Market Prognosis

A concise summary of the major macro events of the past 24 hours, and selected UK company-specific news.

October 25, 2023

AI, friend or foe?

Macro & Overnight

Energy prices and bond yields weakened further yesterday, with equity markets broadly steady and gains in Asia—a cautiously risk-on trend.

On NASDAQ, Microsoft broadly beat while Google (now Alphabet) disappointed.

UK Company News

A busy day for UK company news saw reassuring updates from Ibstockwhich I am sure Alistair will cover in his daily and IG Design and Oxford Metrics, covered by Progressive Research notes.  

Bytes, the UK distributor of Microsoft products, continued to see strong demand for security, cloud adoption, digital transformation, datacentres and remote working solutions. It sees AI products as one of the defining trends in the IT Services sector in the coming years and is well-placed to capitalise on that opportunity. 

Results overnight suggest that Microsoft has maintained its lead over Google in the fight over cloud supremacy and generative AI. Bytes echoes the Microsoft mantra this morning, highlighting the impact of Microsoft AI products such as Copilot, benefiting its solid showing. Bytes, along with ComputaCenter, is a bellwether of UK corporate IT spending, and today’s encouraging outlook statement has broader positive implications for UK plc. 

RWS, the translation services provider, updated that revenue decline has slowed from c.7% in the first half to c.5% in the second half, with some improving trends. It continued to win new clients. Developments in AI remain positive for RWS, and it believes it will continue to support its growth. Cash generation remains strong, and the share repurchase programme is progressing as planned.

Although RWS continues to see itself as a beneficiary of AI, the market is more sceptical here than with Bytes. RWS’s declining revenue trend and downgrades make its AI assertions harder for investors to believe. 

Franchise Brands updated that it now operates from seven franchise brands in ten countries in the UK, Continental Europe and North America, resulting in a more diversified international footprint and a broad range of resilient business services, including Metro Rod and Metro Plumb in the UK and Pirtek in eight European countries, and Filta in the UK and North America. Q3 was a little softer than in H1, but it saw a modest increase in activity at the start of Q4. Net debt reduced by £6m to £76.0m, which remains within key banking covenants. 

FB is a business in transition. While focused on its B2B brands, it has retained its much smaller portfolio of B2C brands, which it was trying to sell until recently. The strategic moves make sense; however, debt is higher than expected at the time of the acquisition of Pirtek. The underlying businesses are highly cash-generative, so it should be a manageable problem. But there are more balls in the air with FB than might have been hoped. ITCOM had a conversation with the founder of FB, Stephen Helmsley. Here is the episode.

Prognosticator 

 

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