Home / Equities / Markets not live, Tuesday 14th January 2020

Markets not live, Tuesday 14th January 2020

We should start, as everyone else has, with Lekoil. Shares are down by two-thirds or thereabouts, the Nigerian explorer having said on Monday that it gave a heap of money to a middleman company that said it’d fix a loan from the QIA then didn’t.

Lekoil had announced the seemingly nonexistent $184m loan agreement to the market on January 2 — “funding secured”! — only for another bunch of different QIA representatives to turn up ten days later and say, actually, no. The second QIA, it’s assumed, was the real QIA and all the other QIAs were just imitating. But what if it was the other way around! That’d be a twist no more implausible than the story so far, tbqf.

Anyway, Lekoil said its due diligence on Seawave Invest, the alleged middleman, included a third-party report “based predominantly on open source information”. This presumably means looking at its off-she-shelf website* built by an IT shop in Ghana whose URL was registered anonymously via US-based Wild West Domains and which only lists a PO box in Nassau for correspondence. Inconveniently, there are no names on the Seawave site whatsoever and most of the pictures appear to be cribbed from other places on the web, with nothing notable turning up so far in the metadata. Still, if anyone skilled at due diligence can identify these chaps in the website’s gallery section do please let us know.

(* Here’s a Wayback Machine link in case that one disappears suddenly.)

Since it’s January, there’s a whole lot of retail going on. Among it, Goldman Sachs likes Dixons Carphone, the seller of extended warranties for £99 HDMI cables on 24.9 per cent APR.

We upgrade Dixons Carphone (DC) to Buy from Neutral and raise our DCF derived price target to 170p from 130p: (1) we expect 2H20 (April-2020 year end) to see an inflection in DC’s UK electrical segment profitability, and expect the segment to deliver consistent mid-single-digit earnings growth in FY21/22, driven by internal initiatives; (2) FY21E should see significant transformation of DC’s UK mobile segment, enabling it to move from a loss of £90 mn in FY20E to a £5 mn profit by FY23E. We assume DC will close the large majority of its standalone Carphone stores in the UK, and benefit from c.£100 mn of cost savings over the next two years; and (3) reduction in trade receivables (up to £500 mn) should fund increased capital expenditure and help reduce financial leverage (from 0.6x net debt/EBITDA in FY20E to net cash of c.£80mn in FY23E). We expect DC to deliver an EPS CAGR (FY20-22E) of 22% as a result of the above.

We currently forecast only +1% LFL growth for DC in FY21E in its UK electrical segment, and a steep decline in the mobile segment. However, we believe tailwinds from events such as Euro 2020 and the Olympics, increasing adoption of 5G phones, and improving consumer confidence over big-ticket purchases pose upside risks. DC will report its 3Q FY20 trading on January 21: we expect UK electrical LFL of -1% (on a comp of +2%). However, our more positive view and rating upgrade are a function of improved prospects for medium-term earnings/cash growth.

Boohoo says all’s fine again. Peak-period trading covering the four months to end December sees revenue of £473.7m, up 44 per cent year on year and beating the £456m consensus. It’s the eponymous brand’s turn to drive performance (helped along by a coruscating Christmas advert), where accelerating growth can probably be seen as an incremental positive since unlike other bits of the business it’s 100 per cent owned. With Boohoo already trading at 50x calendar 2020 EPS or 38x EV/NOPAT, every little helps.

“Of course expectations were high after their positive tone in a statement post Black Friday, but execution continues to be highly impressive,” says Barclays. Here’s their detail:

Core Boohoo revenues of £232.6m (+42% yoy) are 11% above Barclays £209.3m (+28% yoy) and consensus of £209.8mm (+28% yoy); PLT revenues of £190.8m (+32% yoy) are 2% below Barclays £194.6m (+35% yoy) and 5% below company consensus of £200.5m (+39% yoy); Nasty Gal revenues of £41.5m (+102% yoy) are £9m below Barclays £50.3m (+145% yoy) and £2m below company consensus of £43.4m (+110% yoy); and other brand revenues of £8.8m are £5m better than Barclays £4.0m and £3m better than company consensus of £6.1m.

Group gross margins declined c70bps yoy to 53.5% in P3 – c30bps better than Barclays 53.2% and in line with than consensus 53.5%. Core Boohoo GMs declined c20bps yoy, PLT GMs declined c130bps yoy, and Nasty Gal GMs declined c10bps yoy.

Guidance raised, but still looks conservative: The company increased guidance for revenue growth to +40-42% (previously +33-38%) and adj EBITDA margins to 10.0-10.2% (previously “around 10%”). At the midpoint, this implies EBITDA of £122m, 3% higher than company consensus of £118.4m. For P4, this implies between +21-34% growth – this looks conservative to us. If we put c40% for P4 growth and 10.2% EBITDA margin for the year, we would get closer to c£125m EBITDA – if that were to run through to EPS, we would be looking at a potential mid-single digit upgrade to consensus.

Games Workshop — whose average customer is likely to be opposite in every way to Boohoo’s average customer — is at a record high after reporting a decent Christmas. The orc figurine and 16-sided dice specialist did 18 per cent sales growth and £58.6m in profit for the first half, with gross margin up 260 bips to 69.5 per cent on a more profitable product mix (more demand for paint apparently). The margin pop was despite the fact that trade (ie, wholesale) was the key driver, with sales up 27 per cent against online and retail up 15 per cent and 8 per cent respectively. Here’s Peel Hunt, house broker.

The shares have continued to perform well, which is not surprising given the strong performance and high returns. There is still a lot to look forward to, with a product launch this summer, the development of TV series and animation and the activity of licence holders. Our forecasts imply a slight reduction in H2 profits vs the prior year. This is to take into account a less helpful product mix vs H1, currency (headwind of c£2-3m), lower royalty income (£2.3m vs £5.5m) and potential for a lull in sales ahead of the summer product launch. The company has made a good start to H2, which could make this too cautious. We have increased our target price to 7,000p, which equates to 30x 2020E.

Finally on retail, UBS is taking profit on JD Sports.

Over the past 12 months, the shares have re-rated by 106% and we think at 22x P/E, the shares now more fairly reflect the value in Finish Line we highlighted at our initiation. In our view, further share price upside requires earnings upgrades, likely driven by the UK and/or Finish Line (together ~80% of group EBIT). We see limited scope for both given: (1) the UK LFL comps step up to +10% in 1H21 and cost inflation is set to rise in 2020 (National Living Wage +6.2%); and (2) consensus and UBSe already forecast 400bp gross margin expansion at Finish Line over the next 4 years. Upgrades would require Finish Line to exceed its medium-term gross margin target, but the UBS Evidence Lab data suggests it might be too soon to assume this.

Elementis profit warning. A reminder if it’s needed that Elementis makes ingredients for paints and O&G drilling stuff, along with talc and chromium chemicals. It also owns the world’s only mine for rheology grade hectorite clay, which goes into anti-wrinkle gunk. Anyway, paint and talc have been fine but the more cyclical O&G and chromium businesses have not, while personal care (clay gunk and antiperspirants mostly) had a mixed quarter on competitive pressures. So, expect 2019 ebita of $122m to $124m, 6 per cent below consensus.

Numis goes from “buy” to “add”, 185p target.

Key attractions of the investment case include a 17% adj. EBIT margin target, cash conversion of least 90%, and balance sheet leverage of <1.5x. Improved cash conversion has been achieved during 2019, in-line with the Group’s medium-term objective; however, expected year-end net debt/EBITDA of c.2.8x implies no balance sheet deleveraging progress during H2 2019. We have revised our 2019 forecasts close to the mid-point of the guidance provided by management today, equating to downgrades to our adj. EBIT and adj estimates of 5.4% and 6.6%, respectively. Similarly, we lower our 2020 adj. EBIT and adj. EPS estimates by 3.7% and 5.4%, respectively.

The Elementis alert’s unlikely to be the last from the European chemicals stocks, according to Bank of America. “Our checks suggest soft trading conditions persisted in Q4 and management teams may be cautious in guiding 2020 growth,” they say. “We cut our EBITDA estimates by 3 per cent across the sector and now only expect 4 per cent profit growth in 2020, versus 6 per cent at consensus. BASF stands out as having an unrealistic consensus; our estimates are 10 per cent below and we see unwillingness to cut capex.”

Okay, so what else? Endeavour Mining has terminated talks to buy Centamin. “The quality of information received during the accelerated due diligence process has been insufficient to allow us to be confident that proceeding with a firm offer would have been in the best interests of Endeavour shareholders,” it complains, which is a view Centamin is unlikely to share. Price always looked the bigger sticking point and Endeavour had very limited wiggle room, as any significant bump risked turning the proposal into a reverse takeover.

Anyway, Centamin’s has moved to pacify shareholders by racing out a corporate update and dividend declaration: a final for 2019 of 6 US cents a share brings the total payout to 10 cents, about 2 cents above consensus. 

The bookies are doing almost nothing in response to a Gambling Commission report that bans credit card wagers. The ban will come into effect on April 14 and includes a telling off about operators taking responsibility to only accept payments via e-wallets in circumstances where the wallet provider can assure the operator that they can prevent payment by credit card. William Hill, GVC etc all little changed. Nothing to worry about, says Goodbody:

Overall, the announcement of a ban on credit cards for online gambling in the UK has been well flagged and should not come as a surprise. All operators among our coverage have disclosed that their credit card exposure in the UK is mid-single digits in terms of their deposits. While the GC has also announced a ban on e-Wallet gambling transactions funded by a credit card, we do not expect this will be a significant revenue headwind. We see scope for a proportion of those using credit cards to deposit (directly or through an e-Wallet) to migrate to other payment processes (debit cards). The most likely impact is that this will represent a small revenue headwind to operators UK online revenues in 2020. On a positive note, the use of credit cards to gamble online had been a key negative put forward by anti-gambling campaigners so the resolution could be a good move for the industry.

Over in strategy, SocGen’s Albert Edwards continues to be Albert Edwards.

Ice Age adherents will appreciate The Bank of England’s recently published study, “Eight centuries of global real interest rates” . Its key conclusion is that so-called secular stagnation and the decline towards negative real rates should not be seen as a temporary event caused by the 2008 global financial crisis. It is in fact an irreversible multi-century secular trend, possibly dating back to another major crisis – the 14C Black Death! And you thought I was bearish?!

For the first year since 2008 Mr Edwards isn’t hosting a Bearfest, his mid-January conference that’s sort of like an investor version of Glastonbury if the only act playing was Mogwai. The hiatus is “for various reasons”, he says, adding: “Many clients have been waiting for some sort of anecdotal contrary indicator to call the end of this record equity bull market (eg when the last bear turns bullish or is fired). Knowing that this long-time uber-bear wasn’t likely to turn bullish and that I am still in SG’s employment, clients have been scratching around for another anecdotal contrary indicator to mark the end of this bull market. The decision not to go ahead with our January bear-fest event, which has taken place every year since this bull market started in 2009, may be the top-of-the-market signal some clients have been waiting for. It would have been held today!”

What are we missing? Reader, do please tell us via the comment box.


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