Daily Stock Market Report (Wed 29 Jan 2025) - VANL, PAY, DWL, HSP, AJB, CWR, SMWH

Good morning! The Agenda is now complete.

1pm: we're out of time now for this report, enjoy the rest of your day!

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Companies Reporting

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Graham's Section

PayPoint (LON:PAY)

Up 2% 719p (£513m) - Trading Update - Graham - GREEN

Paypoint’s Q3 update is “on track to deliver expectations for FY25”.

This is a detailed quarterly update with some unusually long paragraphs of text from CEO Nick Wiles. Let’s see if I can break it down for you:

• Momentum building for £100m EBITDA by end of FY March 2026

• Group net revenue +1.9% to £53m

Looking at the divisions ordered by revenue in the quarter:

Shopping division (includes PayPoint One terminals and PayPoint Mini point of sale systems): net revenue down 2% to £16.1,, despite an increase in the UK retail network.

Love2shop: net revenue up >1% to £18.8m. Highstreevoucher.com is ahead of plan while Park Christmas Savings was “solid”.

Payments & Banking:(includes both the omnichannel product “Multipay” and legacy energy sector business): net revenue up less than 1% to £14m. Digital revenue grows strongly while the legacy energy sector business declines.

E-commerce (includes Collect+): volumes up 36.8% vs same peak quarter last year. Net revenue up 32% to £4.1m.

So as usual we have the decline in the old cash/energy-based activities, but other activities are stable and E-commerce is growing rapidly from a low base.

Net debt has risen to £109m as PayPoint has been investing in obconnect (it now owns 55% of this) and carrying out a £20m share buyback programme. Net debt should fall back below £100m by 31 March 2025.

The company has a target leverage multiple (net debt/EBITDA) of 1x and so as EBITDA hopefully rises towards £100m, it should hit its target leverage. There are seasonal and one-off factors at play, so it can’t be expected to maintain the same leverage multiple throughout the year.

Dividends vs buybacks: the company is planning to continue with buybacks for 3 years in total (this is year 1), potentially increasing buybacks in years 2 and 3. At the same time, dividends will only increase “at a nominal rate”, with the idea that the dividend payment will become more affordable as the company’s earnings grow. Dividend cover is about 1.5x currently, and the company wants this to grow to 2x. Seems sensible to me.

Estimates: Panmure have left estimates unchanged today, including FY 2025 revenue of £190m (up 5%) and EPS of 69p (up 10%). EBITDA this year should be around £90m.

Graham’s view

This stock features on my watchlist and is one of my favourite stocks for its cash generation and quality metrics. And it usually has a cheap valuation despite, in my view, having some interesting growth opportunities and some of its products (such as PayPoint One) being market leaders in their niche.

As it has an old-fashioned energy payments business that’s in decline, I think some investors write it off as a dying business. But I think there is much more to it than that, if you look across all of its four divisions.

I do acknowledge that top-line growth is limited: only 1.9% for the quarter, but hopefully around 5% for the year.

[As an aside, please note that the Revenue number on the StockReport for 2024 refers to gross revenue, but the number used by brokers (and me) is net revenue, which is much lower.]

Roland was AMBER/GREEN on this in November (at 790p), with the stock trading at a PER of 11x.

It’s now trading at 10.4x earnings (for FY March 2025). Or if you use FY March 2026 earnings, it’s at 9.6x. You may wish to adjust this for the debt load. But I like the value on offer here.

The capital allocation plan makes sense to me: they will hopefully continue buying back some shares at this valuation, at an earnings yield of about 10%.

If the share price were to fall much further than this, I hope that they’d increase the amount spent on buybacks and perhaps even make it larger (in pound terms) than the dividend, which costs about £27m p.a.

And vice versa: if the share price increases, I hope they’ll spend less on buybacks than planned.

Overall, I remain very happy with this stock on my watchlist and the StockRanks don’t disagree with me, giving it a near-perfect score:

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AJ Bell (LON:AJB)

Down 2% to 439.6p (£1.8bn) - Q1 Trading Update - Graham - GREEN

Let’s check out the Q1 update from this highly-rated investment platform.

Key points from the platform business:

• 19,000 extra customers, up 4% in the quarter to 561,000 (up 16% year-on-year).

• Direct-to-consumer (not advised) customers leading the growth, up 20% year-on-year.

• Assets under administration up 17% year-on-year to £89.5 billion (N.B. this includes the effect of both net inflows and market market movements).

Quarterly net inflows are slightly up on the corresponding quarter last year (£1.4bn vs £1.3bn).

At AJ Bell Investments, AUM are up 38% year-on-year to £7.2bn, starting from a fairly low base. Net inflows for the quarter are solid at £0.4bn.

CEO comment is interesting as it suggests that the October Budget was responsible both for higher pension contributions in the D2C platform, but also for higher pension withdrawals in the advisory platform.

I guess that the average age of customers in the D2C platform is probably lower than the average age in the advisory platform? So in advance of the Budget, one set of customers was busy making contributions, while the other set of customers was busy making withdrawals!

Or perhaps it might also be that retail investors were more worried about the Budget than financial advisors? AJB’s CEO notes that pre-Budget speculation “caused a short-term behavioural change among retail investors”.

He concludes:

"The strong start to the year positions us well as we approach the busy tax year end period. We remain focused on the significant long-term growth opportunity that exists in the platform market. Our dual-channel approach and continued investments into our propositions and brand mean we are well-placed to continue our strong growth."

Graham’s view

With the shares down by 2% this morning, there’s a suggestion that this update may have slightly disappointed some investors.

As noted by Ken Mitchell in the comments and reported by Thomson Reuters:

The market may have been expecting a better performance in the Advised business in the mix given both IntegraFin and Quilter reported very strong net inflows over the same period earlier this month," said James Allen, a Panmure Liberum analyst.

Clearly the market has much higher standards for platforms such as this than it does for the active fund managers we cover. Platforms are still expected to generate inflows, and AJ Bell in particular is expected to do so, given its strong growth trajectory in recent years.

If I compare this quarter’s progress with the progress in the corresponding quarter last year, I get the following growth rates:

• Advised platform: net flows for the quarter were 1.2% of starting AUA last year, vs. 0.5% of starting AUM this year.

• D2C platform: net flows for the quarter were 3% of starting AUA last year, vs. 3.6% this year.

• AJ Bell Investments: net flows were nearly 9% of starting AUM last year, vs. 6% this year.

I know that we shouldn’t read too much into quarterly movement, and that year-on-year progress is still excellent, but perhaps there are signs that things have slowed down a little, in terms of percentage growth?

But with the tax year-end approaching in a few months, I wouldn’t write off AJB having an excellent financial year. This is still a very decent Q1 update in my view.

The stock as usual is quite expensive at a PER of about 20x but it’s actually a little cheaper than it was when I reviewed this last, in October.

Given the company’s continued growth and (arguably!) a best-in-class offering that causes a headache for competitors, I’m willing to leave my GREEN stance unchanged.

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Ceres Power Holdings (LON:CWR)

Up 2.5% to 143.1p (£277m) - Trading Update - Graham - AMBER

I don’t normally cover this one. Ceres is “a leading developer of clean energy technology”.

Clearly it’s still at an early stage of its development, with revenues rising but losses also looming large:

Highlights from today’s full-year update:

• Order intake greater than £110m, two new manufacturing partners and an electrolyser partner.

• Revenue at upper end of guidance (£55-60m), up by c. 150% vs. 2023.

• Cost base reduced by c. 15% going forward.

Cash and short-term investments c. £102m at year end, in line with expectations.

The company is active in Taiwan, Japan, India and South Korea, and has partnerships with blue-chips such as Bosch and Shell.

CEO comment:

2024 was an exciting year for Ceres as we accelerated our commercial delivery with two new major manufacturing licensees and continue to establish Ceres as the industry standard through the adoption of our technology globally. Alongside our first electrolyser partnerships, we now see increased opportunities for our power technology resulting from the rising energy demand from AI data centres and the strain on power grids from increased electrification.

Graham’s view

I’m often quite negative on loss-making start-ups but the cash balance at Ceres is impressive - is there any chance they might be fully-funded to profitability, especially since they are earning a gross margin of up to 80% on revenues?

And they don’t seem to have diluted shareholders too much in recent years, despite the very large losses suffered:

Despite its large historic losses, I think a neutral stance is fair on this one.

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WH Smith (LON:SMWH)

Up 8% to £12.82 (£1.7bn) - Trading Statement - Graham - AMBER/GREEN

I reported positively this week on SMWH's announcement that it was considering the sale of its High Street business.

The market loved that announcement and it's very happy again today, with a positive trading update.

Headlines:

Good start to the financial year with strong growth across all Travel divisions.

Acceleration in like-for-like revenue in North America

The statement covers the first 21 weeks of the financial year (an odd choice, but that's what they've done).

Revenues are up 4% at constant currencies, including 8% growth in the Travel division and a 6% reduction in the High Street division. Nothing surprising there - Travel is the long-term growth opportunity, while the High Street is battered by competition from all sides.

Within Travel, the "Rest of the World" segment (excluding the UK and North America) has the strongest revenue growth, up 9% like-for-like and up 16% in total, at constant currencies. North America and the UK also grew but at more modest rates.

The company is very focused on North America right now and announces various new stores in Orlando and Portland today. The North American pipeline now has c. 60 new stores.

In the High Street division, the focus is on cost savings (£11m of annual savings to be delivered this year) as the company decides its next steps for this division.

The CEO comment concludes:

"The Group is in a strong position, and while there is some economic uncertainty, we are confident of another year of good growth in 2025."

Graham's view

No reason at all to change my mildly positive view on this one. It has a truly high-quality retailing proposition in the Travel division, where I think it is somewhat insulated from competition. At the same time it has a High Street Division which will hopefully be sold and leave the company with a nice decision to make about the new balance sheet position it might achieve. So I think shareholders can be very pleased here.

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Roland's Section

Van Elle Holdings (LON:VANL)

Down 1.3% to 38p (£41m) - Interim Results - Roland - GREEN

This construction group specialises in groundworks and has exposure to sectors including infrastructure, commercial property and housebuilding.

Van Elle’s unusual April year end means that we have interim results for the six months to 31 October today, rather than the trading updates being proffered by most companies at the moment.

Today’s numbers reflect a drop in activity compared to the prior year, but they don’t look disastrous to me and seem to suggest the outlook may be improving. Van Elle has left its full-year guidance unchanged today, albeit with a slight caveat:

Assuming continued strengthening of the Group's end markets, the Board remains confident in achieving market expectations for the full year.

Let’s take a look at some of the key items in today’s results.

• Revenue down 4% to £65.2m

• Pre-tax profit down 24% to £1.9m

• Underlying EPS down 12.5% to 1.4p

• Net cash (excl. leases): £3.1m (HY23: £8.9m)

• Underlying ROCE: 9.1% (HY23: 10.0%)

It’s nice to see a company citing return on capital employed as a KPI. Too few businesses report this important metric, in my view. Even better, I am pleased to see that Van Elle’s figure broadly matches that shown on the StockReport. This suggests the company’s calculation is not too heavily adjusted.

Trading commentary: Van Elle’s activities are reasonably diversified across sectors. This seems to have provided some protection against weaker areas such as housebuilding.

Residential (H1 rev -4% to £28.1m): housing has been a weak area but the company says it’s “showing signs of recovery”. Housing-related orders received in H1 were 52% above HY24.

Infrastructure (H1 rev -9% to £26.2m): in rail, the company has seen a slow start to the new CP7 regulatory period with revenue below expectations. However, activity is increasing in H2, aided by ongoing TransPennine Express upgrades (much needed!).

In Highways, government spending has also been lower than expected.

In Water and Energy, the company is working to build larger market positions, aided by the recent acquisition of Albion Drilling. Today’s updates from United Utilities and Pennon highlight the additional regulatory spending planned in water over the next five years – I imagine there should be significant opportunities for Van Elle.

Regional construction (H1 rev +9% to £10.5m): this is mainly general commercial and industrial construction. The market is said to remain “very competitive” and “extremely price sensitive”.

Van Elle expects the London market to lead “a recovery in developer confidence”, although taller residential projects are being held back by the new Building Safety Act.

Industrial markets including data centres and warehousing are said to offer “significant opportunity”.

Outlook: Van Elle’s order book rose by 24% to £43.4m between April and December last year and the company says that both housebuilding and rail are expected to see increased activity this year.

Subject to recent improvements continuing, management expects to achieve results in line with market expectations, which the company cites as being for underlying pre-tax profit of £6.0m.

Checking Research Tree for updated broker notes finds three offerings today, from Dowgate, Zeus and Progressive - many thanks to all.

• Zeus - FY25E earnings unch. at 4.1p per share

• Progressive - FY25E earnings cut from 4.2p to 3.9p per share due to risk of further delays in residential

• Dowgate (initiation note) - FY25E at 3.9p per share

So based on these three estimates, my sums suggest a FY25E consensus earnings estimate of 4.0p per share. That’s slightly below the 4.2p per share shown on the StockReport ahead of today.

That would put Van Elle on a forward P/E of 9.5, dropping to a P/E of 7 on unchanged FY26 forecasts.

Roland’s view

While the company appears to have a healthy and improving backlog of work, a number of projects have previously been delayed or are awaiting external approval to commence.

With the year end fast approaching on 30 April, my feeling is that there’s an appreciable risk some revenue could slip back into FY25. This might trigger a small miss to FY24 profit expectations.

I would be happy to be proved wrong. But my experience is that when companies say they will hit guidance if trading continues to improve, it doesn’t always happen.

However, while the exact timing of a recovery may be uncertain, I am fairly confident that a recovery is getting underway. In the meantime, I think the risk of a slight miss is probably already reflected in the share price.

Van Elle itself appears to have positive prospects, a sensible balance sheet and a reasonable valuation, so I’m going to stick my neck out slightly and maintain our previous GREEN view.

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Dowlais (LON:DWL)

Up 11% to 76p (£1.0bn) - Recommended takeover offer - Roland - PINK (takeover)

So long, farewell. Automotive parts manufacturer Dowlais’s short spell as a standalone listed company may have reached its end after less than two years on the London market.

This FTSE 250 firm (formerly part of GKN and then subsequently Melrose Industries) has unveiled a £1.16bn takeover offer from a US peer, American Axle & Manufacturing Holdings (NYQ:AXL)

When I saw the takeover headline in the RNS at 7am, I assumed that American Axle was a larger rival, but this doesn’t seem to be the case – it’s actually much smaller and more heavily indebted, but with more highly rated shares. A familiar story for UK investors at the moment.

American Axle’s stronger valuation and high leverage may explain why today’s offer is part cash, part shares.

The deal would see Dowlais shareholders gain a 49% stake in American Axle, which is listed in New York and is part of the S&P 600 Small Cap Index.

Let’s take a look at the offer on the table for Dowlais shareholders, assuming the deal goes ahead.

The offer - for each Dowlais share, shareholders would receive:

• 42p in cash

• 0.0863 new American Axle shares

• Up to 2.8p as a final cash dividend paid prior to completion

The offer is said to have a total implied value of 85.2p per Dowlais share, based on yesterday’s closing price of $5.82 for American Axle. This means it’s broadly 50/50 cash/shares.

However, this is only a 25% premium to yesterday’s closing price for Dowlais, and well below the level the shares were trading at 12 months ago.

Roland’s view

Investors are unimpressed by this proposal, judging from Dowlais’s share price reaction this morning. The stock is only up 10% to 75p, more than 10% below the supposed value of the offer.

If I was a Dowlais shareholder, I think I’d be disappointed too:

• Based on 2025 consensus forecasts, DWL will contribute nearly 80% of FY25 profits to the combined group, but DWL shareholders will only own 49% of the combined business;

• The offer only values DWL on a FY25 P/E of 7 and in my view does not offer a fair premium to reflect potential improvement in earnings in 2025 (and beyond);

• AXL is smaller and more highly leveraged than DWL. The combined group is expected to have leverage of 2.5x EBITDA, versus 1.6x for DWL at H1 24;

• AXL is a US-listed small cap, not an area many UK investors target. I imagine many UK fund managers will be unable to hold AXL shares.

The companies say that combining the two businesses will create $300m of cost savings, creating a business with more advantageous scale and a diversified customer base.

I don’t know much about the market outlook or detailed conditions within the automotive sector. Perhaps it’s possible that both companies are struggling with subscale operations and unbalanced customer bases. I don’t know.

However, my feeling is that unless conditions are getting much worse than previously expected, Dowlais shouldn’t be desperate for a deal. The company’s most recent trading statement (in November) was in line and did not appear to contain any nasty surprises – the shares have risen by 40% since it was published.

At first glance, it to me looks like American Axle may be in greater need of a deal and is hoping that it can leverage its more highly-rated shares to acquire some cheaper UK earnings.

If I was a shareholder, I would be planning to vote against this deal.

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Hargreaves Services (LON:HSP) 

Up 2% to 602p (£199m) - Interim Results - Roland - GREEN

Today’s half-year results from this infrastructure services and land development group provide the usual clear update on the (many) moving parts of this unusual group.

I’ve kept an eye on this business for a number of years and have always been impressed by its clear reporting. Today’s results do not seem to suggest any cause for concern:

the Board anticipating delivering full year results in line with market expectations.

H1 results summary: Hargreaves financial year ends in May, so today’s numbers cover the six months to 30 November 2024.

• Revenue up 13.7% to £125.3m

• Pre-tax profit up 96.3% to £5.3m

• Earnings up 134.6% to 12.2p per share

• Interim dividend up 2.8% to 18.5p

• Net asset value up 2.3% to 580p per share

Services: Management say the company’s services division, which is predominantly earthmoving, had a strong H1. The company tends to be employed on large infrastructure projects – current examples include HS2 and Sizewell C, “where our competence and safety culture are highly valued”.

90% of Services revenue is secured for the full year. As a result of additional earthmoving work, management now expects Services revenue to be c.10% above expectations, leading to an improvement in divisional pre-tax profit.

Hargreaves Land: the sale of one 11-acre site at Blindwells (near Edinburgh) was completed for £9.3m. Unfortunately a further sale has been delayed due to site access problems. This shortfall will offset the outperformance expected in Services for FY25, leaving overall group performance in line with expectations.

An initial tranche of renewable energy assets have also been placed on the market (two wind farms and five access agreements). These have been valued at £12.6-£13.5m. The company is hopeful of completing a transaction in 2025.

HRMS: this is a German business active in metal recycling and coal trading. It returned to profitability in H1 and currently provides regular cash dividends to Hargreaves. The group’s financial exposure to HRMS fell from £70.2m to £62.7m during H1 as a result of cash received.

Outlook: FY25 results are expected to be in line with forecasts:

Despite the completion of a material sale at Blindwells, another planned sale is likely to be delayed until early in the next financial year due to a delay in securing technical approval for site access. This delay is expected to offset the anticipated gains in Services. As a result, the Board anticipates the Group will perform in line with market expectations for the full year.

Updated notes from brokers Cavendish and Singers leave FY25 forecasts unchanged today. However, analysts at both companies have upgraded their FY26 and FY27 profit estimates, citing improved expectations for Hargreaves’ Services business.

Comparing the brokers’ earnings estimates with the StockReport, my impression is:

• FY25E: unchanged at 42.5p per share

• FY26E: upgraded from 44.5p (StockReport) to an average of 51.5p per share

These changes suggest that Hargreaves’ forecast P/E could fall from 14x in FY25 to under 12x for FY26.

When paired with the stock’s 6% dividend yield, I think this could be quite reasonable value.The StockRanks are also very positive:

Roland’s view

A few years ago, Hargreaves shares were trading well below asset value, providing investors with a classic value play. While asset backing remains strong, that’s no longer the case. At just over 600p, the shares now trade at a small premium to their tangible book value of 580p.

Debt levels remain modest and underlying cash generation still looks strong to me, albeit somewhat lumpy. The 6% dividend yield looks well supported to me, at present.

The main risks I can see are that Hargreaves remains exposed to timing issues on large deals and to commodity prices and industrial activity (in Germany).

Although the shares have become a little more expensive since I covered them a year ago, I think the current price tag is probably justified by near-term expected performance.

I believe this is a well-run business with committed long-term management and a clear strategy to transition to a less capital-intensive business model. GREEN.