Investors Chronicle: Just Eat, Petra Diamonds, Amigo Holdings

Hold: Just Eat (JE.)

Just Eat has become McDonald’s second delivery partner in the UK and Ireland, joining Uber Eats in facilitating ordering and delivery through its platform, writes Tom Dines.

Midway through this month, Just Eat revealed that it had signed an exclusive deal with Greggs to provide ordering and deliveries. The two groups had been conducting a trial in London, Newcastle and Glasgow, and now plan to expand to Bristol, Birmingham, Leeds, Sheffield and Nottingham.

The latest announcement is a bloody nose for Uber Eats, introducing competition where previously it was the exclusive provider of the fast-food giant’s delivery service. McDonald’s UK offers delivery in 950 of its locations, and its chief executive said in October last year that delivery accounted for more than 10 per cent of sales.

The positive news is welcome. Just Eat’s attempts to merge with were frustrated last week, when the Competition and Markets Authority said it was investigating the deal.

The CMA’s action took the market by surprise; while the deal was first announced in July last year, but the investigation was not announced until the day before the expected completion.

At the time, shares in Just Eat fell 3 per cent as the perceived risk of the deal being blocked increased, although analysts at Barclays said the most likely scenario was that “this gets approved quickly and can proceed with integration”. said it understands the investigation will look at whether it would have re-entered the UK market had the Just Eat transaction not happened. It added its UK business only had revenues of £76,000 in 2016, the year it was closed.

“ and its advisers will work with the CMA to respond to any questions it may have and is confident that merger clearance will be obtained”, the group said.

Just Eat is not the only company in the CMA’s crosshairs. In late December the regulator referred tech giant Amazon’s acquisition of a minority stake in online food delivery platform Deliveroo for an in-depth investigation. The CMA has said it is concerned the investment could discourage Amazon from re-entering the UK food delivery market — which it exited in 2018 — and damage competition in online grocery delivery.

Sell: Petra Diamonds (PDL)

The reduction in revenue was expected, but the sell-off following this week’s trading update showed investors were hoping for better, writes Alex Hamer.

Petra Diamonds has seen its revenue fall year-on-year even with a major diamond find in the period.

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The miner said the ongoing lull in diamond prices and a lower-quality mix of stones at its mines had hit its income, which was down 6 per cent on a year ago at $194m. This was bolstered by the recovery of a 20-carat blue diamond in September that sold for almost $15m (£11.5m). Petra’s shares were down 9 per cent on the update, to 9.8p. The company’s valuation has declined by 73 per cent in the past 12 months. 

The diamond industry has reacted against the weak prices, with major diamond producer De Beers cutting supply in 2019. It also relaxed rules for those taking part in its rough diamond sales, allowing buyers to hand back the smaller, low-margin, stones. 

The Anglo American subsidiary has set 2020 production guidance around 10 per cent above last year in expectation of some market recovery. Petra said there were “early indications” of an improvement in rough pricing at the start of 2020, with those in the supply chain in between miners and retailers looking to “replenish inventory”. 

Petra’s production was steady at 2m carats (ct) in 2019, and the company said it was on track to meet 2020 guidance of 3.8mct. There was a collapse in the open pit wall at the company’s Williamson mine in January, with 1.3m tonnes of rock coming down. Petra said no one was injured and the production hit would be limited, given that Williamson was running ahead of its plan before the collapse. Heavy rainfall has hindered the recovery work, however, and a pit access road was blocked. 

New Petra chief executive Richard Duffy has had to balance a tight debt covenant alongside the weak market and production challenges. The South African lenders had set a net-debt-to-Ebitda (cash profits) ratio covenant of 4.25 times at December 31, but have waived this. This follows a revision of the covenant last April, increasing it from a flat expectation of net debt being a maximum of 2.5 times Ebitda to a sliding scale starting at 4.5 times in June 2019. Net debt was $596m as of December 31, up from $593m on September 30. 

Hold: Amigo Holdings (AMGO)

it is very unclear if — let alone when — the guarantor lending product will reach social acceptance, even if it is cheaper than other forms of high-cost credit, writes Alex Newman.

Amigo Holdings has put itself in the shop window, after founder James Benamor’s Richmond Group announced it is “a willing seller” of a 60.7 per cent stake in the guarantor loans company.

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The news hit the shares by more than 40 per cent to as low as 36p, continuing a disastrous run to public life since a June 2018 listing, at 275p a share. Though Amigo maintained its guidance for loan book growth and impairments for the nine months to December 2019, management is concerned by increased pressures on its business and a “continual evolution” in the response of the Financial Ombudsman Service (FOS), which handles customer complaints.

In the first half of 2019, the FOS received 266 customer complaints about Amigo, up from 117 in the same period in 2018. Complaints involving the guarantor loan product — in which Amigo is the dominant market player — also rose in the three months to June 2019, while the proportion of cases upheld climbed to 83 per cent, up from 32 per cent in the previous financial year.

The broader regulatory environment remains uncertain. Last November, a Financial Conduct Authority review into guarantor loans — which require sponsors to cover a borrower in the event of non-payment — did not raise issues with the product itself or Amigo’s business model. But the watchdog signalled it will closely scrutinise product affordability and issues around persistent debt. Questions over the sustainability of repeat lending forced Amigo to cut its loan growth forecasts last August, in a painful profits warning.

Amigo now acknowledges overall lending volumes could be hit further, following the launch of a strategic review. The board, to which Mr Benamor returned in December, said it will consider an outright sale of the business, a partial sale of subsidiaries or loans, a group-wide restructuring, or a delisting.

Chris Dillow: A slow recovery

The worst might be over for the eurozone’s industrialists. Official figures next week could show that although German industrial production fell in the fourth quarter of last year, it ended 2019 higher than it was in the summer. This would be roughly consistent with last week’s purchasing managers’ surveys, which showed the rate of decline in manufacturing to be at a nine-month low.

Signs of stability in the eurozone are helping the UK. Purchasing managers here report that the rate of decline in manufacturing is also at a nine-month low.

This reflects the fact that politicians are no longer doing quite so much damage to the economy. The “phase one” trade deal between China and the US and some greater clarity about Brexit have reduced uncertainty slightly and encouraged a few companies to unfreeze hiring and investment plans.

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Nobody, though, thinks this is the start of a strong bounceback. Bert Colijn at ING says the chances of one are “slim”. And Investec’s Ryan Djajasaputra expects real economic growth this year to be only slightly stronger than last year’s, at 1.3 compared with 1.2 per cent.

The European Central Bank’s shares this downbeat view. Its president Christine Lagarde said last week that she expects growth this year to be “similar to rates observed in previous quarters”.

Monetary growth is telling the same story. Ever since the inception of the euro, annual growth in the M1 measure of the money stock has been a good lead indicator of industrial production. Although this growth has accelerated in the past 12 months, from under 7 per cent to over 8 per cent now, it is still well shy of the double-digit growth rates that have heralded strong output growth in the past.

One reason for this is that while policy uncertainty has diminished slightly, it has by no means gone away. There are still huge uncertainties about UK-EU trade rules after 2020, and the threat of a renewed outbreak of trade tensions between the US and EU or China.

In fact, growth might not be strong enough to raise inflation quickly. Mr Djajasaputra expects the ECB to cut interests into even more negative territory later this year.

ECB research suggests that negative rates are not as ineffective at stimulating the economy as some economists believe, but it thinks that other policies are also needed. Ms Lagarde said last week that an easing of fiscal policy in northern Europe “would certainly help”.

All this matters for even the most parochial of UK investors. There has for years been a good correlation between annual growth in eurozone industrial production and annual changes in the All-Share index — of 0.54 since 1997, with each percentage point of higher production growth associated with 1.7 percentage points higher equity returns.

This is partly because eurozone output growth is highly correlated with global growth, which in turn strongly influences investor sentiment. With the eurozone likely to grow only slowly this year, this suggests that UK equities will rise only moderately.

Chris Dillow is an economic commentator for Investors Chronicle



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