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WPP plc WPP a company with the spectre of its founder still lurking in the background is never a happy place to be. Naturally Sir Martin does not get a mention in WPP’s third quarter results but the way in which the company’s business has been impacted in many fields after his sudden departure, does get a mention and repeatedly so. The finger points in only one direction, Third quarter like for like revenue less pass through costs fell by 5.3% compared to 3.3% in the second quarter, as client losses continued to grow. Having seen second quarter growth of 1.4% in the UK, quarter three produced a fall of 2%. Most sectors were impacted by client losses as major global companies continued to desert in increasing numbers.
Strong regional differences made for a patchy performance with Australia and New Zealand doing well. A similar story appeared in company sectors with a strong deterioration in advertising and media management, once the heartland of the WPP empire.One suspects that it will take some time for the spectre to be exorcised.
Aveva Group plc AVV updates that it continued to perform well during the first half of its financial year. and delivered low double digit revenue growth on a constant currency basis. A number of contracts were brought forward into the first half.
Elementis plc ELM delivered a resilient overall third quarter performance, although the CEO is less expressive and prefers to be more down beat by describing it as “solid”. Nonethless even he admits they are excited as the integration of their latest acquisition, Mondo Minerals, commences.
Eckoh plc ECK has seen strong progress in both UK and US orders in the half year to the end of September. In the US it has already exceeded in in the first half the total contract value of $9.3m for US Secure Payments it achieved in in the whole of 2018. In the UK, it has seen excellent progress in contract wins and as in the US, the total value of new contracts won in in the first half has exceeded the total won in 2018.
1PM plc OPM updates prior to today’s AGM that in the first four months of the current year it has experienced a continuing robust level of demand. The strong trading has continued into October.
Redrow plc RDW has delivered another year of strong growth, record results and an excellent trading performance, with the number of new houses sold during the year rising by 9%. and the full year dividend hiked by a massive 65%. The average selling price was hiked by 7% during the year which some cynics may argue is way way above the general rate of inflation. but in the housebuilding industry with its friends in government, who cares. Group revenue rose by 16% to a record £1.92bn. Profit before tax also hit a new record with a 21% rise to £380m and earnings per share were up by 22%.
WPP plc WPP The new Chief Execuive, Mike Read, goes on the attack with an opening statement announcing the interim results and stressing that the second quarter of 2018 was WPP’s first quarter of like-for-like growth since Q1 2017.and that it has performed strongly in terms of winning and retaining business over the half year.Profit before tax rose by 8.5% or 14.2% on a constant currency basis and profit after tax by 11.3% or 16.8% . Billings on a constant currency basis rose by 4.1% and revenue by 2.9%. The interim dividend remains unchanged. at 22.7p per share.
DS Smith plc SMDS continues to be excited by its prospects and has enjoyed good like for like volume growth in all geographical sectors, in the quarter since the 1sr May. In particular the north America paper and packaging division, has performed very strongly.
Halfords Group plc HFD updates for the first 20 weeks of the current year that the trading environment remained challenging. Revenue rose by 3.9%, car maintenance leading the way with a rise of 4.5%. Guidance for the year remains unchanged.
WPP plc WPP “Not a pretty year” says Sir Martin Sorrell about his companies performance in 2017.Top line growth was flat and operating margins and profits were either flat or only marginally up. To add to the gloom, 2018 has had a slow start which managed to be above budget but in January like for like revenue was flat.On a like for like basis 2017 billings were down by 5.4% or 3.9% at constant exchange rates, although revenue at constant exchange rates did show a rise of 1.6% but on a like for like basis it fell by 0.3% On a happier note profit before tax rose by 11.6% (7.7% constant currency) and the dividend is to be increased by 6%.
Rentokil RTO had a good year in 2017 and its strong performance exceeded its medium term financial targets. After a rise of 13.8% in adjusted profit before tax the final dividend is to be increased by 15.1% to 2.74p per share.On a constant exchange rate basis adjusted profit before tax rose by 6.2% and adjusted earnings per share by 5.2%. Pest control performed particularly well and the company was very active in the mergers and acquisitions field, where it acquired 33 pest control companies. The policy of expansion by acquisition is to continue.
National Express NEX delivered strong performances both internationally and in the UK during the year to the 31st December with significant increases inr evenue, profit and cash. This is recognised in the final dividend which is to be increased by 10%. Like for like profit before tax at constant exchange rates grew by 11.7% and group revenue by 6.1%. The UK bus and coach businesses delivered a strong second half after the declines experienced during the first half of the year. A good start has been made to 2018 with profit and revenue both showing rises in January.
Bovis Homes BVS is pleased with what it describes as its operational progress in 2017. This progress saw profit before tax fall by 26% and earnings per share by 25%. and there are not many companies which dare call that, progress. The ordinary dividend is to be increased by 6% after strong increases in the average selling price, up by 7% during the year. The company also expresses itself as being excited by the future which is not surprising if it can get away with price rises like that.
by Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
January 2018 Market Report
During December, major equity markets displayed an upward trend, assisted by well flagged Central Bank actions and statements, a quieter political mood, and the tail end of a generally upbeat third quarterly corporate reporting season. The European Central Bank continued to move, as expected, to a gradual tapering mode, amidst some very strong economic data releases while there was additional political “noise” from Germany, Austria, Italy and Spain. US market watchers negotiated the Federal Reserve (both rate increase and change in Chairman) as well as the last-minute passage of the Tax Reform Bill. In the Far East, Chinese authorities stepped up regulatory action (specifically the financial sector) while Japan recorded and another quarter of relatively strong GDP growth. Aggregate world hard economic data still showed steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.5% to 4% area. Fluctuating currencies are playing an increasing role in asset allocation decisions, the near 14% move in the USD/Euro over the year being a good example. An American investor into Germany has seen a currency adjusted annual return of approximately 25%, some 20% higher than the other way around!
Global Equities rose over December, the FTSE ALL World Index climbing by 1.94% in dollar terms. The UK broad and narrow indices outperformed over the month while underperforming the World, in sterling terms, over the full year. Emerging markets had a relatively strong December thus completing a full year return of nearly 35% in dollar terms. In sterling adjusted terms Germany and Japan led the year-to date returns, amongst the major markets, followed by the USA, although the tech-heavy NASDAQ, Asia ex-Japan, and Emerging Markets all showed yearly gains of between 25% and 35% in local currencies. The VIX index ended the year at 10.26, a fall of around 25% over the full year.
Sector volatility during the month was high, mining outperforming utilities by about 15%. Over the full year, mining shares (the best performing major sector) have outperformed utilities (the worst) by approximately 40%. Within the overall UK fund universe over 2017, smaller caps outperformed larger stocks, and the difference between active and passive performance was much smaller than that experienced in 2016.Within the broad UK All company sector, investment trusts outperformed unit trusts by about 3.5% over the full year. The average IA mixed investment pooled fund (40%-85% shares) delivered a total return of about 10% in 2017.
Gilt prices showed marginal gains over the month, the ten-year yield finishing the month at 1.23%. Over the full year gilts showed a price decline of about 1%, thus delivering a total return of about zero. Other ten-year yield movements were mixed, American, Japanese and German ten-year yields ended December at 2.43%,0.05% and 0.43% respectively. UK corporate bonds rose slightly in price terms over the month and outperformed gilts over the full year. Amongst the more speculative grades, there were mixed trends, with emerging market bonds, in local currency terms, having a better month and US high yield hardly moving. Convertible bonds dropped slightly during the month but rose about 6% since the beginning of the year and I expect this outperformance over gilts to continue. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Amongst the major currencies, the Japanese Yen was the major December feature falling 1.2% in trade weighted terms. On the other side of the coin, the Euro rose 0.57%. The Euro strength at least partially reflected growing economic optimism and a gradual resolution to the German political stalemate. These volatile FX moves have played an increasing role in asset class allocations and this look set to continue. In sterling terms, Japanese and Continental European equities markedly outperformed USA and the UK.
Another mixed month for commodities. Oil showed a further bounce, the most recent OPEC agreement being broadly in line with expectations and some supply issues e.g North Sea and Libya. There were mixed trends amongst the precious metals, while the copper price rose by 7.8% during the month and over 31% over the full year. Over the twelve-month period, palladium rose by over 57% in price terms, while iron ore dropped about 7%. Recent mining conferences have focussed on both the China effect in reducing supply, and the growing requirements of the emerging EV (electric vehicle) markets. See my recent note on how to play the mining and oil sectors into 2018 while also enjoying an above average dividend yield (paid quarterly).
Over the coming months, I expect Central Bank statements and political events e.g. German coalition formation, Catalonian election follow-up, Italian election campaigning, Brexit,Korea, Iran, USA, and the major corporate reporting season (both figures and forward looking statements) to be the main forces driving major asset classes . US watchers will start preparing for the next interest rate hike, under the new Fed Chairman Powell as well as fleshing out the winners and losers from the recent Tax Reform Bill, and watching the machinations ahead of the latest funding deadline (19th January). In Japan, Shinzo Abe is likely to push for changes in the Constitution and reinforce the easier monetary and fiscal economic policy stance following his resounding election victory. Hard economic data (as opposed to sentiment surveys) will shows that the UK economic growth will be slower in 2017 compared to 2016 and downgrades to 2018 have recently been made by many organizations. Anecdotal evidence from retailors usually released early January will give some clues as to consumer trends. BREXIT discussions enter a new phase with discussions on the timing and nature of the new “Trade Deal”, as well as transitional arrangements being a major focus.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected, in my view. Equities appear more valued, apart from some PE metrics, (especially in the US), although not in bubble territory, but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Corporate results from US, Europe and Japan were, on aggregate, up to expectations at the third quarter 2017 stage, although EY noted that the number of UK profits warning were about 10% higher than the previous year at the nine-month stage, mostly in the home improvement, motor and other retail areas. Outside pure valuation measures, sentiment indicators and the VIX index are still relatively low though showing more day to day variation. Growing cyber-currency attention also demonstrates investor skittishness, search for new assets.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, the equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly). A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns.
- I have moved UK equities from underweight to a more neutral position following the market 2017 underperformance and valuations of certain of the major global stocks. Within the UK equity space, I suggest moving the balance of small/large cap stocks now back to neutral following both the outperformance of the former and the volatility in the currency (part post-election, part BREXIT). Ongoing Brexit debate, political stalemate could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings e.g WPP #WPP, Provident Financial #PFG, Dixons Carphone #DX, Carillion #CLLN, Paragon #PAG, Next #NXT, Centrica #CNA etc and cautious statements as we move through into the results season.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals. Oil and gas majors may be worth topping up after recent weakness and balance sheet improvements and have lagged the recovery in the spot price. Concentrate on the major diversified although there are currently some very attractive equity and fixed interest ideas in the mid/small cap area.
- Continental European equities preferred to those of USA, for reasons of valuation, and Central bank policy. This strategy, in sterling adjusted terms worked very well through 2017 (DAX outperforming the S&P by about 8%) and I expect to continue. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, especially in hedged form, despite the large 2017 outperformance. recently.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space.
- UK bank preference shares still look particularly attractive, and could be considered as alternatives to the ordinary shares in some cases. Prices have shown good capital growth since the beginning of the year as well as offering annual yields more than 5%, but are still recommended for more cautious investors with a desire for regular annual income. Recent results and the November “stress test” results show that generally UK balance sheets are generally in good shape, and I see negligible risk of default on preference share dividends for the recommended stocks.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Selected infrastructure funds are also recommended for purchase after the recent weakness (see note).
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices. The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property plays. See my recent note on this sector.
- I suggest a selective approach to emerging equities and bonds, especially where significant dollar loan exposure and or potential geo-political uncertainties are present e.g. Brazil, Venezuela, South Africa. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries.
Full fourth quarterly report will be available in January and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. I expect more clients to consider switching some final salary pots to SIPP over coming quarters, as transfer values start to slip (partially in line with rising gilt yields) and can work with you providing bespoke portfolios according to client needs.
Good luck with performance! Ken Baksh 01/01/2018
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
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Please contact Ken, (email@example.com) for further information
WPP plc WPP has not enjoyed a good first half to the year and what on the face of it appear to be very healthy growth in profits ,are distorted by comparison with the first half of 2016 when there were exceptional net costs of 122m. On a constant currency and like for like basis 2017 has really been a year of slow decline save for the UK which was the strongest performing region in the second quarter with like for like revenue up by 5.8%
Revenue is perhaps the best guideline as to the true state of affairs for the half year and on a constant currency basis it rose by a meagre 1.9% which turned into a fall of 0.3% on a like for like basis. Like for like net sales also fell by 0.5%. Reported billings fared even worse with a fall of 4.7% in constant currency. Reported EBITDA showed a constant currency rise of 1.7%. Helped by the distortions of last years exceptional costs profit before tax showed a rise of 83.3% and reported diluted earnings per share were up by 95.1%
Things have got worse as the company enters its second half year with current trading in July behind both budget and forecast as like for like revenue and net sales fell by 4.1% and 2.6% respectively.
NMC Health plc NMC produced a strong performance in the six months to the 30th June with good progress made cross all parts of the group. Reported revenue rose by 34%, EBITDA by 47.3% and adjusted net profit by 56%
Tesco plc TSCO opens its compensation scheme today for investors who were net buyers of shares or certain types of Tesco bonds between 29th August 2014 and 19th September 2014. The compensation amounts to 24.5p per share plus interest at 4% for retail investors.
Lloyds Bank LLOY admits to having “positive operating jaws” which helped it to produce a strong first quarter financial performance and a significant improvement in statutory profit before tax, despite disagreeing with the house builders (see below) about the state of the UK economy, which the bank says still presents a challenging operating environment. As for those jaws, I never thought I would see the day when a bank would agree so openly that the widely held view about a banks resemblance to a certain type of large and very dangerous fish, appears to be correct !
Persimmon PSN claims that its continuing operational performance is excellent, helped by the resilience of the UK economy. does this mean that at long last challenging market conditions have disappeared. Forward sales revenue has risen by 11% on a year ago, whilst private sales rater per site are 12% ahead. The average selling price has, so far, been increased by 4.1%.
Taylor Wimpey TW is hopeful that the forthcoming general election will not disrupt the housing market after a good start has been made to the year. Average private net reservations so far this year, are up 16% on a year ago. The total order book has risen by 31% since the year end, whilst total order book value is up by 2% on a year ago. Build cost inflation for 2017 is expected to be between 3-4%.
WPP plc WPP First quarter revenue net sales and operating profit are all well above budget and well ahead of last year – at least until you strip out the helping hands provided by acquisitions and the weakness of sterling. On a like for like basis the picture looks far less impressive, with revenue rising by 0.2% and net sales by 0.8%. WPP regards net sales as the true test of its success or otherwise. In this respect North America was under pressure but the UK and continental Western Europe both grew strongly.
Weir Group WEIR is on track for a strong recovery in 2017, with first quarter order input up by 15%, oil and gas orders up by 50% and continued strong cash generation.
WPP plc WPP produced another record year in 2016 helped by huge favourable exchange rate movements, especially in the second half. Without these, the strength was much less pronounced. Reported billings rose by 16% but at constant currency rates the rise was reduced to 5.5% and on a like for like basis it was down to 3.3%. Growth in revenue varied from a rise of 17.6% to an actual fall of 7% in Yen. Overall 10.4% revenue growth was due to currency movements. Profit before tax rose by 26.7% but in constant currency terms fell to 12.5%. Dividends for the year have also been increased by 26.7% at 56.6p per share, which means that the target pay out of 50p per share has been reached a year ahead of schedule.
2017 has started slowly with January producing a like for like rise in revenue of only 1.5% due to what are described as tepid economic growth and weaker new business trends. The growth target for 2017 has been set at 2%.
London Stock Exchange LSE proposes to increase its final dividend by 20% after a strong financial performance for the year to 31st December. Income rose by 17% and adjusted profit before tax and earnings per share both grew by 21%
Harvey Nash HVN claims resilient trading for the year to the end of January despite gross profit falling by 1% on a constant currency basis. Brexit is blamed for holding back growth in the UK & Ireland, whilst the Rest of the World faced challenging market conditions in Hong Kong and Offshore Services were hit by the weakness of Sterling, leading to a fall of 7% in gross profit. Only Mainland Europe helped to save the day with growth of 8% ( 4% at constant currency rates.)
Gear4music G4M Sales for the year to the 28th February were well ahead of expectations with a rise of 58%. Europe and the Rest of the World led the way with a rise of 124%. Profits are expected to be marginally ahead of expectations.