FTSE 100 consolidates ahead of key central bank decisions

UK Investor Magazine
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FTSE 100 consolidates ahead of key central bank decisions

The FTSE 100, along with global equity markets, were in wait and see mode on Wednesday as investors prepared for the latest instalment of commentary and decisions on monetary policy.

The Federal Reserve is expected to hike rates by 75 bps to a 3.75%-4% Federal Funds rates while economists are forecasting the Bank of England raises rates 75 bps to 3%.

“After a positive couple of days, the FTSE 100 was in consolidation mode on Wednesday,” said AJ Bell investment director Russ Mould.

“All eyes will be on central banks on both sides of the Atlantic as both the US Federal Reserve and Bank of England get ready to deliver their rate decisions over the next 24 hours or so.

“While we have a good idea of the quantum of increase both parties will deliver, it will be all about the mood music. Investors are like thirsty travellers in the desert, hoping for even the tiniest drop of comfort to suggest the rate cycle may have run its course.”

Fed Pivot

The Fed pivot, or hopes of a Fed pivot, is an integral driving force behind risk appetite and demand for equities. The Federal Reserve is set to hike rates by 75 bps for the fourth time in a row and markets will be keenly watching to see if this pace is set to be continued.

Investors have been accessing economic conditions in an attempt to gauge the Fed’s next move and there has been little to suggest to major economic slowdown warranting a change in pace. Inflation rates remain stubbornly high and unless there are signs of economic deterioration, the Fed has no reason to even think about cutting rates.

The language used in statements accompany the Federal Reserve and Bank of England’s decisions could set the tone for equities going into the end of 2022.

Corporate updates

While markets are fixated on central banks today, a number of FTSE 100 constituents have provided relatively positive updates.

Next maintained their full year guidance after a promising third quarter update punctuated by seasonal swings in sales likely due to warmer weather.

GlaxoSmithKline’s third quarter was robust with sales rising 18% £7.8 billion helped by bumper increases in speciality medicine revenue.

Next, GlaxoSmithKline, and China with Alan Green

UK Investor Magazine
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Next, GlaxoSmithKline, and China with Alan Green

Alan Green joins the Podcast as we explore UK equities and key macro themes driving markets this week.

We discuss:

  • Next (LON:NXT)
  • GlaxoSmithKline (LON:GSK)
  • Sovereign Metals (LON:SVML)
  • ECR Minerals (LON:ECR)

We focus initially on the Chinese economy and how UK investors could play the end of the Zero COVID-19 policy, should recent rumours prove to have any weight to them.

Next is a fantastic bellwether for the UK economy and to see the retailer maintain their full year profit guidance, despite concerns around the health of the UK consumer.

GlaxoSmithKline sales have impressed the market with £7.8 billion sales in the third quarter, up 18% AER compared to the same period last year. We look deeper into the results and recent developments oil their pipeline of drugs.

We finish by looking at Sovereign Metal’s recent Titanium Rutile offtake agreement and ECR Minerals latest update.

Chinese shares: the difference between A-shares, B-shares and H-shares

UK Investor Magazine
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Chinese shares: the difference between A-shares, B-shares and H-shares

Chinese shares are near multi-year lows after a pursuing a prolonged Zero COVID policy that has rocked their economy and the share prices of Chinese companies.

This week, early rumours suggest China could be moving towards the end of their severe restrictions and the early market reaction to the unconfirmed rumours saw Chinese equities rally.

However, foreign investors wanting the participate in the any future potential rally in Chinese stocks will find it is not nearly as straight forward as buying stock in the UK, France or the US.

Chinese shares have various listing venues, each with certain criteria attached to them dedicating who can buy them, and how they can be bought.

The main types of Chinese shares are:

  • China A-shares
  • China B-shares
  • China H-shares

China A-shares

Chinese A-shares are shares of domestic Chinese companies that are listed in mainland China either on the Shanghai or Shenzen stock exchanges.

Although A-shares are available to foreign investors, Chinese A-shares are typically quite difficult to access and many UK investors would opt for a fund or China A-shares ETF to gain exposure to the sector. The ishares MSCI China A-shares ETF is a good example.

The largest Chinese A-shares include Kweichou Moutai, China Yangtze Power, China Merchants Bank and Ping An Insurance.

China B-shares

Chinese B-shares are again shares of domestic Chinese companies, listed on the mainland Chinese stock exchanges, but dominated in foreign currencies such as the dollar. B-shares are available to foreign investors and Chinese investors with foreign currency accounts.

China H-shares

Chinese H-shares are the Chinese companies most investors will be familiar with. H-shares are Chinese companies incorporated in mainland China and listed on the Hong Kong Stock Exchange.

H-shares include companies such as Alibaba, Tencent and JD.COM.

Many H-shares are available to buy on US exchanges through ADRs, although there is growing pressure from the SEC on these companies to improve their transparency and concerns some may be delisted.

ESG factors are crucial in driving commercial property growth

Aberdeen Investment Trusts
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ESG factors are crucial in driving commercial property growth

Will Fulton and Jamie Horton, Investment Managers, UK Commercial Property REIT

  • In a tougher economic climate, the ESG credentials of individual property assets are increasingly likely to be the difference between stronger and weaker performers.
  • We are achieving our net zero targets through a blend of careful restructuring of existing assets, selective sales and targeting assets with strong ESG credentials. 
  • Commercial property assets not deemed to be “future fit” are likely to see limited occupational and investor demand.

There have been plenty of encouraging signs emerging from the commercial property sector this year. Rents are normalising after the pandemic, vacancies are low and falling, while capital values have been stable. However, there can be little doubt that the market will be more challenging from here against a backdrop of weakening economic growth and higher interest rates. The Environmental, Social and Governance (ESG) credentials of individual property assets are increasingly likely to be the difference between the strongest and weakest performers. 

On the UK Commercial Property REIT, we are targeting net zero landlord emissions by 2030 and net zero for all emissions by 2040. This is a challenging target and can, we believe, be achieved through a blend of careful restructuring of existing assets, selective sales and targeting assets with strong ESG credentials for inclusion in the portfolio. 

Those commercial property assets not deemed to be “future fit” are likely to see limited occupational and investor demand as ESG considerations become ever more prominent in tenant and investor decision-making. This is likely to be particularly important in areas such as offices, where the overall market is shrinking and tenants are become more discerning. 

Decision-making

Where we have existing assets that do not meet ESG criteria, we need to decide whether to refurbish them and bring them to the required standard or sell them. This decision is based on a number of factors, but in particular, whether we can recoup the capital expenditure required to improve the credentials of an individual building. 

Most recently, we divested of our holding in 9 Colmore Row in Birmingham. The potential for stranded offices is a key risk for the trust and we were worried about the capital commitment to improve the building. We managed to sell it at a profit. It was a similar picture with Network House in Hemel Hempstead, which we sold last year. The asset was not of sufficient quality to justify the necessary capital expenditure to relet it. It was bought by a developer that wanted to use it for residential redevelopment.

However, there will be assets where we believe the development costs are worth it, in terms of higher rental income and improved capital values. Newtons Court is a multi-let site in Dartford, east of London. Unit 12 is its largest block – 20% by floor area – and had been used as a fruit-ripening area. When the most recent tenant left, we spent around £3m on an ESG-friendly refurbishment, using energy efficient materials, and installing solar panels on the roof. It went from a D to an A rating. The unit has been well-received and we now have a new ecommerce-group as a tenant at a strong uplift in rental income. 

It was a similar picture for our Tudor Park industrial estate in Radlett. Warner Brothers has been the largest tenant, holding some of the warehouses on a long-term basis and some on a tactical basis. It recently decided to vacate Unit 7, an 86,000 sqft warehouse with an imperfect layout and poor ESG credentials. We have indicative planning permission for a larger building that we can redevelop to a modern specification. This should drive higher income from the asset. 

Activity

ESG analysis is also a vital part of our decision-making for any new purchases made for the trust. For example, this year we have committed to fund the development of a 305-room hotel in the centre of Leeds – Sovereign Square. This meets all our investment criteria – the quality of hotel space in Leeds is weak in spite of the City’s economic activity. The site is in the centre of the city, and alongside groups such as KPMG. Its ESG credentials are also very strong – with a target ‘A’ on its Energy Performance Certificate. This helps ‘future proof’ the asset and give it a stronger yield profile. 

We are already seeing the benefits of this approach in the portfolio, with a low void rate – around one-fifth of the benchmark – and stable yield. Our aim is to build a diversified portfolio with rental and earnings growth and a complete ESG overlay. In a more difficult market, focusing on best in class assets will be vitally important. To deliver on our targets, we need to pursue this strategy with vigour, divesting where necessary, managing assets to bring them to the highest quality and buying assets with the highest ESG credentials as they become available. This is vital in ensuring the portfolio is fully fit for the future. 

Important information

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. 
  • Past performance is not a guide to future returns. 
  • The value of property and property-related assets is inherently subjective due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the valuations of Properties will correspond exactly with the actual sale price even where such sales occur shortly after the relevant valuation date. 
  • Prospective investors should be aware that, whilst the use of borrowings should enhance the net asset value of the Ordinary Shares where the value of the Company’s underlying assets is rising, it will have the opposite effect where the underlying asset value is falling. In addition, in the event that the rental income of the falls for whatever reason, including tenant defaults, the use of borrowings will increase the impact of such fall on the net revenue of the Company and, accordingly, will have an adverse effect on the Company’s ability to pay dividends to Shareholders. 
  • The performance of the Company would be adversely affected by a downturn in the property market in terms of market value or a weakening of rental yields. In the event of default by a tenant, or during any other void period, the Company will suffer a rental shortfall and incur additional expenses until the property is re-let. These expenses could include legal and surveying costs in re-letting, maintenance costs, insurance costs, rates and marketing costs.
  • Returns from an investment in property depend largely upon the amount of rental income generated from the property and the expenses incurred in the development or redevelopment and management of the property, as well as upon changes in its market value.
  • Any change to the laws and regulations relating to the UK commercial property market may have an adverse effect on the market value of the Property Portfolio and/or the rental income of the Property Portfolio.
  • Where there are lease expiries within the Property Portfolio, there is a risk that a significant proportion of leases may be re-let at rental values lower than those prevailing under the current leases, or that void periods may be experienced on a significant proportion of the Property Portfolio.
  • The Company may undertake development (including redevelopment) of property or invest in property that requires refurbishment prior to renting the property. The risks of development or refurbishment include, but are not limited to, delays in timely completion of the project, cost overruns, poor quality workmanship, and inability to rent or inability to rent at a rental level sufficient to generate profits.
  • The Company may face significant competition from UK or other foreign property companies or funds. Competition in the property market may lead to prices for existing properties or land for development being driven up through competing bids by potential purchasers. 
  • Accordingly, the existence of such competition may have a material adverse impact on the Company’s ability to acquire properties or development land at satisfactory prices.
  • As the owner of UK commercial property, the Company is subject to environmental regulations that can impose liability for cleaning up contaminated land, watercourses or groundwater on the person causing or knowingly permitting the contamination. If the Company owns or acquires contaminated land, it could also be liable to third parties for harm caused to them or their property as a result of the contamination. If the Company is found to be in violation of environmental regulations, it could face reputational damage, regulatory compliance penalties, reduced letting income and reduced asset valuation, which could have a material adverse effect on the Company’s business, financial condition, results of operations, future prospects and/or the price of the Shares.

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

Find out more at www.ukcpreit.com and register for updates here. You can also follow us on social media here: Twitter and LinkedIn.

Next maintains full year profit guidance despite falling sales

UK Investor Magazine
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Next maintains full year profit guidance despite falling sales

Next is defying the doomsayers and maintaining their full year year profit guidance even though the economic environment is showing signs of a slowdown.

Next are maintaining their guidance for £840m full year profit before tax, an +2.1% improvement on last year.

Despite next maintaining profit guidance, there have been cracks appearing in their sales activity in October with their weekly sales in the week 16th October dropping 3.7% compared to the same week last year. The week of 23rd October was down 1.3%.

That said, in the last week of September sales jumped 11% highlighting the seasonal nature of Next’s sales figures.

“An element of sales volatility is to be expected for any retailer, with weather always playing a part. Even so, these are quite large fluctuations and may say something about the fragile state of the economy,” said Charlie Huggins, Head of Equities at Wealth Club.

“The uncertain economic backdrop is underlined by Next’s caution for the remainder of the year, with the group expecting sales to fall by 2%. Bear in mind that includes perhaps high-single digit price increases, so volumes are quite weak.”

Notwithstanding the choppiness in Next’s sales figures, their Retail sales rose 3.1% while online sales dropped 1.9% in the third quarter.

Next shares were trading 2.4% higher at 5,082p at the time of writing.

FTSE 100 gains on China reopening rumours, Ocado soars

UK Investor Magazine
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FTSE 100 gains on China reopening rumours, Ocado soars

Rumours on social media were the driving force behind gains in the FTSE 100 today with cyclical sectors rallying on hopes the Chinese economy would soon reopen and boost the global economy.

Social media posts suggested the Chinese had created a committee dedicated to seeing China through the end of the pandemic and reopening their economy.

Miners were the standout sector on Tuesday with Rio Tinto, Glencore, Anglo American and Antofagasta all gaining in excess of 4%.

A reopening of the Chinese economy would spur demand for natural resources and support mining revenues after a period of intermittent lockdowns in the world’s second largest economy.

China has been responsible for a large proportion of global over the past 15 years and any hints at expanding economic activity ignites interest in risk assets.

Ocado

While the miners were the standout sector on Tuesday, the standout company in terms of performance is undoubtedly Ocado, gaining over 30% on the day.

As we recently explained, Ocado’s strength is in their Ocado solutions business and today’s signing of a partnership with Lotte Shopping further demonstrates the scalability of the business. Lotte operates supermarkets and department stores in South Korea with annual revenue of £9.5bn.

The partnership will see Lotte build six of Ocado’s Customer Fulfilment Centres utilising the Ocado Smart Platform by 2028. Ocado shares were 36.6% higher at 646p at the time of writing.

UK House Prices

A day after Zoopla said the housing market may not suffer as much a previously thought, the Nationwide House Price Index indicated house prices were indeed starting to slow.

“The UK property market is in sharp focus again, hit with yet another picture of sharply weakening demand. Although prices still rose 7.2% year on year in October, it was the smallest increase since April 2021, and a rapid slowdown from the 9.5% rise in September,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

“The picture on a monthly basis is even more stark with prices falling 0.9% in October, the largest drop since the depths of the pandemic in June 2020.”

AIM movers: Osirium Technologies record orders and Bowleven cash declines

Andrew Hore
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AIM movers: Osirium Technologies record orders and Bowleven cash declines

Cyber security provider Osirium Technologies (LON: OSI) has generated bookings of £2.52m in the nine months to September 2022, compared with £1.6m in the whole of 2021. The share price doubled to 5.5p. Management says that there is a greater awareness of privileged protection and security, and average contract values are increasing. Annual recurring revenues are £1.74m. There was £320,000 in the bank at the end of September 2022.

Richard Teatum has increased his stake in retailer Joules (LON: JOUL) from 8.92% to 9.99%. The share price recovered by 12.5% to 12.04p.

AIM company of the year Next Fifteen Communications (LON: NFC) failed in its attempt to acquire advertising agency M&C Saatchi (LON: SAA) and the share price has recovered some of the loss since the bid was announced. The fall in the share price made the bid less attractive. It rose yesterday afternoon and it is a further 9.68% higher at 963p.

Quantum Blockchain Technologies (LON: QBT) says the Venice court has issued its final judgement in the company’s claim against previous management and the audit committee of Sipiem. QBT has been awarded €6.19m, plus interest and costs. There is a right to appeal. The claim was sold to CL17 for €5,000 plus 30% of funds recovered. The share price rose 9.09% to 1.5p.

Oil and gas explorer Bowleven (LON: BLVN) reported a loss in the year to June 2022, while available cash has subsequently fallen to $500,000. This is not likely to be enough for Bowleven to make its contribution to the development of Etinde, offshore Cameroon, in 2023. Perenco is buying the stake in Etinde owned by New Age and that should restart progress with developing the asset. The share price slumped by one-third to 2p.

Security services and products supplier Westminster Group (LON: WSG) says revenues will be one-third lower than expected and a loss of £900,000 is anticipated. The MENA technology project has been delayed. Westminster should achieve profitability in 2023, but the Arden forecast has been slashed from £5.3m to £1.2m. The share price is one-quarter lower at 1.425p.

TomCo Energy (LON: TOM) has secured a further extension of the remaining $1m of the Valkor Oil & Gas loan to 30 November. TomCo still needs to secure longer-term finance and the shares are 11.3% down at 0.43p.

Data analytics company Rosslyn Data Technologies (LON: RDT) released full year results in the afternoon on Monday. In the year to April 2022, revenues from continuing operations fell from £3.6m to £2.7m and the cash outflow from operating activities was £2.23m. There was net cash of £882,000 at the end of September 2022, down from £2.4m at the end of April. Rosslyn Data has sold the assets of Integrite for an initial £1.6m with up to £1.4m based on revenue and growth targets. This was a non-core business. The share price fell 8% to 1.15p.

The Mission Group a ‘buy’ after recent decline

Jon Levinson
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The Mission Group a ‘buy’ after recent decline

The Mission Group (LSE:TMG) has eased to 45p to a Mkt cap of £41m after reporting Interims to June 2022. The headlines showed a 10% increase in Turnover to £37.5m with a 9% increase in PBT to £1.5m supported by a 4% increase in dividend to 0.35p. 
TMG, is a digitally focused marketing services and communications collective with a network of 17 entrepreneurial agencies employing over 1,150 people in 29 offices mainly in the UK, but also Asia, Germany, and US. Particularly performing well was technology in the UK and US and new business wins included Disney+, Molson Coors and Phihong.
Despite ec...

Eckoh – looking very healthy in sales and profits, brokers suggest upside

Mark Watson-Mitchell
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Eckoh – looking very healthy in sales and profits, brokers suggest upside

The six months to the end of September for Eckoh (LON:ECK), the customer engagement security solutions group, showed it performing very strongly.

Group sales expanded impressively by 33% to £19.6m, while its profit performance was 50% better.

The end of the first half-year saw the group, which has offices in both the UK and in the US, showing a net cash boost of £4.4m, up from £2.8m at the end of March this year.

Ideal solutions in difficult economic times

Its services and products help its clients to take payments and transact securely with their customers through all customer engagement channels.  

The company offers merchants a simple and effective way to reduce the risk of fraud, secure sensitive data and become compliant with the Payment Card Industry Data Security Standards and wider data security regulations., 

The £125m group operates and offers solutions within a broad range of vertical markets and includes government departments, telecoms providers, retailers, utility providers and financial services organisations amongst its clients.

Increasing orders

Total order levels increased strongly in the first six months, up by 50% to £17.6m.

There was a significant advance in the group’s annual recurring revenues line, up some 52% to £27.8m at the end of September.

“Despite the ongoing macro-economic uncertainty, the Board expect revenue and profit for FY23 to be significantly higher than FY22.  

The Group is trading in line with consensus market expectations, supported by long-term structural growth drivers, increasing Cloud adoption and Eckoh’s strengthening product offering.”

Analyst opinion – 86p Target Price

At the group’s brokers Canaccord Genuity Capital Markets its analysts reiterated their Buy recommendation on the group’s shares.

They now have a Target Price of 80p on the group’s shares.

For the current year to end March 2023 they estimate sales of £40.5m (£31.8m), with adjusted pre-tax profits of £7.3m (£5.2m), generating earnings of 1.9p (1.3p) and easily covering a 0.8p (0.7p) dividend per share.

For the coming year the brokers see sales of £43.8m, profits of £8.2m, earnings of 2.0p and a dividend of 0.9p a share.

The brokers were impressed by the strong order intake, noting that the shares offer “a defensive opportunity in the context of an uncertain macro backdrop, as its security offering sees ongoing demand amongst an increasingly global client base.”

Over at Singer Capital Markets, their analysts also rate the shares as a Buy, but looking for 92p as their Target Price.

They note that new product launches due in the coming months are set to support Eckoh’s goal of doubling its share of wallet amongst its customer base. 

Conclusion – add more to portfolios

The group’s shares, which were up to 64p this time last year, at just 42p have yet to really respond to the good news now shining through, which gives investors the opportunity to tuck a few more into their portfolios.

Westminster Group – operational delays bring about broker downgrade, but the shares are still cheap

Mark Watson-Mitchell
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Westminster Group – operational delays bring about broker downgrade, but the shares are still cheap

The latest Trading Update from Westminster Group (LON:WSG) the managed services and security business indicates a slowing down.

For the year to the end of December the group has seen slippage in a multi-million Technology project that has caused guidance to be somewhat lower than had been anticipated a couple of months ago.

That coincides with a number of contracts that were being progressed for commitment being delayed in their signing.

However, not all is gloom and doom

The big MENA project is expected to be awarded before the end of the year, meaning that any revenue will now be pushed into next year.

The level of enquiries has continued to be very healthy, while the management expects to have enough cash at hand to see it through to the end of 2023.

If any new large contracts are committed next year, then they will be financed appropriately.

Encouragingly the group’s international revenues are in US$.

Analyst’s opinion – shares are a Buy up to 6p

Even though guidance has been reduced, brokers analysts Colin Smith and Lauren Baker Iguaz, at Arden Partners, retain their Buy recommendation on the group’s shares.

They are looking for 6p a share as their price aim.

For the current year end they see £9.1m (£7.1m) sales and an adjusted pre-tax loss of just £0.9m (£1.9m), easing earnings from a 0.6p loss to just 0.3p loss for this year.

Going into the coming year the brokers have £17.1m of sales estimated, to produce £1.2m of profits, worth 0.4p per share in earnings.

Conclusion – shares could easily double in 2023

That revenue increase actually shows very clearly the effect of additional sales to the group’s bottom line.

With the management sounding confident of more business wins over the next year the scalability of its numbers shine through very clearly.

The £5m group’s shares eased 0.42p on the Update, to just 1.48p, at which level I still consider that patient investors will be well rewarded within the next year.

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