Who’ll be the first business section columnist to argue that ESG is corporate cancel culture, do you think? Jeremy Warner maybe? Alex Brummer? Or will that brand of contrarian obtuseness remain exclusive to the likes of Brendan O’Neill?

We ask apropos of Boohoo no longer being cancelled. Shares are up 33 per cent at pixel (or around £1.2bn in market cap terms) which is at least in part in response to news that . . . 

UK authorities have found no evidence of modern slavery offences in the first round of inspections on Boohoo subcontractors in Leicester, underlining the challenge of tackling allegations about the city’s illegal garment factories.

Over the past week seven separate government agencies visited nine premises in Leicester, prompted by allegations about illegal work practices that Boohoo and Priti Patel, home secretary, have described as “appalling”. . . . 

[I]n spite of the concerted government effort to uncover abuses, the Gangmasters and Labour Abuse Authority (GLAA) has admitted that “no enforcement has been used during the visits”. “Officers have not at this stage identified any offences under the Modern Slavery Act,” the agency said.

Reports from Leicester over the past few years have described a diffusion of seamsters and embroiderers flitting between undocumented jobs in places you’d struggle to class as factories, so no evidence of illegal working practices from nine site checks might not be the human rights slam-dunk it first appears. It is, nevertheless, a headline that’s not outright negative. Anyone keen to claim that ESG scrutiny is all just virtue signalling by the Cult of Woke now has a convenient platform, of sorts.

Bring out the “buy” recommendations, starting with HSBC:

While the suppliers implicated in the Sunday Times report have been terminated by Boohoo for breaching its code of conduct on record-keeping and sub-contracting production, there is thus far no evidence to support claims that workers were paid GBP3.50 per hour by these suppliers versus the UK National Living Wage of GBP8.20-8.72 for workers aged 21 or over. We note the following:

 The UK short-lead-time supply chain is a sustainable competitive advantage, further supported by the group’s diversification into international markets, which now account for 60% of CoGS (versus c30% in last three years), including 40% in Asia and 20% in Europe. We expect reliance on UK supply as a percentage of CoGS to continue to diminish over the medium to long term.

 We believe any impact on demand will be limited. Boohoo targets younger and less affluent customers who are influenced by social media. It has proactively reached out to many ‘influencers’ to reassure them in light of the situation. We believe that negative influencer commentary has been limited to date and that Boohoo’s customers are generally driven more by price, choice, and newness.

500p target price and Buy rating (unchanged): Post a strong Q1 update . . . we leave our FY20-22e earnings unchanged as we expect limited impact from a cost or demand perspective. Our unchanged APV-derived target price of 500p implies c122% upside from current levels and a CY21e EV/sales ratio of 3.10x (versus a 1.53x current and a five-year historical one-year forward EV/sales multiple of 2.60x). In our view, the competitive advantage of the group’s business model and its strong cash generation and balance sheet justify a premium to peers.

Goldman Sachs doesn’t even sully its “buy” analysis with concepts of right and wrong:

Ahead of the independent enquiry results, we have retained our Boohoo FY21 earnings forecast (EPS 7.67p, +30% yoy). This assumes +26% FY21E revenue growth, broadly in line with the group’s recent +25% guidance and representing a sharp slow down from the +45% sales increase achieved in 1Q21. In addition, the company expects the initial commitment to invest an incremental £10 million to eradicate supply chain malpractice to be spread over 2 years, and split between capex and opex.

Valuation: In the context of increased uncertainty surrounding the Boohoo earnings outlook, and ahead of the enquiry findings, we have reduced our DCF based price target to 345p (from 500p). Our approach here is to use the current elevated beta (1.35x from 1.1x) as the market is likely to price this uncertainty, driving a 10.8% Boohoo WACC (from 9%). This valuation equates to c.2x FY22E EV/sales (currently trading at 1.3x). We remain Buy rated.

Elsewhere. A quite terrible first-half trading update from Rolls-Royce underlines why it needs a cash call while giving no information on how one might be executed. Cash burn was £3bn in the first six months and will rise to £4bn by the full year. The first-half hit includes a £1.1bn cash exceptional linked to the cessation of invoice factoring, which Rolls used to time cash receipts with engine deliveries.

Then, oh my, there are the hedges. Unwinding duff hedges cost Rolls £100m cash in the first half. Unwinding some more will cost £300m in 2021, then £300m in 2022, then another £750m between 2023 and 2026. The £1.45bn in total that Rolls expects to lose on hedges would put CFO Stephen Daintith in at number four in the rogue trader world top ten, between Nick Leeson and Kweku Adoboli (if the trades had been unauthorised, which is obviously not the case, to be clear).

Short term liquidity looks fine-ish --- £8.1bn in total including £4.2bn of cash -- so the fundraising need is not in emergency territory yet. Things can’t go on as they are though. Management sets an underwhelming target of >£750m in free cashflow by 2022 but gives no indication of how to get there.

“Risk of nationalisation has increased,” says JP Morgan Cazenove, a very aggressive seller with a 125p target:

Per previous research we have argued RR needs to issue c£6bn in equity to ensure its future. We have also warned that nationalisation cannot be ruled out. Today’s trading update is meaningfully worse than JPM / consensus expectations, with guidance for 2020 FCF of £-4bn (JPMe £-2.5bn; BBG consensus of £-1.1bn). Whilst RR does not guide on 2020 earnings the statement has various data points suggesting the statutory net loss in H1 2020 could be at c£-5bn, taking RR’s shareholder funds to c£-8bn. We now expect a very large deeply discounted rights issue after the H1 20 results (27 August). If there is a 2nd wave of COVID-19 / slower than hoped for recovery then it is very possible, in our view, that the UK govt will need to step in to save RR. . . . 

The lack of comment on 2021 suggests 2021 FCF could be anything from negative to a maximum of £750m. In other words, the negative FCF of 2020 does not reverse in 2021. The point here is that the cash outflow in 2020 is not a temporary working capital issue but a genuine loss forever of £4bn of cash. This is partly lost 2020 engine flying hours (those can never be recovered), partly the decision to end factoring (£-1.1bn impact), but - first thing this morning - we cannot explain the permanent loss of another £1-2bn of cash.

Jefferies’ Sandy Morris (buy, 700p target) takes the opposite side of the argument:

We believe sight had been lost of where Rolls-Royce might be come FY23 or FY24. The focus was, we think, very much on the prospect of an equity raise. By pointing to an FY22 FCF of at least £750m, after a £300m headwind from the restructuring of its FX hedging, Rolls-Royce is saying that FY22 FCF from operations could be broadly the same as was originally guided for FY20. After exploring options to strengthen the balance sheet, Rolls-Royce may still decide upon an equity raise, but with £8.1bn of liquidity at end 1H20, any raise is unlikely to unfold against the uncertainty of a volatile trading backdrop and febrile sentiment. That Rolls-Royce can choose the timing is important, in our view. . . . 

No gloss can be put on the ravages of COVID upon Rolls-Royce or its peers in A&D. While it is hard to gauge precisely what was expected of FCF in FY20 and FY21, we believe the valuation implied a bleak outlook. Of course, there remains execution risk, but we believe higher EFH and cost reductions create a bridge to the FY22 FCF of £750m targeted by Rolls-Royce. A path to a brighter outlook has emerged. It’s not a long path either, in our view.

UK housebuilders did literally nothing in response to Wednesday’s stamp duty cut, whereas Persimmon results this morning have moved the sector up about 5 per cent. A person could see this as evidence that market-wide trends such as house prices are pretty much irrelevant to the housebuilding cartel because the companies exist in a protective bubble of artificially constrained supply and state subsidised demand. Here’s Davy to talk about how the government’s latest bit of soft-middle targeting might have the very mild positive of pulling forward some purchases, perhaps:

The holiday on stamp duty is a “call to action” from the government and is likely to increase demand in the short term. The source of demand will be from two different sources: (1) people who were likely to wait until 2021 to buy due to market concerns in a post-COVID world; (2) people who were in the process of saving for a deposit who no longer have to also save up money to cover stamp duty costs. With supply currently constrained from the aftermath of the lockdown combined with social distancing restrictions, we believe the most likely effect of the holiday is support for house prices. We are therefore increasingly confident with our above consensus estimate for house price inflation of -5% in 2020.

As for Persimmon, Peel Hunt (add) can summarise:

While H1 revenue was down c.32%, Persimmon’s sales in the last six weeks are up 30% YoY, comfortably ahead of the other sector figures we are seeing. Build levels are also back to normal, which also puts the company ahead of the sector’s 85-90%. Clearly there is some catch-up demand in this figure and we will not be able to ascertain the ‘new normal’ until probably September. Persimmon trades on the highest P/NAV, but its land bank and margins warrant that. These numbers show there is still some short-term upside despite outperforming the sector in the last three months. . . . 

H1 update

– The H1 update pointed to a 30% YoY rise in net reservations in the last six weeks, while build activity is back to normal levels. This compares with sector figures showing volumes down 5-10% and builds running at c85-90%.

Forward sales are up 15% at £1.86bn, while the group had cash of £830m. As expected, H1 revenue was down sharply (32%) at £1.19bn, as a result of stopping build work. Average private sales in the first 11 weeks of the year were up 10%. Like all other housebuilders, Pe rsimmon is reporting robust sales prices.

The group has continued to make progress on its customer offering in terms of better service and build quality.

Performance & valuation – The shares are down only 11% YTD, ahead of the sector, which is off 23%. While the P/NAV multiple is the highest in the sector at 2.1x, this is warranted in our view by the superior margins driven by the well bought land bank. We retain our forecasts for now, our 2,730 target price and our Add recommendation.

And Goodbody:

Overall, in the context of a 35% fall in completions, this is a very strong update from Persimmon. The themes are similar to peer updates - pricing is firm, sales rates have rebounded strongly and build capacity is increasing, however, completions are stronger and on build rates Persimmon is well ahead of peers. While we remain of the view that the economic impact of COVID means demand and prices will fall significantly from Q3 onwards there is no sign of that yet. The stock has outperformed the sector and the market recently but there is enough in today’s release to drive it on a bit more.

Numbers from Vistry, the former Bovis Homes, aren’t quite as solid. Jefferies this time:

While FY20 guidance has not been restated, with the group back to close to previous build rates and a strong order book in housebuilding and partnerships, we feel comfortable with our forecasts both in terms of P&L and net debt. At 0.95x FY21 NTAV the stock is now one of the cheapest in the sector, albeit the impact of the greater leverage on optionality in land investment and/or capital return may cause share price performance to lag peers.

Given the consolidation of the Galliford assets in January, Vistry has the highest leverage of the sector and the reduction in net debt to £355m (from £476m in mid May) is important - more so considering management originally thought there may be additional net outflows from that point. No guidance has been provided for YE20 net debt but with the movement to a more normal 2H20 we remain comfortable with our net debt of £218m (although we recognise this will be subject to the trading conditions and the land market, with the risk that debt is higher if trading proves more resilient as the group may chose to invest more in land and work in progress).

Given its new structure there was no consensus on which to judge the 1H20 revenue of £641m (vs £1192, pro forma for last year). However, Partnership revenue down 12% shows its resilience compared to housebuilding (revenue -60%, on completions down 63%). No indications on EBIT or PBT were given in the statement and no FY20 guidance has been restated, but mgmt is indicating further upside in synergies from the integration of the two businesses.

The group reports a selling rate of 0.62 for the past 4 weeks, seeing a steady improvement since the lockdown. This compares to 0.6 for Bovis for the 1H last year, and the CFO reports that selling rates in the past 3 weeks rank favourably with what was achieved at the same time last year. While this sales rate includes a number of bulk sales to Housing Associations (0.5 excluding these bulk sales), mgmt indicates small levels of bulk sales will likely to form part of the business going forward and are generally done largely without dilution to EBIT margin. Management reports web prospects to be ‘as high as ever’, aided by the group’s ability to now fully sell a home on-line.

With a selling rate largely returned to pre-lockdown rates the group reports that build rates are c90% of pre-lockdown. Due to the shutdowns those homes yet to see foundations laid will unlikely be completed in time for FY20 delivery. Nonetheless, this gives a more comfortable outlook for FY21 (JEFe FY21 completions being 87% of our forecasts pre-covid). The group reported it was on 168 selling sites, which is largely flat YoY, and is likely to remain flat in the coming 6 months.

Within housebuilding the group reports an order book of £1.2bn (with the large amount of 2H20 housebuilding completions forward sold). The group reports pricing remains firm (regaining a little from the May position). In Partnerships the order book is +11% to £920m.

In a slim day for non-results sellside, Compass gets a downgrade from RBC Capital Markets:

Whilst CPG is market leader and has an opportunity to take share, we see the valuation as too expensive at these levels and move to Underperform from Sector Perform with a price target of 1,000p (from 1,250p).

We have cut forecasts by c.30% to reflect the placing, forex and a more cautious view on the outlook following recent commentary from Sodexo and our view that there are many uncertainties going forward. We get a Q3 trading update on 30th July, and we would expect similar caution about Q4 and the pace of the rebound. Our DCF- derived target price reduces to 1,000p from 1,250p as a result of the downgrades to profit and the dilution of the placing. We note the c.30% premium to key peer Sodexo.

Many uncertainties - The continued rising COVID case numbers in, eg, USA and Latam, and evidence of second waves mean the shape of short-term recovery is uncertain. Entering 2021 in September there are uncertainties about the pace of return to work, the impact from higher unemployment and from potential changing behaviours (more WFH, less eating at work?). In Education, question marks remain about whether volumes can be maintained under social distancing and at Universities whether there will be an impact on volumes from more online lectures and potentially fewer foreign students. We also suspect the retail element in healthcare will take time to recover. Overall, however, a likely lower volume outlook has implications for the cost base, margin outlook and potentially cashflow (if it can’t extract the same creditor terms as in the past).

Should be a long-term winner - Given its scale, purchasing power, focus and a relatively strong financial position post the £2bn placing, CPG should continue to take share, especially with weakened competition. However, this has to be weighed up against a long list of uncertainties about where market volumes recover to over the medium term. In addition, we would point out that the reliance on the US for historical profit growth and that rising capex to sales was putting some pressure on returns. We struggle to see the market attributing historical defensive growth valuations to CPG going forward and suspect the crisis will likely mean an even more conservative balance sheet in the future.

Better opportunities within the sector - We see better value in the sector either in those companies that we think will be long-term beneficiaries of COVID, eg, Rentokil or other outsourcers where we see more defensiveness and cheaper valuations, eg, G4S. On the recovery side, we would prefer to own the temp staffers, which we think will benefit earlier and will likely benefit from corporates (including CPG) increasing flexibility of workforces.

RBC’s more keen on Ferrari ahead of its entry to the lucrative school-gate dropoff vehicle market:

We initiate coverage on Ferrari with an Outperform rating and a €200 price target. The Purosangue SUV will introduce the company to a new demographic and entrance into the Chinese market. The company already has the capacity to produce 15,000 units (up from 10,000) at little incremental cost. Our math suggests an impressive 33% ROIC at these new levels.

15K units at little incremental cost. Driven in large part by the 2022 launch of the Purosangue, Ferrari’s first SUV, Ferrari will dramatically expand its production. It already has plant capacity to make 15,000 vehicles but today only makes 10,000. Importantly, at this higher level of production, we estimate an impressive 33% ROIC (up from 27%). This compares to 13% for Autos, 27% for Luxury and 63% for Hermes, who sits atop the luxury universe. The Purosangue, which we expect will account for ~3K of the 5K incremental sales, will allow the company to reach an entirely new demographic: female and non-sports car enthusiast. Moreover, it will enable Ferrari to penetrate the substantial Chinese luxury auto market. One only need look at Porsche and Lamborghini to see how things might play out.

Ferrari is a luxury stock. Ferrari’s EBITDA margins, stock price movements, and customer base are more similar to that of luxury stocks versus auto OEMs. Over 40% of Ferrari owners have more than one Ferrari and customers are largely in the growing UHNW (Ultra-High-Net-Worth) and millionaire segment, similar to high-end luxury products. Furthermore, like some luxury brands, Ferrari has pricing power and loyalty, especially given the aura of exclusivity it has garnered with its customers.

Ferrari has an EV strategy. Near term, we don’t envision a scenario where Ferrari sells 10,000 units in Europe (threshold where it begins to pay fines). We acknowledge there is a perception that Ferrari’s heritage is linked to ICE architecture and there are new entrants using electric powertrains. While that is true, Ferrari is already using electric technology to enhance performance and plans on hybridizing 60% of vehicle sales by 2022. Longer term, we believe Ferrari can fully electrify its entire fleet.

Initiate at Outperform. Ferrari is the only pure-play, publicly traded, ultraluxury automaker. We believe the closest luxury comparable is Hermes, which trades at 20x 2023E EBITDA. We value RACE on 2023E EBITDA given that the Purosangue will only be introduced in 2022. Discounting back @7% results in our €200 price target. Our EV/IC framework results in a €206 value/share, respectively, and corroborates our price target, which affirms our Outperform rating.

• No Markets Now on Friday 10th July due to Weekend FT duties. Back Monday. A number of AV Telegram group chats are also available.

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