Good morning! Graham and Roland here. I hope you had a nice weekend.
While we prepare today's agenda, I'd invite you to check out Megan's most recent Week Ahead article.
Our table is no longer an image - please let us know what you think of the new format!
11pm: thanks for the feedback on the table, I'm hoping that we can find further improvements for it soon. As there isn't too much news today, let's wrap up the report there for now. Cheers!
Explanatory notes
A quick reminder that we don’t recommend any shares. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.
We stick to companies that have issued news on the day. We usually avoid the smallest, and most speculative companies, although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We have a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Add your own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.
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What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.
Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. And/or it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.
Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.
Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.
Others: PINK = takeover approach, BLACK = profit warning, GREY = possible de-listing. Links:
Daily Stock Market Report: records from 5/11/2024 (format: Google Sheet).
Companies Reporting
Name/Sector | RNS | Status/ brief comment | Our view (colour) |
Domino's Pizza (LON:DOM) (£1.4bn) | Strategy update & TU | In line. Q4 LFL sales up 2.7%. NICs up £3m p.a. New growth framework costs £4-£5m p.a. | AMBER (Roland) |
Boohoo (LON:BOO) (£492m) | Shareholder vote update | The ISS has recommended shareholders vote against the Frasers resolutions. | RED (Graham) |
Synectics (LON:SNX) (£55m) | TU | PBT for FY24 to be materially ahead of expectations (exps: revs £55.4m, adj. PBT £3.9m). | GREEN (Roland) |
Inspecs (LON:SPEC) (£49m) | TU | Profit warning - Q4 sales slower than expected (exps: revs £197m, uEBITDA £17.4-£17.9m) | AMBER/RED (Graham) |
Lendinvest (LON:LINV) (£36m) | Interim Results | Profitable in Sep. Cautiously optimistic re: achieving run-rate profitability during rest of the year. | |
Brave Bison (LON:BBSN) (£28m) | Acquisition & TU | Acquisition of sports marketing co. for up to £10.6m. FY24 trading in line with exps of £3.6m adj. EBIT. | |
Tavistock Investments (LON:TAVI) (£22m) | Interim results | Revenue down 4% to £19.6m, pre-tax loss of £0.2m. NAV down 3% to £39.5m. | |
Plexus Holdings (LON:POS) (£11m) | AGM statement | Confident in ability to drive further growth. | AMBER/RED (Roland) |
Woodbois (LON:WBI) (£10m) | Market update | Positive-sounding information on purchase orders, shipping, etc. |
Summaries
Synectics (LON:SNX) - up 9% to 335p (£60m) - Trading update - Roland (I hold) - GREEN
This security and surveillance systems specialist now expects FY24 results to be “materially above” previous expectations. Synectics’ FY25 guidance is unchanged at this time, but the improved order book and net cash position suggest to me further gains are possible. I remain positive.
Inspecs (LON:SPEC) - down 18% to 40p (£41m) - Trading Update - Graham - AMBER/RED
As profit warnings go, this doesn’t look too dramatic in terms of the numbers. Revenue is expected at c. £197m vs. a prior forecast of perhaps £204m. EBITDA will be c. £17.5m. However the company doesn’t help itself by failing to make prior expectations more transparent. This one listed in 2020 and while I took a neutral stance for as long as possible, it’s a stock that I would avoid and so a mildly negative stance seems justified after another profit warning.
Domino's Pizza (LON:DOM) - down 2% to 345p (£1.36bn) - Strategy update & TU - Roland - AMBER
Pizza chain operator Domino’s has revealed plans for an incremental increase in spending on advertising and ecommerce development, with more patient timelines for new stores to hit targets. Full-year trading is said to be in line, with improved LFL growth in Q4, vs H1 and Q3. I’m neutral ahead of this year’s results.
Boohoo (LON:BOO) - up 1% to 35.6p (£497m) - ISS recommends holders vote AGAINST Resolutions - Graham - RED
Institutional Shareholder Services (ISS) have sided with the boohoo Board over Mike Ashley/Frasers, which should improve their chances of defeating the attempt to shake up their Board. I’m no fan of Frasers but remain very cautious of the competitive and financial situation facing boohoo.
Short Sections
Plexus Holdings (LON:POS) - up 5% to 11.3p (£12m) - AGM Statement - Roland - AMBER/RED
Today’s trading update from oil and gas wellhead services business Plexus is positive in tone, referencing “a significant improvement in financial performance for the financial year ended 30 June 2024”.
The company mentions factors such as the SLB (Schlumberger) deal and “a refreshed strategy” aimed at moving the company outside its core jack-up rental wellhead market. Examples include offshore, decommissioning and carbon capture.
However, today’s update stops short of providing any financial guidance for the year ending June 25, even though the year is now nearly halfway through.
The latest broker estimate I can find comes with thanks to Cavendish, on 14 November. They suggest FY25 revenue of £4.7m and an adjusted PBT loss of £3.1m next year. This mirrors the consensus estimates shown on the StockReport.
I recognise there may be opportunities here for material long-term growth and improved profitability. But as things stand, last year’s profitable result does not seem likely to be repeated in the coming year.
Furthermore, the small FY24 net cash position and forecast for continued losses suggest that a fundraising may be needed at some point over the next year.
I’m going to maintain our previous rating of AMBER/RED.
Graham's Section
Inspecs (LON:SPEC)
Down 18% to 40p (£41m) - Trading Update - Graham - AMBER/RED
Inspecs is “a leading designer, manufacturer and distributor of eyewear (sunglasses, optical frame, lenses and low vision products”).
Unfortunately, today’s trading update is a profit warning:
The Group has seen year on year growth in the second half to date signalling overall positive momentum, despite the improvement in Q4 sales not having been as strong as anticipated. However, due to the slower recovery in our European markets and the deferral of orders for some of the Group's larger customers into 2025, the Board now expects to report revenue for the year to 31 December 2024 of c.£197m (c.£202m on a constant currency exchange rate basis) and Underlying EBITDA in the range of £17.4m to £17.9m.
I have to mark this update down for not telling us what the prior expectations were.
Similarly, checking the interim results published in September, I see that the company at the time said it was confident in meeting market expectations, but did not say what those expectations were.
The company uses Peel Hunt as its broker: a fine broker, but not one that makes its research widely available.
So unfortunately this is one of those situations where expectations are communicated privately - not an acceptable situation for a publicly listed company.
I think that the prior forecast for revenue was £204m (from the StockReport) with EBITDA of around £20m.
Graham’s view
It’s been a while since I looked at this one, but in January 2024 I was reviewing another profit warning from Inspecs, remarking that it was “accident-prone” and lamenting that Peel Hunt forecasts were not widely available.
It appears to suffer from a lack of both fundamental quality and visibility. Losses have been a regular occurrence, and so have profit warnings. They say that they own various patents and manufacturing techniques but I’m still not convinced that there is a lot of valuable IP at work.
Net debt was last seen at £20m as of June 2024.
At those interim results, underlying EBITDA of £10m converted to PBT of only £1.3m.
I’ve never really trusted this one and after another profit warning I think it’s reasonable for me to downgrade this to AMBER/RED.
If I was trying to construct a bullish argument for it, I would point to its progress in reducing net debt, a new site in Vietnam expanding capacity, and a cheap earnings multiple.
However, I would never add this to my personal portfolio. I view this stock as superficially cheap, but for good reasons.
The enterprise value is around £60m, giving an EV/EBITDA multiple of about 3.5x. For a poor-quality company with a dubious track record, I still wouldn’t view this as offering very good value. So AMBER/RED makes sense to me.
Boohoo (LON:BOO)
Up 1% to 35.6p (£497m) - ISS recommends holders vote AGAINST Resolutions - Graham - RED
An under-appreciated feature of the asset management industry is that many institutions do not have an independent, fully-researched view on their holdings. This is true not just for passives, where it is to be expected, but also for many actively-managed funds.
The result is that when it comes to voting their shares, institutions rely on the proxy advisory services Glass Lewis and ISS (Institutional Shareholder Services).
Today, boohoo loudly announces that ISS have sided with them and against Frasers/Mike Ashley:
ISS states that Frasers has offered a superficial view of performance and no specific plans for change and the two Frasers candidates, Mike Ashley and Mike Lennon, have real conflicts of interest, concluding that Board change at boohoo Group is not warranted.
They reiterate their view that Frasers are trying to destabilise boohoo, that Mike Lennon is an insolvency expert, and that shareholders should ask themselves why Frasers would want him on the board at Boohoo.
Graham’s view
I wrote last week that the confrontational style of M&A pursued by Frasers is not a style that I’d want to bet on. There are proven ways to pursue M&A without engaging in conflict: Next, which I hold, is the most obvious counter-example in the retail sector.
The fact that ISS have sided with the boohoo board is not all that surprising to me, given the belligerent approach taken by Mike Ashley.
On the other hand, I have also expressed many concerns in the past about boohoo’s governance. I was reminded of these concerns last month, when boohoo announced a new independent Chair.
In connection with this, founder Mahmud Kamani became “Executive Vice Chair” and made various assurances and undertakings to the company.
These promises from Mr. Kamani included that he would not be involved “in the commercial decision making of any competitor of boohoo”, and that “any transactions involving boohoo and a related party are conducted on arm’s length commercial terms with him playing no role in related board discussions or decision making”.
Kamani also made a statement “that he has no intention to make an offer for the company” and “no intention to purchase any of its assets”.
He promised not to “take any action which might reasonably be expected to result in boohoo being unable to operate as an independent business”, and not to “seek to disrupt the commercial strategy of boohoo”.
Some might be reassured by these promises, but I would be alarmed. I would not want to own shares in a business where it was seen as necessary for the Executive Vice Chair, founder and largest individual shareholder to promise not to "disrupt" the company.
I was RED on boohoo last time and I’m still RED on it today. Thanks to a recent fundraise it has successfully repaid £50m of its term loan, so net debt should have reduced from the £143m it reached in August. I’ll be very impressed if that is the last fundraise.
Roland's Section
Synectics (LON:SNX)
Up 9% to 335p (£60m) - Trading update - Roland - GREEN
(Disclosure: Roland has a long position in Synectics)
Today’s (short) update from this security and surveillance specialist comes hot on the heels of a $2.7m contract update in late November, which we covered here.
FY24 update: Synectics now says that pre-tax profit for y/e 30 November 2024 is expected to be “materially ahead of market expectations”.
Management helpfully specifies previous market expectations for revenue of £55.4m and pre-tax profit of £3.9m.
However, the company has not included any numbers for revised expectations in today’s update. At the time of writing there are not any updated broker notes available on Research Tree, either.
For now I would guess that a 10% uplift might be a sensible estimate, suggesting a pre-tax profit of perhaps £4.3m and earnings of 20p-21p per share.
My estimate of a 10% update is consistent with the 9% gain seen in early trading this morning. The last-seen share price of 335p puts SNX on a FY24 P/E of around 16, unchanged with yesterday’s closing valuation.
FY25 outlook: strong momentum through the second half of the year has supported an improved year-end order book of £37.8m (FY23: £29.2m). Net cash at year end was improved at £9.6m (FY23: £4.6m).
Management expresses “confidence for the year ending 30 November 2025” but does not suggest any upgrade to FY25 guidance today. I’d guess an update on FY25 guidance will be provided with the FY results in March.
One potential weakness I highlighted in November was the somewhat average quality metrics of this business. Operating margin and ROCE both remain below 10%.
However, crunching the numbers on the current FY25 forecasts suggests to me that operating margin could approach 10% next year, suggesting further benefits from operating leverage. This could potentially underpin a further upgrade to guidance if order intake remains strong.
Roland’s view
I recently added Synectics to my rules-based SIF portfolio and my own personal holdings.
While it felt a little uncomfortable (for me) buying a share that had already doubled this year, I think the strong balance sheet, reasonable valuation and improving profitability provide some underpinning for the increase in valuation.
Further gains don’t seem unreasonable to me, and I was interested to see that Synectics featured in Ed’s recent list of 20 trending small caps.
In November I moderated our view to AMBER/GREEN in the absence of any update to guidance. Today I feel it’s logical to go back to GREEN, given the positive factors I’ve discussed above.
Domino's Pizza (LON:DOM)
Down 2% to 345p (£1.36bn) - Strategy update & TU - Roland - AMBER
Pizza takeaway chain Domino’s has finalised a new eight-year growth framework agreement with its franchisees and has also announced an update on trading for the year ending December 2024.
The new deal is said to underpin a further significant expansion of the group’s UK footprint:
“In particular, it underpins our confidence in our targets of in excess of 1,600 stores delivering £2.0bn of systems sales by 2028 and 2,000 stores delivering £2.5bn of system sales by 2033 driving profit growth across the system.”
Trading update: trading for the current year is said to remain “in line with expectations”.
In the first 9 weeks of Q4, total orders are up 5.3% (Q3 24: +3.5%) and like-for-like sales are up 2.7% (Q3 24: +0.7%).
Based on these figures, trading in Q4 appears to have improved slightly from Q3. This performance also represents an improvement from H1, when total orders fell by 0.9% and LFL sales were down by 0.1%.
Broker consensus forecasts shown on Stockopedia suggest underlying earnings could rise by 7% to 20.1p per share in FY24, giving a forward P/E of 17.2.
A dividend of 11.1p per share is expected. This would give a 3.2% yield and extend an impressive 21-year record of growth – highlighting the strong profitability and cash-generative nature of this capital light franchise operation.
The big question for me is whether Domino’s can maintain its past profitability as it continues to expand in the UK. The company expects to open its 1,400th store next year and is targeting a total of 2,000 by 2033.
For contrast, Greggs has over 2,500 stores and McDonald’s has nearly 1,300. These numbers suggest to me that Domino’s target is not necessarily unrealistic, but may not be easy to achieve while maintaining attractive profitability.
Let’s take a look at the changes the company is planning to keep its progress on track.
Profitability and Growth Framework (PGF): today’s new framework builds on the Memorandum of Understanding that was signed in 2021. This was agreed after a period of rumbling dispute with the group’s franchisees, which threatened the group’s ability to continue rolling out new stores effectively.
This MoU is already said to have delivered some useful results (my bold):
DPG and its franchise partners have made significant strategic progress together since 2021 under the MoU, collectively benefiting from an aligned system. New store openings have accelerated, national value campaigns have delivered increased orders, and we have brought more innovation to customers. In addition, app customers have doubled, our service times have significantly improved and GPS technology was rolled out. We also successfully launched and scaled nationally on Just Eat and Uber Eats.
The negotiation of this framework has been led by CEO Andrew Rennie. He was appointed in 2023 and is a hugely experienced Domino’s exec and former franchisee, with a strong track record of growing other franchise markets.
The plans announced today are expected to drive “meaningful new store openings”. But they’ll also come at some extra cost to both franchisees and the listed company.
Marketing spend: franchisees pay into a National Advertising Fund, operated by Domino’s. Franchisees contribute 4% of their system sales, while I believe Domino’s has previously contributed amounts it has determined to be appropriate.
Going forward, franchisees’ contributions will be unchanged, but Domino’s will now contribute a flat 0.2% of system sales to the NAF. This would have been equivalent to c.£3m last year.
Digital investment: Domino’s now has 9.5m app users, driving more than three quarters of online orders. The company will now step up investment in its ecommerce technology and believes this could increase order frequencies.
From July 2025, franchisees will increase their contribution to the eCommerce fund from 0.75% to 1% of system sales. Domino’s will contribute 0.25% to help support increased ecommerce operating costs.
New store incentives: a big area of concern for the business is how to effectively manage the process of splitting existing franchise territories to create opportunities for new stores.
New store incentives will now be paid to franchisees over five years instead of three, presumably to provide a mutual incentive to develop stores in areas that are less densely populated. Incentives themselves are unchanged at £100k for a virgin territory and £150k for a split territory.
I presume the difference between these numbers reflects the extra difficulty of building a successful store in a split territory.
National advertising campaigns: these will continue and have been paired with a new food rebate mechanism for franchisees that’s intended to reward increased LFL orders. (As a reminder, franchisees have to buy all of their supplies from Domino’s – this supply chain revenue accounted for 70% of total group revenue last year.)
Extra costs: Domino’s expects the changes above to result in an additional £3-£4m of operating costs from next year.
In addition to this, the company says national insurance increases announced in the recent Budget will cost c.£3m per year, after some mitigation.
Roland’s view
Domino’s reported revenue of £680m and operating costs of £204m last year. Against this backdrop, the increase in costs announced today does not seem particularly onerous to me. If franchisees are happy with this plan, then I think it should be satisfactory for Dominio’s shareholders too.
Domino’s share price has been fairly volatile over the last five years and remains well below historic highs.
Looking at the latest accounts, my feeling is that the company currently uses a little more debt than is necessary or ideal. I would have preferred to see cash from recent buybacks diverted into debt repayments.
However, the company’s low capex requirements and strong profitability metrics suggest to me that the balance sheet is unlikely to become a problem.
The market seems to have given today’s announcement a lukewarm reception. I think the plans seem fine as far as they go, but I’d prefer to review them again alongside this year’s full-year results.
With the stock trading on a mid-teens P/E multiple, I think a certain level of growth is already priced in.
On balance, I’m going to maintain our view at AMBER.
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