Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
HOLD: Ultimate Products (ULTP)
Ultimate Products recorded a drop in revenue in its interim results as the homeware business was hit by supermarket overstocking, revenue deferrals because of supply chain disruption, and the froth coming off the UK air fryer boom, writes Christopher Akers.
Only laundry and floorcare brands Beldray and Kleeneze delivered top-line growth in the half. Revenue at the key scales and kitchen brand Salter (which delivers almost 40 per cent of total sales) was down 9 per cent as demand for energy-efficient air fryers eased. However, air fryer sales were still double the level seen in the first half of financial year 2022.
The gross margin was up 190 basis points to 26.6 per cent as lower shipping rates and the sales mix in the half helped.
The company still managed to increase profits despite the revenue contraction, as finance expenses fell 16 per cent to £598mn on the back of lower debt. The net bank debt to adjusted cash profits leverage ratio improved from 0.7 times last July to 0.4 times.
A manageable debt position supports the company’s hopes for a share buyback programme. It confirmed that it will seek shareholder approval for this at a general meeting next month, which it needs to do because of City rules on shareholding levels. Co-founders Simon Showman and Barry Franks and chief executive Andrew Gossage hold 41 per cent of the shares.
The shares trade at an undemanding nine times forward consensus earnings, and the company is well placed in the market with about 80 per cent of UK households owning at least one of its products. But the rating looks fair as things stand.
BUY: Tesco (TSCO)
Tesco raised its dividend by 11 per cent and announced plans to buy back £1bn worth of shares as its volume performance improved in the context of easing food price inflation, with Britain’s biggest supermarket forecasting another uptick in profit this year, writes Christopher Akers.
With inflation in retreat, the company returned to volume growth in its second half in the UK and Ireland, and it shifted 9 per cent more units of its premium Finest range. Despite the threat from German discounters Aldi and Lidl, it grew its market share by 28 basis points to 27.6 per cent in the UK.
Retail adjusted operating profit rose 10.9 per cent to £2.76bn, and guidance is for this to be at least £2.8bn in this financial year. Retail free cash flow, which was down slightly at £2.06bn this time around, is expected to come within the target range of £1.4bn-£1.8bn. The company is displaying confidence when it comes to investing for growth, with capex set to rise by £100mn to around £1.4bn in 2025.
Statutory operating profits doubled to £2.82bn on the back of revenue progress, although the comparative figure was hit by a £982mn impairment charge.
On a like-for-like basis, UK sales were up 7.7 per cent, Ireland sales were up 6.8 per cent, and Booker (the wholesale part of the business) saw a sales uplift of 5.4 per cent. Central Europe sales were flat. The UK and Ireland delivered a 15.7 per cent increase in operating profits, while these halved in Europe on higher costs and regulatory headwinds.
The sale of the company’s banking operations (credit cards, loans and savings) to Barclays, announced in February, should help improve the value of the rest of the business, with the unit disappointing on revenue and profits. The transaction is expected to complete in the second half of this year and generate £1bn of cash, which includes a £250mn special dividend paid by Tesco Bank last summer. The latter amount will be used to help fund the new £1bn buyback, with £1.8bn worth of shares already repurchased since the current capital return programme began in late 2021.
A valuation of 11 times forward consensus earnings looks undemanding given return prospects. Analysts at Shore Capital calculate that Tesco is delivering an annual total shareholder return of about 15 per cent, accounting for dividend and earnings yields. We remain bullish, with the company’s relatively low non-food exposure leaving it well-positioned among the grocers.
SELL: THG (THG)
Predicting an upturn in the fortunes of THG, formerly known as The Hut Group, would tax even the most seasoned Roman augury, as the company’s ability to generate substantial losses on billions in revenue continues to test the patience of its investors. Fortunately, with more than £600mn of cash and equivalents still to burn through it can keep chugging on for a while yet, writes Julian Hofmann.
The fundamentals of THG’s problems are not difficult to understand: the ecommerce company currently does not generate the margins to justify the cost of its existence, although there were signs in these results that some improvement is creeping in.
Cash profits, heavily adjusted, nearly doubled to £114mn to give a margin of 5.6 per cent — well above the depths of 2.9 per cent that THG plumbed in 2022. Comparisons were skewed by a one-off £275mn impairment charge in the previous year.
Other operating costs also seem to be going in the right direction; distribution costs — THG’s traditional bugbear — reduced to 14.6 per cent of revenue, on a reported basis, down from 18 per cent last time. Management seemed to place more emphasis on managing cash flow, rather than on investment, which reached near break-even point during the year. This was helped by £55mn in asset sales, with a reduction in stock helping to improve working capital.
Broker Peel Hunt, which has just started coverage of THG, said it would like to see “more disclosure” of information from across THG’s three operating divisions. The broker forecasts an EV/ebitda ratio of 11 for 2024. All the same, we still don’t see much value here.
Read the full article here