Looking Ahead At The Next Week
Although the group’s results have been heavily affected by the pandemic, the solid performance in the food business, the faster-than-expected online growth in the C&H business, and tightened cost management have all resulted in good cash generation.
The group’s rapid reactions to respond to the pandemic and improved operating efficiency have sent a positive signal to the market, and the downtrend has helped the group to reach the inflection point.
Companies: Marks and Spencer Group plc
Unsurprisingly, the limited business progression in H1 19/20 and the pandemic outbreak towards the end of the year have resulted in a significant FY profit contraction.
However, the unprecedented pandemic crisis seems to be dragging all the industry to the same starting line, in terms of market transformation. In particular, after the group showed a better than expected cash position after additional RCF and CCFF and substantial cost-savings, this gives new hope to the market.
The group has released a better Q3 19/20 trading performance in the UK in both the food and clothing businesses, which confirms that the appetite of UK consumers remained solid during the festival period.
However, the limited sales progression in the clothing business (-1.7% lfl vs. -5.5% lfl in H1 19/20) has disappointed the market.
Also, management’s more cautious stance on the gross margin’s guidance was clearly not reassuring.
Following two weak quarters of LFL in Clothing & Home M&S has this morning reported 3Q C&H LFL of -1.7% against consensus of around -1% yoy against a weak comparative influenced by November 2018 marketwide issues. Food LFL increased by 1.4% (consensus around +1%).
The group has announced a slightly better than expected H1 19/20 figures, mainly thanks to the improved efficiency and better sales volume in the Food division.
On numbers M&S has reported a weak 1H with Underlying PBT of £177m (HY 2018/19 £213m re-stated) down 17% as the company suffered weak sales in Clothing & Home (LFL – 5.5%) and invested revenue in repositioning both sides of its offer. We would expect that the updated guidance and the 1H performance are likely to result in full year 2019/20 market consensus estimates staying at around £450-470m pre-exceptional items, implying less of a reduction in 2H.
Overall the takeaways were predictable given personnel changes recently with Clothing & Home showing some progress according to the company but along with the accompanying supply chain behind schedule while food was more upbeat. The disclosures also highlighted how far M&S has to travel to achieve a sufficient food offer for the Ocado JV. Our store visits suggest to us that clothing SKU reduction and sub-brand de-fenestration are resulting in a further-weakened offer in Womenswear in the Autumn/Winter 2019 season.
While initially these look like in-line results with a few minor encouragements in terms of stability in the food business we note the £486m of non-recurring costs after £97m in 1H and last year’s £514m. That makes £1bn of non-recurring costs over two years and £1.6bn over four years. We understand that big changes are underway but it is difficult to establish the true underlying position with this amount of displacement of costs into non-recurring categories.
M&S has reported lacklustre FY18 figures as expected. The transition phase is very tough and clouds will last at least in the short term. Further sales and profit declines are expected for FY2019. The group has proposed a share price of 185p for the new rights issue, which represents a 31.8% discount to the previous closing share price and -13.5% vs. our target price.
Today’s announcement of the up to £750m payment to Ocado for certain assets and rights in a 50:50 joint venture is the first step in the likely long and unprofitable development of national online coverage for M&S’s food business.
M&S has announced the creation of a 50/50 JV with its home rival Ocado group. M&S will acquire a 50% share of Ocado’s UK retail business, supported by its smart platform. According to the agreement, Ocado will provide its e-commerce platform and transfer its retail customers, sales and supplier relationships, some vehicle assets and central retail functions to the JV. Also, Ocado will provide third-party logistics services. M&S will provide the best ranked quality food products and over 12m of food shoppers.
The JV was valued at £1.5bn and M&S will pay £750m, of which £562.5m cash and a deferred consideration of £187.5m, plus interest, payable after five years. The transaction will be financed mainly by equity (planned Rights issue of £600m) and by cutting dividend pay-out by 40% in 2019 (relative to FY18/19).
In FY18, the JV has generated estimated revenue of £1.5bn and EBITDA of £34.2m, i.e. an EBITDA margin of 2.3%. Gross assets subject of the transaction are estimated at £164m.
The JV is expected to be concluded in Q3 19 and to be effective from September 2020 at the latest, following the termination of the current Waitrose sourcing agreement.
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Companies: HeiQ PLC
Entain reported strong Q4/FY 20 sales with 7%/1% cc growth respectively (ahead of estimates). The performance was driven by the strong broad-based momentum in online (Q4 20: +41%, FY 20: +28%), which more than offset the decline in retail. The US stood out with 131% growth, pushing FY 20 revenue expectations higher to $175-180m. We will be upgrading our estimates to factor in the stronger than expected performance. In other developments, Jette Nygaard-Andersen was appointed CEO with immediate effect.
Companies: Entain PLC
REACT Group plc (REACT), the specialists in deep cleaning services for customers in the public and private sectors, has announced encouraging full year results, marginally ahead of our increased forecasts and a significant turnaround from the losses reported in previous years. Cash balances at the year-end were also substantially higher than forecast at £1.8m. The new management team has delivered on its promises in what has been a challenging year and we continue to remain very positive on the prospects for the Group. We have introduced forecasts for FY2021 but at this stage, with so much uncertainty we have set our expectations prudently. Nevertheless, the year has started strongly and our projections, supported by a high level of recurring revenue and margin improvement, still anticipates a more than doubling of EBITDA and could be raised as REACT progresses through the year.
Companies: REACT Group Plc
Escape Hunt (ESC) has conditionally agreed to acquire its French master franchise partner, BGP Escape (BGP). Together with UK sites currently in build, ESC expects BGP to add enough scale for the group to reach positive EBITDA when conditions normalise and new sites have matured. The acquisition is attractively priced at only 1x EBITDA before earnout payments.
Companies: Escape Hunt Plc
Taking into account the adverse impact of the pandemic, the Air Europa acquisition price has been halved to €500m with payment deferred until the sixth anniversary of the acquisition’s completion, which is now scheduled for H2 21.
Companies: International Consolidated Airlines Group SA
Following the transformational acquisition of rival Dominium we are formally initiating on DP Poland. The combination has broadened and strengthened the business model, creating a top 3 market player with a proven new CEO at the helm. Significantly, the enlarged entity will be profitable and self-funding, something the market has been long waiting for. The deal creates a platform to accelerate growth and to become the dominant pizza player in Poland. We identify three main drivers – cost synergies, organic growth and a resumption of the rollout strategy. DP Poland has proven that the Domino’s formula works as well in Poland as it does elsewhere in the world; its mature stores are substantially profitable. The share price will be driven by confidence in delivery of EBITDA growth and cost synergies.
Companies: DP Poland PLC
M&B’s poor trading performance in Q1 FY20/21 was not a surprise. Lfl revenue in the current quarter is also likely to remain deep in the red. Management is exploring an equity issuance to remain afloat / meet the fixed cost and debt service obligations. After all, the cash coffers are fast depleting and the choice on the table is limited.
Companies: Mitchells & Butlers plc
Today's news & views, plus announcements from FERG, AHT, KAZ, LMP GLO, ERM, MCS, STU, SEIT, SOLG, INCE, AEXG, BEG
Companies: AEX GLO SEIT SOLG STU INCE
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Companies: Dixons Carphone PLC
Air Partner has reported a record H1 performance, with PBT increasing by 250% to £10.5m. This was driven by COVID-19 related work, in particular repatriation flights and transportation of PPE, which offset more challenging trading conditions elsewhere. Air Partner’s diversity has insulated it from the significant COVID-19 impact felt elsewhere in the sector. As expected, COVID related work has slowed down in H2, though there have been some early signs of improvement in Private Jets (number of JetCards sold +50% YoY) and Safety & Security (multiple contract wins in Redline). Given continued subdued demand, gross profit has reduced YoY in Q3 to date, though this was offset by cost initiatives. We reintroduce forecasts for FY21, assuming PBT of £10.5m, which implies break even in H2. The balance sheet remains strong, with net cash of £18m and the Board has proposed an interim dividend of 0.80p.
Companies: Air Partner plc
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Companies: Sportech PLC
The Group continues to gain momentum as it delivers its ambitious growth strategy. Testament to strategic acquisitions and strong organic growth, Group revenue increased 14% YoY to £4.0m whilst EBITDA margin expansion (+430bps) drove a c30% YoY increase to £1.4m. Additionally, the strategic decision to incorporate TCAT as a new subsidiary should expediate its commercialisation and expansion. We believe One Media offers value to investors whilst it trades at a discount relative to its peer group, our fair value per share analysis and DCF valuation. Buy
Companies: One Media iP Group PLC
MGM resorts international (MGMRI), Entain’s JV partner in the US, has offered to take over the British bookie for ~£8bn ($11bn), with a possible partial cash alternative also on the cards. Following the news, Entain’s stock popped up 30% before closing the year’s first trading session 25% higher.
Kingfisher continued to register strong sales growth in Q4 FY20/21, buoyed by the higher DIY spend by consumers since the onset of the pandemic. Management continues to refrain from providing full-year revenue guidance, citing the pandemic-related uncertainties and the impact of lockdown restrictions. We maintain a positive outlook on the stock.
Companies: Kingfisher Plc
We were bullish about the ongoing effects of strategic/operational initiatives at G4M, seeing forecast upside risk. It has not disappointed. Q3 sales and margin outperformance drive a 30% upgrade, and a shift into net cash. Extensive planning and systems/delivery changes have helped it after Brexit too, with trading stronger than expected so far in Jan. Valuation looks undemanding given upgrade momentum and the discount to lower margin peers.
Companies: Gear4music (Holdings) PLC