High Street Christmas sales figures fail to sparkle

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Today’s edition features:

  • Costain Group (COST.L)
  • IG Design (IGR.L)
  • Persimmon (PSN.L)

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"US traders yesterday appeared to be taking some of the warnings emanating from the Wednesday’s FOMC minutes more seriously. Doubts regarding Trump’s ‘miracle growth rhetoric’ emerged taking the shine off the recently strong financials sector, with cash liberated being switched back into defensives like government bonds and gold, sufficient to push the Dow Jones down over 130 points before it staged a recovery to close with just minor losses. 10-year Treasury yields also fell to their lowest in a month, touching 2.35% before also rallying ahead of the fix. Having reached a 14-year high against the international basket earlier in this week, the Dollar was knocked back a full percent, with the Chinese Yuan emerging as the principal beneficiary registering it biggest one-day gain since 2005 as the central bank surprised forex dealers by removing its US$ peg in an effort to reverse the currency’s recent aggressive decline. Asian equities mostly followed the US lead, with only the Hang Seng making a reasonable gain while other bourses closed flat to fractionally down. Further damage to confidence could be inflicted later today, if the key December US non-farm payroll data due this afternoon come out significantly below the 180,000 jobs consensus, which would likely to push expectations of the Fed’s anticipated higher rate trajectory back somewhat and take the US$ with it. Other macro data due today includes European December Consumer Confidence and November Retail Sales as well as US Trade Balance figures. Equities in London are seen having a relatively quiet end to the week, with the FTSE-100 expected to move just 5 points either side of unchanged in light volumes ahead of the release of the US employment report, which is due at 13:30hrs GMT."
– Barry Gibb, Research Analyst



Markets

Europe
The FTSE-100 finished yesterday’s session 0.08% higher at 7,195.31, whilst the FTSE AIM All-Share index closed 0.77% better-off at 858.05. In continental Europe, the CAC-40 finished 0.03% higher at 4,900.64 whilst the DAX was 0.01% higher at 11,584.94.

Wall Street
In New York overnight, the Dow Jones shed 0.21% to 19,899.29, the S&P-500 fell 0.08% to stand at 2,269.00 and the Nasdaq added 0.20% to finish the session at 5,487.94.

Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.34% to 19,454.33, while the Hang Seng gained 0.18% to stand at 22,497.91.

Oil
In early trade today, WTI crude was down 0.19% to $53.66/bbl and Brent was down 0.19% to $56.78.


Headlines

High Street Christmas sales figures fail to sparkle
High Street sales fell in December for the fourth year in a row, as shoppers shifted more Christmas shopping online. Sales were 0.1% lower than in December 2015, according to BDO’s High Street Sales Tracker, with consumers spending more on home wares but less on fashion. However, online sales were 19% higher than a year earlier. And the tills in High Street stores rang loudly in the week up to Christmas Day – sales rose 11.7% compared with the same week in 2015. BDO said retailers benefited from Christmas day falling on a Sunday. Online orders saw an even steeper rise for the week to 25 December, up 51.1%. Online sales make up about 15% of all retail spending. During the first three weeks of December fewer shoppers visited the High Street, retail parks and shopping centres. But they returned in the final week leading up to Christmas day, splashing out on items for the home as well as “lifestyle” items such as bicycles and seasonal products such as wrapping paper and Christmas cards. Some of December’s spending may also have been brought forward to November by sales offers around Black Friday. BDO reported higher year-on-year in-store sales for October and November.

Source: BBC News


Company news

Costain Group (COST.L, 371.75p) – Buy
Costain, an engineering solutions provider delivering integrated consulting, project delivery and operations and maintenance services, yesterday provided a trading update for the year ended 31 December 2016. The Group said it has continued to perform well since the half-year and remains confident to deliver full year results in line with the Board’s expectations. New contract awarded during the H2 includes the High Speed 2 South Enabling Works, the Area 14 maintenance commission for Highways England and the Peterborough and Huntingdon compressor station upgrade for National Grid. The Group has reduced the total headcount to 4,100 from 4,200 at the interim, but increased roles in advisory, technology and design service to 1,200 (end-H1 FY2016: 1,000), reflecting the change in nature of its service offering. The Group’s order book at the year-end remained flat at the record level of £3.9bn (FY2015: £3.9bn) while the Group has increased its revenues secured for FY2017 to over £1.2bn (end-FY2015: over £1.1bn secured for FY2016). Moreover, Costain has a preferred bidder position at over £500m (end-FY2015: £500m). In a separate announcement, the Group noted that it has secured a place on Transport for London’s Surface Transport Major Projects Framework, with total valued of up to £500m, covering delivery, upgrade and maintenance of bridges, tunnels and highways across London. Costain is one of 3 suppliers for the 4 year Framework, which may be extended by additional 2 years at TfL’s discretion. The Group finished the year with a strong net cash position of over £100m. Costain’s CEO, Andrew Wyllie CBE, commented “Costain has had another strong year. Our customers are undertaking substantial investment addressing urgent national needs and we are looking forward to the future with confidence.” Costain will announcing results for the year ended 31 December 2016 on 1 March 2017.

Our view: Costain provided a strong trading update for the full year, confirming performance remained in line with Board expectations. The Group has secured a number of significant new orders and contract renewals during 2016, demonstrating the quality of it’s long-term relationships with blue-chip customers that can be expected to work with it for the foreseeable future. The year-end order book remained strong at £3.9bn, revenues secured for FY2017 have risen slightly year-on-year to £1.2bn, while Costain is in a preferred bidder position for work valued at over £500m. As the Group ended FY2016, it returned to a strong net cash position of over £100m (H1 FY2016: £69.2m). Being significantly a UK-UK (labour and materials) operation, Costain is unlikely to incur a significant hit from BREXIT although, like others in the sector, must be considered vulnerable to a prospective wider economic slowdown and some build cost inflation on US$-based raw material and oil costs. Management confidence has supported the share price recovery since 24th June, helped further by the Chancellor’s Autumn Statement (23rd November) reaffirming commitment towards infrastructural investment, particularly in sectors such as highways, digital and railways. The recent Markit/CIPS UK construction PMI showed the Index has increased to 54.2 in December (November: 52.8), an expansion for the fourth consecutive month. Given the Group’s excellent forward visibility for the next two years (management noted £1.2bn of revenue for 2017 and £2.2bn of revenue for 2018 was already secured, latter at the time of its H1 result), record order book and strong cash position, Beaufort reiterates its Buy rating on the shares.

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IG Design (IGR.L, 256.00p) – Speculative Buy
IG Design Group, a leading designers, manufacturers and distributors of gift packaging, greetings, stationary and play products, yesterday provided its trading update for the three months ended 31 December 2016 (‘Q3 FY2017’). The Group said it has continued to perform well since the half-year with all regions are trading profitably. The Group remains confident to deliver full year results in line with the Board’s upgraded expectations announced in November 2016.

Our view: IG Design confirmed that it remains confident to meet full year expectations following its key Christmas trading period. There is a problem, however, in the respect that there is currently a perceived overhang in IG design shares. Highly influential holder, Miton Group, has been seen to be reducing its holding through a series of disclosures since December 2015, taking its over 20% down now to below 16%. The Diverse Income Trust, a 3.88% shareholder, has also been selling down their position recently. Until investors are convinced these exercises have been completed, the shares are likely to be held back. This is unfortunate, given the operational progress the Group continues to make, having proven that its global expansion and acquisition strategies are working well. IG delivered financial performance ahead of expectations at the interim and generated a strong order book, while upgrading its FY2017 expectations and increasing its full year dividend guidance to 4p per share (FY2016: 1.5p). The shares are valued on FY2017E and FY2018E P/E multiples of 16.2x and 14.7x with dividend yields of 1.6% and 2.0%, respectively. Considering the successful acquisition of Lang Companies Inc., a highly complementary US-based supplier of quality gift and speciality products, on 11 July 2016, we believe the Group will further benefit from the strong performance of its US divisions (FY2016 revenue stood at 40% of the Group), further supported by positive currency translation effect. While domestic operational cost pressures will be felt due to Sterling’s devaluation, with current year domestic revenues expected to represent less than one-third of the total, the market is possibly underestimating foreign exchange benefits presently accruing. In this respect, Beaufort remains impressed with the progress being achieved, particularly given that IG’s operations are largely insulated from background macroeconomic and political uncertainties. In light of this, Beaufort reiterates its Speculative Buy rating on the shares, although it understands the technical overhang may hold them back until it is cleared.

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Persimmon (PSN.L, 1,940.00p) – Buy
The UK housebuilder yesterday announced a trading update ahead of its final results for the year ended 31 December 2016, which will be released on 27 February 2017. It detailed revenues for 2016 of £3.14bn were 8% higher than the prior year (2015: £2.90bn) with legal completion volumes increasing by 599 new homes to 15,171 (2015: 14,572). The Group’s average selling price increased by 4% to c.£206,700 (2015: £199,127), keeping the Group at the lower-cost end of the market. Sales reservations through the autumn season were strong with healthy customer demand for new homes. Buying a new-build home remains a significant desire for much of the population in a still significantly undersupplied market, supported by competitive mortgage offers and government incentives which make a purchase affordable. The Group’s private sales rate for the second half of the year was 15% ahead of the prior year and second half legal completion volumes of 7,933 were 695 stronger than for the first half of the year (H1: 7,238). The Group successfully opened 255 new development sites across the UK during the year and is building on all sites which have an implementable planning consent. Management expects gross margin in the second half to have improved further due to a combination of the continued reduction in land cost recoveries associated with opening new sites, and the continued strong control over development costs. The Group held cash balances of c.£913m at 31 December 2016 (2015: £570m).

Our view: The results conference call came across as confident as ever. Management continues to focus on disciplined high quality growth to achieve sustainable market share in regional markets. The two new house building businesses opened at the start of 2016 based in Perth, Scotland and Launceston, Cornwall made good progress delivering over 650 new homes in their first year of operation. This year it has already launched a further new business based in Mansfield, north of Nottingham, to support the delivery of increased volumes of new homes in this regional market. The value of forward sales at 31 December 2016 of around £1,230m is 12% ahead of the prior year (2015: £1,103m), while acquiring 18,700 plots of new land in 83 locations with good deferred terms. The Board noted that it continues to see good opportunities to acquire additional land whilst remaining mindful of the risks associated with the uncertainty arising from the UK’s decision to leave the EU. It also expects more relaxed planning guidelines to encourage local authorities to continue to progress their plans to support growth in housing delivery in line with the National Planning Policy Framework. Sajid Javid, the Communities Secretary’s proposed Housing White Paper, that could potentially be released this month, may further improve this scenario, possibly creating a more efficient process for clearing site pre-commitment conditions as well as higher transparency regarding future development zoning. Persimmon clearly would be keen to fully participate in any throughput improvement this opportunity might generate to satisfy an obviously unsupplied market. Build cost inflation, coming from higher US$-based raw materials (timber, porcelain, metals etc.) and oil prices, expected to be in the range of 3.5% in 2017 should be more than offset by higher average selling prices. Importantly also, the gross margin improvement witnessed during H2, although slower than the +290bp achieved in H1 due to a very strong comparative, is being helped by slightly better labour availability, while mortgage availability and product range remains highly supportive. A slight reduction in land creditors outstanding to some £550m (against £570m in the first half) demonstrates both a prudent approach and some land availability constraints. Beaufort retains its overweight position across the UK Housebuilding Sector, keeping Persimmon on its Buy list based on a high, low risk dividend of over 6% for this year on a forward 2017E earnings multiple of just 10.3x and P/NAV of 2.2x.

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To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland & Charles Long
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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During the three months to end-December 2016, the number of stocks on which Beaufort Securities published recommendations was 228, and the recommendations were as follows: Buy – 83; Speculative Buy – 116; Hold – 27; Sell – 2.

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