Investor column: Next, Mortgage Advisory Office, AG Barr
BUY: Next (NXT)
Next featured a return to form after the easing of the lockdown attempted to get back to buyers, writes Julian Hofmann.
Next has suffered more than most of the extended shutdowns last year, followed by uncertainty over supply chains amid major delays at ports and shortages of heavy truck drivers.
The combination of these factors has made the company’s performance on a like-for-like basis to 2020 difficult to assess and, although the market has always reacted positively to a revised sales forecast for the entire year of 6-10% . However, there were notes of caution about how his logistics situation heading into Christmas would materially affect his service. CEO Lord Wolfson described the results as follows: “A sandwich of good news, bad news, good news. “
Wolfson went to great lengths to explain the issues the company faces in its supply chain. “The problem is the availability of seasonal staff in our warehouses as the busy periods of the year approach, especially female staff. The potential shortage of seasonal workers could affect how quickly Next can fill orders as Christmas approaches, although he added that the company can mitigate the worst effects of this situation by lengthening order fulfillment. to reduce the pressure on its warehouse capacity during peak hours. .
As with all businesses, the availability of truck drivers has been a hot topic recently. Although costs have increased, there had been no operational issues with the mix of internal and external contractors Next uses to deliver its goods, Wolfson said. Despite this, Next’s overall inventory levels are down around 12% from 2019, although management said orders filled with similar alternatives have meant the online operation may face a downturn. shallower stock base.
Management also expects the situation to improve as there are signs that bottlenecks in ports are starting to ease. Next refers to the fact that the prices of shipping futures have started to drop as more capacity comes online. The other good news from Next’s metaphorical sandwich was that legacy costs from its physical stores fell much faster due to the pandemic, mainly due to the £ 11.5million drop in total rental costs to a higher execution rate of 50%.
Betting against Next has always been unsuccessful as the company has handled multiple changes over the years to accommodate new retail trends. Stocks have largely trod the water so far this year with a futures rating 17 times the consensus forecast, but fundamentally Next is still delivering – even though it takes time to fulfill the order.
HOLD: Mortgage Advice Bureau (MAB1)
A stamp duty holiday fueled by soaring house prices fueled the results of the Mortgage Advisory Board, writes Julian Hofmann.
Sitting atop the most completed home sales the UK has seen since 2007, the Mortgage Advisory Board was still likely to post a positive set of interim results.
In the end, half didn’t disappoint and, fueled by a 50% increase in new mortgages from 2020, saw the company enjoy a huge mid-market windfall. However, as with all matters related to the real estate market, the question quickly arises as to whether unprecedented market activity will continue at the current rate.
Management itself believes that there will be some softening in demand in the second half of the year, as the stamp duty decreasing effect kicks in, although underlying demand is expected to continue. The business model of the small-cap company means that it generates a significant operational gear and that it would take a downturn of some magnitude for it to reverse. This analysis is corroborated by the cash conversion rate shown in the cash flow statement. In these results, MAB reported net cash generated from operating activities of £ 14.7million, up from £ 5.9million in 2020, an impressive conversion rate of 130%.
In the absence of bank debt, MAB’s fundamentals appear strong, if the mortgage market continues to evolve throughout the second half of the year. However, the slightly easing outlook is clearly a concern for some investors, who have depreciated stocks on the back of these results. A futures PE valuation of 27 times the consensus forecast for 2022 leaves little room for error and earnings expectations seemed well valued relative to the market.
HOLD: AG Barr (SAC)
AG Barr has experienced robust revenue and earnings growth, with a focus on the cocktail and energy drink markets, but economic headwinds are looming, writes Christopher Akers.
Investors in AG Barr were hoping for positive news in the half-year results of the soft drink maker as of August 1 after the Covid-induced drop in revenue and profits in January’s annual results. At a high level, they should be satisfied, given the scale of sales and reported profit growth. Growth was strong in all operating segments, and in particular for the Funkin cocktail brand. The dividend was reinstated, with a combination of ordinary and special dividends giving a payout of 12p per share, with an implied return of 2.3%.
A cocktail isn’t the first thing that comes to mind when you think of the maker of Irn-Bru, but diversification has been key to the group’s growth. Funkin was acquired in 2015 and is playing an increasingly important role in revenue generation: with £ 19million in sales it generated 14% of the group’s total revenue, up from 7% last year.
It could be argued that Funkin’s sales metrics were skewed due to the trade disruption in 2020, compared to increased consumption of the premixed drink at home, but group chief executive Roger White said that Although Funkin’s sales growth on the trade of 230 percent had to be put in the context of foreclosure comparators, the results are “ahead of our own or ahead of customer estimates.”
A key component of the soft drink market is the energy drink subset, which outperforms the whole. AG Barr has tapped into this market with its Irn-Bru Energy and Rubicon Raw Energy products. The group has only a small footprint in this expanding market, and as AG Barr’s position “grows both in terms of consumption and penetration,” White has said he wants to go further. Further investments are planned in the Rubicon product.
However, behind the headlines and the growth story lie some warning signs. Management is open about concerns over cost inflation and “increased challenges across the UK road transport fleet” which “are impacting customer deliveries and incoming materials”. They point out that the half-year results were driven by one-off factors such as the reopening of the hospitality sector and that a similar operating margin performance is not expected for the full year.
Broker Peel Hunt expects earnings per share to continue rising over the next two fiscal years to reach 27.2 pence in 2023. For now, a forward price-to-earnings ratio of 24 times adjusted earnings isn’t not unreasonable, but the market realizes that the underlying industry growth tends to be steady rather than dramatic, despite Funkin’s sales. And AG Barr is not immune to broader supply chain issues.
Chris Dillow: Financial Literacy Has Its Limits
The purpose of studying economics, said the late economist Joan Robinson, is “to learn how to avoid being deceived by economists.” I was reminded of this by the FT’s launch of a campaign to improve financial literacy.
Teaching people the math of interest rates and the power of capitalization should protect them from loan sharks. It can also protect us from fund managers, as their fees compound just like interest. Even an extra half a percentage point per year in fees adds up to over £ 2,000 over 20 years for every £ 10,000 you invest. Financial literacy teaches us the true cost of our choices. It is important.
Unfortunately, however, there are also limits to what it can accomplish. The biggest economic mistakes of our time were made by financially literate men.
One of the reasons for this is that increased financial literacy can increase confidence more than it increases knowledge – which is especially likely because knowledge of the future (which is what matters to decisions financial) is inherently limited.
Knowledge is not the same as intelligence and not the same as wisdom. Smart people do stupid things. They are as prone to overconfidence and stubbornness as others, and maybe more so.
Successful investments require that we have a disciplined sales strategy; don’t trade a lot and beware of speculative stocks because we know that these (as measured by the Aim Index) underperform hugely on average. Avoiding these mistakes does not require a great deal of knowledge. It takes discipline. Any fool can be smart, but intelligence is not enough.
Exacerbated emotions of almost any kind can also lead us to losses. Economists have found that both anger or joy can cause us to take more risks than if we were in a calmer state of mind.
Which brings us to a problem. The poorest face exorbitant borrowing costs, so teaching them financial literacy encourages them to try and live within their means. But for many it is a joyless existence. And for this very reason, it is not viable. American psychologists have found that sadness makes us more impatient. “Retail therapy” is a real thing – sometimes we spend to cheer ourselves up, which means going into debt. We all have limited willpower, so if we spend it trying to live sparingly, sooner or later we will feel the need to let go.
None of this is to deny the value of financial literacy, just to recognize its limits. Liverpool football manager Bill Shankly once said to a young player: “The problem with you son is that your brain is in your head.” He was right.
Simply knowing the brain is not enough to make us do the right thing. We also need discipline, emotional stability, and good habits – things that are easily undermined, especially by a life of poverty and insecurity. Mathematician Alfred North Whitehead once said: “Civilization advances by increasing the number of important operations that we can perform without thinking about it. He is not quite advanced.
Chris Dillow is an Economics Commentator for Investors’ Chronicle