Dairy Crest's Cathedral City cheddar takes a year to mature, meaning blocks sitting in supermarket chillers were made using milk bought at lower prices © Bloomberg
Buy: Dairy Crest (DCG)
Analysts welcomed Dairy Crest’s pension agreement, with Numis increasing the target price to 655p from 630p. Peel Hunt, however, reduced earnings per share forecasts on account of a sharp rise in the price of cream, writes Tom Dines.
Dairy Crest announced this week it had reached an agreement with the trustee board of its pension fund to change the scheme’s built-in increases to follow the consumer prices index, rather than the retail prices index. As a result, it has reduced cash contributions to the scheme by £12m over the next two years. The accounting, or IAS19 deficit — which appears in the financial statements — has improved by £125m, which will be reported as a gain in the results for the year to March 2018.
The company will now pay £10m in 2017-18 and £15m in 2018-19, followed by £20m annually until March 2022. Management believes these contributions combined with gradual de-risking will lead the scheme to be self-funded from then on.
The group has long sought solutions to shore up its pension fund. In April 2013 it revealed that a mountain of cheddar worth £150m would be used to back up its pension fund, as it pledged the dairy stock to the retirement fund’s trustees.
The move from RPI to CPI-linked pensions has been a popular move by employers with big future pensions bills, but generally means pensioners get less. Analysis conducted in February by investment group Hargreaves Lansdown suggested that for every £1,000 in pension income in 1988, under RPI it had increased to £2,586 this year, but only £2,105 under CPI.
Hold: Capita (CPI)
Analysts at Peel Hunt are forecasting a decline in adjusted pre-tax profit for Capita in 2017, falling to £421.9m, below the consensus of £438.9m, writes Tom Dines.
Shares in outsourcer Capita fell sharply this week following the release of restated results, outlining the group’s performance according to the IFRS 15 accounting standard, which it will soon adopt. The differences are stark. Under the new rules, underlying revenue for the 2016 full year would be 5 per cent lower, operating profit would be 30 per cent lower and the company moves to having net liabilities of £553m, from net assets of £483m before.
IFRS 15 pertains to revenue recognition from contracts with customers. In Capita’s case this means revenue and profit is likely to be recognised later along the life of a contract, with lower profits or even losses in earlier years.
The standard becomes mandatory from January 1 2018, but some companies are opting to adopt it earlier. This is typically an attempt to make comparisons against past performance easier for investors when the new standard comes in.
Recently, energy services group Utilitywise announced it would be adopting the rule early. The group said this would likely leave it in a negative retained earnings position and miss revenue expectations by £4m to £4.5m for the year to July 2017. As a result, it scrapped the final dividend for the year, sending the shares down considerably on the day.
It is reasonable to expect more announcements like this as the implementation of the rule comes closer. Analysts at Liberum issued a note earlier this week warning that a wide range of industries would be susceptible, including aerospace and defence, construction, software, support services and telecoms. The companies most at risk will be those with the highest ratio of long-term receivables to revenue.
Sell: Safestyle (SFE)
Businesses with exposure to customers incentivised by credit options — motor retailers included — are all struggling. And it is difficult to see where general retailers will find renewed momentum, writes Harriet Russell.
Things are not getting better for window and door specialist Safestyle. The company said margins, and thus profits, would suffer significantly following a continued deterioration in market conditions. But what does this actually mean?
Fensa — the government body that tracks the market for the replacement windows, doors, roof windows and roof lights in England and Wales — said unit installations had fallen 18 per cent during the months of July and August. This follows statistics for the five-month period to the end of May 2017, which showed a market decline in volume terms in excess of 10 per cent.
Initially, at its first profit warning in July, Safestyle said its order intake had continued to grow at about 2 per cent, despite the wider market contraction, but in this second warning it appears that has changed. Now, orders are declining beyond the board’s expectations.
This throws up a couple of interesting points. At first, this seemed to be a volume issue rather than a value issue: if market volumes were falling but Safestyle’s orders were growing, that suggests its inflation-driven price increases were not totally deterring customers. And the availability of credit plans meant Safestyle’s customers could still stomach the instalment payments calculated by third-party financiers. So what has changed? Perhaps those price increases are beginning to bite as household budgets start to feel the squeeze between inflation and wage stagnation. Or maybe consumers are less likely to take on debt for discretionary items, preferring to delve into more long term products such as mortgages while rates are low. The probability is that both of these things are true.
In order to drum up new customer leads, Safestyle has also ploughed money into marketing — not to mention paying subsidies to its credit-providing financiers — meaning margins are bearing the full brunt of this slowdown.
What does this say about the wider Repair, maintenance and improvement market? According to Matthew McEachran, an analyst at N+1 Singer, this end of the housing market should be in what the industry calls “second phase replacement”. That’s a good place to be: it means people who bought homes 20 or so years ago should be contemplating home improvements and explains why the Construction Products Association (CPA) and the Office for National Statistics (ONS) expected the private RMI market to grow in 2017. It’s what makes Safestyle’s performance “even more shocking” in Mr McEachran’s words.
But analysts at Peel Hunt argue that growth in new construction has been stronger than RMI since 2013 and this trend is expected to continue over the next couple of years, while Mr McEachran argues that RMI is driven by one, rather unquantifiable variable – consumer confidence. This, says Mr McEachran, has “taken a beating” in 2017.
Stock screen: Momentum rocked by miners
The volatility of the FTSE 100’s large metals stocks — a particular feature of London’s blue-chip index — has been the dominant theme within our quarterly momentum stock screen in recent months, writes Alex Newman.
Of the 10 shorts selected by the screen in March, three were large diversified miners. Their resurgence alone was the sole reason why the wider group of shorts failed to decline, and instead comfortably outperformed the index benchmark by 3.5 per cent. Without the inclusion of Anglo, BHP and Glencore, the seven other shorts delivered a negative total return of 8.4 per cent, precisely as momentum investing would suggest. Indeed, so strong was the trio’s quarterly performance, that all three stocks have made it on to the resource-dominated selection of 10 longs for the three months to December 2017.
The point of this screen is to pass the job of stock selection over to a broad investing principle; namely, to run your winners and short your losers. But the curiously persistent feature of this screen is that the shorts have actually been performing very well. Over the past year, they have beaten not only the index, but the long picks, and by a handsome margin.
A quick note on the screen’s criteria. The 10 momentum longs are based on the 10 best-performing FTSE 100 shares of the previous three months, while the shorts are based on the worst-performing 10.
The longs this time around are: Anglo American, Worldpay, Antofagasta, Glencore, BHP Billiton, Intertek, Rio Tinto, Tui, Coca-Cola, Randgold Resources.
The shorts are: Provident Financial, Pearson, WPP, Paddy Power Betfair, easyJet, Royal Mail, ConvaTec, InterContinental Hotels, G4S and Admiral.
Among the longs, Anglo American has carried a higher beta than its large diversified peers. Higher costs, lower-quality assets, and a choppy record of project execution, have all combined with a larger debt profile to move the group sharply in one of two directions. Add to this, a high exposure to South Africa, where the spectre of high inflation and punitive legislative shifts continually looms, and you have the recipe for a volatile stock. Increasingly, however, sentiment seems to be returning to the group. Half-year results showed a 27 per cent drop in net debt to $6.2bn, an impressive $800m ahead of the year-end target. With lower interest payments, Anglo’s assets have less work to do. But productivity improvements mean they are doing more regardless, which is particularly helpful considering prices for core commodities such as coal, diamonds and iron ore are looking better than in 2016. Throw in a return to the dividend list, and momentum could be further buoyed by income-seekers.
Payments processor Worldpay has had an excellent run since it floated in 2015. Soon, its strong position in the world of e-commerce will be subsumed within a larger machine. In July, management accepted a £9.3bn takeover bid from US rival Vantiv, in an approach billed as an attempt to build “a leading global omni-commerce payments provider”. The deal, which is expected to complete “in early 2018”, will reward Worldpay’s shareholders with 55p in cash plus shares in the acquirer. That structure means any improvement in the US counterpart’s organic earnings forecasts — or a further fall in sterling against the dollar — could add a small boost to Worldpay’s shares.
One of the lead indicators for this quarter’s stock screen will be copper. The price of the red metal has surged by around a fifth in the last three months, putting Chilean mining company Antofagasta — the closest thing to a blue-chip pure play on the metal — comfortably among the FTSE 100’s top performers. A fall in the company’s tax rate and costs, as revealed in last month’s half-year numbers, provide encouragement that other forces are moving for the group too.
However, it is copper on which Antofagasta’s shares are most reliant. That could be a worry, because there are signs the price rally is not entirely correlated to industry fundamentals. China, which consumes around half the world’s copper supply, has been importing a similar level of the metal over the past four months, while the year-to-date increase is only up by around 1.2 per cent. Antofagasta may then be more reliant on speculative ‘long’ positions by commodities traders, who think a supply deficit could emerge by the end of the decade.
The relative strength of copper could also partially dictate the performance of Glencore, BHP Billiton and Rio Tinto in the three months ahead. All three miners have exposure to the metal and are considering copper additions to their asset bases. The balance of their performance will largely be determined by the weighting in each portfolio; zinc for Glencore, iron ore for Rio, and oil for BHP. In each case, any further increase in Chinese demand for coking coal should support momentum. That should spell out the varying degrees to which London’s largest miners can replace swap debt reduction and interest payments for selective project sanctions and shareholder returns. Any near-term signal from BHP that it has found a buyer for its US onshore business could provide another fillip to the shares.
Investors seized on two features when quality assurance and testing specialist Intertek posted its half-year accounts in August. The first was a big hike in the dividend. The second was an encouraging 110 basis point increase in the operating margin to 16.4 per cent at constant currencies — suggesting the 5x5 growth strategy announced last year is starting to bear fruit.
Alex Newman is an reporter for Investors Chronicle
The Financial Times and its journalism, including Investors Chronicle content, are subject to a self-regulation regime under the FT Editorial Code of Practice: FT.com/editorialcode
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