Good morning all,
The AIM All-Share Index was down by over 2% yesterday, noticeably worse than the FTSE which was down 1.3%.
The S&P 500 was down c. 2% at one point but finished the day down 1.2%.
I was sorry to read the dismay in yesterday's comments section. It's always a test when values are deteriorating. My own portfolio also took a hit with the likes of BRK.B down 3% and IGG down 1.5%.
One of the ways I deal with short-term volatility is that I do not do any daily calculations of my portfolio value. I can see my progress over a month and year-to-date, for example, but I do not calculate the daily change in my portfolio, either in percentage or in absolute value terms. I do not want to know! This works for me but of course it might not work for everyone.
The reason for yesterday's slide: the Trump trade war has heated up with 25% duties on Canada and Mexico that came into force yesterday. Tariffs on China moved from 10% to 20%. And China retaliated with 15% tariffs of their own on certain products. Tit-for-tat tariff decisions seem increasingly likely, with Canada also retaliating against the US.
Some of the biggest movers on AIM were: BUR down 8%, SRC down 5.5%, JET2 down 5%, DATA down 5% and YCA down 5%.
1pm: all done for today.
Companies Reporting
| Name (Mkt Cap) | RNS | Summary | Our view (Author) |
|---|---|---|---|
Flutter Entertainment (LON:FLTR) (£37bn) | Final Results | Strong 2024. Players +13%, rev +19%. 2025 guidance: rev +13%, adj. EBITDA +34%. | |
Games Workshop (LON:GAW) (£4.5bn) | TU | Ahead of expectations. Strong trading across core business and licensing. | GREEN (Megan) It’s a short, sweet update today from the company which, to my mind, is the brightest light on London’s markets. It’s ticking all the boxes for a high quality stock and getting repeated bumps from expectation-beating updates. In a time when there is not a lot of positivity in global markets, GAW makes me happy. |
Old Mutual (LON:OMU) (£2.3bn) | TU | “Solid” results. Headline earnings +10% to +30% | |
Quilter (LON:QLT) (£2.1bn) | Final Results | AUM +12% to £119bn after £4.8bn of net inflows. | |
Breedon (LON:BREE) (£1.5bn) | Acquisition and Final Results | Management hopeful that 2024 represents a floor in UK construction activity. Sales +6% boosted by acquisition. | AMBER (Megan) Another big bump in the share price today following expectation-beating final results and an earnings-enhancing acquisition. This continues to look like quite an attractive momentum option. But the debt-fuelled growth makes me nervous. |
Dowlais (LON:DWL) (£886m) | Final Results | Rev -19%, adj op profit -8.7%. Outlook: rev flat or declining in 2025 with flat adj op margin. | PINK - under offer |
Ibstock (LON:IBST) (£600m) | Final Results | Revenue down 10% and PBT down 30% to £21m. Market demand improved in H2. | |
Ferrexpo (LON:FXPO) (£423m) | Response to SBI Statement | Court has granted request to transfer 49.5% of Ferrexpo Poltava Mining to a Ukrainian agency. | BLACK [no section below] |
Galliford Try Holdings (LON:GFRD) (£354m) | Interim Results | Ahead of expectations for the full year. H1 sales +13%, adj PBT +22%. | AMBER (Roland) |
De La Rue (LON:DLAR) (£239m) | TU | In line. Currency order book growing. Net debt increased. Formal sale process of the company still underway. | PINK |
Impax Asset Management (LON:IPX) (£229m) | AGM Stmt | AUM: £34.1bn (Dec 2024) down to £28.5bn (Feb 2025). Fall primarily driven by St. James’s Place. | GREEN (Graham holds) |
Capita (LON:CPI) (£219m) | Final Results | Adj revenue down 8% offset by cost-cutting programme. Reported op loss narrowed to £9.9m. | AMBER (Roland) |
Netcall (LON:NET) (£189m) | Interim Results | Cloud services sales +44% driving total sales +22%. Recurring revenue now 79% of total. | AMBER (Graham) A nice outlook for 2025 with the company firing on all cylinders and enjoying double-digit organic growth, boosted by acquisitions. The tricky bit is deciding if it's fully valued or if it still offers an opportunity at this level. My value instincts lead me to a neutral stance. |
Foxtons (LON:FOXT) (£185m) | Final Results | Rev +11%, adj op profit +38%. “Double digit” share gains in sales. YTD trading in line with exps. | |
Ricardo (LON:RCDO) (£143m) | Interim Results | Rev +1.9% at £169m, adj op profit £8.3m. Order book +3.4% to £393m. Exps unchanged. | |
SIG (LON:SHI) (£139m) | Final Results | In line. Rev -5.4%, LFL -4%. Adj loss before tax of £14.3m. Outlook soft, LFL sales flat YTD. | RED (Graham) [no section below] Another challenging year for SIG. Net debt has ticked up to £497m although it's "only" £176m if you exclude lease liabilities. There is a pre-tax loss both on an "underlying" level and on an accounting basis. The company has reduced headcount and closed unperforming branches, and the CEO argues that this insulation/building products supplier is well-positioned to benefit from operational leverage when demand recovers. I do acknowledge the company's successful refinancing of its €300m bond in October, but the new notes carry a 9.75% fixed rate that will eat away at operating profits. The leverage multiple is an uncomfortable 4.7x (including leases). A high risk, high reward situation and not one that I'd have any interest in betting on. |
Batm Advanced Communications (LON:BVC) (£75m) | Strategy & Trading Update | Profit warning. FY EBITDA now exp $8m versus prev exp $9.4m. Sale of non-core asset for $2m. | SP -12% AMBER/RED (Graham) [no section below] This overly complex Israeli group continues to divest non-core businesses with the aim of focusing on cyber security, networks and medical diagnostics (to me this is still too complex given the scale of the group!). At least we get another small disposal announcement today. However, there is also a profit warning and the results for 2024 will include impairment charges. The situation is inscrutable and I suspect that a moderately negative stance is now justified. Cash of $31.6m (£25m) might cause this to show up on some value screens. |
EnSilica (LON:ENSI) (£39m) | Contract Win | €2.13m European Space Agency Development Contract. Will receive 80% funding. | AMBER/RED (Graham) [no section below] Yet another prestigious contract as the ESA will fund Ensilica to develop a new component for global navigation satellite systems. I would be RED on this stock on fundamentals but the quality of Ensilica’s contracts leads me to believe that there must be more to this than initially meets the eye. |
Graham's Section
Impax Asset Management (LON:IPX)
172.4p (£229m) - AGM Statement - Graham - GREEN
At the time of publication, Graham has a long position in IPX.
Impax reports a nasty fall in AUM, as expected: from £34.1 billion (Dec 2024) to £28.5 billion (end of Febraury).
Ian Simm provides a generously long AGM statement. Some of the key points:
- Equity markets are no longer dominated by a handful of US-listed stocks. So the relative performance of Impax strategies against their benchmarks has improved.
- The loss of the large St. James’s Place mandate in February represented £5.1bn of lost AUM.
- Net outflows are expected for March.
This sounds promising:
we continue to see material client interest in our investment capabilities and offering, and the flows into our collective funds have been improving. Looking ahead to the third and fourth quarters, we are encouraged by our pipeline and by significant recent account wins.
(N.B. IPX has a year-end in September, so its third and fourth quarters run from April to Sep.)
Impax’s AUM has exceeded £40 billion previously, e.g. it was £41.4 billion in Dec 2021.
In more recent times, it has been close to that level, e.g. £39.6bn in March 2024.
But it’s now about 30% below there.
The company has now responded to this sharp fall with a 10% reduction in headcount (30 roles).
The effect of this is:
reducing our run-rate annual costs by more than £11 million but without materially reducing our capabilities or growth prospects. This efficiency programme will broadly neutralise the loss of the St. James's Place revenue.
There is also mention of a potential share buyback - and I think this is new.
"With successful recent experience of both seeding new products and making acquisitions, we continue to reflect on how our capital allocation to these areas and/or to dividends and share buybacks can optimise shareholder value. We intend to provide an update on this topic in the Company's interim report.
The statement ends positively, with the claim that competition is weakening in the world of sustainable investing:
"Asset owners continue to demonstrate their increasing interest in investing in the transition to a more sustainable economy... With several of our competitors around the world deciding to vacate this space, we believe that our position as a specialist presents us with a significant opportunity to build our business."
Estimates
My thanks again to Paul and Andy at Equity Development for providing updated forecasts. The AUM forecast for Sep 2025 has been cut from £34.1bn to £31.5bn.
Fortunately, much of the recent AUM decline has been in lower-margin accounts and this results in the FY 2025 revenue forecast only falling from £159m to £155m.
Combine that with cost cuts and the after-tax profit forecast for this year has barely moved, adjusting very slightly from £30.6m to £30.5m.
Graham’s view
I own some shares in this fund manager as I think that valuation has become very interesting, and I’m inclined to stay GREEN on it today even after the AUM and revenue forecasts have been shaved.
Some positive points:
The PER is only a little higher than 7x (current year) and is less than 7x based on next year’s forecast.
The balance sheet was worth £110m (tangible) as of Sep 2024, supporting half of the current market cap.
An acquisition in Germany is set to complete in the coming weeks, to expand their fixed income capabilities.
If they are seriously considering share buybacks, I think this could start to get very exciting - they could very meaningfully reduce their share count if they prioritised buybacks over the dividend.
The dividend is not fully covered by EPS but if they continued to pay it, the yield is a remarkable 16%. However, that sort of yield isn’t necessary and with the market cap at the current level I would much rather see spare cash being used to reduce outstanding shares.
The main negative point is that there’s no guarantee that we will see net inflows any time soon. Management have made positive noises this morning re: their pipeline and recent account wins, so we can hope. For now, however, the bear thesis has played out, and sustainable investing has fallen out of favour. And the political climate in the US in particular does not appear to provide a very favourable environment for it to come back into fashion. Sustainable investing may become something of a niche interest.
Impax is currently the smallest position in my portfolio (1%). I’d like to top up and increase my holding in it, but that will depend on my conviction in it increasing. It has already fallen by 30% since I bought it in December - every time I think it can’t get much cheaper, it surprises me!
Netcall (LON:NET)
Unch. at 114.9p (£190m) - Half-Year Report - Graham - AMBER
We have interim results to December:
Strong Cloud momentum and enlarged opportunity through innovation and complementary M&A
The company provides “AI-driven Process Automation and Customer Engagement”. It’s an “AI business transformation platform”.
Industries served include healthcare (NHS), local government, housing and insurance.
Today’s financial highlights are excellent:
Please note that organic revenue growth is 12%, not the 22% shown above.
Prospects are good:
Positive sales momentum into H2, with the Board confident in delivering on its expectations and completing another successful year
I’m curious to see why PBT failed to grow during the period, and am unsurprised to see that it relates to acquisition activity. Netcall says that its higher adjusted EBITDA was “offset by acquisition related charges, including amortisation of acquired intangibles, non-recurring transaction costs, and post-completion services”.
Some software development costs are capitalised (boosting profits) but this does not concern me as there is a matching charge under “depreciation and amortisation” on the cash flow statement.
CEO comment:
"We are delighted to report another strong trading period, marked by double-digit organic growth and increased profitability. The expansion of our Liberty platform continues to drive success, and we are particularly pleased with the results of our cloud investment programme, which has seen 41% growth in cloud contact centre subscription revenues and the addition of further generative AI features across the platform. The integration of our recent acquisitions, Govtech and Parble, is progressing well, enhancing our capabilities and creating cross-sale opportunities.
He notes that £71m in contracted revenue has yet to be recognised.
Balance sheet
That relates to a theme picked up by Paul last year - customers often pay Netcall cash upfront, before their contract’s revenue is recognised on Netcall’s income statement. Until the revenue is recognised, the cash sits on Netcall’s balance sheet along with an offsetting liability (“contract liabilities”).
Today’s balance sheet shows contract liabilities of £23m. The cash balance is £22m. So effectively the company’s entire cash balance derives from advance customer payments.
This is not a bad thing at all, but it does mean that I wouldn’t truly consider the company to have a net cash balance of £20m+, as this cash comes with strings attached.
I also note in passing that the company has negative tangible balance sheet equity. Once again this does not necessarily make Netcall a bad investment. It just means that we can’t expect the balance sheet's tangible assets to help support the valuation in a downturn.
Estimates: thank you to Canaccord Genuity for publishing on this today. They note that Cloud services are the company's key fuel for growth and leave their FY June 2025 sales and profit forecasts unchanged: sales of £47.5m and adj. PBT of £8m.
Graham’s view
This stock has some very nice features: double-digit organic growth, recurring revenue that’s nearly 80% of total revenue, and (usually) good cash flow with advance customer payments. Although cash flow in this H1 period disappointed due to the timing of a payment from a large customer.
The StockRanks summarise what is happening: we have a high-quality operating performance and excellent share price momentum, reflected in a hot valuation:
Some value metrics:
I also think customer concentration might be a factor to watch out for, although hopefully a diminishing one.
From the 2024 annual report:
No single external customer accounted for more than 10% of the Group’s revenue in the current year. A single external customer accounted for 14% of the Group’s revenue in the prior year
On balance, I approve of the AMBER stance that we took on this last time. I think it’s clear that there is plenty to like about Netcall as an investment. The tricky part is figuring out whether it’s still attractive at this valuation.
Price to sales is 5x. The closer it gets to 100% recurring revenue, and the higher the margins it can generate on this revenue, the more positive I can get at this sales multiple.
Megan's Section
Games Workshop (LON:GAW)
Up 6.5% to £146.60 (£4.8bn) - Trading Update - Megan - GREEN
It’s a short, very sweet, unscheduled update from Games Workshop (LON:GAW) this morning. Just two sentences to let us know that trading in January and February has been very strong in both the core retail and the licensing business, which means annual pre-tax profits (for the year to 1 June 2025) will be ahead of current expectations.
It’s not unusual for Games Workshop to provide investors with such a positive update (this is the fourth trading statement since the last financial year end, and three of those have included the highly sought after phrase “ahead of expectations”). But investors shouldn’t take the continued forecast-beating growth for granted. The positive impact on share prices from these types of updates can persist for several months (as Ed’s research here demonstrates).
For Games Workshop, the slew of positive updates also means earnings forecasts for the 2025 financial year are now 74% higher than they were this time last year. And that doesn’t include the upgrades to earnings forecasts which will no doubt land later today.
In January, the company reported total revenues of £300m for the first six months of the year (£269m from the core retail business and £31m from licensing). Pre-tax profits in the first half were £126m. That compares to £236m and £95m respectively in the previous first half.
Because of the way the company’s financial year falls, trading in the two halves of the year tends to be pretty well balanced. Now with January and February trading so strongly, current forecasts of £571m in sales and £168m in net profits for the full year look pretty conservative.
Comment on Amazon tie-up: In December, Amazon and Games Workshop announced the first in what could be a series of commercial tie-ups: a TV series based on Warhammer which will star Superman actor Henry Cavill. But in the January interim results, investors were slightly disappointed by the lack of commercial detail.
There are still no commercial details to be found in today’s update, but it is encouraging to see that licensing revenues are trading ahead.
But for me, the bigger attraction from the Amazon tie-up is the potential to bring the Warhammer world to massive new audiences. There are over 200m Amazon Prime subscribers worldwide - a far cry from the word-of-mouth and community marketing of Games Workshop’s past.
The Netflix series The Witcher (which is also based on a game and stars Henry Cavill) attracted 83m views in the first 90 days after its release. The year the series came out, sales of the newest version of the video game were up over 500%.
Megan’s view: There is no doubt in my mind that Games Workshop is the brightest light on London’s markets. And, since its promotion to the FTSE 100 last year, it has so far managed to maintain its incredibly positive trajectory.
There is even a value argument to be made if you’re interested in dividends. The yield on the very reliable payout is currently 3.4%. Roland has also taken a deeper look at the importance of earnings and cash flow cover for investors looking for reliable, growing dividends. (You can read that research here.)
At a time when global markets are suffering from geopolitical turmoil and domestic markets remain lacklustre, Games Workshop makes me happy. I can’t be anything but Green.
Breedon (LON:BREE)
Up 15% to 490p (£1.7bn) - Full Year Results and Acquisition - Megan - AMBER
Those who glanced at the financial results statement from Breedon (LON:BREE) this morning would be forgiven for not being entirely sure if the company was reporting ‘ahead of expectation’ numbers. Excessive use of semi-colons in the headline have made the statement not that easy to read.
However, I can confirm that financial results from the construction materials group are ahead of the previously announced expectations. Underlying EBIT for the year to December was £174m, compared to forecasts in the November trading update of £169m and up 11% on the previous year.
Robust international expansion. Total sales growth of 6% was entirely driven by the company’s expanding international footprint. GB revenues fell 4% and Irish sales were down 1% in the period. But in March, Breedon acquired US construction materials company BMC which helped deliver £133m of sales in the company’s new US division.
In October the BMC branch completed its first bolt-on acquisition of a building products and masonry manufacturer. And the company’s commitment to its growing international business has been further reinforced by this morning’s announcement of another US-based acquisition. Lionmark, which Breedon has bought at an enterprise value of $238m, is a Missouri-headquartered construction company, which specialises in road infrastructure.
In the 12-months to November 2024, Lionmark recorded $246m of sales and adjusted EBITDA of $31m. That compares to Breedon’s underlying EBITDA of £25m in the US division. Lionmark is expected to double the company’s US footprint.
Debt-fuelled growth. The company’s year-end net debt figure was £235m higher than the previous year at £405m. Leverage at the year end was 1.4x, but this has risen to 1.9x following the acquisition of Lionmark, which only just falls within the company’s existing banking covenants.
The Lionmark acquisition is being funded by $226m of debt-funded cash to be paid on completion. Plus $12m in shares offered to the vendors, which must be held for a minimum of 12 months.
A comment on momentum. Like many UK-listed companies in the building materials space, Breedon’s shares have been swept up by renewed optimism for the construction industry. The share price is up 30% in the last year and, after a brief blip in January, up 11% in the year to date.
A further leap today adds weight to the momentum story. Companies which enjoy big gains on results day, tend to enjoy sustained share price momentum over the following months, especially if the results come ahead of expectations.
Megan’s view: While the international opportunity looks enticing, I don’t love the extent to which the company is reliant on its debt to fuel that opportunity. There is a strong momentum angle to the investment case here, but I would argue that it is not backed up by the most robust fundamentals. One for the brave, but I am neutral. AMBER
Roland's Section
Capita (LON:CPI)
Up 8% to 13.9p (£236m) - Full Year Results - Roland - AMBER
Growing momentum against our strategic priorities; full year results in line with guidance and market expectations
This outsourcing group has been on a remarkable journey over the last decade. Unfortunately for shareholders, it’s not been a happy trip. Capita is now a small cap – but its market cap 10 years ago was £6.8bn!
Do today’s results provide any reassurance that a sustainable turnaround is underway?
2024 results summary: Let’s take a look at the headline figures, which we are told are in line with expectations.
Revenue from continuing operations fell by 8% to £2,369m
Adjusted operating profit rose 5.5% to £95.9m
Reported operating loss improved to £9.9m (2023: loss of £52.0m)
Free cash outflow of £122.7m (2023: outflow of £154.9m)
Net debt exc leases reduced to £66.5m (2023: £182.1m)
Today’s results are heavily adjusted. I recognise that some investors are more sympathetic than I am to adjusted profits.
However, in this case I think the company’s largest adjustment is worth noting, because it seems to relate to downgraded trading prospects for one of Capita’s largest business units.
Two big numbers were involved in transforming the group’s adjusted operating profit into a reported operating loss:
Impairment of goodwill: £75.1m (2023: £42.2m)
Cost reduction programme: £27.9m (2023: £54.4m)
My main concern is the goodwill impairment, which relates to the Contact Centre business.
This is Capita’s second-largest division by revenue. Trading seems poor and likely to remain weak in 2025. As a result, management has felt it necessary to impair some of the goodwill attached to this business unit.
The commentary does not make for positive reading:
Adj revenue -18% to £651m, adj op loss increased to £5.9m (2023: £4.0m loss)
Contact Centre order book fell by 53.9% to £645m in 2024
Reduction in bid activity in 2024
High single-digit revenue drop expected in 2025
Most new contracts agreed in 2024 are framework agreements. These appear to be the corporate equivalent of zero hours contracts – they do not provide guaranteed volumes, transferring risk from customer to supplier
Capita also notes that “certain delivery issues have led to the reduction of volumes on one particular contract”
My impression is that the Contact Centre business is having a bad time. I would not be surprised to see further problems emerge in 2025.
Let’s take a quick look at Capita’s other main business units.
Public Service: Capita’s core Public Service division is said to be the largest supplier of software, IT and business process outsourcing to the UK Government. This division generated around half Capita’s revenue last year.
Trading was positive, with adjusted operating profit up 28% to £89m, matched by operating cash flow to £92m.
However, as with contact centres there was a marked contraction in the order book:
Order book -17.6% to £2,823.4m
Total contract value secured -49.5% to £928.7m
The company says the decline in new contracts was caused by the government transition following last year’s election. If that is the case, I’d hope to see some improvement in 2025.
Pension Solutions: this pension administration and consulting business is a smaller but higher margin unit. Revenue rose by 5.1% to £179m last year while adjusted operating profit was 8.5% higher at £28.1m. That gives a useful 15.7% operating margin.
The outlook for 2025 is for mid-single digit revenue growth and stable margins.
However, this unit also needs to replenish its order book. Pension Solutions’ book-to-bill ratio was 0.8x in 2024 and the value of contracts secured fell by 56% to £145m.
After winning a “material” Civil Service contract in 2023, Capita failed to achieve any similar-sized wins in 2024.
Regulated Services: this division handles various operations for clients, the largest of which is closed book Life & Pensions. Capita says it’s exploring an exit from these operations and is managing the unit “for value”.
Last year’s performance certainly suggests a decline, managed or otherwise. Revenue fell by 27% to £152m and adjusted operating profit dropped 62% to £12.6m. Operating cash flow was negative, with a £13.7m outflow.
The order book fell by 47% to £231m and new contracts secured were valued at just £7m. The company says it’s continuing to hand back contracts and expects revenue and profits to continue declining.
Outlook: Capita has provided some fairly clear financial guidance for 2025 – luckily, as we don’t have access to any broker notes.
Adjusted revenue expected to be “broadly in line with 2024”, with growth in public services and pensions offset by declines elsewhere
Small increase in adjusted operating margin
Free cash outflow of £45m to £65m, driven by a £55m outflow to deliver the cost reduction programme
Expects to be free cash positive, excluding the impact of business exits, “from the end of 2025”
Medium target of 6% - 8% adjusted operating margin unchanged
Consensus estimates on Stockopedia prior to today show forecasts for adjusted earnings of 2.5p per share in 2025. That prices the stock on a FY25E P/E of 5.6 after this morning’s gains.
Roland’s view
CEO Adolfo Hernandez has a tech background and his strategy is to make Capita a tech-led business that delivers AI and technology solutions – presumably in areas where high numbers of outsourced workers were previously needed (e.g. call centres & public sector back office work)
Hernandez was only appointed a year ago, so perhaps it’s too soon to pass judgement on this strategy.
However, the group’s financial performance remains decidedly mixed and 2025 seems likely to be another poor year, at least in terms of reported profit and free cash flow.
The sharp decline in new business wins last year concerns me, even allowing for the mitigation of a government transition.
Capita also remains a very low margin business, even on an adjusted basis. Earnings forecasts have trended steadily lower over the last year:
The StockRanks were ambivalent about Capita ahead of today’s figures, flagging up low quality metrics in particular:
I think there’s some risk of further downgrades in 2025. More broadly, I am not yet convinced this can become the kind of higher margin, cash-generative business that deserves a stronger valuation.
I went AMBER/GREEN on Capita in December, ahead of today’s figures. But having now reviewed the numbers, I can’t get higher than AMBER.
Galliford Try Holdings (LON:GFRD)
Up 10% to 384p (£391m) - Half-Year Report - Roland - AMBER
Revenue and adjusted profit before tax for the full financial year are expected to be above the top end of the range of current market expectations.
Today’s half-year results from construction group Galliford Try brings good news for shareholders in the form of an earnings upgrade. Brokers covering the stock have upgraded their estimates for the current year by c.10% – a material improvement.
The shares have flatlined since the autumn, so will today’s news be the catalyst for a further step up? Ed’s recent work on post-earnings drift certainly suggests that it’s a possibility.
Let’s take a look at today’s news and see what’s changed.
H1 results summary: the headline numbers in today’s results look strong to me. Galliford’s order book and profits are both higher than they were a year ago:
Revenue up 12.7% to £923.2m
Adjusted pre-tax profit up 22% to £20.5m
Adj PBT margin improved from 1.7% to 1.9%
Adjusted EPS up 11.3% to 15.7p
Interim dividend up 37.5% to 5.5p per share
Last 12 months average month-end net cash: £176.4m (H1 24: £132.7m)
Order book up 6% to £3.9bn (FY24: £3.8bn, H1 24: £3.7bn)
There’s been a nice progression in the order book over the last 12 months. Galliford says that 98% of revenue is secured for the current financial year, with 81% for next year.
I’d also give recognition to the company for providing an average month-end net cash figure. The only thing better than this is a daily net cash figure – a measure reported by the gold standard business in this sector (in my opinion), Morgan Sindall.
The reason why cash is so important for businesses of this kind is that they operate with tiny margins and regularly experience big working capital movements. Good liquidity is essential. Relying on debt funding for this kind of business can easily end in disaster. The recent failure of ISG is an example.
For this reason, I would not consider Galliford’s c.£200m net cash balance to be surplus to requirements. The fact that the forecast dividend is expected to cost c.£16m suggests to me that management shares this view.
Trading commentary: today’s upgrade appears to have been driven by stronger than expected trading through H1, as well as a strong outlook for the remainder of the year.
Galliford’s business is split into Building and Infrastructure divisions – both made an equal contribution to profit in H1, but it’s the infrastructure business that really seems to be powering ahead.
Building: revenue rose by 5% to £467.3m, with operating profit up 18% to £12.5m. There’s a large public sector element to this work, plus affordable homes and facilities management. The company has also picked up some work as a result of the failure of ISG.
Infrastructure (highways and water): revenue up 25% to £451.7m, op profit up 32% to £12.3m. Management reports strong activity on AMP7 [water regulatory work] ahead of transition to “larger AMP8 frameworks”. Given the much-publicised problems with UK water infrastructure (and the recent increase to my water bill) I expect this could remain a growth area.
Outlook & updated estimates: CEO Bill Hocking sounds confident, and perhaps with good reason:
The Group enters the second half of the year with improved confidence for the financial year to 30 June 2025 and with 81% of work secured for 2026. Revenue and adjusted profit before tax for the full financial year are expected to be above the top end of the range of current market expectations.
With thanks to brokers Panmure Liberum and Cavendish, we can translate this positive outlook into updated earnings estimates:
Panmure: FY25E EPS +12% to 29.4p, FY26E +10% to 31.2p
Cavendish: FY25E EPS +12% to 30.3p, FY26E +2.3% to 31.5p
Averaging the two estimates for FY25 gives me an earnings figure of 29.9p per share, 12% above the 26.6p consensus figure shown in Stockopedia.
With the stock up 10% as I write, Galliford’s FY25 forecast P/E is almost unchanged at 12.7.
Roland’s view
We tend to be sceptical about contracting and construction firms in this report, due to their low margins, lumpy contracts and accident-prone nature. For me, owner-managed Morgan Sindall is an exception to the rule – but should I consider adding Galliford Try to this short list too?
For me, the answer is a definite maybe. Today’s upgrade extends a run of upgrades over the last 18 months. Momentum definitely seems strong here:
I like the company’s focus on regulated and public sector work, which reduces its cyclical exposure.
I’m also impressed with the improved margins and continued strength of the net cash position. A shift to daily net cash reporting would improve things still further!
Quality metrics have been improving, with decent ROCE and ROE:
On the other hand, this does remain an extremely low margin business – the H1 results show an operating margin of just 1.9%. Galliford had to turn over more than £900m to generate a £17m operating profit. That doesn’t leave much room for error or surprises. A 1% variation in expected revenue or costs could easily wipe out 50% of profits.
I was positive on Galliford when the shares traded on a single-digit P/E. But at nearly 13x earnings, I feel the shares are probably more fairly priced.
Morgan Sindall – a higher margin business with a stronger record of value creation for shareholders – trades on a similar multiple. And as highly-regarded Renew Holdings showed recently, unexpected delays in order flow can occur even in regulated markets.
The StockRanks are positive on Galliford Try and I imagine they will remain so when today’s half-year accounts are digested.
However, at the risk of being behind the curve, I’m going to maintain our AMBER rating, purely on valuation grounds.
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