personal finance

Investors Chronicle: Avon Rubber, Sosandar, Tesco


BUY: Avon Rubber (AVON)

Even a global pandemic has been unable to halt Avon Rubber’s march forward, writes Nilushi Karunaratne.

The protective equipment specialist saw its adjusted operating profit surge by over a third in the year to September 30, to £30m, boosted by the addition of 3M’s ballistic helmets and armour business in January. On a statutory basis, operating profit dropped by two-fifths to £5.9m, weighed down by exceptional charges relating to acquisitions.

Having sold its dairy equipment business for £179m in September, the group is now free of the vagaries of animal feed and milk prices. The proceeds left it sitting on £93m of net cash at the end of September — up from £35m a year earlier — although this has come down following the $130m (£97m) purchase of helmet specialist Team Wendy last month. Broker Peel Hunt anticipates Team Wendy will help lift adjusted operating profit to £49m in 2021.

There will also be the benefit of numerous contract wins over the past year, many of which are with its largest military customer, the US Department of Defense (DoD). This includes an exclusive three-year agreement worth up to $333m to supply the DoD with enhanced small arms protective body armour.

The group’s shares dipped by around 7 per cent following these numbers — probably in reaction to the statutory earnings decline — although they have still more than doubled in value since the start of the year. While a forward price/earnings ratio of 33 is rather pricey, investors are being offered healthy margins, a high return on capital employed and an increased dividend. The UK’s recent defence spending boost also means the post-Covid outlook for global military budgets may be better than feared.

SELL: Sosandar (SOS)

With Next now making a determined move online, Sosandar may soon face growing competition for clicks, writes Oliver Telling.

Investors, who often like to buy into the hottest trends, would do well to bear in mind the words of legendary designer Yves Saint Laurent: “Fashions fade. Style is eternal.”

A retail business can cling to the fickle coattails of fashion, but it’s harder to find a unique selling point that ensures it will never go out of style.

Online-only womenswear retailer Sosandar listed on Aim in 2017, amid a flurry of excitement about ecommerce companies. Many investors bet the firm, which targets middle-aged shoppers, could capitalise on the growing demand for click-to-buy fashion — its shares nearly tripled in under a year.

But since then, Sosandar’s stock has faltered, as shareholders grew impatient for it to turn a profit. This week the company reported an operating loss of £1m for the six months to September — its best result since listing.

Sosandar slashed its sizeable spending on marketing during the pandemic, at the same time as its loungewear range received a boost from housebound mums. Revenues climbed 52 per cent on the same period last year, to £4.3m, with a record month in October.

But while the sales direction is up for the business, investors shouldn’t expect it to reach the heights of online fashion giants Asos and Boohoo, which at the same point in their lifetimes had started making profits.

Sosandar’s blessing and curse is its target market. It’s a modern solution for shoppers who still remember when shoulderpads were in vogue, with a marketing bill swollen by spending on brochures and TV advertising. Its customers’ teenage daughters, meanwhile, see models and friends posting photos of the latest Boohoo gear on Instagram, where the retailer has 7m followers. Sosandar has 54,000.

The company most likely has its sights set on shoppers at John Lewis and Next, who both now sell Sosandar’s own-brand clothing. But this market will take longer to transition online. Although high street lockdowns this year accelerated the shift to internet shopping — Sosandar saw email sign-ups jump 28 per cent in three months — online purchases still made up less than a fifth of clothing sales in the UK pre-pandemic. 

Sosandar’s journey to date is a reminder that not all internet retailers are made equal, and it doesn’t always pay to buy into the latest trend.

HOLD: Tesco (TSCO)

The board of Tesco has opted to return £585m in business rates relief to the UK government and devolved administrations, writes Alex Newman. The move will put pressure on fellow food retailers to follow suit.

At the end of March, with the weight of the coronavirus and looming lockdowns bearing down on the UK economy, the retail, hospitality and leisure sectors were given a 12-month holiday on business rates for the 2020-21 tax year.

For many firms, that was broadly viewed as a vital lifeline. But now, with the greatest risks behind it, Tesco plans to give up the relief’s entire economic benefit. The repayment, equivalent to more than the Tesco’s first half pre-tax profit, will carry a full-year cash impact of £535m. A further £50m is set to be returned next year.

“We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society,” said chairman John Allan. “We firmly believe now that this is the right thing to do, and we hope this will enable additional support to those businesses and communities who need it.”

The group made the decision despite putting “every penny” of the rates relief towards its pandemic response. This year’s Covid-19 related costs are expected to hit £725m, the supermarket said in October.

Tesco added that it was “immensely grateful” for government support at the start of the Covid-19 pandemic, when food retailers’ operations were under severe strain and posed an “immediate risk to the ability of supermarkets to feed the nation”.

The move also follows growing political pressure for supermarkets to pay back the relief, given their revenue and profit growth since the pandemic struck. Last month, the Sunday Times cited figures from advisory firm Altus which suggested grocers were in line to benefit to the tune of up to £1.9bn from the 12-month holiday on business rates.

Tesco’s first-mover advantage is likely to win it further plaudits as a model corporate citizen. But the decision also carries commercial logic. With a greater proportion of its online sales than its rivals, it is arguably in a stronger position to return the tax breaks than the discount retailers or J Sainsbury (SBRY), which has said it expects rates relief of £453m this year.

These businesses are now under pressure to follow Tesco’s lead.

This dynamic was reflected in the immediate market reaction. Though Tesco shares dipped 1.6 per cent on the announcement, Sainsbury’s stock sold off by 3.9 per cent, while B&M Europe, saw its shares dip 2.4 per cent.

The discount retailer, whose classification as an essential retailer in April allowed it to operate throughout lockdown, has collected at least £38m in business rates relief this year. Its decision to announce a £250m special dividend with half-year numbers now looks even more suspect.

As some businesses emerge from the pandemic in much better shape than they initially feared, calls for the return of emergency state aid are only likely to grow. Aside from business rates relief, companies which accepted furlough support are increasingly being forced to choose between repaying the cash and shareholder distributions.

In absolute terms, Tesco’s decision adds another big dent to this year’s earnings expectations. On a longer-term view, it looks like a canny business move — as well as being the right thing to do.

John Hughman: The end of the beginning

It is probably too early to declare categorically that Covid-19 has been beaten. But on the day that we emerged from Lockdown 2, news that Pfizer’s vaccine had been approved for use in the UK surely lifted the nation’s spirits — even if the market’s reaction was more muted than it had been previously on news of trial results.

Nevertheless, we are all in need of victories wherever we can find them. And although there are lingering concerns about the speed at which the vaccine has been approved, it is a landmark not just in the battle against Covid-19, but the longer war against many other diseases, too. 

Yet even if it is starting to look as though we may be close to controlling the virus, when it comes to the economic battle it feels like only the end of the beginning. The latest forecasts from the Office for Budget Responsibility (OBR) show that UK GDP is expected to fall 11.3 per cent in 2020, the largest fall in 300 years, when a little ICE age caused an economic ICE age. 

A dig into the statistics unsurprisingly shows that the bulk of the fall comes from a major contraction in private consumption — a lack of shopping, eating out and going on holiday. The flipside of the fall in consumption in 2020 is that many have been forced into saving, and indeed at 28 per cent the UK saving rate rose to its highest ever level in the second quarter of the year. But the OBR expects this to moderate to a more normal level as restrictions ease and unshackled households splash the cash again — although with unemployment expected to double to around 8 per cent next year in the OBR’s central forecast, it is likely that they will not be emptying their bank accounts entirely, lest a rainy day come.

Even if consumption resumes its seemingly ever-upwards trajectory, where they will be spending this cash is another matter altogether. If the OBR’s forecast that the government’s Bounce Back loan scheme will lose £29bn is correct, it is small business that will bear the brunt of the contraction — the ground has been set for an economic survival of the fittest where fewer, larger companies prosper. And even among larger companies there will be winners and losers, as this week’s collapse of Debenhams and Arcadia, slow to adapt to a world of changing shopping habits, demonstrates. 

In short, it might pay to be wary of claims that we are now about to see a sustained shift into beaten-up value shares. Such has been the economic pain that even the rising tide brought about by positive vaccine news will not — as we have already seen — lift all boats. So, pick your value winners carefully — there is still a long fight ahead.

John Hughman is editor of Investors Chronicle



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.