BUY: Rolls-Royce (RR)
Rolls-Royce shares rose after the sale of its Bergen Engines business was confirmed, writes Michael Fahy.
The aviation engine supplier was one of a number of travel-related companies whose shares recovered as evidence suggested that the Omicron coronavirus variant is more transmissible but less lethal than the previously dominant Delta variant.
Rolls-Royce has said it will also retain € 16 million in cash. The money will be used to pay off debt.
The deal is the latest in a series of sales by Rolls-Royce, which marks the € 1.7 billion in sales of its ITP Aero business in Spain to Bain Capital Private Equity in September as it seeks to rebuild its balance sheet.
The company said in August 2020 that it expects to raise € 2 billion from asset sales as it seeks to recoup an investment-grade credit rating it lost a month earlier after Moody’s downgraded its debt.
Bergen Engines is based in Norway and manufactures medium-speed engines used in ships and power stations. The company employs 950 people and generated about € 250 million in revenue last year.
Rolls-Royce’s shares have been rocking in recent months as good news of contract wins for the U.S. military and funding for its small modular reactor consortium have been offset by renewed disruption of long-distance travel.
The company’s shares are currently trading at 23 times FactSet’s forward earnings, but a recovery in aviation should help improve earnings and continue efforts to strengthen its balance sheet.
BUY: SigmaRoc (SRC)
Building Materials Group SigmaRoc has agreed to buy Johnston Quarry Group and Guiting Quarry for £ 35.5m, writes Michael Fahy.
Johnston Quarry Group operates eight quarries and two processing sites across the South West, Oxfordshire and Lincolnshire. The quarries contain up to 86 million tons of reserves, including building blocks used for premium housing, aggregates and agricultural lime.
JQG generated revenue of £ 14.7 million and pre-tax profit of £ 3.6 million in the year to 30 September, and had gross assets including land, reserves and machinery worth £ 22.1 million, SigmaRoc said. . It buys the businesses of sellers Nicholas Johnston, Giantflow and Flowgiant and will finance the deal from its own resources, assuming £ 6 million of JQG’s debt and £ 3.6 million in leases for plant.
Two additional quarries are purchased from the same vendors and have a “strategically attractive location relative to JQG”, SigmaRoc said. He expects these transactions to be completed between the second half of this year and the latter part of 2024, subject to conditions that include the possession of the necessary planning permits.
SigmaRoc, which doubled its pre-tax profit to £ 7.1m on a 56 per cent increase in revenue to £ 84.8m for the six months to 30 June, operates from 76 sites across the UK and Northern Europe, with employing about 1,800 people. The company’s shares jumped 5 per cent to 88p, bringing their 12-month profit to 39 per cent, although they are down 23 per cent from September’s high of 115p.
The shares are currently trading at about 13 times earnings, in line with their five-year average. During this time, they have consistently outperformed the FTSE all-share index, and given the strong demand in the company’s end markets, it does not look like a big deal.
SALE: Capita (CPI)
Capita continues to sell its non-core assets, and the completed sale of the Secure Solutions and Services unit caught the regulator’s eye, writes Julian Hofmann.
As part of its bid to sell £ 700 million in non-core assets, outsourcing company Capita has agreed to sell its Capita SSS software business to compete with NEC in October in a £ 62 million deal.
The aftermath of the transaction was somewhat hampered by the intervention of the Competition and Market Authority (CMA) which issued a stop order to prevent the merger of Capita SSS with NEC. The CMA said it needed time to determine if there was a competition issue, although the regulator made it clear that its order did not inhibit the completion of the transaction.
The CMA wrote to both companies on December 21 to interrupt the combination of NEC and SSS operations. Capita announced the completion of the sale on January 3 and received payment.
Although at this stage there is no suggestion that the CMA may eventually veto the transaction, the deduction order effectively prevents any exchange of information or personnel between Capita SSS and NEC. So, for all intents and purposes, the NEC and Capita SSS merger is stuck until the CMA makes its decision.
Capita’s urgent need for cash lags behind the disposal of what it considers non-core assets. Prior to that, the company said it had raised £ 643m for the £ 700m sale target for 2021. That total also included the announcement on Christmas Eve that Capita AMT had sold Sybex to Jonas Software for £ 40m (£ 23m in advance). with the rest of the payments shifted).
The timing of the announcement so late in the year may be related to the fact that Capita will book a loss on AMT Sybex of around £ 42m, after acquiring the Irish software developer in 2014 for £ 82m. The impression of a fire sale is further reinforced by the fact that Sybex had assets at the time of its £ 77m disposal.
To be fair to Capita, the company is not far from reaching its target for alienation. The stock remains deep under water and it is difficult to see any immediate catalyst for improvement.
Chris Dillow: A year of falling inflation
Inflation is rising. The Bank of England predictions that the CPI inflation rate will reach 6 per cent in April, largely due to higher gas prices and some price declines last January falling from the annual data.
However, the gold market is relaxed about this. Although five-year yields have risen significantly since last year’s curtailment, they are still only at the levels we saw in early 2019 when no one was very worried about inflation. There is a reason for this. That is, inflation is likely to decline from spring.
Simple math tells us that. From next spring, some price increases will fall from the annual inflation data, such as petrol price increases, the increase in VAT on hospitality and (eventually) higher gas prices. This will leave us with a higher price level but a lower inflation rate.
And there are already signs of some price pressure declining. The price of Brent crude oil has fallen by 8 per cent since its highs in October, and that of copper, zinc and platinum has also fallen since then. One important key indicator suggests that these trends may continue. China’s money inventory (on the M1 benchmark) has risen only 3 percent over the past 12 months. Historically, this has led to poor growth in the country and thus to a low demand for raw materials.
Another anti-inflationary force will be weak domestic demand. Higher gas prices, cuts to universal credit, higher national insurance contributions in April and continued pressure on public sector payments will all curb consumer spending. In that area, retailers will struggle to raise prices a lot.
In fact, spending is already weak: retail sales volumes in November was 2.8 percent lower at April’s level. People do not spend the cash piles they built during the restrictions. With 12.1 percent growing in the year to March 2021, households’ bank deposits has since risen a further 3.8 percent. Yes, rapid growth in the money supply can lead to inflation. But only if that money is spent – and so far this is not the case.
There is also not much evidence of a wage price spiral. Official figures show that median monthly pay increased by 4.6 percent in the year to November – which is a decrease in real terms. And for every sector that has seen a real wage increase (such as transportation, IT, and finance), others have seen significant cuts, such as in manufacturing, retail, and construction. Except in a few industries, workers do not have the bargaining power to push for inflationary wage increases.
Fundamental domestic economic forces therefore point to declining inflation this year. However, this is reason for only cautious optimism: a world in which gas supply is sensitive to Russian politics is not one that recognizes great confidence.
But what if I’m wrong? Higher-than-expected inflation is likely to be accompanied by weak demand – either because higher gas or other key commodity prices are hurting real income, or because the Bank is raising interest rates and pushing demand. In such a world, bond yields may not rise much, simply because investors will seek a safe haven against the risk of falling stock prices caused by earnings downgrades or increased risk aversion. The possibility of higher inflation may be a reason to avoid gilts, but it is not a reason to switch to equities.
Chris Dillow is an economic commentator for Investors’ Chronicle