Why has BP outperformed Shell? And will it continue?

Otmane El Rhazi from Mindful Money » Shares.

Brewin Dolphin equity analyst Iain Armstrong takes a look at the differing fortunes of the two FSTE 100 listed oil majors BP and Royal Dutch Shell… 

BP

We know that the dividend is a key priority for management at BP, but at what spot price do we estimate the dividend is actually at risk for BP? We said in January that BP’s dividend was safe at a$60 long term Brent price. Since then BP has said that it will attempt to run the company based on a long-term price of $50. However, it will take time for BP to set the company to the new strategy. Therefore, in the meantime, it would be vulnerable to oil prices around $50.

Given the higher level of operational gearing to crude prices at BP, are the earnings prospects here not better (vs Shell) in a more benign spot price environment, even when paired off against the external risks faced by BP (Rouble and Macondo legacy)?

There is not that much difference in the oil price gearing between the two companies and the bigger exposure to the Downstream, currently having a bit of a renaissance, at Shell narrows the gap further. Once BG is on board the gap will be even smaller. The different long term oil price assumptions used to run the two companies ($50 at BP, $70 at Shell, would make a difference).

Royal Dutch Shell

What is the time frame to the deal?  There has been no change to the original guidance of one year. Are there any barriers to its completion? There are several regulatory hurdles to cross. The most important being in Kazakhstan, Brazil and China. However, unlike the proposed Syngenta / Monsanto deal, we do not think that the deal requires disposals to pass the regulatory hurdles.

How do the economics of this deal stack up at different oil prices? Shell said that the deal would make economic sense at a long-term average Brent price of around $80 per barrel based on the assumptions of synergies and capex cuts. While this is clearly above the futures price in 2016/17, we have argued that Shell has understated the potential benefits of the deal.

What impact does the oil price have on the sustainability or growth of Shell’s dividend?

In January we argued that Shell would still be able to pay its dividend at a long term oil price of $60 per barrel. Since then it has significantly reduced its capex assumptions, as has BG Group. The additional gearing involved in the deal would stretch the balance sheet if the oil price remain around $50 per barrel but the improvement in cash flow from BG Group would mostly offset this concern. Clearly a $20 difference between Shell’s medium term oil price assumption would be a concern. However, we do not believe that the oil price would remain at $50 or below for an extended period.

Is there an oil price at which Shell’s dividend is at risk? $50 Brent for an extended period.

Given the difficulties BG have had with Offshore Brazil, what likelihood is there that RDSB will fare any better? Should we not be cynical about the ability of the RDSB to add value here? Offshore Brazil has been a phenomenal success story for BG. There have been problems with local content but in the bigger scheme this has not been a major concern. Petrobras is a concern but we note that it has been operating normally through the “carwash” scandal.

In conclusion, we think that the underperformance of RDSB versus BP is unjustified on fundamentals. We accept that there are risks from completing the BG acquisition, but there are also risks to BP from the conclusion of the Macondo trial later this year. In addition, we think that BP (and its dividend) is more vulnerable than RDSB to an extended period of lower oil prices given its need to rebuild production and reserves following the major overhaul of the company in response to the Macondo accident.

Kingfisher’s first quarter results reach expectations but for now its shares are a ‘hold’

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Brokers are calling home-improvement retailer Kingfisher a ‘hold’ after the business reported a 0.8% rise in like-for-like sales and an increase in retail profit of 1.4% to £150m during its first quarter.

The company, which owns B&Q and Screwfix, operates over 1,200 stores in 11 countries based in the UK and Asia. UK and Ireland sales rose 1.6% on a like-for-like basis, whilst the company’s second biggest region, France, saw sales fall 1.2%.

Commenting on the results Graham Spooner, investment research analyst at The Share Centre, said: “Within this mixed bag of news, investors should note that there are plans to improve the group. New CEO Veronique Laury has initiated the One Kingfisher program, which focuses on creating a new, internal leadership team whilst closing excess stores as more customers chose to shop online. These changes may hopefully be reflected in future figures for the company.”

Brewin Dolphin equity analyst Nicla Di Palma noted in the group’s announcement there was very little commentary in the statement, aside from the CEO’s words on the One programme. Di Palma added: “This is based on a significant increase in products commonality amongst regions. Potentially, this could drive a significant increase in margins, although there are implementation risks. The balance sheet is solid and we believe there is the potential of an increase in the buyback programme – from £200m to about £300m.”

Kingfisher’s shares rose 2.8% in early trading, but are 12% down on 12 months ago. In line with the market consensus, Spooner is calling Kingfisher a ‘hold’.

Severn Trent a ‘hold’ for low risk income seekers

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Shares in water company Severn Trent are a ‘hold’ after a ‘mixed bag’ of results.

 

The company reported a 53.5% fall in pre-tax profits to £148.2 million, from £318.9 million in 2014.

 

However, the underlying profits at the company rose 8.8% and turnover increased 2.5%. Revenue also increased 2.4% to £1.8 billion in the year to March, up from £1.76 million a year earlier.

 

The fall in pre-tax profit was blamed on investment ‘in business development in US concession’ which had ‘impacted profit year-on-year’.

 

Severn Trent chief executive Liv Garfield said the performance over the past year had ‘demonstrated where we are strong and the areas we need to focus on to drive improvement’.

 

‘We have hit our target of a 10% reduction in leakage…and improved our customer service performance. We’ve made some significant cultural and operational changes…as a result we are facing the future with confidence,’ said Garfield.

 

Graham Spooner, investment research analyst at The Share Centre, retained a ‘hold’ recommendation on the shares.

 

‘Investors do not expect much in the way of excitement from this sector and are used to such company results being in line with expectations,’ he said.

 

‘Current investors will be pleased to see that the all-important dividend has risen by 5.6% to 84.9p. However, as a result of the regulator review in December, this will fall to a forecasted 80.66p for the year ahead.’

 

Spooner added that the shares were a ‘hold’ for ‘investors seeking income and wanting to take a lower level of risk’.

 

 

 

Royal Mail shares are a ‘hold’ given the challenging market backdrop

Otmane El Rhazi from Mindful Money » Shares.

As Royal Mail reports its full year results, Graham Spooner, investment research analyst at The Share Centre, explains what they mean for investors… 

In its full year results reported this morning, Royal Mail revealed recent trading had been in line with expectations, amidst challenging conditions. Despite the group posting a 9% fall in operating profit to £611m, these results were broadly in line with expectations.

Royal Mail has said that a continued focus on efficiency has resulted in better than expected cost performance in the UK. Additionally, the group said a large number of innovations are now in place helping transform the business. Investors should note that although there are positives to be taken from this update, the group is still finding its trading environment challenging and it remains cautious on the outlook.

Despite cautions, the group does have a steady cash flow and a proposed full-year dividend of 21.0 pence, up from 20.0 pence last year, which may please investors. With these results in mind, we currently recommend Royal Mail as a ‘hold’ for medium risk investors looking to achieve a balanced portfolio.

Royal Mail sees annual profits rise by 6%

Otmane El Rhazi from Mindful Money » Shares.

Royal Mail has enjoyed a jump in annual profits despite the backdrop of a “challenging” trading environment.

In its results for the year ended 29 March, the postal service group reported that adjusted operating profit before transformation costs rose to £740m, marking a 6% rise.

The group’s parcel volumes increased by 3%, with a better performance in the second half. Addressed letter volumes however declined by 4%.

Net debt at the group was cut from £555m to £275m, mainly due to cash flow generated, offset by dividend payments of £200m.

Commenting on the results Royal Mail chief executive officer Moya Greene said: “We have delivered operating profits in line with our expectations. Our continued focus on efficiency resulted in a better than expected UK cost performance, offsetting lower than anticipated UK parcel revenue. At the same time we have delivered a large number of innovations at pace as we transform our business.

“Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs.”

Following the announcement, by 8:47am, shares in the group had slipped by 2.5p, or 0.5% to 497.4p.

Technology firm Stadium Group is a ‘buy’ for more intrepid investors say brokers

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Graham Spooner, investment research analyst at The Share Centre, highlights why Stadium Group is worthy of investors’ attention right now…

Stadium Group is a UK based provider and manufacturer of niche electronic technologies. The group’s recent change of focus has been positive and resulted in restructuring and cost cutting in order to become a specialist provider in its sector.

Stadium’s latest update in April showed results in line with expectations, and confidence in its prospects for the year ahead. The group has recently acquired IGT Industries and United Wireless to help with its new strategy.

Its two divisions, Integrated Electronic Manufacture Services and Technology Products, focus on providing to six core sectors: Medical, Security, Industrial, Automotive, Lighting and Defence.

We look positively on the improving margins and cash conversion, along with attractive earnings growth forecasts. Production facilities have also been upgraded in the UK and Asia.

There is also a progressive dividend policy, which may attract investors, especially as this not always the case for AIM companies. With a forecast yield of 2.2% for 2015 we recommend Stadium Group as a ‘buy’ for higher risk investors looking to achieve a balanced portfolio.

Mindful Money’s weekly shares watch: Burberry, Vodafone, M&S & Royal Mail

Otmane El Rhazi from Mindful Money » Shares.

Vodafone shareholders are likely to have their fingers crossed in anticipation of hearing improved sales numbers when the group updates the market with its fourth quarter numbers on Tuesday.

During the past year, the telecommunications giant has seen its shares rise by 8% and in the last three months broker sentiment has heated up with the consensus now pointing to a ‘buy’.

Looking to this week’s results, Sheridan Admans, investment research manager at The Share Centre who also has the FTSE 100 member on his ‘buy’ list said that specifically investors will want to hear that there has been a moderation in the slowdown in sales in key European countries – as was in the case during the third quarter.

He added: “The UK still seems to be the only major European country where it is experiencing growth. Analysts expect global revenues to grow by 8%, with a similar increase in operating profits led by growth in the emerging markets and increased demand for data services. Investors will be looking out for commentary on possible acquisitions as the telecoms industry consolidates and offers ‘quadplay’ services.”

Wednesday sees high street stalwart Marks & Spencer reports its own full year results.

With the group’s shares up 23% over the past year, Keith Bowman, equity analyst, at Hargreaves Lansdown Stockbrokers said the “clear positive in the fourth quarter” was a return to growth for clothing sales, made without the sacrifice of profit margin.

He noted that food sales again grew, whilst prior difficulties for its online operations appeared to have been largely tackled. However less favourably, international sales arguably remained unconvincing, hindered most recently by challenges in Russia and the Ukraine.

Bowman said: “Current full year profit predictions look for a 4% increase in underlying or adjusted pre-tax profit to £648m on a consensus basis and a 2.5% rise for the final dividend to just over 11 pence. Furthermore, and given the improved sales performance, hopes that management may announce additional shareholder returns, potentially via a special dividend, now persist.”

Admans, who currently lists Marks & Spencer as a ‘buy’, noted that since its positive trading update, rival Next has also reported good growth in clothing sales so many investors will expect some reassuring news.

He said: “The performance of the food business has been excellent in recent times, but the market will be keen to see if there has been any impact from a rise in petrol prices and deflationary pressures elsewhere in the food retailing sector.”

Overall with the group’s focus on improving sales, particularly for General Merchandise, showing tentative delivery, analyst consensus opinion currently points towards a ‘cautious buy’.

Luxury fashion house Burberry also reports its final results on Wednesday. Having already reported second half sales, profits and the outlook head the agenda.

Bowman highlighted that challenges in Hong Kong and changes in the price mix are expected to see adjusted pre-tax profit falling by just over 3% to £446m, whilst currency headwinds and fragrance launch costs also play their part.

The new CEO, Christopher Bailey, has had a bit more time to bed in and the investors so far seem to be happy, with the stock up by 15% over the past year.

Admans, who is calling the shares a ‘buy’ said: “Despite the weak global economic backdrop, trading updates over the last year have been optimistic. Markets expect the sales to increase by 8% over the financial year but restructuring of parts of the business and investment into new retail space to dampen profitability. There is also likely to be a significant currency impact on sales as sterling appreciates. Investors will look out for the sales indicators in key regions such as China.”

But prior to this week’s update, and with the share price having outperformed the wider FTSE-100 index by some 15% during the last year the overall analyst opinion currently points towards a ‘strong hold’.

Royal Mail Group reports its full year results on Thursday. Despite the firm’s shares being down by 15% over the past 12 months, the decision by Dutch-owned Whistl, formerly TNT, to suspend its UK letter delivery service has aided recent Royal Mail share price performance, as highlighted by the 8% jump over the last month.

Bowman said: “Against the backdrop of inline nine month trading, accompanying management comments are expected to provide little near term inspiration. Hindered by a pay increase for frontline employees, consensus operating profit year-over-year is expected to decline by 30% to £466m, while the potential threat of Amazon’s own delivery network looms in the background.”

In all, and ahead of the announcement, analyst consensus opinion signifies a ‘sell’.

ITV’s results show strength for investors despite being overshadowed by pay strike

Otmane El Rhazi from Mindful Money » Shares.

As ITV reports on its first quarter, Graham Spooner, investment research analyst at The Share Centre, explains what they mean for investors.

This morning, ITV’s first quarter results gave some good news to investors. In light of the journalist strikes which may overshadow the figures, the television broadcaster posted a rise in revenue.

Although viewing numbers continue to fall, revenue from external sources in the first three months rose 14% year-on-year to £665 million, whilst revenue from ITV studios rose 17% to £224m. Investors will be pleased that advertising revenue from the broadcaster’s main channels is also up around 5% for the first half of the year.

Chief executive Adam Crozier commented “We’ve had a strong start to the year with growth across all parts of the business” which speaks volumes in the results which were ahead of previous guidance.

With recent signs of improving outlook for advertising and a management confidence in the year ahead, we recommend ITV as a ‘buy’ for medium risk investors seeking growth.

Why pharma giant GlaxoSmithKline is a ‘buy’ for income seeking investors

Otmane El Rhazi from Mindful Money » Shares.

Helal Miah, investment research analyst at The Share Centre, explains why pharmaceutical giant GlaxoSmithKline is a ‘buy’…

The defensive nature of the GlaxoSmithKline and the competitive yields paid to investors make this a core holding for many portfolios. As our preferred company in its sector, Glaxo offers investors new product lines, diversification across consumer healthcare and biotechnology, and increasing exposure to emerging markets.

Investors should note that Glaxo’s latest results in the form of first quarter sales were in-line with market expectations at £5.6bn. The management’s outlook for the short to medium term was upbeat, whilst the cost saving programme of £1bn is to be accelerated and completed by the end of 2017 vs. 2019.

While the business has suffered from generic competition in recent years, it expects significant recovery in 2016 and growth in core earnings over the next five years. The management continue to prioritise a stable and growing dividend pay-out, which will be supported by a return of capital to shareholders following a series of recent transactions with Novartis.

Prospective investors will appreciate that Glaxo’s shares trade at better valuations compared to the peer group and the group’s R&D pipeline gives us confidence for the medium to long term. We recommend GlaxoSmithKline as a ‘buy’ for income seeking investors who are willing to accept a lower level of risk.

Mindful Money’s weekly shares watch: Easyjet, Compass Group & ITV

Otmane El Rhazi from Mindful Money » Shares.

Easyjet has some hype to live up to when it publishes its second quarter results on Tuesday, given the very positive tone of its last market report when it raised full-year profit guidance.

Shares in the discount carrier have reflected the sentiment too, climbing by 19% over the past six-months. Over one-year however, they are up by just 6%.

But for now Sheridan Admans, investment research manager at The Share Centre is happy to back the firm. Looking to this week’s report, he highlights that in the time that has passed since the last update the company has reported some good traffic figures for March but on the downside, investors have also seen a strike by French traffic controllers and a steady recovery in the oil price.

He says: “News about the level of demand from business travellers and the company’s plans to add capacity will attract attention, as will any hints about the potential for special dividends in future.”

Hargreaves Lansdown Stockbrokers equity analyst Keith Bowman broadly agrees, noting too that the board previously highlighted further potential volatility around currency movements.

He adds: “Ahead of the news, and with the airline’s model seen as remaining in favour with cost conscious European consumers, analyst consensus opinion continues to point towards a ‘strong buy’.”

Compass group follows with its own set of half-year numbers on Wednesday. The FTSE 100 listed global catering giant has enjoyed a 15% rise in its share price over the past six months on the back of some recovery in its trading in Europe and Japan in March. Investors will be hoping to hear that this has continued.

Admans, who has the business on his ‘buy’ list, said: “The performance in North America and some emerging economies has been very positive for the company in recent times. However, the market will be focusing mainly on any comments about prospects in Europe for the rest of the year given the mixed underlying economic picture in the region, due to Greece’s bailout talks and political tensions in Ukraine and Russia. The impact of the rising oil price and exchange rate movements may also be noteworthy.”

Having already reported a “strong” first half Bowman agreed that attention is likely to focus on the outlook and that gains at the company’s North American business may stay front and centre while ongoing growth for its Fast Growing & Emerging business could again be underlined.

He said: “Growing shareholder returns, including a share buy-back programme, also remain in focus. Less favourably, more moderated gains ahead for the Emerging business could be outlined given both challenges for its oil & gas customers and slower progress for key group economies Brazil and Turkey. On balance, analyst consensus opinion currently signifies a ‘strong hold’.”

Thursday sees Downton Abbey and X-Factor broadcaster ITV publish its first quarter trading update. Revenue growth came from all parts of the business last year and over the past three months its stock has edged ahead by a solid 11%.

“Investors will be hoping for more good news, especially from the Studios division,” said Admans, who is calling ITV a ‘buy’. He added: “Other areas to concentrate on will be any updates on recent acquisitions, costs and cash flow. The groups outlook for advertising, although not quite so important as in the past will still be closely followed by investors.”

Bowman noted that the group’s 2014 full year results saw management forecasting 11% growth in Net Advertising Revenue for the first quarter. He said: “Online, Pay & Interactive revenues are expected by the board to grow strongly over the full year, with its Studios business returning to good organic growth. A combination of the UK General Election, comparatives with the 2014 Football World Cup and the pending Rugby World Cup provide the full year backdrop.”

Buoyed by ongoing sector consolidation hopes – Liberty Global, owner of Virgin Media previously acquired a 6.4% stake in ITV – analyst consensus opinion currently denotes a ‘buy’.

BT – What its annual results mean for investors and why it is still a ‘buy’

Otmane El Rhazi from Mindful Money » Shares.

As BT reports its full year results, Ian Forrest, investment research analyst at The Share Centre, explains what they mean for investors…

BT’s fourth quarter and final results reported today were solidly in line with market expectations and investors will be pleased to hear upbeat comments on prospects for the current year with sales and profits both forecast to rise.

Better still was the news that the well-covered dividend has been raised by 14%, reflecting the group’s strong performance.

Furthermore, investors should note that the group expects the dividend to increase by a similar amount this year.

CEO Gavin Patterson said it had been a ground-breaking year for the group with pre-tax profit growing strongly, up 12% to £3.17bn. Although overall revenue was down 2% to £17.9bn, BT has made some major investments to underpin the future growth of the business.

As expected the star of the show was the consumer division which registered 266,000 new fibre broadband connections in the fourth quarter, it’s best ever performance. Furthermore, the company signed up more customers to its BT Sport TV channels. The other divisions experienced tougher trading conditions, especially those exposed to the public sector in the UK.

However, the international division is seeing good growth in Asia and the Middle East.

With continuing growth in its broadband and TV channels, allied to the potential for its £12.5bn takeover of mobile phone group EE and its strong cash flows funding dividend rises well above inflation, the shares have clear attractions. As a result, we recommend BT as a ‘buy’ for medium risk investors seeking a mixture of growth and income.

 

BT enjoys 14% rise in annual pre-tax profits

Otmane El Rhazi from Mindful Money » Shares.

Shares in BT edged ahead in early trading as the telecommunications giant announced a 14% increase in pre-tax profits to more than £2.6bn for the 12 months to the end of March.

By 8:46am on Thursday, the group’s stock was up 1% or 3.1p to 457.4p.

Despite a 2% fall in revenues, to £17.8bn chief executive Gavin Patterson described the past year as “a ground-breaking” period for the firm.

He added: “Profit before tax and free cash flow have both grown strongly and we have delivered or beaten the outlook we set at the start of the year.

“We delivered our best ever performance for fibre connections in the fourth quarter with Openreach adding almost half a million premises to our network.”

It has also secured content for FA Premier League to 2018/19 and Aviva Premiership Rugby to 2020/21 and last week shareholders approved BT’s proposed £12.5bn acquisition of EE.

BT confirmed it would pay a dividend of 12.4p per share, marking 14% rise on the previous year.

“Our performance during the year is reflected in our full year dividend, which is up 14%. Our results and the investments we are making position us well for the future and enable us to increase our free cash flow outlook for the coming year,” added Paterson.

Sales numbers at Morrisons fall back once again

Otmane El Rhazi from Mindful Money » Shares.

Troubled supermarket group Morrisons has reported that like-for-like sales tumbled 2.9% in the three months to 3 May.

It marks a poorer performance on the previous quarter when sales dropped 2.6%.

Following Thursday’s announcement, shares in the group had slipped by almost 1.5%, or 2.68p to 177p by 8:19am.

Back in March, Morrisons announced that its underlying full-year profits had more than halved to £345m, representing its poorest results in eight years.

However the business now anticipates that underlying profit before tax will be higher in the second half of the year than the first.

The latest market update from the FTSE 100 listed retailer marks the first since David Potts took over as chief executive officer in March.

He said that the businesses priorities are to “improve the customers’ shopping trip and make our core supermarkets strong again”.

Potts added: “My initial impressions from my first seven weeks are of a business eager to listen to customers and improve. I have been very pleased by the desire and support of colleagues, and by the genuine warmth and affection for Morrisons shared by both colleagues and customers.

“This is a business with many attributes, some unique. Our task is to use those advantages to improve the shopping trip for customers and create value.”

In April, supermarket group announced it was to cut 720 roles at its Bradford head office, where the number of people employed has increased by 50% since 2008.

BP is rated share of the week by the Share Centre

Otmane El Rhazi from Mindful Money » Shares.

The Share Centre has rated BP as a buy and says the firm is being proactive in taking action to cope with the lower oil price.

Helal Miah, investment research analyst at The Share Centre says: “As a world-leader in oil and petrochemicals, BP explores for oil and natural gas refines, markets and supplies petroleum products, generates solar energy and manufactures and markets chemicals.

“Investors will appreciate that BP has been impacted by recent lower oil prices. Although reported profits for 2014 dropped to $4bn from $23.8bn, the previous year’s figures included the large profit on disposal of TNK-BP, and there have been large asset write-downs in 2014.”

“There were fears that the first quarter 2015 profits will fall dramatically due to the lower oil price, but the diverse nature of the business helped mitigate the losses with group profits of $2.6 billion. The upstream businesses such as refining saw profits climb from $1 billion to $2.2 billion as the industry recovers following a bad few years.

He says: “The company has sold a number of assets to reinvest in higher growth opportunities. The group are being proactive in the lower oil price environment and are already looking to cut back on jobs and salary increases. Additionally, BP has a number of new projects that are soon expected to come online and contribute to production, which for 2015 is expected to be higher than 2014. For reasons such as these, we continue to recommend BP as a ‘buy’ for investors willing to take on an intermediate level of risk, whilst looking for capital growth and income.”