The FTSE 100 dipped on Tuesday after manufacturing data from the UK and Eurozone sapped confidence from markets, despite a roaring session in the US overnight.
The FTSE 100 was trading down 0.25% at 7,764 in early afternoon trade following news the UK and Eurozone manufacturing sector contracted, but at a slower rate than expected.
“It seems there’s no such thing as good news, as a brighter outlook painted by the PMI numbers for the eurozone also led to a slip in stocks. Manufacturing activity shrank the least in five months for the region, but the realisation is washing over investors that although this is certainly progress, there is still a long way to go at a time when a hawkish ECB is preparing to hike rates further,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
“The UK snapshot shows how low consumer confidence, widespread strikes and the ratcheting up in interest rates are clearly taking their toll, with business activity falling to a two-year low. The flash reading for January dropped more sharply than expected to 47.8 from 49, in December with below 50 indicating a contraction.’
UK-focused stocks such as the housebuilders and retailers were actually stronger on Tuesday, but those exposed to global growth felt the pain of mixed manufacturing data.
Miners were down heavily, as were the oil majors BP and Shell.
AB Foods
AB Foods were weaker on Tuesday after releasing a relatively upbeat set of festive trading figures. Revenue was 20% on an actual currency basis in the 16 weeks to 7th January, but a warning of future cost pressures evidently caused concerns among investors.
Strong US session
The softer session in Europe followed a strong session in the US driven higher by technology names including Meta, Tesla and Alphabet. US futures were falling going into the US open on Wednesday.
The disparity between the FTSE 100 and US stocks yesterday was reminiscent of the variability in performance last year when the FTSE 100 outperformed the major US indices significantly.
UK stocks secured a rare outperformance compared US stocks in 2022 in the face of rising energy prices and economic uncertainty that favoured London’s defensive nature.
This is now showing signs of reversing with US tech storming ahead and the defensive attributes of the FTSE 100 becoming a drag on the index, compared to US counterparts.
Shares in executive search firm Norman Broadbent (LON: NBB) jumped 42.9% to 5p on the back of a 27% increase in net fee income to £7.34m in 2022. The fourth quarter was stronger than the previous quarters and the new year has started well. This has enabled 2022 EBITDA of £100,00 compared with a loss in 2021. Sub-letting excess London office space is paying for a new Edinburgh office.
Some better news from Fire Angel Technology (LON: FA.) where the loss was reduced last year, even after higher procurement costs, and it expects significantly enhanced margins this year. The share price jumped 20.5% to 9.7p. That is the highest the share price has been since September when the interims were published. The home safety products supplier increased 2022 revenues by nearly one-third to £57.5m. A further reduction in loss is expected this year with helpful currency movements providing potential for further upside.
Trading at energy supplier Yu Group (LON: YU.) continues to beat guidance. Liberum has increased its 2022 earnings forecast by 13% to 30.3p a share. Renewal rates have increased as customers seek to lock-in prices and margins have improved. The share price rose 9.72% to 700p, which is the highest it has been since 2018.
Broadcast software provider Pebble Beach Systems (LON: PEB) figures for 2022 were in line with expectations with pre-tax profit expected to be £1.7m. Recurring revenues have increased. The share price improved by 9.38% to 8.75p.
Positive interims from toilet tissue supplier Accrol (LON: ACRL) have sparked upgrades. Interim revenues were 64% ahead at £121.1m and pre-tax profit jumped from £500,000 to £3.2m. Zeus has increased its full year pre-tax profit forecast from £6.7m to £7m. There is still room for margin improvement. Net debt is expected to be £22.9m at the end of the financial year and it will fall rapidly from then on. The share price moved up by 7.18% to 31.35p.
Results from aerospace composites kits supplier Velocity Composites (LON: VEL) were as expected following the trading statement at the end of 2022. In the year to October 2022, revenues were 22% higher at £12m, while he loss was flat at £1.5m. A further loss is forecast for this year. The share soared on the back of the US deal with GKN Aerospace and there has been profit taking. The share price declined by 6.25% to 60p.
Yesterday Kropz (LON: KRPZ) reported the first bulk sale of phosphate concentrate from the Elandsfontein project. The share price rose from 3.55p, which is the all time low, to 4p, but today it has fallen back 6.25% to 3.75p.
Revenues remain modest at diagnostics company Oxford Biodynamics (LON: OBD) even thought EpiSwitch CiRT prognostic test was launched in the US last February. Sales have started to build up so there should be a significant improvement this year on the 2021-22 revenues of £200,00. Pro forma cash is £10.3m following the October fundraising. The share price fell 5.24% to 14.475p.
This leading developer and supplier of home safety products delivered a resilient performance in 2022.
Reporting its strongest revenue performance since 2017, the group’s business unit made a strong showing across most of its territories, with demand outweighing supply, driven by increasing legislation.
Sales for the year at FireAngel Safety Technology Group (LON:FA.) are expected to have risen 32% to £57.5m (£43.5m), while the group’s adjusted pre-tax loss was down 30% at £2.1m (£3.0m).
FireAngel’s principal products are connected smoke alarms, CO alarms, heat alarms and accessories. The group has an extensive portfolio of patented intellectual property in Europe, the US and other selected territories.
Executive Chairman John Conoley stated that:
“The expected FY22 result represents an outstanding performance set against the unprecedented macro circumstances. Whilst the reported result will not be what we had set out to achieve, the underlying numbers demonstrate the strong progress made in line with our ambitions outlined at the time of the Company’s fundraising in H1 2021.
“Societal and regulatory development continues to drive demand for our products. Our continuing focus on self-help pleasingly shows a resilience in overcoming a wide range of macro headwinds to leverage this demand.
The Board expects additional significant improvement in our financial journey in 2023, positioning the Group for further progress against our strategic plans.”
Analyst Opinion – there will be a strong demand for the group’s products
Ahead of the group’s finals being reported in April, analyst Rob Sanders at Shore Capital Markets is estimating that the current 2023 year will see sales of £64.0m, with adjusted pre-tax losses falling impressively to just £0.9m.
Sanders sees the big turnaround showing through next year, with sales estimated at £74.0m and adjusted pre-tax profits coming out at £2.8m, worth 1.4p in earnings per share.
Conclusion – a penny-stock doubler
On these estimates FireAngel shares could easily double from the current 8p within the next year or so.
The UK government’s income from inheritance tax continued to grow in the period from April to December last year as higher property prices and increasing value of investments meant more people became liable for the tax.
IHT tax bills from £700m to £5.3bn from April to December last year.
The government has frozen the inheritance tax rate at £325,000 for two years which likely lead to more people becoming liable for the tax in the coming years.
Mitigating IHT
Fortunately, IHT is a tax that can be managed through the effect use of schemes designed by the government to spur private investor investment in growing businesses.
These include the EIS and SEIS scheme that are exempt from IHT, should investments be held for two years.
“Inheritance tax (IHT) receipts will continue to remain high given the freezing of IHT thresholds for two more years. One area that advisers and investors could consider helping mitigate against IHT is by investing in an Enterprise Investment Scheme (EIS), as full inheritance tax relief is provided, for the life of the investment once the shares have been held for two years,” said John Glencross, CEO and Co-Founder of Calculus.
The Lloyds share price has been flirting with the 50p level since the beginning of 2023 – but it is yet to break the key psychological level convincingly.
Despite higher interest rates boosting Lloyds key profitability metrics, the threat of a downturn in the UK economy capped Lloyds shares gains for most of 2022.
Having recovered from below 24p in the immediate aftermath of the pandemic, the Lloyds share price has more than doubled and handsomely rewards investors that bought Lloyds shares when everyone else was selling.
Whether Lloyds can continue past 50p will depend heavily on economic dynamics that held it below 50p for so long. Higher interest rates are now largely priced into shares with net interest margin touching 2.98% in Q3 2022. Focus will now be on the consequences of a slowing UK economy.
UK Mortgages
Upcoming banking results will be poured over for details of the strength of their mortgage business. The Lloyds business model is heavily overweight UK mortgages compared to peers and any weakness in UK housing will cause concerns for investors. For example, Barclays has a substantial investment banking arm that has propped up earning in recent years.
Lloyds is the UK’s largest provider of mortgages and the ongoing success of the UK housing market is inextricably linked to Lloyds future profits. Lloyds open mortgage book stood at £298.4bn 31st September 2022, up from £292.6bn a year prior.
Should Lloyds start to see disruption in the housing market, provisions will have to be made for possible bad debts and will weigh on profits.
Lloyds made a net provision charge of £1bn in the nine months to end of September 2022, after recording a net credit in the same period a year higher.
The extent to which impairments will accelerate or decelerate will be crucial to the short term performance of the Lloyds share price.
Higher interest rates will now largely be priced into UK banks and their net interest margins are typically in line with analyst estimates. This will exacerbate the importance of new mortgage business and provisions for bad loans.
If the Lloyds share price fails to break 50p in the current market rally, it will become a strong level of resistance in the future after failing their on numerous occasions.
Lloyds full year results for 2022 are due to be released 22nd February.
Narrowband radio frequency communications networks developer CyanConnode (LON: CYAN) is raising £5m at 17p a share in order to strengthen the balance sheet and stock up with long lead time components. Three directors are investing £110,000 in the placing, which is at the current market price.
The share price has risen by more than 50% over less than four months, providing an opportunity to raise cash to finance expansion. In October 2022, there was a £500,000 share subscription at 12.25p a share. Earlier in the year, £2m was raised at 14p a share. In June 2021, £3.15m was generated from a placing and subscription at 9.5p a share.
CyanConnode has a strong order book and is participating in tenders for 75 million smart meters in India, which is equivalent to £1bn of revenues. Management hopes to win between 20 million to 30 million orders over five years. There are also opportunities in other countries.
In the six months to September 2022, revenues fell from £4.08m to £1.35m. The operating loss doubled to £2.4m. There was a £114,000 cash outflow from operations and there was more than £1m in the bank at the end of September 2022.
Revenues have already reached £5m in this financial year thanks to strong trading since the interims. The cash generated has already been invested in inventories.
Full year revenues of £12.5m are currently forecast and this is expected to rise to £16m in the year to March 2024, when a small profit is forecast.
The FTSE 100 gained on Monday as investors prepared to receive major economic updates later this week, including US GDP and inflation.
After a busy period of company results and updates, equity investors will be bracing for the macro consequences of insights into global economic growth from the US.
“The FTSE 100 ticked higher on Monday without suggesting it would threaten the all-time high which it briefly flirted with before a sell-off at the end of last week,” said AJ Bell investment director Russ Mould.
“The big economic announcements come on Thursday and Friday as the US releases GDP figures for the fourth quarter and core inflation numbers from the world’s largest economy are also released.”
“These will offer insight into two key and related factors which are grabbing the market’s attention right now. First, will the US avoid a deep recession and second, will inflation ease sufficiently to allow the Federal Reserve to ease up on interest rates before it has inflicted too much pain on businesses and consumers?”
FTSE 100 gains
The FTSE 100 was gaining with the usual high-beta suspects leading the index higher. Ocado, which has a beta of 1.75, was the top gainer, up 2.3%, at the time of writing. Ocado has become one of the fastest moving FTSE 100 constituents and is now regularly the top riser or faller.
St James’s Place was the FTSE 100’s top faller after the wealth manager’s rating was cut by analysts at both Barclays and HSBC. Barclays now has a price target of 1,507p with a hold rating. St James’s Place was down 2.5% to 1,203p at the time of writing.
Online fashion retailer Sosandar (LON: SOS) has secured its latest wholesale partnership with Sainsbury, which will sell part of its range of clothing and accessories online and in stores later in the year. Sainsbury is growing market share in non-food markets. Existing partners include NEXT and John Lewis. This will not have a significant effect on the year to March 2023 when revenues of £42.5m and a move into profit is forecast. The 2023-24 forecast does not include any contribution from Sainsbury and pre-tax profit of £3.1m is already forecast on revenues of £58m. The share price rose by 9.52% to 23p.
Intercede Group (LON: IGP) has sparked further upgrades with its latest trading statement. The identity management software company says it could get better if further sales close before the end of March 2023. Forecast 2022-23 pre-tax profit has been trebled to £600,000 on a 6% upgrade of revenues. The share price is still much lower than 18 months ago, but it recovered 20.4% to 68p.
Energy transition services company Getech Group (LON: GTC) says 2022 revenues were ahead of expectations at £5m and there is a record order book of £4.6m. Transitional petroleum contributes two-thirds of revenues with the rest coming from critical metals. There was cash of £4.3m at the end of 2022 and that is enough for current requirements. There are plans to raise more cash from selling Kitson House, but the disposal has been delayed. There are discussions with strategic investment partners. The share price increased 10.9% to 15.25p.
Invinity Energy Systems (LON: IES) says existing contracts underpin growth in in 2023. There are £22m of vanadium flow battery systems due for delivery in 2023 and a further £7.4m order book for 2024. There was £5.1m in the bank at the end of 2022. Pilot projects with Siemens Gamesa should begin in the summer and a next generation product should be available in the first half of 2024. The share price is 11.5% ahead at 43.5p.
Surgical Innovations (LON: SUN) says 2022 revenues will be 5% ahead of expectations at £11.3m and this should enable the surgical instruments supplier to breakeven as gross margins recover. The UK grew significantly and momentum in the fourth quarter is carrying on into this year, although trike action could hit demand. International sales should continue to recover. The share price is 9.38% higher at 1.75p.
Vast Resources (LON: VAST) expects litigation in Zimbabwe relating to diamond joint ventures to be concluded this month. This could lead to the release of a parcel of 129,400 carats of rough diamonds. This litigation started in 2009. The share price is 5.26% ahead at 0.2p, having been 0.24p earlier in the day.
Podcast content platform operator Audioboom (LON: BOOM) increased revenues by one-quarter to $75.5m in 2022. However, this is lower than forecast and pre-tax profit has been downgraded to £3.2m, compared with £2.7m in 2021. Advertising spending has been weak because of economic conditions. Net cash was better than expected at $8.1m. The share price declined 6.03% to 397.5p.
Textile wholesaler Leeds Group (LON: LDSG) reported flat interim revenues of £15.6m, but the loss was more than halved at £224,000, although that includes a £138,000 gain on a property sale. Net debt is £6.13m, but that includes cash that will be used to pay the creditors of subsidiary KMR, which is in the hands of an insolvency administrator. The share price fell 7.14% to 13p.
The M&G Global Emerging Markets Fund is increasing exposure to China and sees the world’s second largest economy as a potential source of outperformance in the coming year.
As we start the Chinese New Year – the Year of the Rabbit – China is dominating headlines and gaining the attention of investors.
The end of Zero COVID policies promises to boost the Chinese economy and provide support for mainland and Hong Kong equities. Indeed, the leading Hong Kong indices have rebounded some 40% from last year’s lows.
The dramatic shift in the approach to COVID highlights the Chinese leadership’s desire to pursue growth. Their willingness to roll back COVID policies they had previously been steadfast in delivering has demonstrated economic health is still the CCP’s main priority.
Having scrapped lockdowns and restrictions at the end of last year, the Chinese New Year may mark a new chapter in the Chinese economy and returns for investors in Chinese equites.
Increasing China Exposure
Speaking at an M&G event held in London last week, Fund Manager Michael Bourke alluded to a rotation towards China in their portfolio as a result of the Chinese reopening and valuation of Chinese equities.
The extent to which managers of the M&G Global Emerging Markets Fund have increased their exposure to China is illustrated below. From being underweight China compared to the MSCI EM benchmark by 10.9% in December 2020, the fund is now overweight China by 0.9%.
Being significantly underweight China through 2021 and early 2022 meant the M&G Emerging Markets Fund significantly outperformed the benchmark. Sharp losses in Chinese tech names were a major drag on Emerging Markets over the past 18 months and avoiding the sector helped produce M&G’s outperformance compared to the benchmark.
However, the losses in Chinese stocks are now being seen as major opportunity – and a sustained recover in Chinese equity may provide the M&G team with third consecutive year of outperformance.
The valuation argument is compelling. Bourke explained that Chinese equity valuations have spent a considerable period trading one standard deviation away from the average price-to-earning ratios, and are ripe for a rebound.
Alibaba accounts for 3.9% of the M&G portfolio while Chinese finance conglomerate Ping AN Insurance Group earns a 3% weighting.
In addition to China, Bourke detailed their interest in Mexico and South Korea, while saying they saw little value in India currently.
Mexico’s proximity to the US and manufacturing capabilities has driven a 4.2% higher weighting in the M&G EM portfolio compared to the benchmark.
South Korea’s traditional tech names and semi conductor companies have been swept up in the global tech sell off are also providing fairly attractive valuations.
Samsung and Taiwan Semiconductor were the top two holdings as of 31st December.
Producing material growth – that is exactly what Plant Health Care is all about, not only in helping farmers globally to sustainably grow more, but also in building up its own sales and profits.
The Business – Cost-effective products for sustainable agriculture
Established way back in 1995, the Holly Springs, North Carolina-based Plant Health Care (LON:PHC). Plant Health Care leading provider of novel peptides for plant protection to global agriculture markets
The company offers its various products to improve the health, vigour and yield of major field crops, such as corn, soybeans, potatoes and rice, and specialty crops, such as fruits and vegetables. As the impact of climate change is increasingly felt throughout the globe, for example, the growing problem of drought in certain regions, then the need for increase yield becomes critical, increasing demand for Plant Health Care’s solutions.
It operates globally through agreements with major distributors of agricultural products.
Its innovative, patent-protected biological products help growers to protect their crops from stress and diseases, and to produce higher quality fruit and vegetables, with a favourable environmental profile.
It offers products to enhance the yield and quality of crops, such as corn, soybeans, citrus, sugar cane, and rice, as well as fruits and vegetables.
The company provides Harpin aß, a recombinant protein, which acts as a bio stimulant to enhance the yield and quality of crops; and Saori, a vaccine for plants that promotes healthy growth of soybeans and helps them fight disease. Saori is the first product from the company’s PREtec (Plant Response Elicitor Technology) platform. Derived from natural proteins, PREtec is an environmentally friendly technology which stimulates crop growth and ability to withstand a variety of abiotic stresses as well as to improve disease control, plant health and yield. PREtec is compatible with mainstream agricultural practices.
The Products– Strong pipeline
Using environmentally friendly peptides derived from natural proteins, its innovative, patent-protected products help growers to protect their crops from stress and diseases, and to produce higher quality fruit and vegetables, all while being compatible with mainstream agricultural practices.
Plant Health Care’s core patented products act as “vaccines for plants”, making plants healthier, better able to resist disease and stress, thereby improving crop yield and quality.
Harpin aß
Plant Health Care’s Commercial business is driven by sales of Harpin αß, a recombinant protein which acts as a powerful bio-stimulant, promoting the yield and quality of crops. The group sells Harpin αß through specialist distributors around the world. In Mexico, the group also distributes third-party biological products.
Sales of the group’s Harpin αß product increased by 55% in 2021, as market shares grew in core markets; the Commercial business is profitable and cash generative.
PREtec
Plant Health Care’s PREtec (platforms are generating numerous promising products.
The group is currently focusing on three products targeting very large market opportunities with a value of more than $5bn. These products are under current evaluation with six potential commercial partners.
The PREtec technology platform is proving to be a reliable source for new products. The pipeline is poised to launch one new PREtec product each year going forward.
The first PREtec product, Saori™, was launched in Brazil in 2021, through PHC distribution partner Nutrien, generating a very positive response from growers.
Saori™ promotes healthy growth of soybeans and helps them fight disease; Brazilian soybean growers spent $2.5bn on fungicides to control disease in 2021, so this is a huge opportunity for Saori™. [Recently announced further plans in Brazil to expand Saori into sugar cane and coffee for disease control.
The Markets
Plant Health Care plc, provides agricultural biological products and technology solutions in the Americas, Mexico, and internationally.
The group has negotiated and tied-up distribution agreements with major sector players globally.
It recently registered Harpin ab in France, which will enable expansion into the European market, considered to be the biggest globally for biological products.
Early in January the company signed an agreement with Novozymes South Asia for the exclusive distribution of Harpin ab for sugar cane production in India, first sales of which are expected in the second half-year of 2023.
Growth Strategy
The group intends to drive revenue in the short term by focusing on distribution of Harpin αβ by aligning with large distributors with broad market access. It plans to expand sales in broad acre crops where Harpin αβ provides the most benefit to farmers, including sugar cane, corn, soy, citrus, rice, almonds and grapes.
With the launch of Saori™ in Brazil, it has gained access to the largest soybean market in the world.
The target is to launch at least one PREtec product in a major market every year. Saori™ in Brazil in 2021 was the first, followed by the launch of PHC279, for control of orange rust in sugar cane and coffee leaf rust, into specialty crops in the USA with PHC distribution partner Wilbur-Ellis.
PHC949, a seed treatment for control of root-lesion nematode in soybean, has recently been submitted for registration approval.
It has made a significant capital investment by building a pilot plant facility in its Seattle location, allowing the production of peptides on a pilot scale and assisting with developing and optimising manufacturing methods.
It has also secured a production facility for PHC279, which led to the achievement of volume cost targets.
There is an extensive library of PREtec peptides, which can be further expanded. PHC is well positioned to take a lead in consolidating this fragmented sector, due to its strong portfolio and market access.
The group has now been granted fifteen global patents for PREtec peptides and numerous filings are in the process of being reviewed around the world, enabling the building up of its intellectual property portfolio. .
The company’s products have been classified as “low toxicity” products and qualify for ‘fast track’ regulatory approval in the USA and Brazil.
The Share Capital (as at November 2022)
There are 304,662,482shares in issue.
Larger holders include Ospraie AG Science (17.88% of the equity), Richard Griffiths (13.95%), Janus Henderson (9.92%), Lombard Odier (7.41%), Scobie Ward (5.72%), and Management, Directors and related parties (2.11%).
In addition, there some 33,291,306 Stock Options alive, subject to various performance conditions, such as share price hurdles.
Totally fully diluted, there would be some 337,953,788 shares in issue.
Analyst Opinion – the shares are a Buy, looking for 33p
Ahead of the group issuing a Trading Update and Investor Presentation on 6th February, together with any further guidance being given by the company, analyst John-Marc Bunce at Cenkos Securities is rating the group’s shares as a Buy.
His estimates for the year to end December 2022 are for revenues to have improved nearly 36% to $11.4m ($8.4m), helping to substantially reduce the group’s pre-tax loss by a third from $4.6m to $3.0m.
For the current year Cenkos Securities, the group’s NOMAD and Broker, is looking for sales to rise over 39% to $15.9m, severely reducing the company’s loss to just $0.3m.
It is in the coming year that the broker envisages a significant advance by the business, with expectations of a 56% revenue increase to $24.5m, generating adjusted pre-tax profits of $5.2m, worth 1.6c per share in earnings.
The analyst states that “we see Plant Health Care as well positioned in the agritech industry and highly undervalued compared to its intrinsic value and peers” giving a 33p price target for the group’s shares.
Conclusion – substantially undervalued
Following years of development this group now has massive upside potential.
As this group aids farmers in increasing crop yields in the face of climate change and growing populations, its model of distributing globally its products through major partners will shine through.
Today it is a leading provider of proprietary biological products for agriculture, with itspeptides poised to enter large markets.
In the meantime, its strong cash reserves and strict control of expenses should be sufficient to enable it to boost global sales over the next year or so, bursting the group into cash breakeven in 2024.
By the end of next year this company could well be reporting sales of over $25m, have some $5.5m net cash and making $5.2m profits.
With its shares at around the current 11.5p, the group is substantially undervalued at only £36m.
