Thursday 13:00 BST
● Micro Focus hit an 18-month low after warning that weak trading and a deteriorating macro environment meant it would miss full-year sales targets. The software maker said full-year revenue would be down between 6 per cent and 8 per cent rather than the 4 per cent to 6 per cent previously indicated.
“Weak sales execution has been compounded by a deteriorating macro environment resulting in longer decision-making cycles within its customer base. Some investors may be concerned by the timing, given two more months to go till the year end and the fourth quarter typically being the strongest quarter. The group confirmed there remains a significant pipeline but to be within the current guidance range, a highly challenging percentage of this pipeline needs to close by year end. This suggests a weaker outlook for licence sales.”
Management also announced a strategic review to look at operational, strategic and financial options for the business. There was no guidance on profitability and no conference call to give more detail on the plan.
“Given Micro Focus’ bold approach to such things, that all options will be on the table. This may provide valuation support over the coming months, but today investors are likely to question whether the strategic review itself implies issues are likely to take some time to resolve.”
● Amigo hit a record low, with the guarantor loan provider halved by a profit warning.
Hamish Paton, the group’s recently appointed chief executive, said impairments would be more severe than expected and that net loan growth would be “broadly flat” this year, rather than the low-teens growth targeted over the medium term.
Impairments jumped to 30.5 per cent of revenue in the fiscal first quarter, from about 25 per cent historically. Amigo said its in-house collections team was struggling to cope with recent fast growth, as well as baking in more cautious provisioning assumptions. Accelerated investment and provisions for complaints meant Amigo’s cost to income ratio rose between quarters from 17.5 per cent to 23.4 per cent.
Part of the downgrade reflected due in part to a reduced appetite for repeat loans, which have been the focus of regulatory scrutiny. Mr Paton said Amigo was prioritising new consumer lending as well as strengthening compliance and tightening its credit policy.
“Whilst these actions will likely adversely impact short-term profitability, we see them as sensible for ensuring longer term sustainability of a business that remains a leader within a growth market.”
● Tullow Oil retreated after the oil explorer said its planned farm down of its Ugandan prospect to Total and Cnooc will be terminated at the end of Thursday following the expiry of the sale and purchase agreements. The Uganda Revenue Authority and the companies could not agree on the availability of tax relief, it said.
Tullow had been targeting a final investment decision on the Ugandan prospect by the end of 2019. Unless and until Tullow can reduce its one-third stake, the development will likely remain mothballed and company debt levels will remain elevated at about $2.5bn, analysts said.
BMO valued Tullow’s Uganda stake at $700m, or 39p a share, based on production starting in 2023. A one-year delay would cut the current value to $400m or 22p a share, it said.
“Whilst frustrations around the project were clear, the termination of the sale and purchase agreements and inevitable further delay to the project was an unlikely scenario, in our view, given the parties involved. Whist removal of the deal, resultant delay, and project risking clearly impacts valuation, this also has repercussions for Tullow’s growth and deleveraging story, and puts more pressure on the ongoing programme in Guyana.”
● Goldman Sachs upgraded Smiths, the medical equipment to industrial seals conglomerate, from “neutral” to “buy” with an £18.50 price target.
Smiths’ “defensive revenue profile is attractive given the uncertain macro backdrop”, said Goldman. Aftermarket and consumables make up more than 50 per cent of group revenues and about half of sales are in US dollars, the broker told clients. It also argued that 2020 revenue would be underpinned by recent order wins for Smiths’ detection division, the John Crane seals business would benefit from resilient downstream oil and gas operational expenditure, and increased investment in the medical business should improve growth ahead of a spin-off next year.
Supporting a re-rating for the shares were improving free cash flow conversion, continuing portfolio simplification and the removal of pension concerns, given its scheme is now in surplus, Goldman said. The broker estimated that Smiths’ enterprise value was 11.1 times 2020 earnings compared with a peer average of more than 14 times.
Goldman also upgraded Piovan, Prysmian and Rexel from “neutral” to “buy” as part of a broader note on the European capital goods companies.
Volatile markets and macro uncertainty have led the sector to underperform in recent months, opening up an opportunity to buy “companies with strong earnings fundamentals misunderstood by consensus and where we could see catalysts (eg corporate action announcements) materialising”, said Goldman. It saw Piovan, GEA and Prysmian all screening well for low leverage, solid cash conversion and high shareholder remuneration. The broker also argued that Rexel, Piovan and Signify were potential takeover targets.
● UBS upgraded HomeServe, the home repairs subscription service, from “neutral” to “buy” with a £13.50 target.
“We believe HomeServe can deliver best-in-class earnings growth, led by a Membership business with under-appreciated potential to combine greenfield and product expansion with increasing operating leverage, and supported by a Home Experts platform disrupting the UK market for home services and improvements.”
UBS’s base case was for Homeserve to deliver operating earnings growth of 14 per cent a year to 2025 thanks to US expansion and membership sales in mature markets, as well as sixfold sales growth from its Home Experts trades booking platforms. A 15 per cent pullback for the stock in recent months suggests investors have assumed one or other side of the business will miss management targets, which looks pessimistic given the market size and the structural shift towards online services, UBS argued.
● In brief: DNB raised to “overweight” at JPMorgan; Danske Bank cut to “neutral” at JPMorgan; EFG International raised to “neutral” at UBS; JCDecaux cut to “neutral” at Merrill Lynch; Kier rated new “buy” at Peel Hunt; M6 cut to “underperform” at Merrill Lynch; Medica raised to “hold” at Peel Hunt; Michelin cut to “neutral” at Citigroup; NIBC cut to “hold” at Kepler Cheuvreux; NN raised to “buy” at Goldman Sachs; NewRiver raised to “buy” at Peel Hunt; Nokian Renkaat rated new “sell” at Citigroup; Nordea cut to “neutral” at JPMorgan; Paragon raised to “sector perform” at RBC; Pirelli rated new “sell” at Citigroup; TF1 cut to “underperform” at Merrill Lynch; Wolters Kluwer raised to “neutral” at Merrill Lynch.
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