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Investors Chronicle: Telecom Plus, Ashtead, BP

BUY: Telecom Plus (TEP)

Telecom Plus is continuing to build on its high-quality client base. Income should be mostly sheltered from the disruption caused by coronavirus, and management expects that profit next year will be only marginally below 2020, writes Lauren Almeida.

Telecom Plus increased its full-year dividend by almost a tenth, after sales and earnings reached new record highs in 2020. The group posted an improved gross margin, at 19.1 per cent, which it attributed to improved agreements with some of its key suppliers.

The group has been trading resiliently, with customer numbers for the year up by 2.7 per cent to 652,237 and service numbers growing by 6.4 per cent, surpassing the 2m mark. The quality of new customers is also steadily improving, with 60.4 per cent switching their core services to Utilities Warehouse, the group’s trading name, in the final quarter of its 2020 financial year.

New partner recruitment also grew by about a quarter year-on-year, and the group noted that more than 1,300 joined over the course of last month, which is almost 50 per cent higher than the same period last year.

Net debt climbed 61 per cent to £59.4m (including lease liabilities of £9m), which the company said was in part due to capital expenditure on its digital transformation programme, the growth of its meter operator and changes to the corporation tax quarterly instalment regime.

Peel Hunt forecasts adjusted pre-tax profits of £60m and earnings per share of 62.1p in 2021, compared with £60.8m and 61.8p in 2020.

HOLD: Ashtead (AHT)

The long-term structural drivers remain in place, with the swing from equipment ownership to rental perhaps even accelerating going forward, writes Mark Robinson.

The future is hard to know. But we think it is probable that companies will take a far more cautious approach to capital management in the wake of Covid-19. For an industrial group like Ashtead, which is looking to deepen its footprint in an underserved US tool hire market, the transition to a capital-light model may not seem feasible. But its fortunes are bound up with the health of the US economy, so it may have no other option than to trim its sails over the next couple of years.

The group has already slashed its capital expenditure guidance to £500m, representing a third of the outlay in full-year 2020. Ashtead’s business model is structured to cope with the inherent cyclicity of its end markets, but management might have to take a belt and braces approach to costs until the fall in aggregate demand in the US becomes clearer.

Though overall volumes pulled back sharply in March and April, sales have been propped up by the designation of its Sunbelt Rentals arm as an essential business in the US, UK, and Canada. The group continues to support those areas vital to the social fabric, including first responders, hospitals, alternative care facilities, and telecommunications and utility companies.

Full-year sales were broadly in line with guidance, while adjusted profits at £1.06bn were ahead of expectations. Fourth quarter performance, though predictably dire, was also better than expected, but shareholders will take greater comfort in record free cash flow generation of £792m, which underpinned the increased dividend payout.

The decision on the distribution is not only at odds with many listed peers, but the timing is also questionable given that net debt (ex-lease liabilities) increased by 13.5 per cent on the previous year. Ashtead forked out about £187m to meet its annual dividend commitments through to April, so the decision could be deemed imprudent given it has also suspended all mergers and acquisition expenditure until further notice.


BP’s June quarter results where the financial implications of this forecast cut are laid will be compelling reading, writes Alex Hamer.

BP has cut its long-term oil price forecast, knocking up to $17.5bn (£14bn) off the value of its assets because they are valued at $70 per barrel (bbl). This drop has raised the spectre of stranded assets and project cancellations.

The energy giant said accelerated green programmes during the Covid-19 recovery would see more investment in lower-carbon technologies, hitting oil demand. The new long-term price forecast is $50/bbl. 

The writedown forecast for the June quarter results is between $13bn and $17.5bn. This is split between property, plant and equipment and exploration assets. 

Chief executive Bernard Looney said Covid-19 would have an enduring economic impact. “We have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ towards a Paris-consistent world,” he said. The company is also reviewing its development plans, Mr Looney said. There are several major projects in the pre-final investment decision phase, like the Clair South expansion in the North Sea. 

BP said its new forecasts — which included gas at $2.90 per British thermal unit (Btu) — were “broadly in line with a range of transition paths consistent with the Paris climate goals”.

Last week, Carbon Tracker released a new report saying oil and gas companies’ growth-focused approach would mean stranded assets and writedowns as demand falls off and governments bring in more Paris Agreement-related regulation.

Earlier this month, the major said it would cut 10,000 jobs globally in response to Covid-19, around 15 per cent of its workforce.

Unlike Royal Dutch Shell, BP has maintained its dividend despite its earnings being smashed by the oil price crash. Jefferies analyst Jason Gammel said the job cuts, $55/bbl estimate and upcoming lower-carbon strategy initiatives would likely see this decision revisited.

Chris Dillow: In defence of globalisation

The pandemic is accelerating the retreat from globalisation. The World Trade Organization (WTO) expects that world trade will fall even faster than output this year; companies are reconsidering whether long international supply chains really are reliable; and governments around the world are trying to reduce reliance upon imported medical equipment. All this is reinforcing pre-existing trends. As Stephen Davies of the Institute for Economic Affairs points out, in the new political alignment of cosmopolitans versus nationalists (which is of course not confined to the UK) there is a large constituency which is antipathetic to globalisation.

This should trouble us, because (economically speaking) there is much to be said for globalisation.

For one thing, it’s good for productivity. Before the financial crisis, rapid growth in world trade was accompanied by strong productivity gains, and the subsequent slowdown in trade has seen productivity falter. Of course, correlation is not causality: many other things have depressed productivity growth. But there is some link here. The first line of the first book in modern economics says: “The greatest improvement in the productive powers of labour . . . seem to have been the effects of the division of labour.” In creating a deeper division of labour, globalisation raises productivity.

Granted, productivity is not so important now. But in the long term, it is crucial. Whether you want higher wages, higher profits or more public spending, you need more productivity.

What’s more, it is difficult to actually engineer a more national and less globalised economy. As Abhijit Banerjee and Esther Duflo show in their book, Good Economics for Hard Times, economies are “sticky”. People and capital can’t easily shift into new industries — as the government’s difficulties in procuring UK-made ventilators demonstrated. Much has been said about how some people have been “left behind” by globalisation. But that tells us that all economic adjustments are difficult. The shift from globalisation could be as hard as globalisation itself was.

There is more to be said for globalisation. In principle, if capital can flow freely across countries it will move from where profitable opportunities are scarce to where they are more plentiful. This will sometimes mean it moving to low-wage countries where it will increase demand for labour and bid up wages. Which is why the era of globalisation also saw a fall in global poverty. Granted, this process hasn’t gone as far as it should; in the eurozone, for example, we’re a long way from equalising wages between Germany and Greece. But that reminds us that capital is in fact not as mobile as you might think.

A further benefit of what capital mobility we have is that it supports fiscal policy. In a globalised world, governments can tap into the global pool of savings which means they can borrow more without raising interest rates. Again, this process is imperfect: rich western countries have much more fiscal space than poorer ones. But it is something we need if economies are to recover from the coronavirus lockdown.

None of this is to say that globalisation has been well-handled. The American rust belt, British post-industrial towns and Parisian banlieues all testify to how many governments failed to spread the benefits of globalisation to all its citizens. And they failed to appreciate that this was necessary not merely as a matter of charity or justice but to maintain the legitimacy of a liberal market economy. To retreat from globalisation, however, would be to throw out the baby with the bath water.

Chris Dillow is an economics commentator for Investors Chronicle


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