Investors Chronicle: Reckitt Benckiser, Bellway, Petra Diamonds


Buy: Reckitt Benckiser (RB)

There’s no sign of dimming enthusiasm for hygiene products, which made up 42 per cent of the company’s net revenues over its third quarter, writes Alex Janiaud.

Unsurprisingly, the coronavirus pandemic has encouraged most consumers to pay greater attention to their personal hygiene. People are increasingly washing their hands to ward off the virus — more than eight times a day in the UK, according to a July study by Citron Hygiene, compared with five times a day before the pandemic, when nearly half of consumers had never used hand sanitiser. The hygiene obsession has translated into roaring sales growth for Reckitt Benckiser, manufacturer of hygiene, health and nutrition products, which secured quarterly net revenue of £3.5bn.

Hygiene was the group’s main source of revenue growth over the period. Demand for its Lysol disinfectant contributed to a divisional sales uplift of 12.4 per cent, while Reckitt’s Finish dishwashing brand also experienced a boost — a probable outcome of increased working from home and school closures. Reckitt’s health products matched the group’s overall sales growth of 6.9 per cent. Disinfectant brand Dettol, which sits within this grouping, has followed similar trends to the hygiene portfolio.

But condoms have also helped to spur health product growth. The group has placed sexual health among its priorities for rejuvenating its brand, and as restrictions on social mingling were rolled back in key markets over the summer, Reckitt witnessed an improvement in sales for its Durex condoms. Durex has gained traction in China and India, two target growth markets for Reckitt. The product has been subject to an increased spending programme across the group, and Reckitt recently launched its thinnest condom in China, which has received good early feedback.

Personal care products like Veet hair removal, which sit within Reckitt’s health bracket, also fared well over the period. Increased homeworking has weighed on some beauty and personal products this year, in a trend that was also observed by Unilever at its half-year results in July. Sales of over-the-counter health products fell by a tenth over the quarter.

Hold: Bellway (BWY)

We suspect assumed sales prices may need to modify in the coming year if consensus bank forecasts are anywhere near accurate, writes Alex Newman.

A return to the dividend list and bullish comments around productivity improvements added some gloss to full-year numbers for Bellway, though re-establishment of the shares’ income credentials was not enough to shake off market fears of a difficult year ahead for the housebuilder.

Investors knocked 4 per cent off the value of the FTSE 250 group on the publication of these results. On a backward view, a predictably dismal period for sales and cash generation meant the chief financial metrics were negative. Revenues contracted in line with housing completions, while exceptional costs of £72.6m and a 15 per cent rise in work-in-progress to £1.5bn — the product of a stalled sales process only now slowly unwinding — led to the near-total erasure of a £201m net cash position in just 12 months.

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Recent trading has been more positive. At £1.87bn, the forward order book is up 42 per cent in a year and at a fresh record, productivity levels are said to be currently between 85 and 90 per cent of those achieved in the year to July 2019, and — in a trend reflected across a surprisingly buoyant summer and autumn housing market — overall reservations are up 31 per cent since the start of August.

However, just how long that strong demand can be propped up will depend on myriad factors, from the avoidance of fresh lockdowns, to the final chapter in the Brexit negotiation saga and the efficacy of the job support scheme — which comes into effect when the UK’s coronavirus job retention scheme ends next week. The tone of chief executive Jason Honeyman’s outlook read more concerned than confident.

In the face of a contraction in higher loan-to-value mortgages from the high street banks, Bellway also snuck in some thinly-veiled lobbying of the government, arguing for it to continue with both the current stamp duty holiday on property values below £500,000 and the Help to Buy shared equity scheme.

“A continuation of these schemes not only encourages home ownership, helping the housing sector to boost output, but also creates employment and aids the wider economic recovery,” argued chairman Paul Hampden Smith. As detailed by the National Audit Office, Help to Buy has helped push up prices paid for newly built homes far above increases seen for existing properties, to the huge benefit of the housebuilding sector.

Mindful that next year’s policy changes may be less favourable, Bellway has spent the past year buying up land plots from a “wide geographical spread” and — with an average expected selling price under £280,000 — at a lower price point than the full-year 2019 average. Management hopes this should ensure what it deems an affordable product for prospective homebuyers in the coming years, while reducing the reliance on Help to Buy.

Quite how heavily the group has indirectly depended on taxpayer support in recent months was revealed in two details in its preliminary results. First, as reservations fell below 150 a week between the imposition of national lockdown on March 23 and the end of the period, some 57 per cent of buyers used the scheme. In 2019, when reservations averaged 210 a week, this was just 35 per cent.

Second, while more than a quarter of new homes were sold to first-time buyers, 77 per cent accessed the scheme. With credit availability starting to tighten, it is unclear how badly Bellway’s sales pipeline might be hit if this support were withdrawn.

A year ago, we asked whether flat sales prices, cost pressures and Brexit uncertainty might cap operational gearing and mean that the group’s then-record year would prove a peak. That call was apposite — though not for reasons we foresaw — but there is still reason to expect Bellway’s underlying profitability will be well-supported for the foreseeable future. The strength of the balance sheet has also proved its worth.

Sell: Petra Diamonds (PDL)

Petra has been in trouble for a long time. Through a new arrangement, shareholders will end up with a smaller proportion of a still-struggling company, writes Alex Hamer.

Petra Diamonds shareholders will be left with around 9 per cent of the miner’s issued shares in a deal designed to save the company. A sale process announced mid-year did not bear fruit, and $650m in loans coming due in May 2022 have become the main problem. Petra, owner of the famed Cullinan mine South Africa, said that it would split the debt into $307m of new notes and the rest turning to equity which will go to four major South African lenders.

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Petra needs shareholder support for the restructuring, although the company has already said that it would bring in “alternative structures” to get the deal done if investors vote it down.

A weak diamond market and production issues at its South African mines contributed to the stretched financial situation — but the high debt had been a red flag on the company for some time. The company could not pay the interest on the $650m loan in May.

The value of Petra’s stock at the market opening on Tuesday was under £15m, after an 85 per cent fall since January. Even that 2020 high of 11.1p was down almost 90 per cent on two years earlier.

The company said it had not received any viable takeover offers during the four-month period in which it had run a formal sales process. A recent picture of the balance sheet is not available, as the full-year 2020 results were delayed from August to November in keeping with the Financial Conduct Authority’s (FCA) Covid-19 rules. A trading update in July said that tenders had been cancelled and that roughly three weeks of production had been lost at the Finsch and Cullinan operations.

Petra chief executive Richard Duffy said the deal with lenders would provide “the business with a stable, deleveraged capital structure that will ensure [its] short and long-term viability”.

The lenders will be able to appoint four directors to the board, who will be part of a committee that will “monitor significant capital and other investments and recommend their adoption to the full board”.

John Hughman: Back to Brexit

If there are any silver linings to the pandemic, one of them must be that it has distracted attention from talk of Brexit. Just as now all we seem to hear about in the news is Covid-19, for several years all we seemed to hear was endless discussion of the UK’s departure from the EU and its disputed consequences. Such are the strange times that we live in that a return to the most contentious subject in our recent political history feels like a return to normality. 

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The facts as they stand are that December 31, the day upon which the UK’s transition period will end, is ticking ever closer, and no trade deal, free or otherwise, has been agreed so far. Should that remain the case, the UK will exit the EU without a deal, and the new year will see us begin trading with our nearest neighbours on WTO terms — an outcome that has been both feared and celebrated in equal measure. In September, Boris Johnson set an informal deadline of October 15 as the day upon which a deal would be struck or there would be no deal at all. But that day has come and gone and still trade negotiations rumble on. 

In all likelihood, a trade deal will be reached — you only have to look as far as sterling’s sanguine response to the latest Brexit developments to see that is the expectation. Indeed, such has been the disruption caused by Covid-19 that it would not appear to be in either the UK or EU’s interests to create yet more uncertainty and the possibility of further economic pain. Similar negotiations in the past have often been resolved at the eleventh hour and the gap between the two negotiating sides has narrowed to the point where it no longer feels like an untraversable chasm. 

Whether that also delivers better news to UK investors remains to be seen, although so many businesses have been eviscerated by other factors that no deal has slipped well down the pecking order of things to worry about. Take hospitality, for example, where worries about an exodus of EU workers have given way to worries about whether they will ever need as many staff again. Or oil and gas, and the existential crisis it faces as ESG permeates every aspect of investing. A Brexit deal will do little to restore certainty to sectors that now face permanent changes to the way they operate, for whatever reason.

But what is new? If the pandemic has taught us anything, it is that as investors we should always brace ourselves for change. The effects of Covid-19 have been rapid, but so have the effects of technology on many industries, for many years. And it is similarly easy to be caught out by creeping change, too, like the rise of ESG — so slow as to be almost imperceptible, but equally dangerous to the complacent investor.

John Hughman is editor of Investors Chronicle



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