Markets Now - Thursday 13th August 2020
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Well this is all a bit embarrassing.
The upper chart shows shares in Dignity, the funeral director, rising 60 per cent in the 11 sessions before today’s. The lower chart shows two volume spikes over the period: more than five times the daily average changed hands on July 29, when the company delivered interim results, and nearly ten times the daily average changed hands on August 11, when the company didn’t. Tuesday’s very heavy volume and price rise of 21.5 per cent were after Dignity, to reiterate, had said nothing whatsoever.
It's all a bit embarrassing, specifically, for The Competition and Markets Authority. The CMA today published its provisional findings report from a more than two year long investigation into the funerals sector. The headlines look very positive indeed for Dignity, with no recommendation of price controls, so the shares are up by a further 37 per cent at pixel. Those chancing upon a reason to buy the stock on Tuesday morning can now bank a gain of ~70 per cent.
Life’s been a bit problematic at the CMA of late. Chairman Andrew Tyrie quit abruptly in June after just two years in the job, apparently after a board-level scrap over his plans to give the watchdog some actual bite. Less than a week later the CMA performed a U-turn hankered after by lobbyists and said it was okay for Amazon invest in Deliveroo, having previously considered it a poison pill proposal. Then in August, having found JD Sports and its controlling shareholder Pentland in breach of an enforcement order related to their Footasylum takeover, the CMA delivered a piddling £300,000 fine and a ruling whose internal logic was so flawed it could’ve been written by M Night Shyamalan.
Given all that, the last thing the CMA’s wallflower CEO Andrea Coscelli needs right now is an FCA investigation into why the agency’s findings seem to leak into the market before publication. It’s pretty clear, however, that an investigation is merited. Confidence needs to be restored that at least one watchdog can still do its job.
Peel Hunt, upgrading Dignity from “sell” to “hold”, has a handy summary of the decision:
The CMA has found that it would not be possible to impose price controls given the current circumstances. It has, however, found that price controls are required, and so is proposing returning to the option of a price control remedy when the funerals industry has recovered to a steady state, which may well be different from that existing before the onset of Covid-19. This is likely to require a supplementary market investigation focused on resolving the pricing issues identified.
In the meantime the CMA is proposing a ‘Sunlight’ regime, which would impose a level of oversight on the industry and companies’ behaviour. Information on prices would need to be more visible, an inspection regime would be implemented and certain companies would need to provide financial information to the CMA.
Consumers are more likely to compare prices going forward, but this should be a relief for the industry given that there will not be a price control regime for some time. However, the CMA clearly intends to return to this, particularly as it found that “the Co-op and Dignity, which account for 30% of branches, are often significantly more expensive (we estimate by approximately £800 and £1,400 respectively) than many of the small typically family-owned businesses that operate the majority of branches in the UK.”
11.00am BST - Watches of Switzerland, which sells watches from Switzerland, is up after bundling together its full-year results to end April and its first-quarter update to end July. Lockdown casts a shadow over the end of the former and the start of the latter, of course, but strong numbers on either side suggest that even during a pandemic and a depression the only way to stop people buying ostentatious wrist-weights is to lock them out of the stores. UK domestic demand countered the stalled tourism and airport sales, WoS says, with provincial branches doing better than London. Goldman with the summary:
FY20 Adjusted EBITDA (pre IFRS 16) of £78.1mn came in at the top end of company guidance (£75-78mn) and ahead of company-compiled consensus expectations (£73.1mn, GSe £70.9mn). Sales in 1Q21 (April year end) also positively surprised, declining -28% cFX (GSe -53% cFX). Encouragingly, group sales were flat in June and up +7.4% yoy in July, demonstrating WoS’ resilience and strong trading momentum, in our view. We update our forecasts to reflect new company guidance issued for FY21 and now look for +3% LFL growth in FY21E - a material improvement from our prior forecast of -11% with adjusted EBIT of £66m (was £39m).
Positive momentum into FY21: Positive yoy sales growth in June and July. Sales in 1Q21 declined -27.7% cFX (GSe -53.4% cFX), with the US outperforming (-20.8% versus the UK -30.1%) likely driven by a lower exposure to tourism demand as well as an earlier reopening schedule (WoS’ US business traded for 44% of normal business hours in Q1, versus 35% in the UK). Encouragingly, the exit rate for the quarter was positive in both regions (UK +1.1% and US +27.0% in July), reinforcing our view that WoS is well positioned for a sales rebound, as waitlisted products and appointments support store productivity.
Guidance for FY21 shows management confidence, in our view. Management has guided to a revenue range for FY21 of £840mn to £860mn (implying +5% yoy growth at the mid-point) with a flat adjusted EBITDA margin (9.6% adjusted EBITDA margin pre IFRS 16 in FY20).
Online continues to outperform. Watches of Switzerland’s online sales grew +46% in the last six weeks of the financial year (end April 26). This positive momentum continued into Q1, when UK e-commerce sales grew +79% yoy. While we expect online growth to moderate as store traffic normalises, we believe the current environment is accelerating luxury’s shift online – including for the watch category (which lags behind other product segments in terms of its digital exposure, on our estimates). We continue to believe online can support WoS’s growth profile over the medium term.
Store openings resumed post lockdown: As expected, some store openings (e.g. American Dream in New Jersey and Battersea) which had been expected to complete during FY21 will now fall into FY22, as a result of construction delays during lockdown. However, new store openings have resumed where possible; for example, the group opened a new Rolex boutique in Glasgow as well as three new TAG Heuer boutiques in Watford, Kingston and Oxford during 1Q.
Valuation: 12m PT increases +6% to 363p (342p prior), implying 39% potential upside.
In sellside, Natixis gets an upgrade to “overweight” from Barclays following the recent ejection of its CEO and the buyout talks (subsequently denied, for what little that’s worth) with parent company BPCE:
Following an annus horribilis for the bank, we upgrade our rating on Natixis from Equal Weight to Overweight, with an unchanged €3.40 price target. At 0.5x TNAV and with earnings estimates significantly rebased, we think the risk/reward is favourable. This is particularly the case with the change in CEO and the promise of a new strategic plan,due to be announced in June 2021; Natixis has historically shown its willingness for dramatic corporate action. No details are available, but aside from the press-reported possibility of a minority buyout, a potential sale of CIB to the parent could be an elegant solution with the possibility of as much as a €7bn capital return potential.
1. Trough multiple:At 0.5x TNAV, Natixis trades at less than half its 10-year peak. We still estimate the bank generates an 8% RoTE in 2022 on what we deem still to be cyclically depressed assumptions. At the same time, we see strong prospects for yield next year if and when the ECB recommendation on capital return for the sector lapses. On a payout of 75%, which is low relative to history for the group, we forecast a yield of 9%,which would still leave the group some 200bp above its CET1 target. We raise our FY22 earnings estimate by 2% following 2Q20 results.
2. Optionality from results of strategic review–CIB sale to Parent?The change in CEO and announced upcoming strategic review look to be key catalysts given the group’s history of swift corporate action. Of the options available, beyond press reports of a potential buyout of minorities, the possibility exists for a different solution, namely the sale of CIB to the BPCE parent,as was done with the retail franchise in 2018. Taking into account SRF costs, we estimate CIB is ascribed a negative value by the market in Natixis’ hands; this would not change BPCE’s profile and could release up to €7bn of equity for distribution to Natixis shareholders (70% of which would return to the parent in any case).
3. Trough earnings: Beyond that, we think the cycle of earnings downgrades looks to have reached a trough. H20 and CIB top-line estimates have been rebased significantly and the €16bn of net new money in 2Q20,or 8%, was a key positive surprise and was encouragingly spread across the AM affiliates. At the same time,the lack of retail banking exposure and short duration of the balance sheet means that in the medium term, we have less concern compared to peers of negative impairment surprises as state support measures roll off.
And PurpleBricks goes onto UBS’s “buy” list:
Long-term structural growth with short-term earnings upside
Purplebricks' earnings are highly levered to a UK property market recovery, which appears to be underway. We upgrade Purplebricks to Buy and lift our PT to £1, +50% upside potential, for 4 reasons: 1) Purplebricks should benefit from a short-term rebound in home sales (Jul-20 instructions +25% yoy); 2) A lower cost structure vs traditional agents enables lower pricing which should translate into market share gains long-term. With c40% of costs fixed, higher market share should lead to c20% LT EBITDA margins vs 11% in 2019; 3) Innovation in technology, marketing and new pricing models with a focus to drive growth is likely to be successful; 4) Purplebricks is net cash (£66m) with good access to liquidity post the sale of its Canadian business.
Short-term catalysts exist from a stronger rebound in home sales
Our expectations for Purplebricks performance were cut significantly in Apr-20 given Covid-19. However, recent data suggests that the housing market is making a strong recovery and Purplebricks should benefit given its transaction-based nature. As a result, we now expect £83m of revenue in FY21, +10% ahead of consensus. Upside exists if the 25% instructions growth seen in Jul sustains till the end of the year. A sensitivity analysis suggests a 10% change in instructions would increase FY22E EBITDA by £4m or +38%.
Lower cost structure should drive market share gains in the long-term
Purplebricks' national online model means it doesn't incur branch and admin costs of an equivalent sized network. We estimate in the LT this gives them a 20% cost advantage vs traditional agents, which means they can charge significantly less to consumers while offering a similar service. As a result, we expect Purplebricks to start gaining market share again in a stable UK market to reach 8% LT (7% prev.) vs 5% now. Further, we see upside from the introduction of a new pricing model later this year, which could attract new customers in underpenetrated regions. Finally, ongoing investments in technology and marketing should also underpin an improvement in performance vs the last 2 years where market share has been declining.
Valuation: Lift DCF-based PT to £1 from £0.44
We up our PT to £1 on EPS upgrades (higher instructions, better cost mgmt.). Market discounts LT market share of 6% (5% now) with 17% margins (achieved in H119).
2pm BST - Very few songs have a listed corporation in their title. There’s My Adidas by Run DMC, of course, but most other namechecked brands -- Louis Vuitton (J Cole), Dior (Pop Smoke), Gucci (various) -- are divisions or subsidiaries of a parent company. Mercedes-Benz by Janis Joplin, similarly, is disqualified by Daimler’s ownership; Man at C&A by the Specials doesn’t count as it falls under its Brazilian-traded parent company COFRA.
A song-stock portfolio of can however include Moncler (Tinie Tempah), Boeing (Brazzaville), Securicor (Crass), American Express (Molly Nilsson), Western Union (The Searchers) and one or more of NatWest-Barclays-Midlands-Lloyds (Manic Street Preachers). If there are others we can’t think of them immediately.
Anyway, back to markets. National Express is down sharply on interim results that look somewhat disruptive to the recovery timetable. Travel restrictions and school closures have been unhelpful and management guidance for when to expect improvement offers little in the way of confidence. Here’s HSBC:
A fluid picture: The group emerged broadly as it expected from H1. Its outlook for H2 is less solid. In particular, the return of pupils to US schools is changing as a result of concerns over COVID-19. Management currently expects 42% of schools to start on time. Of the remainder, 80% are likely to be delayed by an average of 16.6 days with the rest moving indefinitely on line. Of course, we expect children to go back at some point. But the dates are being pushed out further, denting the near-term recovery. Likewise, the UK business is making less money than we had expected as a result of continued social distancing. The best-performing business is Alsa, which does look very solid, in our view, with patronage building back quickly to c.50% for the regional long distance businesses from the single digits during the lockdown.
A wide range of near-term outcomes possible, but we retain our faith in the longer term destination. There is a very wide range of potential outcomes this year and next as we contemplate delays to schools restarting plus the continued impact of social distancing. Therefore, our updated forecasts should be treated with a high degree of caution. Where we are more optimistic, is that we believe NEX is well placed to benefit when the current crisis is past. Before the lockdown, it was growing, and we do see long-term demand for its services. So we leave our estimates for 2022e unchanged. Some things have certainly got better for the group. It points out, for example, that in Spain concessions are being extended in recompense for the current disruption. And it is picking up new contracts in the US.
Balance sheet looks fine: H1 saw a big free cash outflow of GBP193m. There was a GBP140m working capital outflow as government grants are paid in arrears, and there was a decline in payables as a result of cost-cutting. However, the group still has ample cash with GBP1.7bn in liquidity. And covenant tests should not be in any danger of being triggered (implied EBITDA would be cGBP140m vs our forecast of GBP440m for next year). Even on our lower estimates for 2021e, net debt/EBITDA looks manageable at 2.3x.
Retain Buy but lower TP to 300p from 335p: Clearly, the short-term recovery has moved away from National Express and considerable near-term uncertainties remain. But we don’t have any concerns over its longer term survival and expect patience to be rewarded. We keep our Buy rating but cut our target price to 300p from 335p to reflect the uncertainties over the forecast delivery.
National Express was in great shape into the pandemic and is confident it will get out with the same strong fundamentals. The group’s base case assumes revenue to be around 50% of pre-Covid-19 expectations until the end of August 2020 before recovering gradually to around 70% by the end of 2020, and then a further gradual recovery to around 80% by the end of 2021. The group’s worst case reflects: A slower recovery during 2020 and 2021, with Group revenue only recovering to around 60% of pre-Covid-19 expectations by the end of the 2020 and around 70% by the end of 2021. In the base case scenario, the Group has a strong liquidity position over the next 12 months, in the worst case the group would reduce opex and capex and still have enough liquidity with no need for significant structural changes required.
The group did not reiterate its May ’20 sensitivity analysis: downside scenario involving revenue recovering slowly from the start of Q3 (and from the current then monthly run-rate during Q2 of just over 50% down versus pre-COVID-19 levels), remaining at somewhat lower levels into and throughout 2021 (a monthly run-rate of approximately 25% down versus pre-COVID-19 levels). Under such a downside scenario, the Group’s EBITDA in 2020, taking into account the benefit of management actions taken to reduce the cost base, would fall approximately 40% relative to 2019. However, with the embedded growth in the business (such as the 2019 acquisition of WeDriveU and the significant new contract wins in Rabat and Casablanca), revenue and EBITDA in 2021 under this downside scenario would recover close to 2019 levels.
We see NEX LN with a proven track-record of overall PBT growth in modest growth markets, but also offering consistent equity FCF generation, and supportive DPS yield without under investing in assets. The shares are UK listed but c4/5 of FY19 turnover and c3/4 of EBIT is non-UK generated. We like the National Express diversified business delivering consistently improved and above-average operating margins. NEX is attractively priced trading at 7x 2021 EPS, versus 10x historical average. We have an Outperform rating and 350p price target representing over 50% share price upside with 9% dividend yield once shareholder remuneration starts again on the back of over 10% FCF yield.
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