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Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.
We discuss the US Fed August meeting, and indications from Fed boss Jerome Powell that the administration was prepared to ride with higher inflation around 2%. The markets seems to translate as low interest rates for years to come…John gives his view.
John discusses the resilience of mining and commodity stocks in the face of the economic turmoil and Coronavirus threat, along with some of the trading calls from Atlantic over the past month.
Finally we look at some trading ideas and upcoming corporate news in September from Halfords #HFD, Meggitt #MGGT, JD Sports #JD, Travis Perkins #TPK, Tullow Oil #TLW and Costain #COST. Given the volatility in the markets, John advises using the Atlantic Alerts system – moving after the results not before. “If the tide goes out, make sure you’ve got some shorts on”.
by John Woolfitt, Atlantic Capital Markets
Rolls Royce has the tools to engineer a recovery.
Fundamentals & Statement Summary
Aero engineering giant Rolls-Royce (RR.) this morning unveiled interim results for H1 2020, and reported a significant H1 impact from COVID-19, adding that the timing and shape of industry recovery remains uncertain. The group reported a 24% fall in underlying revenues of £5.6bn, down 24%, and an operating loss of £1.7bn including one-off charges of £1.2bn in Civil Aerospace, largely related to COVID-19. The reported loss before tax of £5.4bn included a £2.6bn non-cash loss from the revaluation of the FX hedge book, reflecting lower forecast US$ receipts.
Rolls also reported good liquidity of £6.1bn comprising £4.2bn of cash at 30 June, and a £1.9bn undrawn revolving credit facility (RCF). A further £2bn undrawn term loan was also announced in July and finalised in August. The group ended H1 with net debt of £1.7bn excluding lease liabilities (FY 2019 net cash of £1.4bn).
The group reported successful actions to reduce costs, with £350m delivered in H1 towards a 2020 target of £1bn. These actions included a fundamental restructuring of Civil Aerospace, with a 4,000 group headcount reduction by 27 August, with further potential disposals expected to raise at least £2bn, including ITP Aero and other assets.
The Board decided that given the uncertain macro outlook they would no longer be recommending a final shareholder payment of 7.1 pence per share in respect of 2019, resulting in cash savings equivalent to £137m. For the same reasons, the Board has not approved an interim shareholder payment for 2020. A range of options to further strengthen the balance sheet are currently under review.
CEO Warren East commented: “We ended 2019 with good operational and financial momentum. However, the COVID-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world. We have responded rapidly to increase our liquidity, with £6.1bn at the end of H1 and a further £2.0bn term loan agreed in H2, to help weather the continued uncertainty around the timing and shape of the recovery in the civil aviation sector. We have made significant progress with our restructuring, which includes the largest reorganisation of our Civil Aerospace business in our history. This restructuring has caused us to take difficult decisions resulting in an unfortunate but necessary reduction in roles. These actions will significantly reduce our cost base, which combined with recovery in Power Systems and continued resilience in Defence, will help us to deliver significantly improved returns as the world recovers from the pandemic.
While our actions have helped to secure the Group’s immediate future, we recognise the material uncertainties resulting from COVID-19 and the need to rebuild our balance sheet for the longer term. We have identified a number of potential disposals that are expected to generate proceeds of more than £2bn, including ITP Aero and a number of other assets. Furthermore, in light of ongoing uncertainty in the civil aviation sector, we are continuing to assess additional options to strengthen our balance sheet to enable us to emerge from the pandemic well placed to capitalise on the long-term opportunities in all our markets.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
In line with aerospace industry stocks and the majority of FTSE100 constituents, RR shares fell sharply through February and into March, twice bouncing off a 250p then multi-year low. Despite recovering and punching back above the 50-day moving average in May, the stock succumbed again at the start of July, trading below the yellow MA envelope, even briefly dipping below 250p to set a new multi-year low at 212p before recovering in the run up to the results. The NVI (negative volume index (traded volume to determine trend strength or confirm a price movement) has improved since the end of June, and if RR can ‘climb back’ into the price range envelope after the results today, and in the process regain the 50-day moving average, then recovery of the falling 200-day MA is possible, although expect a retest of 212p multi-year lows before any sustained recovery.
Summary and Atlantic View
While it’s aerospace counterparts face something akin to a perfect storm, as a corporate entity Rolls Royce has many more strings to its proverbial bow. It is this multi-sector offering that will ultimately be the saviour of this iconic company, and while the group are rightly hailed as the world’s leading aero engine manufacturer, a solid cash / liquidity position has enabled Rolls Royce to pivot rapidly to meet the COVID challenge. A resilient ongoing defence business performance and a recovery in Power Systems provide Rolls with the time to decide on the best course of action to restructure and streamline the aerospace business, and with actions / disposals already underway in this regard, the catalysts will soon be in place to drive a recovery. The decision to suspend the dividend will no doubt see some investors look elsewhere, but despite COVID uncertainties, Atlantic believes Rolls Royce has the tools at its disposal to engineer a decent recovery in the share price by December 2020. We recommend buying the shares on the current weakness.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Reckitt Benckiser Gp RB. The first quarter got off to a slow start but improving growth is seen for the remainder of the year, particularly in the second half. Like for like full year net revenue target is expected to show growth of 3-4% compared to 1% in the first quarter. The health business was impacted by an unusually weak cold and flu season across US and several European markets. First quarter sales of over the counter health products showed a like for like decline of 9%. The good news is that March saw an increased incidence of cold and flu and coincidentally, of course, an increased share performance.
Paddy Power Betfair PPB updates that the first quarter to the 31st March was a good one with total revenue up by 17%, led by gaming with a rise of 26%.Online revenue performance at Sports was affected by unfavourable results in both the UK and Ireland. Australia is described as having had a very strong quarter, whilst from the US huge progress is reported.
Smith & Nephew plc SN has made a good start to 2019 across the whole of the company. Underlying revenue growth for the full year is expected to be in the upper half of the guidance range of 2.5% to 3.5%.Mid-teens growth from the Emerging Markets, A strong quarter in China was accompanied by Mid-teens growth from Emerging Markets. First quarter revenue of $1,202 million saw growth 4.4% and all three global franchises accelerated, with growth ahead of 2018.
Rolls Royce Holdings plc RR updates for its AGM that it has continued to make progress with its restructuring programme. The market environment is healthy, with strong order intake at Power Systems, good flying hour growth in Civil Aerospace and positive order momentum in Defence. Costs are being brought down and engineering efficiency is being improved
Fisher (James) FSJ reports for its AGM that its first quarter financial performance at its Tankships and Offshore Oil divisions in the first quarter. is well ahead of last year. The pipeline of opportunities in its Specialist Technical remains strong. With a good start to 2019 the outlook for the year remains positive and the company is well placed for further growth.
Rolls Royce Holdings RR 2017 was a year of strong recovery, with financial result ahead of expectations. Underlying organic revenue for the year to the 31st December rose by 6%, profit before tax by 25% and earnings per share by 27%. The results were however impacted by the challenge and cost of managing what it describes as significant in service engine issues which are likely to continue for several years. 2018 is expected to be a year of significant operational progress despite the fact that it will take a few years to implement solutions for customers, to the engine problems which Rolls is currently experiencing and the costs of which are and will continue to be, significant.
Legal & General LGEN continued to perform strongly in 2017 with operating profit rising to a record £2.1bn. Profit before tax was up by 32% and profit after tax by 50%. Growth in earnings per share is described as terrific and the full year dividend is to be increased by 7% to 15.3p. per share.Confidence is expressed of further growth in 2018 and beyond.
Paddy Power Betfair PPB produced good growth in 2017 with a final dividend of 135p. per share promised, making a total rise of 21% for the year. Preliminary results for the year to 31st December show a rise in underlying revenue of 13%, EBITDA up by 18%, earnings per share by 20% and operating profit by 19%. The Chief Executive describes it as as an exceptional business with market leading positions in key online and retail markets which will continue to generate shareholder returns in the long term.
Page Group PAGE 2017 was a year of many records with 22 counties producing record performances. Revenue at constant exchange rates rose by 9.8% for the year to 31st December and the final dividend is to be increased by a modest 4.3% to 12.5p per share on top of the special dividend of 12.73p. announced in October.
Taylor Wimpey TW is increasing its special dividend from last years 9.2p per share to 10.4p payable in July 2018 after profit before tax for the half year to 2nd July fell by 23.7% and basic earnings per share by 22.7%. The company claims that trading has been very positive with good consumer confidence, especially in central London.Homes completed during the half year rose by 9.3% and the average selling price was increased by 6.3% to £253,000. The target is for £1.3bn to be returned to shareholders as dividends over the period 2016-18. Revenue over the half year rose by 18.5%. For the first time for many years mention is made of the fact that the housebuilding industry is subject to a cycle.
Rolls Royce RR received a higher than expected benefit during the six months to the 30th June from accounting adjustments to long term contracts. These helped to transform last years thumping half time reported loss of £2.15m. into a reported profit of £ 1.941m. On an underlying basis profit before tax rose by 148% and earnings per share by 167%.
BP plc. BP can at last see light at the end of the tunnel with second quarter underlying replacement cost profit of £0.7bn after a rise in upstream production of 10% to make a total of 6% for the half year. Last years first half loss of $2002m has this year been turned into a profit of $1,593m. The first half performance is described as solid with a strong operating performance and strong cash flow. The dividend remains unchanged.. More relief will appear in the second half which will see a decline in payments relating to the Gulf of Mexico .
4imprint Group FOUR continues to prosper with revenue rising by 11% in the six months to 1st July, profit before tax up by 41%, basic earnings per share by 39% and the interim dividend being increased by 11%.
Elementis plc ELM The half year to 30th June proved to be a positive period as the company focused on its growth strategy. Sales rose by 24%, profit before tax by 17% and basic earnings per share by 15%. The interim dividend remains unchanged.
Brand CEO Alan Green talks Valentines Day, markets, Tlou Energy (TLOU) and Rolls Royce (RR.) on TipTV
Brand CEO Alan Green talks Valentines Day, markets, Tlou Energy (TLOU) and Rolls Royce (RR.) with Zak Mir and Matt Brown on TipTV.
Pendragon PDG claims it made significant progress during the year to 31st December despite a patchy performance in some areas. Used vehicle revenue over 5 years grew by 64% at an annual compound rate of 10.4%. In 2016 the rate came in at only 5.6% whilst like for like after sales revenue rose by 7.3% but total new vehicle revenue actually fell by 1.4%. Underlying profit before tax rose by 7.6% but total profit before tax fell by the same amount.
Mucklow (A&J) Group MKLW makes no comment at all on its half time figures for the 6 months to 31st December. Perhaps it prefers to let the figures speak for themselves, which they certainly do. Statutory pre tax profit slumped from £14.4m to £9.1m and basic earnings per share were down from 22.72p to 14.39p. The interim dividend is increased a smidgeon from 9.59p to 9.88p
Electric Word ELE is another company which sought transformation and it claims that by the year end it had succeeded, turning a loss of £2.3m in 2015 to a profit of £9.2m for 2016, including a £10.7m profit from discontinued operations. Like for like revenue rose 16% but continuing operations still doubled its losses over the year, which it ended with a cash pile of nearly £13m.
Morrisons MRW brings good news for the consumer if not for itself, with price deflation in the quarter to 1st May reaching 2.6% and expected to continue. Compared to quarter 1 2015 Morrisons has done well. Like for like sales this year were up by 0.7% or 1.2% including fuel compared to last years falls of 2.9% and 6.6% respectively, although this years like for like figures have been helped by store and convenience shop closures. What is not a good sign is that items per basket fell by 2.8%.
Rolls Royce RR expects first half results to to be close to breakeven but does not enlighten us as to whether that will be positive or negative. Better things however, are promised for the second half.
Smith & Nephew SN has had a mixed first quarter, with Established Markets growing by 6%, led by by its largest market, the US with 8%. Emerging markets on the other hand fell by 6%. Weakness was felt in China and in the Gulf states there was a significant slow down. Sports joint repairs were up by 11% and knee implants proved as popular as ever, as the medical profession throughout mainland Europe continued happily on the gravy train of advising its unwitting patients to undergo unnecessary knee replacement surgery. Latest figures show that half of such operations in the US are completely unnecessary and are of benefit only to the medical profession.
IMI plc IMI expects first half revenue to decline at the same rate as in 2015 with a pick up promised for the second half. Revenue for the quarter to 31st March fell by 4% despite the favourable impact of exchange rate movements. In Critical Engineering Markets were challenging during the quarter and orders from some customers were delayed.. Precision Engineering did even worse with a fall of 7% but Hydronic Engineering prospered by comparison with good revenue growth, due to new products having a notable impact.
2015 was all change year for Rolls Royce (RR.) Management, market conditions and the near term outlook all changed as the company set about trying to transform itself but the biggest transformation of all is to the final dividend which is today slashed by half. And that is not the end of the transformation. Rolls promises that the next interim dividend will also be transformed in similar fashion.
Shareholders have had a raw deal from the (mis)management of the company. Two years ago in January 2014 the shares stood at an all time high of 1275p since when they have been in virtually continuous decline until last nights close at 530p. So not only have shareholders lost half of their income, they had over the past two years also lost 60% of their capital.
In fact so dire were the expectations as to how badly Rolls had performed in 2015, that todays results, disastrous as they are, have come as something of a relief and the shares jumped this morning by over 10% to 590p.
How well or how badly Rolls has performed depends on whether you like your results fried or boiled, or in more technical terms, reported or underlying. Reported profit before tax is up by 140%. On an underlying basis it is down12%. Earnings per share are similarly , either up by 215% or down by 10%. Perfectly sensible contradictions for the number crunchers.
The order book has grown by 4%, due mainly to strong market share growth in Civil Aerospace and that just about brings the good news to an end except for something called the quality of its mission critical technology, whatever that is supposed to mean. The trading outlook for 2016 is unchanged.
Fear not however, for the company is to be transformed, (just like Hornby, another collapsing British icon) and here Rolls unwittingly provides a list of its failings (ie. the things which need transforming by the new transformation team)
Pace and simplicity are to be added, presumably to replace existing slowness and confusion. Annual cost reductions of £ 150m to £200m are to be made, without any explanation as to why management allowed costs to get so out of hand. Senior management has been reduced by 20%, again without any explanation as to why such costly overstaffing was permitted in the first place. A return is needed to profitable growth, clearly implying that previous growth has been loss making.
Even worse, although market conditions are now steady, Rolls admits that 2016 will still be a challenging year.
Meanwhile sterling continues to tumble. And one wonders why.