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.
Companies: Marks And Spencer Group
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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Sales were a bit disappointing in Q3. Group revenue was down 3.9% at CER. Food sales benefited from price investment and Christmas boost to soften their decrease to -2.1% lfl. Clothing & Home have deepened their slowdown to -2.4% lfl. The positive news is the 14% surge in online sales.
M&S has reported 3Q LFL of -2.4% in UK Clothing & Home sales and -2.1% in UK Food. We believe that expectation was 1-2% negative in C&H and 2-3% negative in Food. C&H benefited from better than expected online sales growth of 14% with stores down we estimate 6-7% LFL. Overall the online performance was undoubtedly good but in-store C&H was poor albeit affected by the less promotional trading stance and market conditions. Food we believe turned out within forecasting parameters.
We feel that M&S is entering a period of forecast attrition as it tries to reposition against a background of continuing weak demand. This is likely to be exacerbated by execution issues in our view. We believe that these are resulting from Too Much Disruption and Not Enough Control. We have reduced our current year estimate below £500m and expect PBT to decline again in 2019/20. Indeed we believe that investors should be valuing M&S against a base profit towards the end of its reorganisation in the range £300-400m. The dividend is becoming increasingly vulnerable.
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FY20 results – All Focus on Resuming Operations
Companies: Dart Group
Independent review launched: The Boohoo Group has announced the launch of an immediate independent review of its UK supply chain, intended to identify any areas of risk and non-compliance and to further strengthen the Group’s compliance procedures to ensure similar allegations will not recur in the future. The review is to be led by Alison Levitt QC, a highly experienced advocate who has previously reported on complex issues, including safeguarding enquiries. Boohoo has also announced an initial additional £10m investment in ensuring any supply chain malpractice is eradicated and is accelerating its independent third-party supply chain review with ethical audit and compliance specialists Verismo and Bureau Veritas.
Companies: Boohoo Group Plc
Today’s statement reveals incredibly robust Q1 trading across the Group’s brands and regions, with a positive outlook and guidance reinstated for the remainder of the financial year and beyond. In addition, the Group has announced the acquisitions of Oasis & Warehouse, bringing two well-recognised and complementary brands onto its platform. We believe the unprecedented disruption resulting from the COVID-19 pandemic has accelerated the channel shift to online where we see BOO as the clear winner, with an established and leading model positioned to consolidate the market.
DWF has issued a trading update showing positive momentum during the first two months of the new financial year. We are re-instating our financial forecasts assuming modest organic growth of 2% in 2021E.
Companies: DWF Group
Gaming Realms is a creator and licensor of innovative games for mobile, with operations in the UK, U.S. and Canada. Through its unique IP and brands, Gaming Realms brings together media, entertainment and gaming assets in new game formats.
Companies: Gaming Realms
Whilst Arena delivered FY20E results in line with our expectations, this has inevitably been overshadowed by the challenges posed by COVID-19 to the industry. Arena acted swiftly to cut costs and preserve cash, such that it currently has a c£23.5m cash balance. This is enough to see the company through into 2021, even if the global event market remains heavily disrupted for the rest of the year.
Companies: Arena Events
We are introducing our Best Ideas for 2019 and also review the performance of last year’s picks. We suggest ten solidly financed stocks with good business dynamics that ought to be considered for core portfolio holdings and six UK domestically focused stocks that our analysts believe should perform strongly in the event that uncertainties unwind. We also introduce a new style of research from N+1 Singer which presents a Company’s dynamics and metrics in a clear and concise manner and concentrates on the pivotal issues affecting that Company and an investment decision.
Companies: BCA CLIN CLG CBP DNLM EAH STU FCRM FUTR GTLY INS GLE NICL SDL SPR TRI
AFC Energy is a global leader in the fuel cell sector. It has a proven fuel cell technology which it is commercialising through its H-Power™ product, an off-grid electric vehicle charging system which is run on hydrogen and produces no emissions. The company's core fuel cell technology is a liquid alkaline fuel cell called HydroX-Cell(L)™. The company is also developing a solid alkaline fuel cell called HydroX-Cell(S)™ , the critical component of which is a is a solid electrolyte which upon validation will be marketed under the AlkaMem™ trademark. We expect the AlkaMem™ product to have multiple electro-chemical applications outside of fuel cells. The purpose of this note is to compare AFC Energy's products, markets and business strategy against its listed peers Ceres Power and ITM Power. The note also assesses the state and outlook of the hydrogen market in addition to the proton exchange membrane market, which is relevant for AFC Energy's AlkaMem™ product. As a reminder, we believe AFC Energy has a fair value of 27p/sh.
Companies: AFC AFC AFC
We note this morning’s announcement from Boohoo Group strongly refuting several allegations made in a short-selling note published yesterday afternoon. In our opinion arguments made in the short selling note are flawed and do not disclose any new or unexpected information about the Group. The unprecedented market backdrop resulting from the COVID-19 crisis has only acted to highlight the strengths of Boohoo’s agile, pure play, e-commerce model and we see current share price weakness as offering an attractive entry point.
What’s new. This morning Purplebricks UK has provided an “update regarding current trading and the potential impact of COVID-19 and Govt guidance on the UK housing market.” Key points are:
1. Purplebricks first priority is health of people and customers: its online business model includes “video valuations, virtual viewings, connecting customers with potential purchasers via Purplebricks online platform.”
2. Govt restrictions on movement are weakening vendor and purchaser activity; deferral of completions would have a further negative impact.
3. Immediate cost-saving measures will materially reduce cash burn including suspending TV and radio advertising, reducing online marketing, taking advantage of the Government Job Retention Scheme.
4. Purplebricks currently has net cash of £35m and no debt.
Companies: Purplebricks Group
In this note and following the SMMT June data released earlier this week, we look at the key dynamics of the sector during H1 2020, and the prospects for the rest of the calendar year. While no direct stimulus for the sector was announced in the recent summer statement, customers who were considering their purchasing options now have the clarity to move ahead with buying decisions that were potentially on hold.
Companies: CAMB LOOK MMH PDG VTU
Gaming Realms’ 2015 final results show a business that continues to build momentum, as revenues more than doubled to £21.2m (2014 pro forma: £9.8m). Growth is being driven by its real money and social gaming (including licensing) verticals, which were up 362% and 294%, respectively. Gaming Realms also recently announced that it has extended its licensing deal with Scientific Games to land-based gaming machines as part of its strategy of taking the Slingo brand into adjacent markets. 2015 adjusted EBITDA losses fell by 30% to £4.1m and the Q1 trading update (revenues up 100% y-o-y) supports our view that the company can break even at the EBITDA level this year.
Bowling, alongside low-cost gyms, is the strongest sub-sector of Leisure at present. Its fortunes have been revived over the last 5 years through product diversification, investment and a more family focused offering which is resonating with consumers seeking value and experiential treats. The sector is well established accounting for 3% of the family leisure market. We are attracted by its positive growth dynamics and minimal exposure to rising costs. We explore 6 themes in this note and initiate coverage on Hollywood Bowl (Buy; 250p 12m TP) and Ten Entertainment (Buy; 315p 12m TP), albeit with current year EPS forecasts 4% below consensus, reflecting recent prolonged hot weather concerns. On a 1-3 year view both have plenty of scope to further enhance shareholder value through self-help and site expansion.
Companies: Hollywood Bowl Ten Entertainment Group
Gaming Realms is a developer, publisher and licensor of real money and social games with operations in the UK, U.S. and Canada. The business was set up by the team behind Cashcade Ltd, creator of bingo brand Foxy Bingo, which was sold to PartyGaming for just under £96 million in 2009.
We’re just over three months in to 2019 and we’ve seen a 10% UK market rally, retracing much of the Q4 decline, such is the nature of fickle market sentiment. That said, many of the issues we wrote about three months ago that were impacting markets remain: notably Brexit, trade wars, geopolitics and global monetary policy. The 2019 rally thus far feels somewhat fragile, with competing forces of optimism on a potential trade deal which could underpin the rally, against the deterioration in underlying economic data that could ultimately undermine the recent market gains. In this context, we look at what the lead indicators and the market are telling us about the industrial cycle and the stocks most exposed to various industrial trends. The Q4 derating in short cycle industrials and autos had been vicious and while these sectors have seen a more solid footing in 2019, with earnings downgrades being priced in, it will likely take a trough in lead indicators before short cycle stocks can start to perform again and re-rate relative to the market.
Companies: ARS CYAN HYR LIT SOM ABBY AMS AMER ANX ATYM AVON BLVN PIER BUR CGS CAML CALL CSRT TIDE DTG DEMG EMR FPO FST GTLY GENL INCE GRI GEEC HDY HMI HAYD HEAD HILS HTG HUR IBPO INDI JHD JOG KEYS KCT KGH LAM LOK MACF MNO MANO MOD MKLW OXIG PCA PANR APP PXC PHC PMO RBW RMM REDD RSW RNO RKH RBGP ROR SUS SCPA SHG SOLG TRAK TRI VNET VTC ZOO ZTF