Volvo’s Q1 revenue saw a 14% yoy contraction, 8% above expectations. As expected, Q1 20 vehicle sales decreased by 20% yoy, which came mainly from a significant revenue contraction of 25% yoy in North America (second largest geographical revenue source) and -12% yoy in Europe (Volvo’s largest geographical market). Taking into account Volvo’s deterioration in the order intake at the end of March in Europe and North America, we expect a more significant revenue contraction yoy in Q2.
Companies: Volvo
Volvo’s revenue of SEK432bn was in-line with our expectation while EBIT of SEK48bn was above our SEK42.7bn. The group’s profits clearly benefited from currency tail-wind. All divisions suffered falling order volumes in the last year. The rates of decline were between -1% (Construction Equipment) and -21% (Volvo Penta). Trucks saw its orders fall by 29%, but the rate of decline moderated to -10% in the last quarter. This is a clear indication that 2020 will be much tougher.
Volvo is the Western hemisphere’s second largest truck producer (226k in 2018) after Daimler (>500k) and says that it intends to form a strategic alliance with Japanese Isuzu (532k trucks of all weight classes plus SUVs and Pick-up trucks). In a first step, Volvo sells its Japanese operation (called UD) to strengthen the two companies’ position in heavy trucks.
Orders for new trucks fell sharply in the last quarter and a slight fall was also experienced in Construction Equipment. Although truck deliveries fell as well, the divisional operating margin was slightly up. However, Construction Equipment has started to experience a slight profit margin fall.
Trucks and Construction Equipment contribute a total of 85% to Volvo’s consolidated sales and almost 90% to its EBIT. US heavy truck sales were up by 11% in the last month and Caterpillar’s worldwide machines sales increased by 4% in all of the last three months.
Volvo’s revenue and earnings are generated with trucks (63% and 64% in H1 19, respectively) and construction equipment (22% and 28%). These highly cyclical businesses have continued doing very well in Q2, but trucks have started to see falling order inflow as have buses.
Much stronger than expected volume growth in the Americas combined with Swedish kronor weakness have translated into much stronger than anticipated revenue and profit growth.
Although Volvo suffered a charge of SEK7bn from the early degradation of an emission control component, it has delivered what we had anticipated. The reasons for the excellent profit number were SEK weakness plus much higher capacity utilisation. However, a further margin increase is unlikely in 2019 as order inflow growth has clearly moderated as of late.
Volvo has long tried to suggest that it is producing ‘green‘ trucks but management has discovered that one emission control component is degrading faster than expected. This translates into higher emissions and it forces Volvo to make the above provision which represents more than 25% of our projected 2018 Truck division’s EBIT. The company’s press release suggests that this provision only covers initial costs such as the testing of vehicles, statistical analysis and the dialogue with the relevant authorities. Subsequent recall costs associated with the implementation of corrective measures are expected to burden divisional earnings at a later stage.
Volvo is selling a 75.1% stake in its fully-owned subsidiary WirelessCar to VW. The disposal price is SEK1.1bn, which translates into the above profit, i.e. the company currently shows negative equity. The transaction is expected to be finalised in H1 19. The subsidiary provides connected vehicle services and solutions to global producers of passenger cars as well as commercial vehicles. By keeping a minority stake, Volvo will continue to have access to the know-how and it will continue to focus on connected solutions for its trucks. WirelessCar had 3m connected vehicles around the globe in 2018 and turnover is projected to reach SEK0.5bn this year.
Volvo’s Q3 revenue increased by 20% to SEK92bn which brought the ytd number to SEK285bn (+17%). The respective EBIT growth rates were +38% (to SEK10.2bn) and +31% (to SEK30bn). We had expected a 9M revenue number of SEK280bn and EBIT of SEK28.6bn.
Volvo says that it has detected the premature degradation of one emissions control component. This leads to NOx emissions that exceed legal limits over time. The trucks involved were delivered overwhelmingly to clients in Europe and North America. According to the company’s release, it is impossible to assess the possible financial impact at this time, but the costs could be material.
Volvo’s Q2 revenue surpassed the SEK100bn level for the first time ever and EBIT of clearly more than SEK11bn was above the SEK10bn level for the first time as well. Strong demand combined with cost reductions in the past have translated into these superb numbers.
Q1 order inflow has been very convincing indeed which provides comfort for the next quarters. This, plus better than expected numbers for the first quarter, allows us to raise our projections.
Volvo is clearly unsatisfied with Geely’s latest announcement. It had acquired a stake in Volvo just a few weeks ago and has now decided to buy a stake in Daimler, Volvo’s fierciest competitor for trucks around the world. It remains to be seen whether the nomination committee will allow a new Geely representative to join its Supervisory Board.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
Successful businesses ‘never let a crisis go to waste’. Indeed since an otherwise strong Q1’20 was interrupted by COVID-19, Mpac has further streamlined operations, accelerated R&D and launched new remote equipment diagnostic/acceptance testing, virtual reality & other ‘Industry 4.0’ services.
Companies: Mpac
The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
RBG Holdings pre-close trading update to June 30th confirms a strong H1 performance for RBL, the Group’s law firm, with revenues up 36% like-for-like to c.£11.4m YoY. Convex, the CF boutique, understandably has faced COVID headwinds, with most of its H1 pipeline deferred indefinitely, whilst Litigation Finance continues to grow its pipeline and financing commitments on a longer term view. Due to continued uncertainty from COVID we withdraw our forecasts this morning, with a view to reinstating once more clarity on H1 outturn and momentum into H2 is available.
Companies: Rosenblatt Group
Resilient Trading Update
Companies: Macfarlane Group
The Norcros operating companies largely performed relatively well in challenging market conditions (in both the UK and South Africa) in FY20 though year end trading was affected by COVID-19 lockdowns, as flagged previously. The group’s financial position appears robust following management actions (including foregoing an FY20 final dividend) and well-placed to both contend with weaker near-term markets and the pursuit of market share gains from a position of relative competitive strength. Our estimates remain suspended at this time.
Companies: Norcros
Revenue for FY 2020 is ahead of expectation and we adjust our forecast accordingly. Sales are growing at an impressive rate; >50% pa despite COVID-19 and the virus had no effect on the company’s ability to deliver projects with 23 new customers live in Q4. We note COVID concerns are causing some delay on contract decisions, and sales would have been even stronger but for that. These delays do lead to caution on FY 2021, and we ease back our forecasts on more prudent management guidance. However, with the recent £5m equity placing, PCIP has plenty of cash to continue to invest in rolling out its exciting secure payments proposition. This cloud-based solution can be deployed remotely and assists call centres in moving agents to WFH and still collect payments securely. The outlook remains very bright with continued rapid growth expected.
Companies: PCI Pal
The year-end trading update was encouraging, with expected results showing good YoY growth, modestly below but close to our earlier expectations. Trading has been resilient, particularly in safety critical areas such as its nuclear exposure, with some weakness being seen in oil & gas, where there is limited exposure. Two new contract wins in the nuclear sector have also been announced today. FY 2021 forecasts remain under review. With strong finances, the company is well positioned to maximise M&A opportunities, through its PIE strategy.
Companies: Avingtrans
The group has issued a trading update for the year ended 31 May 2020 highlighting an adjusted EBITDA of at least £11.5m which is close to the group’s original expectation, despite widespread disruption to operations in the second half. The statement notes ample liquidity headroom in excess of £10m with net debt (excluding IFRS 16 lease liabilities) reducing in H2 to £7.5m as planned. The Group’s order book and prospect pipeline remains strong overall and the update is accompanied by the announcement of two meaningful contract wins in the nuclear sector. A further significant positive development is the grant of outline planning permission for the conversion of the group’s 7 acre Hayward Tyler site in Luton into residential housing for up to 1000 dwellings. Whilst financial guidance for FY2021E remains withdrawn at this point due to on-going uncertainties around the impact of COVID-19, we see the group continuing to demonstrate good resilience, operating at close to normal levels, supported by exposure to multiple markets and a strong customer base that includes governments and their agents.
Caledonia's Q2 2020 production from its 64% owned Blanket mine in Zimbabwe was 13.5koz gold. This was an increase over the same period last year of 6.2%, leaving Caledonia with a first half production of 27.7koz – well ahead of this time last year (24.7koz) and on track to meet its 2020 full year guidance of 53-56koz (WHI etc. 55.5koz). Spectra Systems Corporation is a provider of machine-readable high-speed banknote authentication, brand protection technologies and gaming security software. The company has announced that it has executed a new contract with a major world central bank to ‘enhance existing authentication sensors to detect a unique type of counterfeit notes'.
Companies: Spectra Systems Caledonia Mining Corporation Plc Com Shs Npv
Marlowe delivered a strong performance during FY20A, with +7% organic revenue growth, and improved Adj EBITDA margins. Integration of acquisitions is progressing well, and with receipt of c£40m gross proceeds, Marlowe is well placed to accelerate the consolidation of its markets. We leave our forecasts unchanged and reaffirm our Buy rating.
Companies: Marlowe
Scotland’s only quoted housebuilder recorded its highest ever weekly number of reservations following the reopening of its sales offices after the prolonged construction lockdown north of the border. As a result, Q1 2021 sales are expected to be “significantly higher” Y/Y, after the inevitable disruption caused by Covid. In this morning’s FY 2020 trading update, the Group also highlighted the widely reported trend across the housing market to larger homes with gardens, Springfield’s ‘sweet spot’ in our view.
Companies: Springfield Properties
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Companies: Forterra
ECSC Group plc* (ECSC.L, 71.5p/£7.2m) | Trackwise Designs plc (TWD.L, 90.5p/£20.0m) | Transense Technologies plc (TRT.L, 59.5p/£9.7m)
Companies: ECSC Group Trackwise Designs
Strong H1 results, prospects good, investing in the future WEY's H1 results this morning reflect both the positive effect of proactive actions taken by the company last year and strong demand from the market at large. Sales up 43% YoY and PBTA of £0.3m (2019: £0.1m) reflect increases across both sides of WEY's business and are accompanied by margin uplift (62% gross margin as against 56% last year). The company is a well-established leading supplier of online education, having built a 15-year track record of excellence in its sphere. Covering the half year ending on February 29th, the period of the results precedes the lockdown; however this morning's statement lays out the heightened demand for WEY's product which is an inevitable result of the new focus on remote working and online learning. WEY is plainly extremely well-placed to grow in the current environment, and it has made significant investments in educational quality and in marketing – in both cases including senior and wellrespected hires. The Covid-19 crisis has generated a new appreciation of online education from parents, pupils and educational authorities, who increasingly see this as a real, practical and highly effective substitute for traditional education, adding to the already strong demand across WEY's brands. Our 30p-plus fair value assessment rests on the inherent opportunities and is also supported by the strong balance sheet (£6.6m of net cash, +£1.6m in the period).
Companies: Wey Education
