Rolls Royce was the standout performer on Thursday as the engine maker’s shares jumped over 20% on better than expected 2022 results and a positive outlook.

However, the FTSE 100 fell 0.4% and underperformed European indices as mining companies dragged the index lower following Anglo American’s earnings update.

The German DAX was 0.33% higher and French CAC gained 0.2% at the time of writing.

Declines in Anglo American, Antofagasta, Endeavour Mining and Rio Tinto weighed on the index and wiped out the impact of robust earnings from both WPP and Rolls Royce.

“The FTSE 100 slipped as a positive reaction to results from Rolls-Royce and WPP was not enough to offset weakness from various mining, pharmaceutical and consumer goods stocks,” said Russ Mould, investment director at AJ Bell

“BAE Systems dipped nearly 3% on its full year results. Despite predicting higher military spend in 2023 which should improve its earnings, the negative share price reaction is most likely to down to investors taking profit after a strong run for the shares since Russia invaded Ukraine a year ago and how that led investors to seek exposure to the defence sector.”

Mondi was the FTSE 100 top faller, down 5%, after warning of marcoeconomic uncertainties and said they saw “an environment of softer demand and pricing, with destocking expected to continue through the first quarter.”

US Interest Rates

The market’s perception of interest rate trajectories has dominated equity trade so far this year and last night’s Federal Reserve minutes threw cold water on hopes of a Fed pivot in the short term.

“There were few crumbs of comfort from the closely watched minutes of the US Federal Open Markets Committee, with the determination of policymakers to stay tough on inflation clear,” Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“The data so far might signal that the hot prices are beginning to be tamed, but it is not yet enough reassurance that the spiral is going to come down fast enough to target without more aggressive tightening, albeit at a slower place. The resilience of the US economy is right now considered to be disadvantage, with rate hikes so far proving to be just glancing blows in certain sectors.” 

The US economy smashed economist estimates and added 517,000 jobs in January, a significant show of strength that doesn’t warrant easier monetary policy.

The S&P 500 finished last night’s session lower but futures were pointing to a higher open.

The final two months of its 2022 year saw TT Electronics (LON:TRT) enjoy continued revenue growth, strong enough for it to beat market expectations.

The global provider of engineered electronics for performance critical applications has reported that its 20% organic growth for the year reflects its successful positioning in structural growth markets and new project and customer wins, with the outperformance driven by its Global Manufacturing Solutions business.

The company operates in industries where there are structural growth drivers, working with market-leading customers primarily in the industrial, medical, aerospace and defence sectors.

Products designed and manufactured include sensors, power management devices and connectivity solutions.

Global Operations

The group, which has design and manufacturing facilities in the UK, US, Sweden and Asia, operates through three main divisions.

The Power and Connectivity division designs and manufactures power application products and connectivity devices which enable the capture and wireless transfer of data.

The Global Manufacturing Solutions division provides manufacturing services and engineering solutions, it manufactures complex integrated product assemblies and provides engineering services including designing testing solutions and value-engineering.

The Sensors and Specialist Components division works with customers to develop standard and customised solutions including sensors and power management devices.

Consensus Opinion – £39.4m top expectation

Expectations for the trading year to end December 2022 are for adjusted pre-tax profits in the range of £36.5m to £39.4m.

Conclusion

When the results are published on Wednesday 8^th March there are likely to be upgrading in current year broker estimates.

WPP have confirmed a third consecutive year of like-for-like sale growth as their transformation strategy begins to purr.

Despite a deteriorating macroeconomic backdrop, WPP revenue for 2022 grew 6.7% on a like-for-like basis and 12.7% on a reported basis. Operating profit jumped 10.5% £1.35bn on a reported basis.

WPP’s sales growth was driven by net new business of $5.9bn in 2022 with new mandates from the likes of Audible, SC Johnson, and Verizon.

Having been deeply entrenched in traditional media formats, WPP had initially struggled to adapt to the emergence of social media but it no is one their main sources of growth.

“WPP is a titan of industry. Its sheer size means gaining momentum and getting into shape is a huge challenge, but it’s one the company has risen to. The largest concern for investors was how successful WPP will be in realising its cost efficiencies, with £600m due to be found by 2025. The fact this target remains in focus and on track is a genuine relief,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“As a media giant, WPP has been stung by a global slowdown in marketing spending brought on my enormous geopolitical and economic stress. By all accounts this looks to be reversing, which has fed into strong growth at the end of the year. To top it off, momentum hasn’t only been achieved, it’s being harnessed, and revenue growth of 3 -5% is expected this year.”

WPP shares were 4% higher at 1,061p at the time of writing.

After a record 2021, Anglo American earnings had a reality check in 2022 as top line revenue and underlying EBITDA receded in line with lower metals prices.

Anglo American’s results shared many similarities with Rio Tinto‘s result also released this week. The impact of Chinese restrictions serious curtailed metals prices and ravaged the top line of major diversified miners.

Anglo American recorded an average Platts 62% Fe CFR China iron ore price of $120 in 2022 compared to $160 in 2021.

Lower metal prices saw Anglo’s revenue fall to 15% to $35bn and underlying EBITDA sank 30% to $14.5bn.

“Anglo is the latest miner to see its top and bottom line take a hefty hit, but its worth taking a step back and remembering the comparable year, 2021, saw record highs for a range of key commodity prices,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“At current levels, prices are still plenty high enough for miners like Anglo to make a good chunk of cash. Return on capital employed of 30% over the latest year was double the groups through the cycle target of 15%, so times are still good.”

“Looking to the future, it’s pleasing to hear positive news from the groups latest copper project, the Quellaveco mine in Peru. First production began last year and it’s ramping up, expected to reach full capacity over the course of this year.”

Rolls Royce shares were soaring on Thursday after full year results beat expectations as the engine maker enjoyed a recovery in flying hours in 2022 and the resultant jump in operating profit and free cash flow.

Rolls Royce shares were up nearly 20% in the very early stage of Thursday’s trading session.

Underlying operating profit for the period jumped to £652m, up from £414m last year. Free cash flow rose £2bn to £505m.

In addition to the strong performance in 2022, Rolls Royce have issued a solid outlook for the year ahead. The company said they expect underlying operating profit to be in the region of £0.8-£1.0bn and free cash flow around £0.6-£0.8bn.

Despite the robust outlook, new CEO Tufan Erginbilgic believes Rolls Royce ‘are capable of much more’ and are embarking on a strategic review.

“It’s not uncommon for a new CEO to do some kitchen sinking. But when the incoming leader describes the existing business as a ‘burning platform’ you know you have serious issues,” said Charlie Huggins, Head of Equities at Wealth Club.

The strategic review will aim to focus on the most profitable lines of business and seek the improve efficiency.

“This will require a winning culture, underpinned by more effective performance management and a shared determination to deliver cash and reduce debt. Our success will enable us to reward investors for their support and invest in future growth,” said Rolls Royce CEO Tufan Erginbilgic.

The FTSE 100 was tracking US market lowers on Wednesday as concerns about interest rates and growth proved too much to stomach for traders.

As we discussed yesterday, a sharp market rally on a potential Federal Reserve pivot may have been premature after Federal Reserve members signalling continued rate hikes in the foreseeable future in recent days.

“A 2% to 3% drop in the main US indices last night was the market waking up to the fact it had been too complacent about interest rates and inflation,” said Russ Mould, investment director at AJ Bell.

“January’s global stock market rally represented a shift in investor sentiment, with many people believing that central banks, particularly the Federal Reserve, were close to the end of the interest rate rise cycle. With signs of inflation easing, investors thought the cost of borrowing wouldn’t get too much more expensive and so risk appetite was returning for equities, cryptocurrencies and more.”

“A bucket of cold water was poured on the market last week when two Federal Reserve members indicated they would support a 50 basis-point hike in the next US interest rate decision. In essence, a larger hike than some expected, and a signal that the Fed would be nowhere near the end of its rate hike cycle, let alone the prospect of seeing rates come down later in the year.”

95 of the 100 FTSE 100 constituents were down as the FTSE 100 sank 0.9% at the time of writing.

Lloyds

Lloyds echoed NatWest and Barclays’ full year results on Wednesday in as far as suggesting net interest margins – a key profitability metric – had likely peaked last year. Lloyds shares were 1.6% weaker at the time of writing.

However, Lloyds losses were less severe than Natwest and Barclays’ near double digit dives last week. lnvestors were likely happy to see Lloyds commit to a further £2bn share buyback. Barclays only committed £500m to additional share buybacks.

Rio Tinto

Rio Tinto shares were 2.9% softer after the diversified miner said free cashflow nearly halved to $9bn in 2022 as lower metals prices wided $8.8bn from their EBITDA.

“Despite challenging market conditions, we remain resilient because of the quality of our assets, our great people and the strength of our balance sheet,” said Rio Tinto Chief Executive Jakob Stausholm.

“That is why we delivered strong financial results with underlying EBITDA of $26.3 billion, free cash flow of $9.0 billion and underlying earnings of $13.3 billion, after taxes and government royalties of $8.4 billion. This enables us to continue to invest in strengthening the business while also paying a total dividend of $8.0 billion, a 60% payout, in line with our policy.”

In an interview with Bloomberg TV, CEO Jakob Stausholm discussed Rio’s wishes to increase their exposure to lithium and the ongoing battle with car-makers for the best assets.

The latest interim report from Avingtrans (LON:AVG) declared a healthy performance, even after on-going supply chain disruptions following Covid and the Ukraine conflict.

The £121m group, which has a proven operating model abbreviated to PIE – Pinpoint-Invest-Exit – manufactures and sells engineered components, systems, and services to the energy, medical, and infrastructure industries worldwide.

In the first half to the end of November 2022 the group increased its revenues to £50.0m (£44.5m) and its adjusted pre-tax profits were slightly better at £4.0m (£3.8m), earnings came out at 10.8p (10.2p) and amply covered a 1.7p (1.6p) dividend per share.

What was impressive was that the group’s order books were stronger than average, with over 90% cover for the 2023 end May year and then a good 55% plus for the coming year.

Group Operations

The group operates in three segments: Energy-EPM, Energy-PSRE, and Medical-MII.

The company designs, manufactures, integrates, and services electric motors and pumps, steam turbines, gas compressors, pressure vessels, blast doors, containers, and skidded systems.

It also designs and manufactures equipment for the medical, science and research communities, including products for medical diagnostic equipment; high performance pressure, vacuum vessels, and composite materials for research organizations; and superconducting magnets and helium-free cryogenic systems for use in magnetic resonance imaging and nuclear magnetic resonance.

The PIE

Its PIE strategy is based on identifying ideal corporate candidates for reorganising, then investing in and creating organic growth before looking to sell that particular interest on to another party.

It has made three successful exits over the last few years and is constantly on the lookout for new situations in which to make such commitments.

It is a very sound strategy and takes time to enact, luckily the group has a good cash balance with which to adhere to its goals for adding value.

Chairman’s Comments

Chairman Roger McDowell stated that:

“Our proven Pinpoint-Invest-Exit (“PIE”) model has once again delivered robust results in the period, exhibited by increased revenue and consistent gross margins, despite inflationary pressures and supply chain instabilities, to deliver a double digit % rising adjusted EBITDA.

Strong order intake and timing of contract revenue recognition has provided management with good visibility over H2 2023 revenue and profits, on-going supply chain disruptions notwithstanding. Therefore, the Board remains cautiously confident about achieving full year market expectations.”

Analyst Opinion – 510p Target Price

Analyst Richard Hickinbotham at Singer Capital Markets has a Buy rating out on the group’s shares with a 510p Target Price.

He is looking for £108.7m (99.1m) revenues for the year to end May, with £8.6m (£8.2m) adjusted pre-tax profits, earnings of 22.0p (21.8p) and a dividend of 4.4p (4.2p) per share.

For the coming year his estimates are for £116.5m of sales, £9.2m profits, 23.5p earnings and a 4.6p dividend.

Conclusion – looking for 450p in 2023

I have been following this group for years and consider that its shares, now down 15p after the report at 375p, are well worth the higher 17 times price-to-earnings rating on which they trade.

Having been up to 492p within the last year, I see them looking to get back up to the 440p/460p levels in 2023.

Lloyds has wrapped a disappointing earnings season for the UK’s three major banks with a warning that net interest margins would fall in the year ahead.

Lloyds followed in the footsteps of NatWest and Barclays in unnerving investors with downbeat forecasts and expectations for the coming year, and impairment charges curtailing 2022 profit growth.

However, Lloyds shares’ reaction to their full year results was not nearly as negative as NatWest and Barclays. A Lloyds £2bn share buyback would have helped contain losses this morning after a slight miss of profit expectations.

Lloyds shares price had broken beneath 50p to 49.6p and were trading down 2% at the time of writing on Wednesday.

Impairment charges

Speaking in an interview with Bloomberg TV Lloyds CEO Charlie Nunn said they saw a mild recession in 2023, which was reflected in a £1.5bn impairment charge in 2022 after a credit in 2021. Nunn said they were seeing early signs of stress on lower balance accounts and noted an overall drop in mortgage activity.

The impact of the impairments eroded a 46% jump in profit before impairments to £9bn in 2022, up from £6.2bn in 2021. Surging profit before impairments was a result of a 2.94% net interest margin for the 2022 full year and 3.22% in the fourth quarter.

Nonetheless, it was the outlook on margins that was the biggest cause of concern for investors. Lloyds echoed Barclays and NatWest in suggesting we have enjoyed the best of the impact of higher rates on earnings. Lloyds predict net interest margins in 2023 will be in excess of 3.05%, below the 3.22% recorded in Q4 2022.

“Guidance on net interest margin for 2023 was a little lower than markets had hoped for, and that’s a trend we’ve seen across the sector over the last couple of weeks,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“We’re cautiously optimistic that the £1.5bn of impairment charges taken over the year in preparation for bad debt are more than sufficient. If that’s the case, there could be scope for that to feed its way back to the profit line in future periods. For now, the impact of the cost-of-living crisis on consumers and businesses is only having a small impact on debt repayment, though we’d expect that to pick up as we move through the year.”