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Amid the spectre of the Bank of England’s miserable recession forecasts, another substantial interest rate hike and the general aurora of negativity swirling around the UK markets right now, it has been nice to find optimism in announcements from some of the country’s biggest businesses.
There has been a lot to digest this week
In this article I’ll cover all of the above in varying detail. There have been some fascinating insights from the community on the large cap space this week so please keep your comments coming.
On Monday, Frasers (FRAS) revealed it had hit the required acceptance level to complete its purchase of Australian-based flash sales retailer MySale. Frasers has been gradually adding to its stake in the business and was forced to make a cash offer in September when its stake first exceeded the 50% threshold.
Building a stake gradually before a full acquisition is a Mike Ashley special. Frasers’ founder - who announced his retirement from the board in September - bought many of the company’s impressive suite of brands in this way (another strategy was waiting for the target company to go bust and then purchasing it at a knocked-down price).
Mike Ashley - a ‘bricks man, not a clicks man’ - has been succeeded as CEO of Frasers by his son-in-law Michael Murra
Ashley’s son in law, Michael Murray, who now runs the business, is applying the same tactic but is focusing on a different area of retail: digital. MySale runs marketplace technology which it uses to power its own global retail websites and the online sales of big brands. It’s an interesting strategic move for Frasers which will be able to use the technology in its own brands’ websites.
Murray is undoubtedly more of a ‘clicks man’ than his father in law (a self-proclaimed ‘bricks man’) who fought hard against the ‘Amazonification’ of the British retail scene and invested heavily in the UK’s dying high street throughout the Covid-19 crisis (something he never received enough credit for). While many peers were attempting to fight the move to online retail by investing heavily in making their stores look nice, Ashley was busy slashing prices. His company’s margins are thin, but revenue has ticked up nicely even in the Covid years.
The physical store footprint is impressive, but a better balance of digital is a sensible move as it will allow Fraser to reach audiences who do their ‘window shopping’ online. In July the company bought ‘I saw it first’, a women’s fashion discount store which has over 5m customers.
A good balance between digital and physical sales is also what has helped shelter Next (NXT) from retail woes in 2022. In its pre-Christmas trading update (for the third quarter ending in October) retail sales in physical stores (which contributed 29% of total sales in the last set of annual results, compared to 46% pre-pandemic) rose 3%. By contrast, the online business (which has provided most of the growth for the last five years) declined 1.9%.
Next is the kind of company that investors need. It isn’t particularly exciting, but it’s reliable - a bit like its products
Overall, the company reported a year-on-year increase in total retail sales in seven of the 15 weeks in the quarter being reported on - with a particularly large boost coming in the last week of September, when cold temperatures sent consumers shopping for warmer clothes.
And while the outlook statement wasn’t brimming with enthusiasm, management has stuck to its previous forecasts of a 2% decline in full price sales for the year, leaving it with £840m of profit (up 2% on last year). Next earnings tend to benefit from the company’s substantial share buyback strategy and that is no different in 2022. Earnings growth is expected at 4.5%, roughly in line with the long-term average.
Like its clothes, Next PLC doesn’t provide much excitement, but it is steady and reliable. And in times of turbulence, that’s what investors need.
I recently read a LinkedIn post on slow-travel policy. This wasn’t a term I had heard before and it turns out that people who follow this policy eschew air travel. This particular slow traveller was attending a conference in Lisbon by way of five trains and an overnight bus. The journey is taking him three days, is five times more expensive than flying direct, but will save about 55% of carbon emissions. I can’t see slow-travel policies catching on for international passengers. Not with companies like Wizz Air (WIZZ) offering return flights from London to Lisbon for £40.
Wizz Air Key Stats:
But companies like Trainline (TRN) are doing their best to make rail travel easier, especially on the continent. Unlike in Britain, there are many networks in European countries which are liberalised, meaning multiple operators can compete on the same routes. Trainline is making it easier for passengers to compare ticket prices for these routes and ticket sales have risen as much as seven-fold versus pre-Covid. The company’s revenue from international markets has risen 118% since before the pandemic.
In the domestic market, true price competition is hampered by the franchise structure of the sector, but Trainline’s technical innovation still claims to help passengers save money. Paying a small fee to a company which will split your fare for you and save you money on your tickets is worth it. UK passengers bought £1.4bn worth of tickets through Trainline in the first half of FY2023, up from £716m last year. But the company made just £88m of revenue on those ticket sales.
Trainline’s UK numbers haven’t quite recovered to the level that they were pre-Covid, but the company has moved back into a profitable position in these numbers. Net profits for the six months to September were £12m, off £17m of operating profits.
Demand for air travel seems to have bounced back quicker than rail, but since the end of the pandemic, the companies in the sector have faced another big pile of challenges. The conflict in Ukraine has tempered appetite for Eastern European travel, staff shortages have disrupted operations, interest rate hikes have made it far more expensive to borrow money for fleet expansion and fuel price inflation has hurt profits badly. For Wizz Air - which halted its fuel hedging policy during the pandemic and will only bring it back in full in April next year - that latter point has been particularly painful.
But the company did manage to swing back into profits in the second quarter of its 2023 financial year (to March 2023), although the challenges of the first quarter meant it still reported an operating loss of €63.8m in the six months to September.
A period of recession provides a bad backdrop for all companies in the consumer travel space. But Trainline is confident that it won’t be too badly affected (because price inflation in train tickets isn’t likely to be as bad as in other areas), while Wizz Air (whose average ticket price was just €44 in the period despite a 35% increase) is surely more sheltered from a cut in discretionary spending than other travel operators.
On Tuesday, BP (LON: BP) became the latest big oil company to report record revenues - $8.1bn to be exact, ahead of analyst expectations, as commodity prices continue to surge. Cash inflows in the period were $8.3bn, helping the company reduce ist net debt position to $22bn and giving management the confidence to buy back another $2.5bn worth of shares.
BP’s share price has bounced around a lot more than some of its peers in 2022 - unlike Shell, it’s faced some big tax charges and it has reported two quarters of substantial net losses this year owing to quirks in accounting - but it’s still risen more than 20% in the year to date.
Whether the price has further to run is a topic discussed in detail in this article.
BT’s (LON: BT.A) interim results for the six months to September 2022 are the traditional tale of woe, encapsulated by its two problems which refuse to budge: huge costs and an unwieldy pension scheme.
On the first point, BT’s capital expenditure in the period was £2.6bn, a 26% increase on the same period last year. As is customary for telecoms companies (which apparently don’t consider the amount spent on mobile networks a fixed asset investment), spectrum costs are excluded from this number. Instead, that capex largely came from the company’s increased expenditure in the fixed broadband network, housed under the Openreach division of the business. For the full year the company expects £5bn of capital expenditure.
And yet, management is desperately attempting to cut costs to counteract big price slashes in the industry and inflationary pressures. BT has long relied on customer lethargy and the belief that it’s easier not to switch providers and it doesn’t save you that much money. But now that isn’t true. New entrants into both the mobile network and broadband space are offering far cheaper prices and switching isn’t nearly as painful as it used to be - when homes had to be hooked up to a new box or dish. Via Openreach, BT still makes money from most homes and businesses in the UK because, in order to provide full fibre, broadband companies need to rent the ducts and cables off Openreach. But the margins the company makes on wholesale are far narrower than when it sells to consumers.
BT engineers are on strike over pay - causing more strain on BT’s spending plan
With inflationary pressures biting, management has stepped up its cost saving initiative: “Given the current high inflationary environment, including significantly increased energy prices, we need to take additional action on our costs to maintain the cash flow needed to support our network investments,” chief executive Phillip Jansen said in the results statement.
Meanwhile, the pension problems remain just as pervasive as ever. In May, BT announced a massive reduction in the size of its pension deficit thanks to positive asset returns and a big increase in contributions. BT has made more than £3bn of investments in its pension scheme in the last three years to reduce that deficit, but in October the fallout from the former chancellor’s mini-budget threatened to put the scheme in jeopardy again. Soaring gilt yields meant the scheme’s assets fell to £39bn at the end of the period (from £53.5bn at the start) meaning the deficit rose to £1.7bn at the end of September, compared to £1.1bn in March. The company made £594m of pension deficit contributions in the period. BT’s pension scheme remains a millstone, although admittedly it is a far smaller one than it was a few years ago.
GlaxoSmithKline’s (GSK) first quarterly results since its demerger with the consumer healthcare arm Haleon show continued recovery from the Covid-19 lull. Shingles vaccine Shringrix was the top performer with revenues up 36% at constant currencies to £760m. The vaccines business as a whole generated £2.5bn of revenue.
Since the demerger, GSK has retained its structure with three reporting sections, but the former pharmaceutical branch has been split into specialty and general medicines, which contributed revenue of £2.7bn and £2.6bn respectively. It’s good to see the company singling out its specialty medicines branch because this is where growth will come from. Revenues in the division rose 22% (excluding the £400m of sales from pandemic-related drugs).
There are more reasons for optimism. Research and development expenditure (adjusted for the merger) rose 8% at constant currencies to £1.3bn. At just under 17% of turnover that’s still slightly behind the R&D spending of peers, but it is an improvement. GSK’s strong HIV business has also finally taken the pressure of its reliance on asthma medicines. And there was a strong increase in revenues from the oncology drugs on the company’s books - albeit from a very low base.
But there is one large cloud looming over GSK: Zantac. The heartburn medicine which was first approved in 2017 has been removed from the market following over 77,000 claims that it causes cancer. The upcoming legal battle, which will begin with a trial in California in February, cost the company £45m in this quarter. We have recently written about the moral dilemma of investing in big oil, moral questions can certainly be asked of the big pharma industry as well. But we’ll leave that for another day.
About Megan Boxall
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Need more articles like this, I think a number of contributors have dropped off in recent years & when you look over at Sharepad constantly firing off articles every week stocko needs to invest more instead of reliance of the stockranks etc which don't tend to work so well in bear markets anyway.
That said id keep up my subs for the content the excellent work Paul & Graham do every week day
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Interesting comments re BT... although I am struggling a little to see much evidence of this switching you reference in the numbers. If you could steer me to the data to look at that would be very helpful. I note the higher ARPU which is obviously part of the strategy to capture more higher value customers and its natural you drop some at the bottom. Personally I find the Enterprise and Global numbers more disappointing. Net net the market looks at one number FCF and votes accordingly depending if its up or down.
re the pension deficit. A quick look at the Gilt market on 30 September you will note this was the crux of Uk issues. So the pension at that date reflects the adverse Gilt performance on assets which was out of sync with discount rates. Now that Gilts have recovered I suspect this has had quite an impact on the deficit. Actually BT decision to hedge its own liabilities without too much gearing is a positive since the situation could have been much worse.
As the investment cycle ends BT will start to throw off cash...which can be used to add to the dividend through buybacks. This creates a buffer of protection around the dividend that should grow. Looking at profits since Covid Enterprise and Global have some catch up which should benefit from an upturn in the UK. This would make the current rating look ridiculous IMO. Its a shame investors can't look through the CF dip during investment since this puts companies off doing anything. Instead they just buyback stock because thats what investors reward.