The FTSE 100 reversed early losses on Wednesday after UK inflation fell back to the Bank of England’s 2% target in May.

One would question what the market is actually looking for from inflation data to gauge the Bank of England’s timing of interest rate cuts, given the FTSE 100 dropped and the pound spiked higher following news UK inflation had finally fallen back to target after 34 months.

London’s leading index hit lows of 8,164 in very early trade before grinding higher through the rest of the session to trade 0.15% higher at 8,202 at the time of writing.

“Inflation hitting the Bank of England’s 2% target might not be the magic moment desired by investors. The pound jumped on the news, implying little chance of the Bank cutting rates at its meeting tomorrow. Few thought it would happen anyway, but today’s figures make it even less likely,” says Dan Coatsworth, investment analyst at AJ Bell.

The early drop in stocks and jump in the pound stemmed from disappointment around headline CPI. Even though the inflation fell back to 2%, it was higher than economist expectations of 1.9%, suggesting prices are still running hotter than initially thought and could curtail the BoE’s willingness to cut rates.

“Inflation hitting target means many will be expecting a cut to interest rates at the Bank’s meeting tomorrow. However, it would be very unlikely for the ratesetters to cut interest rates during an election campaign,” said Laura Suter, director of personal finance at AJ Bell.

“The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up. It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.” 

The uncertainty around an interest rate cut weighed on the housebuilders, who were among the worst performers on Wednesday. A soft set of full-year results from Berkeley Group didn’t help the sector’s cause, with confirmation of a drop in revenues and profits sending the stock 4.5% lower on the day.

Persimmon was not far behind with a 3.8% drop. Barratt Developments slipped 2.7%.

Smurfit Kappa was the best performer on the news that, following its merger with Westrock, the enlarged group will be tracked by US indices. At the time of writing, it was 4% higher.

Like all UK housebuilders, Berkeley Group has had a tough time of it over the past year and this was reflected in falling revenues and profits over the past year.

Revenue fell 3.4% to £2.5bn while pretax profit sank 7.7% to £557m. 

The constraints of higher interest rates is an all too familiar story for housebuilders who have posted consistently poor results since rates started to rise. Berkeley used the word ‘challenging’ five times in the release issued this morning, including in the first line.

Investors never like to see that word in an update. However, it does reflect a well-documented UK housing slowdown beyond the group’s control.

Despite the soggy conditions for housebuilders, investors will be encouraged with the group’s willingness to realign its business model to adapt to the current market conditions. The demand from rental accommodation has not gone unnoticed by Berkeley Group who have earmarked 4,000 homes to be rented out over the next ten years. 

“Berkeley is set to enter the London rental market,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“Full-year results were slightly better than expected, and the London-focused builder is flexing its strong balance sheet to pump cash back to shareholders. The market is still soft, but green shoots are emerging, and commentary was fairly upbeat given the tricky conditions. Guidance for the coming year has been notched up, and with interest rates expected to start their journey down later this year, the near-term outlook is looking better than it has been for some time. 

“Perhaps the bigger news is that Berkeley is planning a move into the London rental market. Eager to capture some of the soaring rental demand in the area, some 4,000 potential homes have been identified to make up the first tranche of a rental portfolio. This won’t be an overnight move; it’s expected to take around ten years to build the homes and get everything up and running, but it would add another string to Berkeley’s bow.”

Vertu Motors (LON:VTU) was established in November 2006 with the strategy to consolidate the UK motor retail sector – effectively it was a ‘Buy-To-Build’ vehicle.

A senior management team, with a wealth of experience within the sector, was put in place and on 27^th March 2007 the company acquired Bristol Street Motors, the 13th largest motor retailer in the UK.

Its subsequent acquisition strategy has been supplemented by focused organic growth driving operational efficiencies through its expanding national dealership network.

Today Vertu Motors is the fourth largest automotive retailer in the UK, with a network of 184 franchised sales outlets and 4 non-franchised sales operations from 143 locations across the UK.

The Group’s Brands And Its Dealerships

Its dealerships operate predominantly under the Bristol Street Motors, Vertu and Macklin Motors brand names.

Manufacturer partners are Audi, BMW, Citroen, CUPRA, Dacia, Ferrari, Ford, Honda, Hyundai, Jaguar, Kia, Land Rover, LEVC, Mazda, Mercedes-Benz, Mercedes-AMG, MG, MINI, Nissan, Peugeot, Renault, SEAT, SKODA, smart, Toyota, Vauxhall, Volkswagen and Volvo.

Its non-franchised operations include Vansdirect, Ace Parts, Powerbulbs and The Taxi Centre.

Ongoing Growth Strategy

It is intended that the group will continue to acquire motor retail operations to grow a scaled dealership group.

Its acquisition strategy is supplemented by a focused organic growth strategy to drive operational efficiencies through its national dealership network.

Management Comment

Commenting on the mid-May announced results CEO Robert Forrester stated that:

”It was pleasing to see the Group successfully navigating a difficult period of trading with declining used car values in the last few months of 2023. 

Used vehicle prices and margins have now stabilised and there has been strong cash generation from lower working capital reducing net debt below market expectations.

During the year, record revenues of £4.72 billion were achieved.

Moving to the new financial year, March and April 2024 were successful months. 

The Group delivered new retail like-for-like sales volumes ahead of the market decline in March and April. 

This demonstrates the robustness and strength of the Group’s operations.”

The Equity

There are some 337.6m shares in issue.

The larger holders include TDR Capital (9.76%), FIL Investment Advisors (5.22%), Janus Henderson Investors (5.05%), Santander Asset Management (4.22%), Nivag Holdings (4.10%), Close Asset Management (4.02%), Robert Forrester, Founder, (2.22%), William Dobie (2.09%), Norges Bank Investment Management (2.04%) and Ennismore Fund Management (1.40%).

In the middle of last month the group announced that is has agreed a new £3m share buyback programme, for up to 30m shares, all repurchased will be for cancellation.

Analyst View

Ian Robertson at Progressive Research considers that the group, in the last trading year to end February 2024, delivered a strong performance against a difficult market.

He noted that the current year had started well with trading ahead of management expectations for the first two months.

His estimates for the current year to end February 2025 are for sales of £4.97bn (£4.72bn), adjusted pre-tax profits of £42.2m (£37.1m), with earnings of 8.66p (7.8p) per share.

My View

Ahead of next Tuesday’s AGM I would expect the group to announce a Trading Update, which hopefully could show a continuation of the trend set in the first two months.

The shares, now at just 78.50p, have always been undervalued when set against the £255m capitalised group’s business.

They are not expensive, and I would expect to see them trading back over the recent 88p High scored last November, with 90p to 95p being a challenging price aim.

Fresh guidance from the company next Tuesday could well help the upwards move.

Games Workshop has reported robust growth in sales and profits for the 53 weeks ended 2nd June 2024.

It was another year of growth for investors, who have now enjoyed top-line growth in every year since 2017.

The table-top gaming miniatures company estimates its core revenue reached at least £490 million, an increase of £45 million or over 10% compared to £445 million the previous year.

Licensing income also improved, rising £5 million to £30 million and investors will look forward to developments in the recently announced licensing agreement with Amazon.

The firm’s pre-tax profits are projected to be no less than £200 million, reflecting a £29 million or 17% increase from the £171 million recorded in 2022/23. Contributing to the profit growth, the group paid out £18 million in equal cash bonuses to staff during the year to recognise their contribution, up £7 million on the prior year’s £11 million profit share.

Shareholders likewise benefited from the enhanced profitability. Dividends declared and paid rose to £138 million or 420 pence per share, compared to £136 million at 415 pence per share last year.

Games Workshop intends to publish its full Annual Report for the 2024 financial year on 30th July 2024.