June 14, 2024
Investment

5 stocks to watch in June


Two takeover bids by foreign buyers, a spat over executive pay and a top of forecast profits outlook, means flaming June is certainly one to watch for investors.

Here is a round-up of some of the stocks to keep an eye on in June as these companies issue their latest results or trading updates.

This is not a recommendation to buy or sell these investments and is purely insight into some of the companies that will be announcing results this month.

Bellway

With the housing market in the doldrums, could the July general election be the wake-up call it needs? New research from Rightmove, which reveals a drop in year-on-year sales in the month before recent elections, but a spike in the month after one, lends weight to the well-worn maxim that house prices bounce after an election.

At a meagre 86,980 property transactions in March, sales were 22% down on the monthly average of the past decade and are a very long way off the June 2017 peak of 118,000. In fact, this is the longest period since the global financial crisis when sales have come in at fewer than 90,000 a month.

For housebuilders like Bellway, even the hope of a brighter future is a tonic of sorts. The long-running uncertainty around interest rates has led to near-paralysis in the housing market. Constant “will they, won’t they?” questions over whether the Bank of England will finally start to reduce interest rates have simply left befuddled would-be buyers waiting on the sidelines.

Bellway is clearly desperate for even the first glimmer of a turnaround. At the half-year stage in March, despite reduced profits and revenue it tried to drum up enthusiasm for the sector, saying it was encouraged by a positive start to this year. Although it seemed at odds with its figures, which showed a lower level of private reservations in the prior year was accompanied by a 62% fall in pre-tax profits to £117.4m. Net cash was substantially down too, from £292.5m to £76.6m, as were housing completions – down 28% to 4,092, with an average selling price of £309,278. But the fact is that both were in line with the board’s expectations; perhaps prompting the cautiously optimistic tone.

Also, arguably, reason to be chipper was data that showed that in the six weeks since 1 February, the private reservation rate had increased by 20.7% to 163 per week. And news that Bellway’s order book had increased on the back of recent trading to stand at 4,914 homes with a value of £1.3bn as of 10 March.

Chief executive Jason Honeyman, who wasn’t coy about saying Bellway was in the eye of the political storm back in 2022, as interest rates started to rise and political turmoil was unleashed by Kwasi Kwarteng’s mini Budget, maintains that overall, the long-term fundamentals of the UK housebuilding industry remain attractive, given the shortage of energy efficient and affordable homes across the country.

He seems to be of the opinion that with interest rates set to go down, house prices reaching their 2022 levels, and a potential future Labour Government planning a large programme of housebuilding – one that focuses on the affordable homes that Bellway specialises in – 2024 could end up being a year of recovery for the company. We will have to wait and see what happens.

In the meantime, Bellway is due to issue its next trading update on 7 June.

More on Bellway

Tesco

With the latest pay data suggesting that workers expect smaller pay rises in the coming months, Ken Murphy’s bumper pay package will have raised eyebrows higher than the arrival of £5 packs of butter did.

The Tesco boss has seen his pay more than double to almost £10m in the past year, after receiving a bumper share award for improving the performance of the business, according to Tesco’s latest annual report. The bumper payout makes Mr Murphy the best-paid supermarket chief executive, bar Ocado’s Tim Steiner, whose proposed £15m pay package incidentally also prompted raised eyebrows at the group’s annual meeting last month.

In contrast, the average employee expects a 3.8% pay rise in the coming year, according to a survey by recruitment company Robert Half and the Centre for Economics and Business Research. And that itself is well below the 6% average annual increase in the past year, as shown by figures from the Office for National Statistics in the first quarter of 2024.

To give him his due, since Mr Murphy joined the retailer in October 2020 he has presided over a 20% increase in Tesco’s share price, following a turnaround of the supermarket under predecessor Dave Lewis. So shareholders have been rewarded. And in April the UK’s largest supermarket group announced a £1bn share buyback. Alison Platt, chair of Tesco’s remuneration committee, said the significant year-on-year increase was largely due to the business meeting “stretching targets in a highly competitive sector” including achieving £640m of savings, and winning customers from other rivals.

And Ms Platt has also asserted that Tesco, which has more than 300,000 employees, has looked after its staff, having invested more than £800m in colleague pay over the past two years.

Tesco has always railed against claims of profiteering when it comes to surging food inflation, insisting that it operates on slim profit margins. But there’s no denying that with a 27.4% slice of the UK grocery market, according to data firm Kantar, it had ample scale and size to weather the worst of the cost-of-living crunch. Mr Murphy has said he expects food inflation to stabilise – around low single digits for the rest of the year – although inflation remains an issue when it comes to basics such as cocoa, potatoes and coffee.

Sales rose 7.2% in the year to February, to £61.5bn, as inflationary pressures “lessened substantially”, while retail adjusted operating profit — which excludes results from Tesco Bank — rose 10.9% to £2.76bn. The company expects that to rise to at least £2.8bn this year. Pre-tax profits jumped to £2.3bn from £882m the previous year, when it took a one-off £982m non-cash hit. Tesco also announced plans to buy back £1bn of shares over the next 12 months on Wednesday, following the sale of its banking business to Barclays.

Tesco issues its first quarter trading update on 14 June.

More on Tesco

DS Smith

The packaging sector is not one you’d think likely to get investors’ pulses racing, but it’s often the quiet ones that surprise the most. Let’s not forget, it was the humble cardboard box that took centre stage when global lockdowns led to a surge in parcel deliveries, making a star of the sector now worth a cool $350bn.

Today DS Smith is still clearly hot property, despite the fact that the parcels boom has cooled and costs have stayed high. A month or so ago it looked as though a takeover by Mondi was a done deal. The UK-listed group had agreed a tie-up that valued DS Smith at close to £6.2bn at 373p a share.

But then US-based International Paper entered the fray with a deal valuing DS Smith at £7.8bn. Unsurprisingly, the board of DS Smith recommended that shareholders accept the 415p a share offer from New York-listed International Paper. The deal should complete by the fourth quarter of this year.

Consolidation is the name of the game today. The European paper industry was more fragmented than in the US, so arguably ripe for consolidation. The first big consolidation came in September last year, when Irish group Smurfit Kappa agreed a $20bn tie-up with US rival WestRock. International Paper had previously bid for Smurfit Kappa in 2018 before backing down after its two offers were rejected.

DS Smith is due to post its full year results on 20 June.

More on DS Smith

AO World

Good things appear to be happening in the world of white goods. Ahead of its full year results online retailer AO World has raised its profit guidance, with bosses cheering “clear progress”. It said it now expects adjusted pre-tax profits to come in “at least” at the top of its previous guidance, of between £28m and £33m for the year to 31 March.

It’s not the first profit upgrade from the retailer either, which has already said its cost-cutting actions were bearing fruit. It now expects to report revenues of around £1.04bn for the year, after its core business returned to growth in the final quarter; although revenue for the group as a whole will fall by around 8% for the year.

The retailer, which counts Mike Ashley’s Frasers Group as a major shareholder, has cut a number of jobs and shut its German business, as part of its turnaround plan. Getting the basics right has been core to its turnaround success, so investors will no doubt be keen to know more when AO World reports its full year figures on 26 June.

They will also be keeping a close eye on Mike Ashley. His Frasers Group increased its stake in AO World just as it launched an £80m share buyback programme. It planned to buy back up to 10 million shares, worth 2% of the company, by 28 April.

AO World full year results are due out on 26 June.

More on AO World

Currys

Another company which Mike Ashley’s company has a stake in is AO World rival, Currys. He has openly said it was a “strategic investment” as he looks to increase his “foothold in the electricals industry”.

Ashley’s Frasers Group is not the only one interested though. Currys has already roundly rejected a 62p per share takeover offer from US investment firm Elliott Advisors, saying its £700m valuation “significantly undervalued” the company and its future prospects. And Chinese e-commerce giant JD.com has declared that it is in “the very preliminary stages of evaluating a possible transaction that may include a cash offer for the entire issued share capital of Currys”.

Currys has every reason to stand its ground though. The market leader in small electricals and white goods, it has raised its guidance on profits for the third time this year, following a ‘strong finish’ to the year ended 27 April 2024.

It has not been plain-sailing for Currys. Since the pandemic boom it has struggled, especially as the cost-of-living crunch has persisted. Depressed consumer spending in the UK, Scandinavia and Greece have all taken their toll.

However, steps taken by chief executive Alex Baldock are clearly starting to pay off for Currys.  Adjusted pre-tax profits for the year to April 2024, after stripping out the recently-sold Greek business, are expected to come in between £115 million and £120 million, which is ahead of previous guidance of “at least” £105 million.

Under the new strategy, which has seen the development of accompanying services alongside its tech products, the UK & Ireland and also Scandinavia, where Currys trades as Elkjøp, have seen earnings before interest and tax more than double year-on-year, to come in ahead of the £51 million consensus estimate.

Currys’ balance sheet is also in better shape, with management now expecting year-end net cash (excluding leases and pension) to come in at around £95 million. That cash positive position and a hoped-for and long awaited fall in inflation and interest rates should see Currys well placed to withstand any further economic blows, or indeed any further “significantly undervalued” offers, in the near term.

Currys full year results are due out on 27 June.

More on Currys

Five-year share price performance table

(%)
As at 29 May
2019-2020 2020-2021 2021-2022 2022-2023 2023-2024
Bellway -3.8 43.1 -31.3 3.2 22.0
Tesco 5.2 23.1 20.7 6.7 22.0
DS Smith 11.1 24.6 -23.4 7.4 25.5
AO World 20.9 90.3 -70.3 -18.4 65.3
Currys -31.8 81.2 -34.9 -37.7 40.1

Past performance is not a reliable indicator of future returns.
Source:
FE, 29.5.19 to 29.5.24 Basis: Total returns in GBP. Excludes initial charge.



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