Daily Stock Market Report (Fri 7 Mar 2025) - Bund crash, JUST, ECEL, SRAD

Good morning! The deluge of results has slowed down to a trickle.

Wrapping up the report there at 12pm. Have a great weekend.

Macro - bund yields

One of the most interesting macro stories this week was the explosion in German bund yields. The bund is their equivalent to the 10-year UK gilt.

This 1-month chart illustrates it nicely:

Chart courtesy of tradingeconomics.com

Wednesday has been described as the worst day for German bonds since around the time of the country's reunification in 1990.

It might not surprise you to learn that President Trump is at the heart of the story: he has repeatedly argued that other NATO members do not spend enough on their own defence. Last month, he told European leaders in a speech that "stark strategic realities prevent the United States of America from being primarily focused on the security of Europe.”

European leaders have responded. Following an election, Germany's latest crop of newly-elected politicians have indicated that they will ease their long-standing budgetary restrictions. Defence spending over 1% of GDP will be exempt from existing borrowing rules, and they also plan to set up a €500 billion infrastructure fund - a figure that's higher than their entire annual budget.

The result has been stronger European equity markets - especially in defence and construction - and higher yields.

The UK's 10-year gilt yield has also moved higher this week. Here's the 1-month chart:

Chart courtesy of tradingeconomics.com

What we saw on Wednesday was a conventional "risk-on" move, with money flowing out of bonds and into equities.

However, these higher government bond yields are also a force for the equity markets to reckon with. If we can now earn 4.6% risk-free from the UK, or in euros 2.9% from the financially very strong German government, our expectations from corporate credit and in turn from equity markets have to be very significantly higher than this.

With attractive real returns available from vastly safer alternatives, perhaps we have to accept that it's logical for micro-caps of questionable quality to trade at the cheap earnings multiples we are currently witnessing?

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Companies Reporting

Name (Mkt Cap)	RNS	Summary	Our view (Author)
Alliance Witan (LON:ALW) (£4.9bn)	Final Results	Return +13.3% trailed benchmark (+19.6%). Average discount narrowed to 4.7%.
Just (LON:JUST) (£1.7bn)	Results for the year ended 31 Dec 2024	SP -15% Underlying operating profit +34%. ROE improves to 15.3%. Outlook: multiple growth opportunities.	AMBER/GREEN (Graham) Tentatively positive on this one; more work is needed. Market clearly doesn't like these results but there are signs of value with excellent capital coverage and very high net tangible assets per share when you include deferred profits.
Stelrad (LON:SRAD) (£175m)	Final Results	Rev -5.7%, adj. op profit +7.6%. Robust performance continues into 2025, trading in line.	AMBER (Megan) Strengthening margins and the potential for an improvement in the markets are promising.  But there are a few warning signs for me, adding an element of risk. The debt position is high, the dividend seems like a distraction and the momentum behind the share price has started to swing in the wrong direction.
Eurocell (LON:ECEL) (£149m)	Acquisition	£29m acquisition includes £7m defcon.	GREEN (Graham) This looks to be a highly complementary acquisition. Eurocell needs to use its credit facility to pay for it, as it's nearly an all-cash deal, but the leverage multiple at the end of 2025 is expected to be less than 1x. This would be considered a very modest degree of leverage for most businesses.

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Just (LON:JUST)

Down 16% to 137p (£1.44bn) - Results for the year ended Dec 2024 - Graham - AMBER/GREEN

I might regret looking at this one, as it’s complicated. Just is a provider of retirement products - annuities, equity release, etc.

The headline numbers today are excellent:

• Underlying operating profit +34% to £504m. They had planned to double this in five years, but instead they have more than doubled it in three years.

• Retirement income sales +36% to £5.3 billion (at a slightly lower new business margin)

• Capital coverage 204%, far in excess of what is needed.

• ROE 15% (2023: 13.5%), ahead of their 12% target.

Tangible net assets per share have risen to 254p, not far off double the current market cap.

Defined benefit pensions

Just are involved in the transfer of defined benefit pension plans away from their parent companies, and it’s a thriving business. It's now a favourable time for companies to offload their pension schemes to insurers, and they are doing it - this is something we've seen at plenty of listed companies.

Since the beginning of 2022, rising interest rates have accelerated the closure of, and in most cases eliminated, DB pension scheme funding gaps. During 2024, we wrote a record amount of DB new business, up 57% to £5,376m…

We expect the strong momentum in all segments to continue in 2025 and beyond, with multiple small, medium and large opportunities available as corporates of all sizes choose to offload legacy and complex DB pension risk to insurers. Despite record market volumes in recent years, we estimate that only c.20% of the £1.1tn DB market opportunity has transferred across to insurers thus far.

It’s great that a large opportunity still exists in this segment, but DB pensions are no longer commonly available. Sooner or later, it is surely inevitable that this line of business will dry up, when the insurance industry has taken on most of the risks.

Outlook is very positive:

…the normalisation of long-term interest rates [is] continuing to drive demand for our products. Our positioning, reputation and capabilities, including investments in our people enable us to continue to strongly execute as we take advantage of the multiple growth opportunities in our chosen markets.

We have a strong and resilient capital base, with a low-strain business model that is generating sufficient capital on an underlying basis to fund our ambitious growth plans, whilst also paying a progressive shareholder dividend that is expected to grow over time.

The share price reaction is sharply negative which forces us to find an explanation.

Some of the possible negatives in today’s report:

New business margin dropped to 8.7% (previous year: 9.1%), “principally driven by business mix”. This is described as a reversion to the medium-term average.

Accounting profit of only £113m (previous year: £172m). The accounting profit is based on transactions made in prior years and have now been earned by the passing of time, while the “underlying profit” includes profits that have not been earned yet.

The dividend of 2.5p per share doesn’t make for a particularly high yield. Earnings per share were 6.5p and “underlying” EPS were 36.3p. Given the strong capital ratio, maybe a higher payout was anticipated by some investors? That said, market expectations were for a dividend of only 2.4p.

Graham’s view

I lack the time to delve into this in more detail today but I’m happy to take a tentative AMBER/GREEN stance on the basis that it’s potentially very cheap against both earnings and assets.

Please note that on the balance sheet, there is equity of just £924m. However, add in contractual service margin - profits that will be earned over time on insurance contracts - and you get the much larger figure of £2.6 billion, or 254p per share, which is used by the company.

Overall I have a positive impression of this one and I like its prospects, but more research is needed.

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Roland's Section - written on 28th January 2025

I have found a piece written by Roland in January that I inexplicably failed to publish. It covers the January trading update from Eurocell (LON:ECEL), a company that has today announced a £29m acquisition. 

Apologies to Roland and to readers for failing to publish this when it was written:

Eurocell (LON:ECEL)

Down 4.4% to 151p (£151m) - Year End Trading Update - Roland - GREEN

Today’s update from this window and door specialist confirms that underlying pre-tax profit for the year ending 31 December 2024 should be in line with market expectations.

2024 was not a vintage year for the building materials sector. Like Stelrad, which I looked at yesterday, Eurocell has seen weakness in both of its key market sectors:

...with challenging macroeconomic conditions and weak consumer confidence, further compounded by uncertainty following the Autumn Budget and high interest rates, impacting activity levels in both the repair, maintenance and improvement (RMI) and new build housing markets.

Group sales for the year fell by 2% to £358m. This appears to be in line with consensus estimates of £357m in Stockopedia.

Consensus estimates are for earnings of 15.1p per share, putting Eurocell on a 2024 P/E of 10 after today’s slight fall.

Last year’s revenue drop reflects a 6% fall in sales of profiles, partially offset by a 1% rise in sales from the company’s branch network. This is said to reflect “strategic initiatives for garden rooms, windows, doors and ecommerce activity”.

Despite this limited success, pricing and costs both remain under pressure:

We are experiencing competitive pressure on selling prices in the branches, as well as overhead cost inflation across the business.

The impact of April’s National Insurance and minimum wage increase is expected to be c.£3m per year. Eurocell says it plans to offset this through selling price increases and some cost savings.

For context, I estimate these cost increases represent about 13% of Eurocell’s forecast pre-tax profit for 2024, compared to an equivalent figure of 60%-70% for Halfords!

Roland’s view

Eurocell looks well managed to me and has a good balance sheet. Management reports year-end net debt excluding leases of £3.1m today, despite a £15m share buyback last year.

My sums suggest buying back shares at current levels could provide attractive returns for shareholders, assuming market conditions improve as expected:

A modest valuation and a useful dividend yield should reduce the downside risk of holding the stock while providing a useful and well-covered income:

The StockRanks are also very positive. Eurocell is currently a Super Stock:

I can see plenty to like here and am happy to maintain our previous positive view of Eurocell. GREEN.

Graham's view (7th March): today's £29m acquisition (of which £7m is deferred) doesn't stand out to me as being particularly cheap or expensive. The acquired company ("Alunet") includes four businesses providing a range of doors and windows, e.g. patio doors, timber doors and garage doors. It made £4.5m of EBITDA on £43m of revenue in 2024, and the EBITDA multiple being paid is 6.5x - for this type of business, I would imagine that this is a fair price.

Eurocell points out that it has a £75m credit facility available, which it will need to use to pay for this deal. It still expects to have a net debt/EBITDA multiple of less than 1x at 31 December 2025.

From a strategic point of view, I can't argue against this. Alunet sounds like a highly complementary business. I also can't argue against the price paid. It does create a little financial risk for Eurocell but at this stage not to a degree that would overly concern me.

So I'm going to leave our GREEN stance unchanged. Eurocell's share price has barely moved since Roland's covered it last (it's 149p today, vs. 151p in January), so I hope he agrees!

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Megan's section

Stelrad (LON:SRAD)

Down 6% to 131p (£167m) - Final Results - Megan - AMBER

In-line results from high flyer Stelrad haven’t been enough for some expectant investors this morning.

In January, the radiator manufacturer guided to a 6% fall in sales in 2024 after ongoing market weakness. It’s a weakness that has persisted since 2022 when sales peaked at £316m. In 2024 revenues fell to £290m, due to a 6% decline in the volume of radiators sold.

But in that time, the company has been making progress to recover operating margins. And that has most notably been achieved by an 11% improvement in the contribution per radiator. 2024 was the first year in the company’s history that each new radiator contributed an average of more than £20.

While demand has been declining, material prices have also been on their way down which helped support the rise in operating margins. After excluding exceptionals, operating profits rose 7% to £31.5m, equivalent to an operating margin of 10.8%.

It is good to see the company tightening the ropes while the market is weak. If the radiator contribution and margins can hold firm at current levels, the company should be well placed to thrive when demand comes back.

Inventory levels rising

It may be the preparation for a return to higher demand that prompted management to invest so heavily in inventories in 2024. The investment has been described as a move to “enhance service levels”, but the big swing (which also had a knock on effect on cash flows) may have contributed to this morning’s share price weakness.

Year-end inventories stood at £67.3m in 2024, compared to £63.3m at the end of the previous financial year. This was partly a fallout from the sales decline. Cost of goods sold fell by £20m to £201m - inventory is definitely hanging around for longer than it did in either of the previous two years.

What’s more, a £9.5m increase in working capital to £10.1m is largely the result of a stocking up of inventory.

This had a knock on effect on the cash flow statement. Cash outflows from inventories swung from a £13m decrease to a £6m increase in 2024. Operating cash inflows were down 30% to £31.4m (equivalent to an operating cash conversion of 99%). Free cash inflows dropped 46% to £9.6m (a conversion of just 58% from net profits).

Balance sheet vulnerability

A sharp drop in free cash flow isn’t a great sign, especially in light of the company’s propensity to pay an over-generous dividend. In 2024, Stelrad paid out £9.8m in dividends, which was not covered by the free cash flow. As Roland noted in his recent coverage of the company, chief executive Trevor Harvey owns 9% of the company’s shares and therefore receives £880k a year in dividends - perhaps an explanation about why the company continues to deliver such significant payouts.

The high payout and falling cash flows are also sub-optimal given the company’s meaningful debt. Total borrowings were £85.5m at the end of 2024, resulting in net debt at £67.6m. The leverage ratio is 1.55x and net gearing is over 100%.

Aside from the balance sheet vulnerability, this has a knock-on impact on finance costs which remain worryingly high.

Megan’s view: Strengthening margins and the potential for an improvement in the markets are good signs. And this is a generally promising company which generates decent returns and has a historically high propensity to generate cash. It’s also not trading on a massive PE ratio despite recent share price strength and the dividend is yielding 6%. There is definitely a positive investment case to be made.

But there are a few warning signs for me, which adds an element of risk which I am less comfortable with. The debt position is high, the dividend seems like a distraction and the momentum behind the share price has started to swing in the wrong direction. AMBER