The Bank of England’s announcement immediately caused share prices across major UK banks to drop, with Lloyds declining 1.6% to 47.7p, NatWest losing 4.6% to 10.3p and Barclays seeing a dip of 2.4% to 170.9p at the time of writing.
Analysts said that the rising interest rates have set UK households up for a year of uncertainty and slashed consumer budgets.
“UK consumers now face an annus horribilis, as rising borrowing costs will be compounded by higher food and energy bills, and tax rises to boot,” said AJ Bell head of investment analysis Laith Khalaf.
“Interest rates will mean savers getting a bit more return on cash held in the bank, but elevated inflation means they will actually be worse off.”
“Markets expect four more increases this year on top of today’s, meaning that by Christmas 2022 we’ll have a base rate of 1.75%, if the expectations are to be believed,” said AJ Bell head of personal finance Laura Suter.
“At that level we’d be returning to the interest rates of 2008, around the time of the market crash.”
Khalaf added, “unless you want egg on your face, it’s best not to count your chickens before they’re hatched when it comes to monetary policy, but it looks pretty clear that central banks are intent on several further rate hikes as we move through 2022, to help stave off the real and present danger of sustained inflation.”
Hikma shares were trading down 0.3% at 2,055p despite a 9% increase in group revenues.
Hikma’s revenue grew from $2.3bn to $2.5bn in 2021 with strong performances in all three divisions of the pharmaceutical company.
Injectables contributed 41% to the group revenues with an amount of $1bn. The US consisted of $691m and the Middle-East and North-Africa (MENA) markets accounted for $180m of that amount.
Generics saw a revenue growth of 10% in the segment to $820bn. The growth mainly came from recently launched products such as Kloxxado and generic Advair Diskus.
The branded segment had an increase of 9% in revenue to $669m with strong performance coming from the MENA region with their chronic illness treatments.
R&D will continue to have a 6% investment taken from the revenues to continue growing their pipeline of products.
Hikma’s operating profit saw a 12% increase to $632m in 2021.
The group also saw a 38% increase to $638m in cashflow from operating activities.
The company has a net finance expense of $39m, up from $22m in 2020 due to refinancing costs and losses in interest income.
The group’s net debt has decreased by $185m to $420m in 2021.
The group decided on 26p as a recommended final dividend in 2021, summing up to a total dividend of 40p.
Siggi Olafsson, Chief Executive Officer of Hikma, said, “Hikma delivered strong financial results in 2021, marking another successful year of solid growth and continued strategic momentum.”
“Our operational strength and high quality standards ensured our ability to provide customers with a consistent supply of essential medicines in a challenging environment.”
“Our Injectables business is now supplying US hospitals with sterile compounded pharmaceutical products, has expanded into Canada, and is set to grow further with the acquisition of Custopharm1 and our expansion into US biosimilars.”
“Our Generics business is bringing more complex and specialty products to market, launching Kloxxado and generic Advair Diskus in 2021, and with additional product launches planned for this year.”
“Our Branded business is delivering consistent growth, with an increased focus on medications to treat chronic illnesses.”
“We have an exciting platform that will drive continued growth and progress in the year ahead.”
The FTSE 100 gained on Thursday as the Bank of England raised rates and investors digested the latest comments from Russia that progress towards a ceasefire was ‘wrong’.
European shares had started the day on positive note after the Federal Reserve increased rates, leading to a rally in US stocks overnight.
The FTSE 100 eked out some gains Thursday morning after the US Federal Reserve moved to raise interest rates for the first time since 2018,” said Russ Mould, Investment Director, AJ Bell.
By the time the Bank of England announced a 0.25% rate hike to 0.75%, the FTSE 100 was trading comfortably higher 7,320, up 0.4%.
However, the pound fell as doubt was cast over the possibility of future rates hikes, despite a revised Bank of England 8% inflation target.
UK Banks
UK banking shares were marginally lower on Thursday before the Bank of England voted 8-1 to raise rates, but extended losses after the bank changed their language around further rate hikes this year.
In February the bank said it would be ‘likely’ they raised rates again – which they have done today – but they now say there ‘might be’ more rate hikes this year, casting doubt over the trajectory for UK rates.
This means UK banks could miss out on further benefits to their Net Interest Margins in absence of more rate hikes.
Lloyds, Barclays and Natwest shares were down over 2% at the time of writing and continuing their declines.
Ocado
The top fallers included the Ocado Group, declining 8% to 1,106.5p. During the height of Covid-19 Ocado was trading at almost 3,000p per share in September 2020.
The online retailer took a dent to its earnings after it failed to acquire new clients, alongside issues including its patent lawsuit with Norwegian Autostore and a robot fire in its South-East London property.
“The pressure on margins from rising inflation looks to be a growing issue and will not help Ocado at group level given the solutions business remains heavily loss-making,” said AJ Bell investment director Russ Mould.
Diageo rose 2.2% to 3,674.7p after JP Morgan upgraded the stock’s rating from hold to buy earlier today.
Scottish Mortgage Investment Trust continued its upward trajectory after the 7% rebound in the Hang Seng index today saw its major Asian holdings Tencent and Alibaba recover recent losses.
Commodities
Oil prices have once again exceeded the $100 mark to $102 earlier today as a result of the International Energy Agency stating that the sanctions imposed will lead to a loss of 3m barrels a day of Russian oil exports.
Shell and BP shares were up 1% in Thursday morning trade.
Russia has lost access to their foreign currency reserves with increased sanctions on the country invading Ukraine resulting in fears of default.
Russia was supposed to pay $117m in coupon payments to investors of dollar-denominated bonds. However, international sanctions have locked most of the country’s foreign exchange reserves leaving Russia in a fix.
Russia said they have sent an order for the payment of $117m to Citibank and is awaiting to see if US authorities permit the payment.
From Russia’s perspective, they are not defaulting as they believe that they have means to meet the payment. Russia has suggested that the payments can be made in roubles if the order was not accepted.
As of today, the country has began their grace period of 30 days to meet the payments in dollars whilst still awaiting the verdict of whether a default has occurred.
Later today, an update regarding the payment reaching Citi will be released. If the country’s payment is not accepted, it will be their first foreign currency default since 1917.
Russia defaulted in rouble denominated bonds in 1998.
In the aftermath of the pandemic, project timelines, supply chain pressures and inflationary costs of input materials were mitigated by a proactive supply chain management initiative.
The group faced operating problems with the supply of raw materials and labour however still managed to report strong financials as they altered the prices by introducing flexibilities in labour and manufacturing practices to match the increase in costs.
Adjusted EBITDA had an increase of 86% to £107.1m in 2021 compared to £57.6m in 2020.
The groups St Ives project is in line with the plan and capital investments of £35m have been allocated to the projects coming in 2022. The capital expenditure however reduced from £30m to £21.9m in 2021.
Net debt declined from £75.6m to £41.1m as the company understood the importance of liquidity and remained discipline in their capital expenditure. Adjusted ROCE increased from 8.2% to 20.6% in 2021.
The groups total dividend is 14.3p including a proposed final dividend of 9.6p in 2021 compared to 4.3p in 2020 as a result of their progressive dividend policy.
Going forward, the company will keep health and safety as a priority in their operations, a practice they focused on during the pandemic.
Martyn Coffey, Chief Executive Officer, Marshalls, “trading remains strong and has continued to improve since the start of the year, notwithstanding ongoing supply chain challenges.”
“Our strong market positions, focused investment plans and established brand underpin the group’s business strategy. We remain confident that our strategy will continue to deliver profitable long ‑ term growth and that we will be able to mitigate raw material shortages and cost inflation through the effective management of our supply chain.”
“Given the strength of recent and current trading the board’s expectations for the current year are now ahead of its previous view.”
The UK Investor Magazine Podcast was thrilled to welcome Helen Steers, senior manager of the FTSE 250 Investment Trust Pantheon International PLC, for an in-depth discussion of private equity and access for private investors.
Pantheon International is specialist £1.7bn market cap private equity Investment Trust that has produced 12.2% annualised NAV growth since 1987.
The fund focuses on private investments in technology and healthcare and has previously invested in companies including Spotify, Wayfair and OneSavings Bank.
Helen discusses how retail investors are able to gain exposure the private equity market, which is typically reserved for large institutions, through Pantheon International.
We also explore the biggest trends in private equity and how Pantheon International selects companies for inclusion in their portfolio.
In 2021, box office sales contributed $955m followed by retail contributing $552m.
A substantial amount of $296m was received in revenue from other income which is mainly on-screen advertising and booking fees.
Pre-pandemic revenue was $4.3bn leaving the group in a position to rethink their strategy on how to recover from the consequences of lockdowns.
Covid-19 caused closures of public venues such as Cineworld and thus the results include impact of the restrictions between January to May 2021.
Group adjusted EBITDA was $454m in 2021 after a loss of $115m in 2020. The company restructured their labour policy, renegotiated contracts and controlled their expenses in an attempt to reduce their losses incurred by the pandemic.
Operating profits was $15m in 2021 as opposed to losses of $2.2bn were set in 2020.
A net reversal of impairment charges of $127m in 2021 was a big contributor to a swing in operating profits following charges of $1.3bn in 2020.
Cineworld’s net financing costs were $690m in 2021.
The company understands the importance of liquidity and thus raised $425m through convertible bonds. The United States CARES Act tax refund also returned $203m.
The groups net debt rose from $4.3bn to $4.8bn in 2021.
Cineworld disagrees with the C$1.2b award from Ontario Superior Court’s judgement and has submitted an appeal.
In 2020 the group paid interim dividends of $0.38, however final dividends will be declared after the group evaluates their cash balances post liabilities.
Mooky Greidinger, Chief Executive Officer, Cineworld Group said, “whilst our 2021 results still reflect the impacts of COVID-19, particularly at the start of the financial year, we are encouraged by the recent strong trading performance throughout the final quarter.”
“It is clear that our customers remain loyal and have missed the big screen experience as well as the sociability of watching a movie with others.”
“Our strong final quarter performance reflects the pent-up demand for affordable out-of-home entertainment and the record breaking film slate, including “Spider-Man: No Way Home”, which showcased the importance of cinematic releases.”
“The business is well positioned to execute its strategy and capitalise on the highly anticipated movie schedule, which includes Avatar, Top Gun Maverick, Jurassic World: Dominion, Minions: The Rise of Gru, Doctor Strange in the Multiverse of Madness, Thor: Love and Thunder, Black Panther: Wakanda Forever, Bullet Train, Spider-Man: Across the Spider-Verse, Pixar’s Lightyear, Fantastic Beast, Elvis and many more.”
Rolls-Royce shares have faced significantdownside throughout the pandemic but shares have recently seen all the benefits of increased air travelscuppered by a poor set of results that missed expectations.
Rolls-Royce is one of the world’s largest suppliers of jet engines. However, the company’s main source of revenue comes from the maintenance costs of the engines rather than just the sales. This means the company needs planes to be flying to earn revenue.
In 2021, Rolls-Royce saw operating profits of £513m as opposed to losses of £1.9bn in 2020 as the pandemic came to an end.
The company saw revenues over £11bn with largest contributions of £4.5bn and £3.3bn from the civil aerospace and defence segment respectively.
Rolls Royce’s Civil Aerospace division produced revenues of £4,536m in 2021 after recording 7.4m large engine flying hours, up 11% on 2020.
This is set for further recovery in the coming year and will be a key driver of revenue growth and profitability in 2022.
Although the key driver of demand in their Civil Aerospace unit is set to return, there should be caution around the impact of inflation on household spending and a possible reduction in leisure travel.
Defence
With tensions arising on the geopolitical front due to the Russia-Ukraine war, Rolls Royce will likely see an uptick in defence orders as global powers once more refocus their budgets on bolstering their military capabilities.
The defence segment saw an increase of £155m to £3.3bn in 2021 revenues, with an underlying operating loss of £172m.
Rolls Royce have secured a B-52 engine replacement contract with the US which promises a long term revenue source and have recently announced the launch a joint-venture to create a fighter jet engine for Turkey, an TF-X aircraft.
Investors will be watching closely for any surprise contract wins this year.
Power Systems
The revenues in the power systems business division increased by £89m to £2.7bn. Rolls Royce power solutions are focused on clean energy across a diverse range of applications from hydrogen combustion engines to power solutions for a hyperscale data centres.
Rolls Royce is also moving into nuclear power after receiving a $546m funding round supported by the UK Government for Rolls-Royce to start developing their first small modular nuclear reactors.
Earlier in the week, the British government requested the UK nuclear regulators to begin the process of approving Rolls-Royce’s nuclear reactor initiative.
The results from the nuclear reactors should help reduce carbon emissions and fossil fuel dependence, and in time, Rolls Royce revenues.
“We have also made significant progress with our new businesses in electrical power and small modular reactors, both of which have the potential to create very significant long-term value,” said Chief Executive Officer, Warren East.
Warren East is set to leave his post at the helm of Rolls Royce which has dented investor sentiment around Rolls Royce shares.
The power division saw an increase of £67m in underlying operating profit to £242m.
The increase in revenues and underlying operating profits have been observed due to reduced impact of COVID-19 leading to increased order intake in the fourth quarter.
Rolls-Royce Shares Valuation
With Rolls-Royce trading at 93p, the stock has a forward P/E of 29.3x which is high given earnings growth recently missed expectations and margins look weak for 2022.
However, investor sentiment around travel related shares may improve through 2022 and benefit Roll Royce shares, which may swept up in broad-based allocations to the sector.
The BAE Systems’ share price saw a dip of 4.5% to 699.2p in early afternoon trading on Wednesday in a move towards the lowest levels since the beginning of the Ukraine crisis.
BAE Systems is the largest arms contractor in Europe and saw their shares picked up by investors positioning for increased defence spending as a result of the conflict.
The start of the conflict coincided with the release of their 2021 results which revealed an increase in revenue and operating profit in 2021.
However, BAE’s share price has experienced a decline after diplomatic negotiations began this week, potentially quashing the stock’s attractiveness for investors realigning their portfolio’s for prolonged geopolitical tensions.
Should there be a ceasefire, the premium built into BAE’s shares could quickly evaporate and see the stock move back to around 600p, the level it was trading before the conflict.
Financial Results for 2021
Regardless, BAE Systems is a historically strong company and has sound fundamentals. The group saw its sales increase to £21.3 billion in 2021 compared to £20.8 billion in 2020.
The arms contractor reported an underlying EBIT of £2.2 billion against £2 billion in 2020 and a revenue of £19.5 billion in 2021 compared to £19.2 billion in 2020.
BAE Systems highlighted its operating profit of £2.3 billion in against £1.9 billion in 2020, and its order intake of £21.4 billion compared to £20.9 billion in 2020.
The arms group announced a dividend per share of 25.1p against 23.7p in 2020. BAE has almost always been an income investors favourite, and there is nothing in its latest results to suggest this will change.
BAE Systems Growth
BAE Systems reported an expected growth between 2-4% over 2022, attributed to electronic systems, air, maritime, cyber and intelligence sectors in the company.
The company recently acquired US-based Bohemia Interactive Simulations, which specialises in military training simulations, a point of interest as the Ukraine conflict continues.
The arms developer noted that 75% of expected sales are already in its order backlog for the coming year. This has the potential for upside surprises in future earnings releases.
BAE Systems shares
BAE Systems has strong fundamentals and is operating in favourable environment. The company has reported increased profits and dividend for 2021, and is projected to grow 2-4% over 2022 based on its current backorder portfolio.
However, the potential for the Ukraine war premium to be removed from the BAE share price means investors should be patient looking for an entry.
Alan Green joins the UK Investor Magazine Podcast for a discussion of the key factors driving markets and a selection of UK equities.
Global equities have surged as Ukraine-Russia negotiations provided a glimmer of hope there could be a ceasefire. Suggestions of stimulus in China also provided optimism in markets and we discuss whether this is short-lived spike or the start of a sustained period of lower volatility.
Barclays is set to benefit from higher interest rates promised by centrals banks this year. We make valuation comparisons with their banking peers and access their outlook.
Sovereign Metals has made an announcement relating to their Titanium Rutile project in Malawi and we look forward to a significant upgrade to their resources in 2022.
Smart Metering Systems yields 4.6% and the renewables-focused power solutions company has just posted a respectable set of results including a near 20% increase in underlying profit-before-tax.
