Good morning and welcome to today's report.
Today's news includes details of a possible takeover of small-cap lender International Personal Finance (LON:IPF) by US investment group BasePoint. As it happens, Graham was already scheduled to speak with IPF management this morning to discuss the firm's half-year results. He will be reporting back later with his thoughts on this situation.
Update: for understandable reasons Graham's call with IPF this morning has been cancelled, but we will certainly be reviewing today's results and takeover offer.
12.30pm: wrapping it up there, cheers!
Spreadsheet accompanying this report: link (last updated: 30th June).
Companies Reporting
| Name (Mkt Cap) | RNS | Summary | Our view (Author) |
HSBC Holdings (LON:HSBA) (£170bn) | Adj PBT +5% to $18.9bn, adj RoTE 18.2%. Property losses in HK. Cautious tone on tariffs. | ||
Rio Tinto (LON:RIO) (£76bn) | Net earnings -22% to $4.5bn. Net debt +10bn to $14.6bn. FY25 guidance broadly unchanged. | ||
GSK (LON:GSK) (£57.0bn) | Adj op profit +12% to $2.6bn, Specialty Medicine sales +15%. FY25 “towards top of range” | ||
BAE Systems (LON:BA.) (£54.8bn) | H1 rev +9%, op profit +2% to £1.3bn. Order book -6% to £57bn. FY25 guidance upgraded. | ||
Glencore (LON:GLEN) (£36.5bn) | CuEq prod +5% due EVR coal acq. $1bn cost savings identified. Thru-cycle guidance upgraded. | ||
Sage (LON:SGE) (£12.1bn) | 9mo trading in line with exps, FY guidance unchanged. Rev +9%, with N.Am +11%. | ||
Taylor Wimpey (LON:TW.) (£3.8bn) | SP -5% PW: rev +9%, adj PBT -21% to £148m. NTAV down 5.6% to 117.5pps. H1 completions +11% to 5,264, FY guidance unchanged at 10,400-10,800 homes. FY25 op profit now exp c.£424m (prev £444m) | BLACK (AMBER) (Roland) Today’s profit warning appears to relate to a single charge for historic faulty workmanship, rather than a downgrade to trading guidance. But there’s no mistaking the fact profitability remains under pressure due to cost inflation and softer volumes – while affordability issues mean the company’s ability to increase prices is very limited. An adjusted return on equity of under 10% suggests to me the current valuation, just below NAV, is probably about right. | |
Aberdeen (LON:ABDN) (£3.7bn) | Adj op profit -2% to £125m, AUMA +1% to £518bn. Net flows £(0.9)bn. Confident outlook. | ||
Tritax Big Box REIT (LON:BBOX) (£3.5bn) | Has let new facility at Symmetry Park on 15yr lease. Yield towards upper end of 6-8% guidance | ||
Greencoat UK Wind (LON:UKW) (£2.7bn) | Interim Results & Sell-down of interests in three wind farms | H1 net cash generation £163m, dividend cover 1.4x. NAV -5.2% to 143.4p. £181m of disposals announced today. | |
Man (LON:EMG) (£2.1bn) | AUM +14.7% to $193.3bn (vs Dec24), net inflows of $17.6bn driven by long-only products. | ||
Rathbones (LON:RAT) (£2.1bn) | FUMA £109bn, flat vs Dec 24. IW&I integration complete. PBT -4.6% to £62.3m. £50m buyback. | ||
Seplat Energy (LON:SEPL) (£1.4bn) | PBT +64% to $292.9m, production +178% to 134.5kboepd. FY25 guidance unchanged. | ||
Yellow Cake (LON:YCA) (£1.1bn) | NAV per share +14.3% to 577p on 30 June, reflecting 21.8% Q2 increase in uranium price. | ||
Bodycote (LON:BOY) (£1.0bn) | SP +13% Rev -7.5%, core adjusted operating profit -14.7% to £54.3m. FY outlook unchanged, challenging market conditions. | AMBER (Graham) [no section below] There has been quite a lot of news from this in recent months, including a profit warning in March and then a reassuring trading update in May. Today’s update continues the theme of reassurance: revenues have fallen, and there is reverse operational leverage with profits falling at a much faster pace, but the company says there is no change to the full-year outlook. Thanks to modest leverage (net debt/EBITDA only 0.6x), it extends its existing share buyback programme by another £30m (to £120m), with the prior £90m amount having already been bought back. This buyback extension is another sign of confidence from management but I think a neutral positioning from us continues to make sense, given its lack of growth. Market forecasts suggest that top line revenue will grow by low single digits for the foreseeable future. | |
Aston Martin Lagonda Global Holdings (LON:AML) (£796m) | H1 vol in line, adj EBIT loss £121.5m. FY25 adj EBIT “towards breakeven” w/ +ve FCF in H2. | ||
Serica Energy (LON:SQZ) (£686m) | SP unch Ramp-up slower than expected. Steady-state production is now expected from August. Serica says its other assets are producing at almost 30k boepd, with the potential for total production over 55k boepd when Triton is fully online. However, SQZ 2025 production guidance has been cut to 33-35 kboepd (prev 33-37k) | AMBER/GREEN (Roland) [no section below] I’d like to be a fly on the wall in Serica’s discussions with Triton operator Dana Petroleum. This ageing FPSO has been consistently troublesome in recent times and is once again living up to its reputation. Serica has cut the top end of its 2025 production guidance range today, although as we’ve commented previously, actual profits will probably be more dependent on oil and gas price movements. I think this business – and others in this sector – probably deserve low ratings due to risks around longevity, decommissioning and commodity price/geopolitical factors. However, I expect Serica to remain highly cash generative and will maintain my previous view today, given the P/E of 5 and possible c.10% yield. The StockRanks also remain positive, at 97. | |
Alfa Financial Software Holdings (LON:ALFA) (£649m) | Rev +18% to £62.5m in line with exps. “Strong interest” in Alfa Systems 6, FY outlook unch. | ||
Conduit Holdings (LON:CRE) (£633m) | SP -20% GWP +8.9%, H1 loss $13.5m due to elevated loss activity. FY ROE now exp “mid single digits”. | ||
Goodwin (LON:GDWN) (£559m) | SP +20% Rev +15%, PBT +47% to £35.5m, in line with exps, growth driven by momentum in Mech Division. | AMBER/GREEN (Roland) [no section below] In December I covered Goodwin in more depth and suggested that a period of high capex was starting to deliver results for this specialist engineering group. Today’s results seem to bear out this view with excellent growth and a seemingly confident outlook. The FY25 operating margin of 16.9% and ROCE of 18.9% continue the improving trend shown on the StockReport since 2021. This is a complex business which appears to have no broker coverage. I am an admirer, but investors will need to decide themselves if the current valuation on 25x FY25 earnings represents good value. I suspect it could do, on a long-term view, although naturally I’d hope for a slightly more advantageous entry point. Today’s result include a detailed summary of the group’s business model, which focuses on dominating mid-sized niches. I think it’s worth reading for any interested investor as an example of best practice – not many companies do this. I’m going to upgrade my view by one notch today, with the caveat that prospective investors need to DYOR to understand this business. | |
International Personal Finance (LON:IPF) (£393m) | Interim Results & Statement re: possible recommended cash offer | SP +18% Possible offer from BasePoint at 223.8p. H1 PBT +5.5% to £49.9m w/ H2 outlook for increased growth. | PINK (Graham holds) |
Wilmington (LON:WIL) (£304m) | Aware of speculation, confirms exclusive discussions to acquire Professional Group Conversia. | ||
Franchise Brands (LON:FRAN) (£264m) | SP -5% System sales +2.5%. PBT +9.6% (£11.7m). Growth at Filta International (cooking oil management and fryer cleaning) offset by limited or no growth elsewhere. “Resilient performance despite geopolitical uncertainty resulting in challenging macroconditions (sic) in most key markets“. The company takes a “prudent approach to expectations” resulting in a 10.6% EBITDA forecast cut to £35.3m (Dowgate Capital). | BLACK (AMBER/RED) (Graham) [no section below] Relieved to see that I’ve been cautious on this for a while, most recently in May at the Q1 trading update, when I was neutral. Profits have not been clean, like-for-like sales growth has been limited, and the company has had difficulty meeting market expectations. This culminates today in downgrades to expectations. The company is forecast to end the current year with £57m of net debt and a net debt/EBITDA multiple of 1.6x. I’m always a fan of a franchised business model and would be interested to invest in this if the price was right, but for now I must downgrade it in the light of this profit warning. The adj. PBT estimate for next year is £28m: against an enterprise value of over £300m, I’m not yet convinced that this is offering a very attractive value opportunity (and the last-published ValueRank of 39 agrees with me). I’ll take a moderately negative stance until it’s apparent that the company’s new forecasts are realistic and achievable. | |
Hargreaves Services (LON:HSP) (£240m) | Rev +25%, adj. PBT +4%. “Well-positioned to capitalise on strong pipeline of opportunities”. | ||
FDM (Holdings) (LON:FDM) (£214m) | SP -30% Rev -31%, PBT -48% (£8m). Consultants assigned to clients at week 26 were 37% lower than at the same time last year. Escalating trade tensions, macro uncertainties. Immediate outlook very difficult to predict. | AMBER/RED (Roland) [no section below] I clearly got this wrong when I took a positive view in March. In my defence, the company reported improved trading in Q1, ahead of the launch of US tariffs. At that time, a modest valuation and cash-rich balance sheet seemed to provide a good starting point for a recovery. However, this now seems less likely – or at least delayed. More broadly, the impression I’ve had when I’ve looked at this business in the past is that many of the consultants FDM places with clients are probably entry level. I wonder if they’re at risk of being automated out by AI, in addition to the cyclical exposure we’re seeing now? I don’t know the answers, but one saving grace here is that the balance sheet remains strong. Net cash of almost £35m accounts for 25% of the reduced market cap. Owner management also remain devoted to dividends, with a possible 8% forecast yield. This business has been highly profitable in the past and might be so again, if volume demand recovers. However, I think it makes sense to downgrade my view to be mildly negative today, given the high level of uncertainty in the outlook. | |
Foxtons (LON:FOXT) (£181m) | Rev +10%, PBT +35%. Sales: growth more subdued. Profit exps unchanged thanks to Lettings. | ||
Hostelworld (LON:HSW) (£154m) | FY25 expectations in line. Net bookings +0%, net average booking value -1%. Net cash €6m. | AMBER/GREEN (Graham holds) Earlier this month, I downgraded our stance on this by one notch, to reflect the risk of the company failing to meet its challenging full-year forecasts. I still think there is a high risk of the company failing to meet these forecasts, and I’m therefore going to leave this on AMBER/GREEN, although I am a happy holder of the stock on a long-term view. | |
Somero Enterprises (LON:SOM) (£123m) | Market pressures and global uncertainty weigh heavily. EBITDA guidance $18m (prev: $24m). | BLACK (AMBER/RED) (Roland holds) | |
Strix (LON:KETL) (£103m) | SP -6%. Billi and the Consumer Goods division have achieved growth in line, but the Controls division has been under pressure from macro uncertainties, particularly surrounding indirect tariff impacts and a weaker US dollar, leading to reduced sales volumes & order delays. Estimates are reduced at Equity Development: profit estimates down 7-8%. New FY25 adj. PBT forecast £17.2m. Year-end net debt/EBITDA forecast 2.0x versus bank covenant 2.75x. | BLACK (RED) (Graham) [no section below] Mark astutely noticed that the recent AGM statement contained no “in line” statement, and today we get the profit warning. This company has some issues, notably a high debt load (year-end estimate from Equity Development: £67.7m) and weak performance in the “Controls” division, although the company is not very forthcoming when it comes to quantifying in its RNS exactly how weak this division is. Equity Development suggests that this division will see sales growth in H2 following the release of both a low-cost kettle control and a next-generation control. The company’s other divisions - “Billi” (water filters) and Consumer Goods - have performed “strongly” and “well, respectively. However, I’m inclined to downgrade our stance on this all the way to RED, from neutral, as the balance sheet doesn’t offer enough safety to prevent me from doing so. The current net debt/EBITDA multiple is over 2x and the company is once again in a refinancing process. Their RCF is set to expire in October 2026. | |
SDI (LON:SDI) (£90m) | Resilient performance in line with expectations. Adjusted PBT £8.5m (LY: £8m). FY26 outlook in line. | ||
Winking Studios (LON:WKS) (£70m) | H1 rev up by more than 20% y/y. H1 adj. EBITDA up by 10-20% after LSE listing expenses. | ||
Zephyr Energy (LON:ZPHR) (£61m) | “Solid operational progress”. Pivotal stage in Utah. Finalising docs for $7.3m acquisition. | ||
Eco (Atlantic) Oil & Gas (LON:ECO) (£27m) | Cash $4.7m (3/2025), has since received $8.3m JV payment with a further $11.5m expected. | ||
Hamak Gold (LON:HAMA) (£27m) | Acquired 20 bitcoin. Partnered with Archax, FCA-regulated exchange, to facilitate strategy. | ||
NAHL (LON:NAH) (£20m) | Trading in line. H1 rev broadly in line with last year, adj. op profit +67% to £3.2m (lower costs). | ||
Tpximpact Holdings (LON:TPX) (£19m) | Renewed and extended facilities with HSBC. £11m RCF, £5.5m accordion, £4m overdraft. | ||
Fadel Partners (LON:FADL) (£15m) | H1 rev -11% y/y, adjusted LBITDA $2.4m. Full-year revenue 10-15% below exps, but LBITDA in line. |
Graham's Section
International Personal Finance (LON:IPF)
Up 18% to 212p (£462m) - Interim Results & Possible Recommend Cash Offer - Graham - PINK
(At the time of publication, Graham has a long position in IPF.)
It’s a momentous day for IPF shareholders, with news of a possible recommended cash offer.
Even though it has given my portfolio a little boost today, I must admit that I’m not too thrilled about the news! Firstly, it meant that I missed out on my interview with management this morning!
More seriously, the main reason I’m not too thrilled about the news is the price. At 223.8p, including a 3.8p interim dividend that would have been paid anyway, it represents the following premium:
24.9% to closing price yesterday
38.3% to volume-weighted average share price (VWAP) over the last 3 months
54.3% to six-month VWAP
54.2% to 12-month VWAP.
Now, a 50%+ premium to long-term VWAP is certainly not a bad offer.
And a c. 25% premium to the most recent price is also not bad, and it’s a level which I think UK investors are often willing to accept.
But at the same time, 25% is also around what I would consider to be the minimum acceptable premium that investors are willing to consider.
As readers will know, I’m a really big fan of this company and its management team. It’s not very often I find a company that I like so much - this one is on my 2025 watchlist and it’s in my personal portfolio.
So when I find a company I’m this excited about, I really want to hold it for as long as possible. In principle, I’d rather keep holding it, confident in the long-term outcome, rather than take a short-term gain.
But these are luxury problems, and I know I should be grateful for a quick return of 67% that I may achieve if this proposal goes ahead. I bought my IPF shares in December 2024 and then again in February 2025. This will look pretty good as an annualised return! It also boosts the performance of my watchlist.
Will it go ahead? IPF’s major shareholders strike me as the types of investors who will be happy to take the cash, boosting their fund performance and their liquidity:
The potential buyer is BasePoint Capital, which is “a diversified specialty finance group” based in New York. Their website is mysterious but they do have a presence on LinkedIn and I must presume that they are capable of this takeover.
The IPF Board are minded to recommend the proposal:
The Board is confident in its strategy and in the Company's standalone future, recognising the strong performance to date outlined in the 2025 Half Year Results released today. However, it has carefully considered the Possible Offer with its advisers and has concluded that the Possible Offer is at a value that the Board would be minded to recommend unanimously to IPF shareholders, should a firm intention to make an offer pursuant to Rule 2.7 of the Code be announced…
IPF and BasePoint are in “advanced discussions”.
Interim Results
Let’s turn to the half-year report briefly. It appears to be ahead of expectations.
Some highlights:
PBT £49.9m (H1 last year: £47.3m), ahead of internal plan.
Customer lending growth 11%
Net receivables up 12%
I’m thrilled to see that there were zero exceptional items. There is no difference between pre-exceptional PBT and actual PBT.
And the impairment rate is only 8.3%, which is incredibly low (H1 last year: 10.5%). Remember that the company’s target impairment rate is 14% to 16%, assuming they achieve their target growth in Mexico.
Net borrowings were £558m, which may seem high relative to the value of the business. The main balance sheet metric used by the company is its equity to receivables ratio, i.e. how much of its loan book is supported by equity rather than debt. That figure has reduced from 56% to 53% after a recent £15m share buyback and given the strong growth in receivables seen recently.
That’s still quite a reasonable level, in my view, but of course this type of risk is not for everyone!
CEO comment:
"I'm very pleased with the Group's performance in the first half of the year. Our Next Gen strategy is delivering tangible results, we've responded well to good demand for our credit products and achieved strong growth across all our divisions. Customer repayment performance has remained excellent, further strengthening our financial position…
The strong first-half performance gives us confidence in our ability to deliver ahead of our internal plan for the full year. As we move into the second half, we are focused on accelerating growth, advancing our Next Gen strategy and expanding financial inclusion across our markets - while maintaining our commitment to strong credit quality and sustainable returns.
Outlook:
Confidence in delivering an acceleration of growth in the second half.
Expect second half profits to be similar to the second half of last year, after absorbing the impact of stronger growth.
This implies full-year PBT of £87.8m, which I understand to be ahead of expectations. Applying tax to this and dividing it into the valuation implied by the takeover offer, I think we get a P/E ratio on current-year earnings of 7.4x.
Graham’s view
I have to put this at PINK rather than GREEN now, as I think the takeover is likely to go ahead, which narrows our range of decisions.
Assuming it happens, I will be sad to see IPF go, just as I was sad to see H&T receive a takeover offer.
The message is pretty clear to me: quality UK stocks are still too cheap by international standards. Americans remain happy to pick them up , as the UK market is unable or unwilling to put reasonable valuations on them.
But for those of us who are able to put some money to work, I think we can still look for opportunities to buy before the takeover offer arrives!
Finally, I note the StockRank of 97, with very strong Momentum perhaps offering a hint that more good news was on the way:
Hostelworld (LON:HSW)
Up 1% to 122.75p (£154m / €133m) - Interim Results - Graham - AMBER/GREEN
(At the time of publication, Graham has a long position in HSW.)
Another fairly recent addition to my portfolio, this is just a 1% position, and I also have a small spread bet on it.
The share price fell 9% earlier this month when the H1 trading update was announced, as the company seemed to be leaving itself an awful lot to do in H2, if it was to meet market expectations. It has fallen a bit further again, since that day.
H1 EBITDA was only €7.4m, versus a consensus full-year forecast of €19.9m.
According to today’s trading update and outlook statement attached to the interim results, the company is still planning to hit this number.
Trading update:
We are encouraged by the improvement observed in late May, with this positive momentum continuing into June and July. This uplift was primarily driven by Net Bookings and Average Booking Value (ABV) returning to year-on-year growth in late May, a trend that is continuing into July.
Note that for H1 as a whole, net bookings are flat year-on-year and average booking value was down 1%. But recent trends are apparently more positive.
Continuing with snippets from the trading update:
ABV growth has been driven by increasing commission rates following the launch of Elevate, which is offsetting bed price deflation and a weaker US dollar…
App bookings continue to grow, up 11% year-on-year, driven by increasing engagement in our social network, evidenced by a 42% increase in messages sent, on a trailing 6-month basis, and social members reaching approximately 3 million by the end of June 2025…
The rollout of Elevate, our new marketplace monetisation tool, is showing early success, with blended commission rates increasing to 15.8% in H1 2025, up from 15.2% in H1 2024. Our 'Travel Plans' feature is seeing strong early adoption, extending our social reach into the pre-booking phase. Our other strategic initiatives, including social platform monetisation and the addition of budget accommodation, are on track for launch in 2025.
It’s worth elaborating on what this “Elevate” tool actually does. It has seen “strong uptake”:
We also launched our new hostel ranking system, 'Elevate', in May, alongside enhanced rates and inventory tools to help our hostel partners optimise their pricing and visibility. This system enables hostels to increase their commission rates for greater visibility for specific types of demand, while balancing historical user conversion patterns and incentivising desired marketplace behaviours.
So the principle is very simple - hostels are paying for more visibility on the platform.
Financial performance/balance sheet
As we already knew from the earlier trading update, H1 adj. EBITDA has declined due to an increase in paid marketing costs, both in terms of the total amounts paid and as a percentage of revenue.
More positively, the balance sheet has continued to improve. Net cash increases to €6.1m.
The company hasn’t paid a dividend since 2019. It has now announced a 0.82 Euro cents interim dividend. Based on the latest share price, that will cost just over €1m.
The policy is to pay out between 20% and 40% of adjusted profit after tax. While I would prefer to see the company focus on investing for growth, these dividends could end up being material, based on a net profit forecast for the current year of €14.6m. That suggests total dividends of €2.9 - 5.8m, vs. a market cap today of c. €133m.
Balance sheet equity is €71m but excluding intangibles it’s only €8m. That doesn’t concern me - this online platform should not require too much capital.
In cash flow terms, I note that the company does capitalise some development costs (i.e. it puts them on the balance sheet instead of expensing them), but there are offsetting amortisation charges to balance this. In H1 for example, €3.6m of development costs were capitalised into intangibles, but at the same time there was a €4.3m amortisation charge against intangibles, so I don’t think that profits were artificially boosted by this arrangement.
Graham’s view
Earlier this month, I downgraded our stance on this by one notch, to reflect the risk of the company failing to meet full-year forecasts.
Personally, I am a happy holder of this stock, because I think it has a unique market position among online travel agents. I’m surprised that a company with its profile, and a healthy balance sheet, trades at such a modest multiple:
That said, I still think there is a high risk of the company failing to meet its challenging full-year forecasts. It’s reassuring that management believe they are on track at this stage of the summer, but many months remain before the December year-end.
I’m therefore going to leave this on AMBER/GREEN, acknowledging the risk of some bumps in the road in the short and medium-term.
Roland's Section
Somero Enterprises (LON:SOM)
Down 15% to 190p (£106m) - Trading Update - Roland - BLACK (AMBER/RED)
(At the time of publication, Roland has a long position in SOM.)
The most positive way to interpret today’s profit warning from concrete levelling specialist Somero Enterprises might be to suggest that the company’s new CEO, Tim Averkamp, is indulging in some kitchen sinking activity.
In other words, he’s getting all the bad news he can find out front, setting the scene for a fine recovery for which he can take credit.
I’d like to be this optimistic, but to be honest I don’t think I can be. While I suspect there is an element of kitchen-sinking in today’s update, I’m fairly sure this downgrade is also based on hard reality.
Here’s a summary of the main points:
June was unseasonably poor due to the “subdued pace of project starts” in the core US market due to labour shortages, financing costs and tariff uncertainty;
International markets have also slowed as they wait for clarity on US trade deals;
H1 25 trading is expected to be lower than H1 24, implying pre-tax profit below $10.6m;
H2 25 is expected to be stronger than H1, aided by seasonality and two new products;
Identified $3m further cost savings, taking YTD annualised savings to $6m.
FY 2025 outlook downgraded: 2025 results are expected to be lower than guidance issued in April – full credit to Somero’s management for including clear guidance and the relevant comparative figures in today’s update:
Revenue: $90m (prev: $105m)
EBITDA: $18m (prev. $24m)
Year-end cash: approx $24m (prev. $28m)
I’m pleased to see year-end net cash is expected to remain substantial, providing a substantial margin of safety.
Updated Estimates: house broker Cavendish has provided updated earnings estimates today and highlights an expected dividend cut:
FY25E EPS: 21.1 cents (prev. 29.4c)
Dividend per share: 15.8 cents (prev. 18.3c)
Notably, Cavendish analysts have cut their price target from 400p to 260p. No forecasts are available yet beyond the end of 2025 – visibility is limited and it seems the broker is not pricing in a rapid return to former levels of profitability.
Roland’s view
One point I should probably address is the timing of this announcement. The company’s last update was on 17 June, when management left full-year guidance unchanged. That’s only six weeks ago, so should we have known about this downgrade sooner?
Some shareholders may feel blindsided. But in this case I am going to tentatively side with management. In past webinars, the company has said that its typical lead time on sales is only a couple of weeks. This is why Somero has a policy of maintaining inventory locally in all its operating markets.
According to management, customers (concrete contractors) typically only order a new machine when they have a firm purchase order for a job and visibility on timing. This is understandable, given the cash flows involved, so it means Somero has to be able to supply fast.
The flipside of this is that it also means the company has limited visibility on sales – in the FY24 results presentation, I recall management saying that production is planned on a month-by-month basis, with limited visibility beyond this.
In today’s update, the company emphasises that structural demand for products of the type it produces should remain positive:
Long-term demand drivers in non-residential construction remain intact - including onshoring, data infrastructure (processing, data centers and chip plants), equipment electrification, EV and battery facilities, manufacturing, warehousing and logistics, and power generation
I think this is a reasonable assumption, in generic terms. The main issue for me is whether Somero’s previously dominant position in this market is weakening. Recent updates have mentioned increased competition and the company admits that its product is not the cheapest on the market.
Somero has failed to make big inroads into international markets historically. With competition growing in its home market, I wonder if this business is simply not going to have the advantages it previously enjoyed.
If I’m right, we could see a loss of pricing power as Somero is forced to compete on price in a way it might not have done in the past. Margins have been falling steadily in recent years:
Today’s reduced forecasts leave Somero trading on around 12 times earnings with a 6% yield after this morning’s slump. If we take the view that earnings are close to a cyclical low, this could be an attractive entry point for a value/recovery play.
However, for the reasons above I’m not yet convinced and my own personal holding remains under review. CEO Averkamp has promised to unveil a refreshed strategy for the business with the interim results in September. I may continue to hold until then, as I still have some confidence in this business. But I can also see further downside risks, so I’m going to leave Mark’s previous AMBER/RED rating unchanged until I feel more confident the outlook has stabilised.
Taylor Wimpey (LON:TW.)
Down 5% to 102p (£3.6bn) - Half-Year Results - Roland - BLACK (AMBER)
I’ve increasingly taken a neutral view on housebuilders recently, on the basis that I think profitability is likely to remain under pressure, even if volumes recover.
Today’s half-year results – and profit warning – from Taylor Wimpey seem to support this view.
Revenue rose by 9% to £1,655m during the first half of the year, driven by an 11% increase in completions to 5,264 homes. However the group’s adjusted pre-tax profit fell by 21.1% to £148.1m.
Net assets fell by 5.6% to 117.5p per share, while net cash dropped to £326.6m (H1 24: £584m). The interim dividend has been trimmed to 4.67p (H1 24: 4.8p), to reflect the company’s policy of paying out 7.5% of NAV annually.
Management say UK trading conditions softened during the second quarter, as buyers continued to struggle with affordability. The drop in profits appears to reflect two main factors:
Average Selling Price -1.3% to £313k due to mix of homes, including bulk deals
Continued cost inflation (mgt expect low single digit for 2025)
Taylor Wimpey’s first half also included some exceptional costs that pushed the group to a reported pre-tax loss of £92.1m:
Additional £222.2m fire safety provision “owing largely to increased cavity barrier remediation behind brickwork and render”
An £18m provision relating to a voluntary commitment to resolve the CMA investigation into alleged information sharing between housebuilders
“Unexpected charge” of £20m relating to historical defective workmanship by a principal contractors
Fire safety provisions relate to real work commitments and costs – the company says it expects a cash outflow of around £100m this year relating to these historic liabilities. That’s cash that can’t be used for new developments or shareholder returns.
Revised outlook
The second half of the year has started more slowly than the comparative period last year. The four weeks to 27 July saw a net private sales rate of 0.59 per outlet per week, compared to 0.64 last year. Cancellations have remained stable at 19%, while pricing is also said to be “broadly flat”.
Taylor Wimpey’s order book stood at £2,190m on 27 July, very slightly ahead of the £2,102m reported at the same point last year. However, in volume terms the order book is down, at 7,452 homes (2024 equivalent: 7,667 homes).
Full-year guidance is for completions of 10,400-10,800, excluding joint ventures. This implies a small weighting to the second half of the year. The company also expects higher average selling prices from a more favourable mix of properties. These factors are expected to result in improved operating margins (as fixed costs are spread across a greater number of homes sold at higher prices).
However the impact of the £20m “unexpected charge” for defective workmanship in H1 means that full-year operating profit is now expected to be around £424m, from £444m previously.
Roland’s view
Today’s results contain a disappointing number of exceptional costs, in my opinion. Bad workmanship from a contractor is costing £20m and there’s also another £222m on fire safety remediation. Rectifying these issues will result in real cash outflows, so I’m reluctant to ignore them as adjusting items.
However, adjusting out the unexpected £20m charge suggests that today’s profit warning does not relate directly to current trading. On that basis, I’m not too alarmed by this downgrade, although I note that it continues a weakening trend:
I think the problem is that market conditions remain challenging, in particular relating to affordability.
My reading of today’s commentary is that Taylor Wimpey could probably sell more houses if prices fell. Balancing price and volume is a key skill for housebuilders.
Right now, cost inflation remains an issue and is putting pressure on profitability because the company can’t increase its selling prices sufficiently to offset higher costs.
Today’s results show an adjusted operating margin of 9.7% (H1 24: 12.0%). I reckon this contributes to a trailing 12-month adjusted return on equity of 9.4%. The statutory figures are much lower, of course, due to this year’s H1 loss.
This isn’t a sparkling level of profitability. While the shares are currently trading slightly below their book value of 117.5p, I think this may be justified by the subdued margins and uncertain outlook.
I can see some scope for improvement and a re-rating if market conditions do improve. I’d expect a business like this to be able to generate an average return on equity of 10%-15% through the cycle. But for now, I’m going to echo the StockRanks and remain neutral.
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