Lloyds shares and the looming spectre of inflation: What next for the banking group?

Natasha Doris
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Lloyds shares and the looming spectre of inflation: What next for the banking group?

Llyods has long been an established giant of the banking industry, however as investors grow more cautious of gloomy 9% inflation and shrinking household budgets, what comes next on the horizon for the financial institution?

The Bank of England hiked interest rates 0.25% to 1% earlier in May, with experts predicting an additional rise to 1.25% at its next meeting in June, which would add value to Lloyd’s investments through higher net interest margins.

However, the recent surge in inflation to 9% is set to potentially see a significant decline in their customer’s financial health which could be exacerbated by more interest rate increases.

Lloyds’ share price has fallen 7.7% year-to-date, and with the prospect of rising macroeconomic complications, the share price could be set to drop lower in the coming months as inflationary pressures hits the banking sector.

However, it might be the right time to invest, as Lloyds has a record of bouncing back from economic disruption with strength.

The company beat management expectations in its Q1 2022 results with a profit of £1.6 billion, surging ahead following the Covid-19 pandemic downturn.

Lloyds shares valuation

The banking giant currently has a PE ratio of 5.6, representing value when compared to peers, with HSBC Holdings at 8.6, NatWest at 8.8 and Standard Chartered at 9.8.

Lloyds pays an attractive 4.6% dividend and has a robust dividend cover of 3.9, indicating that the company’s payouts are set to remain covered despite the looming inflationary pressure.

Lloyds shares may dip in the short-term, however the banking mainstay is in strong financial health for future growth.

Retail sales grow 1.4% in April as inflation spikes to 9%

Natasha Doris
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Retail sales grow 1.4% in April as inflation spikes to 9%

Retail sales grew 1.4% in April despite the crushing weight of 9% inflation, as UK consumers spent on alcohol and clothing in the countdown to the summer season, according to the latest report from the Office of National Statistics (ONS).

“The unexpected upturn in retail sales could be viewed as a positive sign that the consumer isn’t as bruised as other data suggests,” said AJ Bell financial analyst Danni Hewson.

Food sales rose 2.8% as a result of increased spending on luxury items including tobacco and alcohol, with supermarket food sales remaining flat.

“But digging into April’s figures the big uptick in food and drink spend in supermarkets might indicate that people are choosing their kitchen tables over pubs and restaurants as they look to save money,” said Hewson. 

“Whilst food spend has been largely unchanged, which suggests people are still being cautious, spend on alcohol and tobacco has soared.” 

“Life’s little luxuries, the things that help us get by when times are tough, will have to come in under budget as those budgets are tested.”

Meanwhile, online and non-store retailers saw a 3.7% surge in light of stronger clothing sales.

“Summer 2022 will still be a time for postponed events and much anticipated holidays. After a couple of years where only the top half was visible to most of the world people are updating their wardrobes,” continued Hewson.

Online retail sales accounted for approximately 27% of total UK retail sales, representing an uptick from 25.9% in March and marking a significant rise from pre-pandemic levels of 19.9% in February 2020.

Vehicle fuel sales saw an uptick of 1.4% following a 4.2% fall the previous month, as consumers adjusted to the shock of spiking petrol prices.

The ONS commented that non-food store sales volumes dropped by 0.6% on the back of a decline in other non-food stores, which fell 3.3% alongside a 0.5% slide in household good stores, such as furniture outlets.

“When you look at other non-food retail, that has dropped back. People can only spend a pound once and when that pound is worth significantly less than a year ago people have to make choices,” said Hewson.

“DIY projects are being parked; home improvements slipped to the back of the queue as people prioritise the way they look over their living spaces.”

The unexpected increase in retail sales has been caveated with a note of caution, as the trend for the past three months has actually been in decline, alongside the latest consumer confidence survey, which indicates that despite the retail sales jump, the big picture is bleak.

“If you look at the last three months as a whole, the trend is a downward one and when you add in the latest consumer confidence survey by GFK, optimism seems a bit out of place,” said Hewson.

“Consumers are terrified about how they’ll weather the next few months, every month they are finding that their personal financial situation is deteriorating and most believe the worst is still to come.”

Meanwhile, Target’s shocking 25% stock sink earlier in the week served as a warning across the Atlantic that customers have already started paring back on former staples in their shopping cart in a move to save cash, as inflationary pressures loom in the macroeconomic sphere.

“Retailers are already feeling the pinch and outlooks from a number of big American names over the last week have sent shockwaves through global financial markets,” said Hewson.

“Big ticket items will gather dust on shelves and shoppers will become increasingly cut-throat when it comes to value.”

The ONS report might have given retailers cause for relief, however the odds are stacked against them as the summer months peel away to autumn and inflation hits a projected high of 10% in October.

The cold snap of the cost of living is already eating into consumer wallets.

“It’s all about priorities. This month people have prioritised preparing for future good times, next month they might have to save any spare cash to actually pay for those good times,” said Hewson. 

“Retailers know they’re in hot water and can do little to turn down the heat.”

Close Brothers Group reports £8.8bn banking loan book

Natasha Doris
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Close Brothers Group reports £8.8bn banking loan book

Close Brothers Group shares increased 2% to 1,093p in early morning trading on Friday, after the company reported a Banking loan book growth of 1.8% to £8.8 in correspondence to a 3.7% rise year-to-date.

The banking firm attributed its positive results to strong new business volumes in Commercial and Motor Finance, with resumed trading in Property linked to increased drawdowns from the group’s pipeline.

Close Brothers said its Close Brothers Asset Management (CBAM) assets fell as a result of negative market movements, with a slide to £15.4 billion against £15.8 billion and a decline in total client assets to £16.7 billion from £17.2 billion on 31 January 2022.

However, the group’s Winterflood sector saw an improvement in trading over the term, with a reported single loss day despite incredible market volatility.

The company highlighted its CBAM year-to-date annualised net inflows of 5% against 8% in HY1 2022, along with a strong pipeline of new business in progress.

Close Brothers noted a CET1 ratio of 14.9% on 30 April 2022, compared to 15.1% on 31 January 2022.

Meanwhile, the company confirmed an annualised year-to-date net interest margin of 7.8% against 7.9% in HY1 2022, which reportedly reflected the group’s continued focus on pricing discipline and a reduction in its cost of funds.

Additionally, Close Brothers commented that it expected the impact of interest rates floors of 1% in certain businesses to gradually drop away on the back of recent rises in interest rates, with the firm expecting no further impact from the floors once the UK base rates exceeds 1%.

The banking group caveated its results with a warning that the impact of the deteriorating economic condition was starting to encroach on its business, with its year-to-date bad debt ratio rising marginally to 1.2%, reflecting higher IFRS 9 provisions to account for a cautious outlook linked to external performance.

“Even at a time when consumer confidence is hitting 40-year lows, Close Brothers is running a highly profitable lending business, with high levels of capital reserves,” said Hargreaves Lansdown fund manager Steve Clayton.

“The bad debt provision has edged up, but aside from an already known issue in their former litigation lending business, now in run-down, bad debts remain incredibly low at just 0.5%.”

“The group’s strong margins make it an excellent cash generator, which has allowed them to grow the dividend significantly over time. This year we expect the group to pay out 66p per share, which is the same level that the group paid in 2019 before the pandemic. At that level, the shares will be yielding an attractive 6.1%, covered almost 2x.”

Close Brothers added that its Internal Ratings Based (IRB) application had received confirmation from the Prudential Regulation Authority (PRA) and was transitioned to Phase 2 during the period.

The institution said its outlook maintained a backdrop of inflationary pressure and macroeconomic uncertainty, however Close Brothers commented that its strong financial position and business model left the company in a decent position to support its clients and grow its sectors.

“We have performed well in the quarter, with continued good momentum across our lending businesses and robust demand in our core markets,” said Close Brothers CEO Adrian Sainsbury.

“We continue to support our customers and clients and maintain our strategic discipline against a backdrop of rising inflation and heightened uncertainty.”

“We are confident that our proven and resilient business model will allow us to continue delivering on our long-term track record of growth and profitability.”

Knights share prices recovers as chief executive invests £1m

Andrew Hore
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Knights share prices recovers as chief executive invests £1m

Regional legal firm consolidator Knights (LON: KGH) reassured investors that there has been no further deterioration in trading since a profit warning in March. The chief executive invested £1m and other directors have also bought shares following the statement.
That has helped the share price recover by nearly one-third to 125p, although it is still well below the level it was before the disappointing trading statement. That is less than eight times forecast earnings and the prospective yield is 2.7%.
In the year to April 2022, underlying pre-tax profit should be at least £18.1 million, down ...

IDOX expects 7% revenue growth to £33m

Natasha Doris
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IDOX expects 7% revenue growth to £33m

IDOX shares increased 0.6% to 62.8p in early afternoon trading on Thursday, following an expected revenue growth of 7% to £33 million reported in its HY1 2022 trading upate.

The software company announced an anticipated adjusted EBITDA uptick of 8% to £11 million, alongside a net debt reduction of over 50% to £4 million from £8.1 million on 31 October 2021.

IDOX confirmed that its robust performance was currently in line with executive expectations, with a selection of operational highlights driving its positive growth.

The group commented that its order intake increased 7% year-on-year, with a strong pipeline underpinning its confidence over the medium term.

The firm also mentioned a series of contract wins and extensions with increased average tenure across its Public Sector Software and Engineering Information Management sectors.

IDOX further reported the successful integration of its 2021 acquisitions and the continued upscaling of its Pune, India centre of excellence to boost efficiency, capability and knowledge-sharing.

“Following the disposal of the Content businesses in 2021 Idox entered 2022 as a focused software and related services business. As a result of the focus on our core strengths and attention to operational excellence, we have delivered another solid financial performance for the first half of our financial year,” said IDOX CEO David Meaden.

“Idox benefits from an extensive customer base, a healthy orderbook, and a strong pipeline. In addition, we continue to explore a number of attractive M&A opportunities and maintain a strong balance sheet to execute upon the ‘fly’ phase of our journey.”

“Whilst we continue to be cognisant of ongoing challenges in the wider macro environment, we remain focused on, and are on track to deliver on our plans for the remainder of 2022.”

IDOX is reportedly scheduled to announce its HY1 2022 full results on Wednesday 15 June 2022.

Fever Tree trading reaches pre-pandemic levels

Natasha Doris
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Fever Tree trading reaches pre-pandemic levels

Fever Tree shares were up 0.3% to 1,528p in early afternoon trading on Thursday, following a reported 150% surge in off-trade sales compared to 2019 levels and strong momentum across its on-trade sales in its trading update.

The drinks firm announced that trading was in-line with expectations laid out in March, with US, Europe and international markets enjoying pre-pandemic rates of momentum.

The company highlighted several recent launches, including its limited-edition Passionfruit & Lime Tonic in the UK, which boosted off-trade sales, along with its Sparkling Pink Grapefruit Soda in on-trade sales across the UK and European markets, on the back of a positive reception in the US.

Fever Tree commented that its innovation pipeline remained strong, with a series of new product launches scheduled for the coming 18 months.

The drinks group added that it was scaling down its shipping costs and delays with the operation of its West Coast bottling line in the US, alongside its East Coast line, which is ramping up production over HY1 2022 and is set to add further flexibility to Fever Tree’s network once fully operational.

“One of the main issues called out for rising costs is shipping to the US, it’s a key growth area for the group so servicing that demand is essential,” said Hargreaves Lansdown equity analyst Matt Britzman.

“Positive steps are underway to bottle directly in the US and therefore avoid a lot of freight costs, that partnership with a local bottling company is well underway and ramping up production this year.”

The company said the addition of its two bottling lines would also reduce the carbon emissions associated with its supply chain.

The firm highlighted an expected FY 2022 revenue in the range of £355 million to £365 million and an EBITDA between £63 million to £66 million.

“Management described trading so far as ‘solid’ and it’s certainly nice to see the group on track for guidance, but we must not forget that was downgraded in March which was met with a nasty market reaction,” said Britzman.

“The main issue this year, is that little to none of the 16% forecast rise in revenue is expected to drop into cash profits and whilst that’s hardly unusual, given the wider macro conditions meaning costs are rising for pretty much everyone, some of Fevertree’s operations should be getting more efficient.”

Fever Tree cautioned that it faced an industry-wide backdrop of inflationary pressures and logistics complications, most critically related to US shipping.

The drinks producer said its short-term remained uncertain, however the acceleration of its East-Coast bottling line would serve to mitigate some of the pressure from cost inflation.

“There are some positives for the longer-term investment case, growth outside of the saturated UK market looks promising and increased demand for premium alcohol and mixers looks to be stickier than first anticipated,” said Britzman.

“However, when investors are expected to pay 36 times earnings for a slice of the pie, in today’s world, those margins need to start moving in the right direction”

FTSE 100 falls 2% as US stocks tumble 4%

Natasha Doris
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FTSE 100 falls 2% as US stocks tumble 4%

The FTSE 100 was down 2.2% to 7,268.4 in midday trading on Thursday, as 40-year high inflation of 9% and the rising cost of living continued to erode investor confidence across the UK.

However, the market was sheltered from the worst of the dramatic fall across the Atlantic, as the NASDAQ fell 4.7% to 11,418.1 and the S&P 500 dropped 4% 3,923.6 after retailer Target’s shares lost 25% on rising costs and supply chain problems, and wiped almost $25 billion off its market cap.

“Against this backdrop the FTSE 100’s fall this morning looked pretty modest, the combination of commodity producers, stocks on lower valuations and generous dividends helping it to outperform other global markets,” said AJ Bell investment director Russ Mould.

The FTSE 100 was anchored by generous dividends, lower valuations and positive commodities performance, pulling the market up from the worst of the sell-off storm.

Royal Mail shares tumbled 12.8%, as the company plummeted on an 8.8% drop in annual pre-profit to £662 million, and warned investors of a “downside risk” to expectations for the coming year.

The beleaguered firm has been facing internal pressure as well, with nationwide strikes threatened as executive measures to shake up the company backfired.

“Royal Mail had been making real progress with its turnaround plans … now inflationary pressures are threatening to unpick that progress and have reignited troubles with its work force as talks continue to avert a potential nationwide strike,” said Mould.

“Pay increases can’t hope to keep pace with rising prices and demands for more flexibility from staff, including working Sundays, are unsurprisingly going down like a lead balloon.”

The group unveiled a full-year dividend of 20p per share, however, bringing its shareholder payment to twice its 10p dividend year-on-year.

Scottish Mortgage Investment Trust shares fell 5% to 739.4p following a NAV total return over the 12 months to 31 March of negative 13%, falling dramatically below the FTSE All-World index benchmark, which gained 13%.

“Investors in Chinese companies have suffered from President Xi’s regulatory crackdowns in the name of ‘common prosperity’. In retrospect, it has been a mistake to reduce our holdings in western online platform companies rather than their Chinese counterparts,” said a spokesperson for the firm.

However, the company announced an uptick in its total dividend to 3.5p compared to 3.4p the previous year.

National Grid shares fell 1.9%, after the utilities group announced an 82% operating profit growth to £4.3 billion, alongside the acceleration of its transition to net-zero with 70% of its five-year investment aligned with EU taxonomy principles.

“National Grid remains focused on positioning our business, through acquisitions and investment, to deliver net zero while continuing to safely ensure security of supply at the lowest possible cost to consumers. And our results today reflect the strength of this strategy,” said National Grid CEO John Pettigrew.

The company estimated broadly flat earnings over 2022-2023, and reported a dividend rise of 4% to 50.9p from 49.1p, marking a 3.7% uptick in line with executive policy.

National Grid delivers 82% operating profit growth to £4.3 billion, accelerates net-zero transition

Natasha Doris
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National Grid delivers 82% operating profit growth to £4.3 billion, accelerates net-zero transition

National Grid shares were down 1.2% to 1,229.9p in late morning trading on Thursday, after the utilities firm announced a positive series of results for its FY 2021-2022 including an 82% growth in operating profit to £4.3 billion compared to £2.4 billion the last year.

The company reported a pre-tax profit increase of 107% to £3.4 billion against £1.6 billion, alongside a capital investment rise of 39% to £6.7 billion from £4.8 billion.

National Grid has experienced a few complications in light of the group’s transition to an increased green energy portfolio.

The group confirmed that 70% of its five-year investment was aligned to EU taxonomy principles, which would make it one of the FTSE 100’s biggest net-zero investors.

The National grid added that it had made strong progress on its £400 million cost efficiency programme as it continued to focus on affordability for its customers, with £140 million delivered to date.

The company poured £24 billion of investment into its five-year financial framework aligned with the EU taxonomy legislation principles, with its extensive programme in progress to deliver the UK government’s 50GW offshore wind goal by 2030, alongside the launch of its clean energy strategy in the US to replace fossil fuels by 2050.

“The UK and US communities we serve are facing significant cost of living challenges, at a time when further urgency is needed to address climate change,” said National Grid CEO John Pettigrew.

“Against this backdrop, National Grid remains focused on positioning our business, through acquisitions and investment, to deliver net zero while continuing to safely ensure security of supply at the lowest possible cost to consumers. And our results today reflect the strength of this strategy.”

Analysts noted that under regular circumstances, advancement into green energy would be cause for celebration. However, with the energy price cap set to rise again in October and utilities bills shooting into the stratosphere, the group has apparently picked a poor time to make the switch.

“The group argues that it must spend to keep up with the UK’s ambitious climate change targets, the current grid simply isn’t strong enough to cope with a ballooning number of new connection requests,” said Hargreaves Lansdown equity analyst Laura Hoy.

“In normal times this wouldn’t be much of an issue, utilities are constantly negotiating with regulators on how they’ll be compensated for infrastructure investment. But with energy prices soaring uncomfortably higher, price hikes for customers are inevitable.”

“Together with the investment needed to shift to an all-electric future, it leaves regulators stuck between a rock and a hard place.”

The National Grid reported that its outlook between 2020-2021 to 2025-2026 remained unchanged, with a projected total cumulative capex of £30-35 billion, asset growth CAGR of 6%-8% supported by a strong balance sheet.

The firm commented that it expected earnings for 2022-2023 to remain broadly flat at an exchange rate anticipated at £1 to $1.30.

The energy group announced an EPS growth of 64% to 60.6p against 37p year-on-year, alongside a 4% dividend rise to 50.9p per share from 49.1 the previous year, representing a 3.7% uptick in line with executive policy.

Crossword Cybersecurity and Physiomics with Hybridan

UK Investor Magazine
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Crossword Cybersecurity and Physiomics with Hybridan

The UK Investor Magazine Podcast was thrilled to welcome members of the Hybridan team Niall Pearson, Head of Corporate Broking & Sales, and Derren Nathan, Head of Research.

In this episode, we focus on Crossword Cybersecurity and Physiomics.

Crossword Cybersecurity has a portfolio of five cyber security products and earns significant revenue from consulting activities. Niall outlines their product mix and how this provides synergies across the portfolio. Crossword has made acquisitions recently and question whether will growth be M&A driven, or will we see organic growth from the current portfolio?

Physiomics is leading oncology consultancy using proprietary Virtual TumourTM technology to provide personalised oncology treatments. Their technology enables treatments suited to each individual by mapping tumour growth and adjusting treatments accordingly. Physiomics sees record contract revenue in the six months to June with significant contracts wins demonstrating the stability of their treatments.

Applied Graphene Materials: A step closer Break-even

Jon Levinson
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Applied Graphene Materials: A step closer Break-even

Applied Graphene Materials (LSE: AGM) were unchanged at 16.5p and a Mkt Cap of £11m.  In February 2021 management supported a £6m fund raise a 41p to commercialize its graphene materials to be used by a  wide range of products. It improves the clients  eco-friendliness and sustainability of product  in formulations of paints, coatings, and composite materials.  Current revenues are tiny for the six months to January 2022 revenue was £46k with a loss £1.7m.  The Net Proceeds of the over-subscribed 2021 funding  was to provide sufficient  working capi...

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