks in Focus: Rolls-Royce

This week I am looking at 112-year-old British company, Rolls-Royce, and its biggest transformation plan in nearly 20 years. During a capital markets event last week, chief executive, Warren East, stated that an overcomplicated way of working was holding the engineering giant back. A six-month long evaluation revealed unnecessary complexities in processes and a lack of accountability and cost awareness throughout the business. As a result, Mr East has announced that he will be implementing some further restructuring in the business as part of the ongoing changes.

Earlier this year, the CEO announced plans to consolidate the company into three focused business units – Civil Aerospace, Defence and Power Systems, as opposed to the current five business unit structure. This is designed to remove management duplication between the three new units, with each having a greater degree of autonomy to allow them to work faster. The announcement made last week will involve cutting 4,600 back office and middle-management jobs over the next two years to make the business simpler and more efficient. All of the redundancies will involve non-manufacturing staff, with roughly two-thirds affecting the UK headquarters in Derby. The company currently needs production staff to help it deliver a sizeable order book of new aero engines. This shake-up is aimed at saving £400m a year by 2020 and generating about £1.9bn in free cash flow over the next five years.

It has been a tough couple of years for Rolls-Royce after five profit warnings, dividend cuts and a dividend freeze. The new plan sounds promising and brings a breath of fresh air. Investors welcomed the transformation plan and sent the shares soaring to a six-month high. However, the business will need to start delivering against its targets on operational improvements, cost reductions and cash generation before it can convince the market that it is on a sustainable path to recovery.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: J Sainsbury Plc

This week I am looking at Sainsbury’s which recently agreed terms with Walmart to merge with its subsidiary Asda.  The proposal pleased investors, with Sainsbury’s shares soaring by 15 per cent following the announcement.  However, the deal still needs approval from shareholders and the UK Competition and Markets Authority, and there have been initial concerns over the affect that the merger could have on jobs, competition, suppliers and prices.

The merger is expected to cost Sainsbury’s £2.7bn in cash, and Walmart will hold 42% of the new combined business. The combination of Sainsbury’s and Asda will result in them becoming the biggest supermarket group in the UK, taking control of over 31% of the grocery market and overtaking Tesco as market leader, which currently has a 28% market share.  The merger will give the group more than 2,800 stores and management claim to have no plans to close any stores as a result of the agreement.

The combined group will be led by Mike Coupe, Chief Executive of Sainsbury’s, who predicts that the merger will save £500m through synergies, a saving that is expected to be passed on to consumers. With promises of reduced prices and improved quality, the combined supermarket will be in a better position to compete with the aggressive drive that we have seen in recent years from the Limited Assortment Discounters (LADs), Aldi and Lidl.  However, if the LADs react aggressively to price cuts, it could result in even more pressure for the supermarket group, who have steadily been losing market share to the LADs.

If approved, the merger is unlikely to complete until late 2019, so it will be some time before we see if management are able to deliver on their short term promises and what the long term consequences of the merger might be for staff, consumers and investors.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/