Good morning!
Mixed feelings this morning about the proposed takeover of H&T. I'm happy for holders of course, while also being a little annoyed with myself that I don't currently hold it! And I'm glad to see that the value of the business has been verified. But at the same time I'm also very sad to see it leaving AIM: this is a high-quality stock that I've followed for many, many years. If I was ever asked for an example of a decent company on LSE's junior market, there is a good chance I'd mention this one. So I can't help feeling that it's a bad sign that it's leaving us.
With inheritance tax changes, an IPO drought and the takeover of so many good companies in recent years, the search for quality companies on AIM is getting harder. The FTSE SmallCap Index is more interesting than AIM now, in my view.
The Agenda is complete.
1pm: wrapping it up there for now, thank you.
Companies Reporting
| Name (Mkt Cap) | RNS | Summary | Our view (Author) |
|---|---|---|---|
Compass (LON:CPG) (£44.2bn) | Outlook unchanged: high single-digit adj. op profit growth. Organic revenue growth >7.5%. | ||
| Experian (LON:EXPN) (£36.6bn) | Full Year Results | Revenue +6% to $7,523m with adj EBIT +8% to $2,083m. Expect FY26 revenue growth of 9-11%. | |
Imperial Brands (LON:IMB) (£23.7bn) | Market share gains (+6bps) ahead of objective. On track to deliver FY results in line with guidance. CEO retirement with CFO set to take the top job in October. | AMBER (Megan) Shareholders have reacted badly to the news of the departure of the company’s CEO, who has overseen an impressive period of growth in difficult conditions in the last five years. I’m not inclined to be too positive about this one, despite the fact that it is being very well managed. The market is only going in one direction and while the company prioritises dividends and buybacks, there is no arresting the decline in sales. | |
| Marks and Spencer (LON:MKS) (£7.1bn) | Cyber Incident - Further update (Tue 13/5) | Some customer data has been taken but this does not include “usable payment or card details” or passwords. Customers are being written to but MKS says there is “no evidence that this data has been shared”. | AMBER/RED (Roland) [no section below] Marks & Spencer shares have fallen by 15% since its cyber attack was disclosed on 22 April. Yesterday’s update increases the known severity of the attack without providing any timing on an expected resolution. Online orders from the company’s website (previously 33% of Clothing & Home sales) remain suspended. I still expect this to be a temporary issue with no lasting impact. But it seems hard to avoid concluding that FY26 forecasts will need to be downgraded. I think it makes sense to stay on the sidelines until there’s some clarity |
Spirax (LON:SPX) (£4.9bn) | “Maintain our outlook for 2025” while recognising tariff uncertainty. Local manufacturing mitigates. Low single-digit growth in Q1 revenue, but adjusted operating margin was slightly lower than last year reflecting order phasing. H2 revenue growth and margin are expected to be higher. | AMBER/RED (Roland) [no section below] Unfortunately there’s no clear sign of a turning point for momentum in this former high flyer, which is exposed to falling industrial output in Europe and weak macro conditions globally. Net debt is relatively high by historical standards and the forward P/E of 22 is not obviously cheap. While I continue to see this as a high-quality business, Falling Star styling suggests to me it could be sensible to remain on the sidelines for now. | |
Persimmon (LON:PSN) (£4.4bn) | Fibre broadband service sold to BUUK Infrastructure for c.£100m, with £70m on completions. | ||
Londonmetric Property (LON:LMP) (£3.9bn) | Non core, mature assets acquired through M&A. Sales are in line with prevailing book values. | ||
Burberry (LON:BRBY) (£3.0bn) | Revenue -15%, adj. op profit -94% (£26m). “Significant improvement in comparable retail sales in H2.” | RED (Megan) If you’re a holder, there are signs of light in these numbers. The new management team seems to be doing a very good job with a very troubled company. But this is a turnaround play based on the underlying value of the brand, which I think is already accounted for by the £3bn market capitalisation. | |
Vistry (LON:VTY) (£2.1bn) | Expectations maintained for the current year, with more significant H2 weighting than in prior years. | ||
TP Icap (LON:TCAP) (£2.0bn) | Comfortable with current market expectations for 2025 adjusted EBIT. | GREEN (Graham) This large global brokerage continues to perform very well and is available at a PER of only 8x despite having some high-quality subsidiaries and an excellent long-term track record of profitability. | |
Savills (LON:SVS) (£1.5bn) | Q1 trading broadly in line with expectations. Expect improved market conditions in H2. | ||
Gamma Communications (LON:GAMA) (£1.22bn) | Adj. EBITDA and adj. EPS to be within the range of latest market forecasts. | AMBER (Roland) Today’s results flag up weaker than expected market conditions in the UK but report “positive trading” from recent acquisition in Germany. My feeling is that consensus estimates could slip a little lower after today. I still think this is a decent business at a reasonable price, but I’m inclined to stay neutral until the outlook becomes clearer. | |
Keller (LON:KLR) (£1.11bn) | Full year to be in line with the Board’s expectations, reflecting a more typical H2 weighting. | ||
Spire Healthcare (LON:SPI) (£787m) | Trading in line with expectations. 2025 guidance unchanged. | ||
Marshalls (LON:MSLH) (£727m) | Full year expectations unchanged. Four months to April: revenue +4% (£207m). Net debt £171m excluding leases, down from £175m (April 2024) but up from £134m (Dec 2024) - this is due to seasonal working capital requirements plus an acquisition payment. | AMBER (Graham) [no section below] I was neutral on this last year with the share price at 336p. Today's update says that end markets are still "subdued" for Landscaping products and there is softer demand for Bricks, although there are some bright spots such as strong performance in Solar/Roofing. While the return to revenue growth is to be welcomed, and my overall impression of the business is positive, I'm not persuaded that it offers better-than-average prospects at the current valuation - unless we are about to witness a construction boom. My lukewarm stance on this is consistent with its StockRank of 61 and a StockRank style of "Neutral". | |
Conduit Holdings (LON:CRE) (£577m) | Gross premiums written +15% in Q1. 2025 RoE to be between high single and low double digits. $50m share buyback announced. | AMBER (Roland) This encouraging trading update confirms the appointment of an experienced CEO who reiterates the revised guidance provided with March’s profit warning. There are signs of rate weakness from increased competition, but management says rates remain attractive. Additional reinsurance should reduce exposure to further major losses. With a c. 20% discount to book value and possible 7% yield, I think Conduit could be attractive if the outlook stabilises. | |
Rank (LON:RNK) (£496m) | SP +7% "Very good news" according to the CEO: an increased number of gaming machines, and sports betting, will be permitted in casinos (England & Wales). The reforms will go into effect on 22nd July. Rank will engage with Scotting government officials on the topic. | GREEN (Graham) [no section below] Following on from the in-line trading statement published in April, today Rank observes that the UK government has published its anticipated casino legislation (or "statutory instruments"). While the news was expected, it is now certain. It means that Rank's Grosvenor Casinos will add 882 gaming machines to their current estate of 1,367: an increase of 65%! In total, the number of machines could more than double to over 3,100. I was already a fan of this stock due to its reasonable valuation and the prospects for profitability to bounce back in an environment of stable cost inflation. This legal change now has the potential to be the catalyst for greatly improved casino profitability, so there is little reason to change my stance. I note that the shares are up 33% so far this month. | |
Victorian Plumbing (LON:VIC) (£352m) | Full-year adj EBITDA to be in line, with adjusted PBT lower at £21-22m (previously c.£23m) | ||
Niox (LON:NIOX) (271m) | Niox sales +21% YTD, clinical sales +10%. Net cash £14.5m. Research revenue ahead of exps. | ||
Gulf Marine Services (LON:GMS) (£208m) | SP -5%. | AMBER/GREEN (Roland) [no section below] This appears to be a one-off problem and I don’t think it’s a huge concern. But to reflect the uncertainty and likely cash drag, I’ve moderated our previous view - at least until the company provides final details. | |
AdvancedAdvT (LON:ADVT) (£206m) | Buying this workforce mgt SaaS business for £5.3m. Paying 5.7x EBITDA inc net assets of £2.5m. | ||
Vertu Motors (LON:VTU) (£206m) | FY25 rev +1.6%, adj PBT -16% to £29.3m. Weak new car market. NTAVps 72.9p. YTD trading +ve. | ||
H & T (LON:HAT) (£201m) | 661p cash, 44% premium. US trade buyer. Multiple bids received from them since December 2024. | PINK (Graham) | |
Vanquis Banking (LON:VANQ) (£180m) | Returned to profit. Gross lending +0.2% to £2,313m. NIM flat QoQ at 17.8%. Complaint costs in line. | ||
Gooch & Housego (LON:GHH) (£113m) | Acquisition of Global Photonics ($17.5m) | 50/50 cash/shares deal to buy US-based firm at 9.7x EBITDA. Adds US defence/aero exposure. | |
Kinovo (LON:KINO) (£51m) | Recommended cash offer from Sureserve subsidiary for 87.5p per share, 41% premium. | PINK | |
Journeo (LON:JNEO) (£49m) | Framework w/ First Bus to deliver £10m revenue through March 2028, with option to extend. | ||
Tpximpact Holdings (LON:TPX) (£22m) | FY25 revenue to be in line with Adj EBITDA exp £4.9m. FY26 adj EBITDA target £6-7m. | ||
LMS Capital (LON:LMS) (£17m) | Current investments had NAV of £23m at 31 Mar 25. Shareholders to vote on realisation at GM. |
Graham's Section
H & T (LON:HAT)
Up 40% to 640p (£282m) - Recommended Acquisition - Graham - PINK
This takeover is the main story of the day so let’s review some of the main facts.
Price: 661p. 650p from the buyer plus an 11p dividend from the company.
Premium: 44%, quite a decent premium.
The buyer: Firstcash Holdings (NSQ:FCFS), “an operator of pawn stores in the United States and Latin America”. Market cap equivalent to £4.3 billion. 1,365 stores with a track record of acquisition.
Reasons for the acquisition (from the perspective of FirstCash):
H&T represents a compelling opportunity for FirstCash to expand its operations into the UK. The acquisition of H&T builds on FirstCash's strong strategic momentum and is expected to expand FirstCash's geographic reach, unlock further growth opportunities, enhance scale and operational leverage and add experienced UK-based leadership, as well as being financially compelling.
The combination of FirstCash and H&T will create the largest publicly traded pawn platform in the US, Latin America and the UK.
But why should H&T shareholders accept it?
The H&T Directors believe that the Offer Value represents an attractive opportunity for H&T Shareholders to realise an immediate cash return at a significant premium to the recent trading price for their H&T Shares.
In more detail:
Notwithstanding the progress made in executing on H&T's strategy and the track record H&T has built as a public company, there remain operational, commercial, funding, and market risks associated with the achievement, timing and delivery of future value to H&T Shareholders.
Some specific risks mentioned by the H&T Board: the gold price, the uncertain macro/fiscal outlook for the UK, and cost pressures from employment legislation/tax changes.
Timetable: expected to complete in the second half of 2025.
Graham’s view
I can’t criticise anyone for accepting a takeover at a 44% premium. That’s a significant gain to bank.
In terms of the P/E ratio, 650p is 12x forecast earnings per share.
That might not seem very high, but it’s much higher than H&T usually trades at:
In another sign of the disconnect between the UK and US markets, I note that FirstCash is trading at a PER of 15.5x. And I don’t think its quality metrics nor its balance sheet are any better than H&T’s.
There aren't any significant “irrevocable undertakings” in today’s announcement - only from the Directors. So H&T’s shareholders still have to decide if they wish to vote for this. I expect that it will go through - a 44% premium is usually enough. But personally I don’t know if I’d vote for it. FirstCash are offering 12x earnings: it’s not a terrible offer in the context of the prevailing share price in a depressed AIM market, but it’s also not an offer where I’d want to snap your arm off!
Finally, it’s worth a mention that FirstCash approached H&T back in December, six months ago. They made four proposals over a month, each of which was rejected. After H&T provided additional information and access to management, there were then “a number of further proposals”, culminating in today’s announcement.
Anyone who sold out since December might feel aggrieved that they were left in the dark and had no idea that these discussions were ongoing. Why not let investors know that a takeover was being negotiated, especially after FirstCash were given additional information about H&T and special management access? I think that would have been the right thing to do.
PS: the Ramsdens Holdings (LON:RFX) share price is up 4% in sympathy.
TP Icap (LON:TCAP)
Down 2% to 263p (£2.01bn) - Trading Statement - Graham - GREEN
This institutional brokerage provides an update on trading in Q1.
As with the retail trading platforms such as Plus500, volatility has been good for TP ICAP:
Total revenue grew 10% to £629m, the best quarter ever registered by the Group, benefiting from a period of heightened market volatility which was driven by the uncertainty of U.S. trade policies.
Broking revenue was up 14%, “performing strongly across all asset classes.”.
Liquidnet - a trading network for institutions - saw revenue growth of 16%, even faster than the 15% growth recorded year-on-year for 2024 (see my coverage of TCAP’s full-year results in March).
Energy & Commodities revenue was unchanged, while the OTC data company Parameta grew 6%. Parameta is slated for a minority listing (i.e. an IPO), but the timing of this potential move is now “under review” after the recent “market turbulence”.
Outlook:
The Board remains comfortable with current market expectations for 2025 adjusted EBIT, following a strong first quarter performance and despite the recent weakening of the U.S. Dollar.
In a footnote, the company observes that GBPUSD (cable) has moved from $1.28 last year to a current rate of $1.34.
Revenues are denominated mostly in dollars, but costs are not, so the company benefits from a strong dollar (and vice versa).
Graham’s view
I’m a big fan of this one; it’s a trusted global brokerage connecting many of the world’s largest institutions (both financial and otherwise).
Beyond the brokerage business, its trading network Liquidnet is very highly ranked and the Parameta data business is thought to have overwhelming market share with its niche.
And it’s a Super Stock offering a heady mix of quality, value and momentum.
Value is apparent with a PER of only 8x:
As the outlook is unchanged and the only major annoyance seems to be the USD exchange rate, I can maintain my positive stance. Parameta's IPO could be the catalyst for rerating, although the timing of this is yet to be determined.
Megan's Section
Imperial Brands (LON:IMB)
Down 8% to 2659p (£22bn) - Interim results and CEO departure - Megan - AMBER
In the five years since Stefan Bomhard took over as chief executive of Imperial Brands, the company’s share price has risen 64%. Not a bad legacy as the boss announces his retirement alongside this morning’s interim results. There’s already a succession plan in place, with current CFO Lukas Paravicini set to take the reins in October. Mr Bomhard will remain on the board until the end of the year and “be available” until next May to ease the transition.
That all sounds pretty sensible, but shares have fallen 8% this morning in response to the news, continuing the difficult run of momentum of the last couple of weeks.
There’s no clear reason for the string of down days, which started on 7 May. Perhaps some profit taking ahead of the announcement of financial results after a strong start to the year. Or maybe the price is responding to the purchase price of the company’s buyback scheme. Last week, the company bought back and cancelled its shares as low as 2923p.
Still, the buyback scheme should be beneficial for shareholders in the long run. Overall management plans to spend a whopping £1.25bn of its cash on buying back its own shares.
I am often a bit sceptical about buybacks schemes, especially ones of this size. Is there not more that the company could be doing with the cash generated from operations?
The investment section of the cashflow statement is very small for IMB. Capital expenditures are just a fraction of what the company is spending on direct returns to shareholders. In 2024, the company spent £1bn on buybacks and £1.3bn on dividends.
Looking at the revenue line, it seems that lack of investment, alongside a difficult and tightly regulated end market, has had its repercussions. Sales are flat over the last five years and fell 3% to £14bn in these numbers. Although if you exclude the massive volumes of tobacco duty and similar taxes, net sales were up by the same amount to £3.7bn.
Net sales growth has been driven by pricing, with tobacco volumes falling in the period in line with wider market trends. The company’s next generation products (including vapes and e-cigarettes) saw increased demand in the main Europe and Americas markets, but the division is still loss-making and still delivers only a fraction of the sales of the core tobacco business.
IMB has five key markets that it has been targeting for long term growth: the US, UK, Germany, Spain and Australia. The former is seeing a rapid decline in demand, which management attributes to both health trends and an increase in illicit vaping products. But in the first half, the volume of IMB products declined slower than the wider market rate as the company made market share gains, despite an average 10% increase in pricing. Even in difficult economic times, the company’s customers are willing to pay up for their tobacco fix.
The European market performance was rescued by Germany, where price increases offset the 1.7% decline in the market size. In the UK the tobacco market shrank by 17%, which seems like a phenomenal pace in just six months. Management says the domestic market remains important, but surely not if the market declines continue at such a pace. Next generation products are still nowhere near enough to offset the decline in revenues in any of the company’s main markets.
Megan’s view
It’s hard to deny that Mr Bomhard has done a fantastic job in a very difficult five years at Imperial. It’s no wonder he’s ready for a break, although it’s perhaps come a little earlier than the market expected. His ability to squeeze higher profits from a product which, globally, is in decline has been impressive. And shareholders have benefited from this management, with excellent share price returns and a generous dividend.
It’s difficult to make a growth case for the shares. I can’t see how the company is going to switch into next generation products without substantially higher investment. And there is no arguing about the fact that the tobacco market is only going one way.
But does that make it a bad investment? For me, yes, I am a long-term growth investor. I am also wary of the fact that this morning’s news of a CEO change seems to have surprised the market in a bad way, and share price shocks can spell bad times for high performing shares.
From an income perspective, the dividend looks secure and is currently yielding 5.8% which is pretty decent. I am not willing to be overly positive about this one, but if the incoming CEO can keep the ship on the same course as it has been for the last few years, that dividend should continue to provide a decent chunk of income for investors. AMBER
Burberry (LON:BRBY)
Up 15% to 946p (£3.2bn) - Final Results - Megan - RED
As predicted in the January Q3 trading update, Burberry’s second half performance has “broadly offset” the losses made in the first half. Reported losses were just £3m, which is impressive given the £53m loss reported in the first half.
In November, after the shocking first half, the company’s new chief executive (brought in to replace Jonathon Akeroyd who was removed as CEO after the mega profit warning last year) announced his ‘Burberry Forward’ plan. Steps taken in the last six months have included major winter and Christmas marketing campaigns, streamlining of the product portfolio and inventory, and a cost cutting programme which has so far saved £25m.
The upshot is that all three of the company’s main selling regions reported far more palatable declines in the second half:
Asia Pacific: -25% in H1 and -9% in H2
EMIEA: -13% in H1 and -3% in H2
Americas: -21% in H1 and +1% in H2
Like-for-like store sales fell 5% in the second half, although the improving trajectory seems to have stalled with Q4 comparable store sales down 6%. Still, it is a major improvement on the first half when life-for-like store sales were down 20%. Overall sales fell 17% or 15% at constant currencies to £2.5bn. Like-for-like store sales were down 12%.
Inventory management: In the last six months, there has been a material improvement in the value of the company’s inventories, which peaked at £596m at the half year point. At the year end, the value of inventories was £424m. The swing of £172m, alongside the 5.2 percentage point decline in gross margins, suggests there has been some pretty brutal discounting in the second half.
Stock sold at a lower value than its cost was also higher, costing the company £44m in the period. And inventory provisions (which refers to the stock where the realisable value is expected to be less than its cost) are at £103m. That’s in line with the inventory provisions reported at the half year point, suggesting the management of the inventory overhang still has further to go.
Balance sheet: Lease liabilities remain a constant worry on the Burberry balance sheet, totalling £1.1bn at the end of the year. The concern is that these lease liabilities are related to stores, many of which will be loss making. The company is therefore tied into property contracts on stores which will continue to suck in capital that the company doesn’t have.
In the second half there was another impairment charge taken on the right-of-use assets taking the total impairment for the year up to £32m. These impairments related to 18 stores.
Megan’s view
The company’s new management team has clearly done an exceptional job at injecting some life back into the flailing Burberry brand. And this has resulted in a major swing in fortunes on a pure profit and loss basis. But six months of hard marketing efforts will not fix the inventory and lease liability issues.
This remains a turnaround stock, but has that turnaround already been priced in? A £3bn market capitalisation seems to account for the value of the brand already.
Holders might have a different perspective and there are signs of light in these numbers for those waiting for the turnaround. But I am quite happy to be on the sidelines. RED
Roland's Section
Gulf Marine Services (LON:GMS)
Down 5% to 17.4p (£198m) - Update on Saudi Arabia Tax Appeal - Roland - AMBER/GREEN
Summary
The company has lost a final appeal over a $9.2m tax bill relating to FY17-19 that was received from Saudi authorities in 2021.
Management is now seeking the waiver of penalty charges applied to the original tax demand.
FY25 Adj EBITDA guidance of $100-108m is unchanged.
Roland's view
Today’s update refers to a previous provision for this issue, but on checking the FY24 accounts, the amount provided for is not disclosed. The significance of the provision is that it means that at least some of this liability has already been expensed, so will not affect reported profits. However, it will affect cash flow and thus debt reduction.
Assuming a cash outflow of c.$9.2m, I think the main impact will be that deleveraging could be slower than planned, perhaps reducing the capacity for shareholder returns this year. This appears to be a one-off problem and I don’t think it’s a huge concern. But to reflect the uncertainty and likely cash drag, I’ve moderated our previous view - at least until the company provides final details.
Gamma Communications (LON:GAMA)
Down 13% to 1,136p (£1.1bn) - AGM Trading Update - Roland - AMBER
Based on our trading and cost actions in 2025 to date, the Board expects Adjusted EBITDA and Adjusted EPS (fully diluted) for the year ending 31 December 2025 to be within the range of latest market forecasts*.
Today’s update from cloud communications specialist Gamma Communications has received a poor response from the market, despite confirming that full-year results are still expected to be within the range of expectations.
It’s only a brief trading statement but the main problem seems to be that trading in the UK has softened since the start of the year “as part of the wider macro-economic picture”. This was noted in March’s results but has seemingly worsened since then:
Since those results, we have seen ongoing softness in the UK market conditions continue. In response, management has taken a number of prudent actions to manage costs.
Fortunately, positive trading in continental Europe has helped offset this weakness. This is the result of a “strong trading performance” from recent acquisitions Placetel and STARFACE (both in Germany).
In its FY24 results, Gamma explained why the German market could offer attractive growth potential:
First, it is the largest business communications market in Europe. Second, the proportion of sales of communications solutions which are based in the cloud is much lower than most of Europe.
We have therefore been increasing our presence in Germany through a combination of organic growth and acquisitions.
Outlook: actions are being taken to manage costs in the UK.
As a result of these measures and the group’s European performance, adjusted EBITDA and adjusted earnings per share for the current year are still expected to be “within the range of latest market forecasts”.
Helpfully, these are given as:
FY25E adj EBITDA: £139.4m to £146.0m
FY25E adjusted diluted EPS: 89.9p to 94.8p
Prior to today, Stockopedia was showing consensus earnings of 93.5p per share for 2025 – at the upper end of this range. The market’s reaction today may suggest that investors now expect consensus to shift slightly lower.
Roland’s view
For some context, Gamma reported adjusted earnings of 85.1p per share for 2024. So the current range of forecasts implies underlying earnings growth of between 5.6% and 11.4%.
However, today’s update is a little disappointing and – in my view – is most likely guiding earnings expectations down to the lower end of this range.
Using an earnings figure of 90p per share leaves Gamma shares on a P/E of less than 13 after this morning’s slide. For a business with a strong track record of growth and excellent quality metrics, I don’t think this is expensive:
It’s a slightly underwhelming start to Gamma’s tenure as a Main Market company, but fundamentally I don’t see any reasons to be seriously concerned.
However, as we’re not yet halfway through the year, I have to conclude that there’s a possibility expectations could be trimmed again if UK trading conditions do not improve.
Megan was GREEN on Gamma in March, but given the downbeat tone of today’s commentary I think it’s sensible to switch to a neutral view today until the direction of travel becomes clearer. AMBER.
Conduit Holdings (LON:CRE)
Up 8% to 376p (£628m) - Q1 Trading Update - Roland - AMBER
CHL, the ultimate parent company of Conduit Re, a multi-line Bermuda-based reinsurance business, today presents its trading update for the three months ended 31 March 2025.
Conduit issued a profit warning and lost its CEO at the end of March. Today’s update has received a positive reception as the company has maintained its revised guidance and confirmed the appointment of founder and former Executive Chairman Neil Eckert as chief executive – an experienced choice.
Q1 growth at “attractive levels”
Key figures show Conduit continued to add new business during the first quarter, albeit at slightly less favourable rates than previously - these are year-on-year comparisons:
Gross premiums written +15% to $410.2m
Reinsurance revenue +17.6% to $213.0m
Overall portfolio risk-adjusted rate change of -4% – this means pricing has weakened in some areas due to competition. However, the company emphasises rates are still attractive following improvements in pricing and terms in recent years
Investment portfolio return of 2.1%
California wildfire loss estimates unchanged at between $100m and $140m
It seems that the strong rate rises of recent years have attracted some more capital to this sector and is putting pressure on rates, as might be expected. Helpfully, Conduit provides a breakdown highlighting the variation in risk-adjusted rates across its three main sectors:
Outlook
Conduit has purchased additional reinsurance to protect its results from any further major losses. Reassuringly, the company’s core profit guidance is unchanged today from March’s profit warning:
We expect a 2025 RoE between high single and low double digits, reflecting the California wildfires, as well as the noted additional reinsurance purchases and portfolio adjustments
In a show of confidence, the board of directors have also now approved a $50m share buyback programme.
On a long-term basis, Conduit remains confident of achieving a “mid-teens RoE” through the cycle.
Estimates: with thanks to broker Panmure Liberum, we have updated forecasts today:
FY25E EPS: 69.7 cents (previously 67.0 cents)
FY26E EPS: 122.7 cents (previously 139.9 cents)
FY27E EPS: 123.1 cents (previously 154.1 cents)
The reduction in FY26/FY27 forecasts reflects PanLib’s assumption that Conduit will have purchased additional reinsurance for these periods and may suffer further rate weakness.
Roland’s view:
Conduit shares currently trade around 20% below their last-reported book value of c.475p. With return on equity expected to be between high single and low double digits, I think this level of discount could potentially offer attractive value.
There’s no comment on the dividend today, but I’d hope that the launch of a share buyback means the payout will be held – if so, the stock offers a c.7% dividend yield.
Although earnings forecasts for FY26 and FY27 have been trimmed, I don’t necessarily see this as a concern. Increased use of reinsurance should help to provide more predictable results and is arguably a sign of the company’s increasing maturity.
Weaker rates are a typical cyclical phenomenon. In this case, the risk is that as a relatively young business, Conduit has not traded through a full cycle before. We have to trust that its experienced management and underwriters will adapt successfully as market conditions change.
In this respect, I’m encouraged by the long sector experience of the CEO and the presence of experienced CFO Elaine Whelan, who was previously CFO for nine years at FTSE 250 insurer Lancashire Holdings.
I went AMBER/RED on Conduit following March’s profit warning and I see that Stockopedia’s algorithms have also turned cautious, with Value Trap styling reflecting very low momentum and rather average quality:
However, the consistency and clarity of guidance from the new CEO and the potential value on offer suggest to me that it’s reasonable to move up one notch and take a neutral view following today’s update. (AMBER)
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