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January 12, 2023

China reopening won’t be smooth

Macro & Overnight

Investor optimism continued ahead of today’s important US CPI print, with NASDAQ extending its winning streak to four trading sessions. US Treasury yields nudged lower despite continued hawkish central bank messaging on the need for higher rates for longer.

Oil prices are perking up, but European gas prices remain weak.

Precious metals and bitcoin (remember that?) continue to strengthen.

Chinese authorities have loosened regulations around property development loans introduced in the wake of the Evergrande collapse last year.

The opening up of China is going to be challenging. Company comments below from Xaar and XP Power indicate such.

UK Company News

It is another busy day for trading updates.

M&S sustained trading momentum through the peak quarter, and all divisions delivered strong growth. Despite macroeconomic headwinds ahead and cost pressures, its strong trading performance provides confidence that the results for the year will be consistent with the guidance set out with the Group’s interim results in November.

Tesco also sounded upbeat, reporting robust Christmas trading and reconfirming guidance. 

Halford’s, however, lowered guidance as they encountered slower-than-expected discretionary sales of bikes and accessories.  

Alfa Financial Software, a software provider to the asset finance industry, continued to perform strongly in the fourth quarter. The continued strong performance of its subscription revenue and a solid finish to the year resulted in expectations for 2022 full-year revenue increasing by GBP1.5m, with all of this falling through to operating profit, thereby underlying the operational gearing of SaaS and subscription-based businesses. 

Semiconductor developer Alphawave announced four appointments to its executive leadership team. An interesting move for a company that has struggled with life as a listed company. 

Online fashion retailer ASOS said it was confident in its outlook, with significant improvement in profitability and cash generation expected in H2 FY23. Gross margin is broadly flat, with encouraging progress made. Its Driving Change agenda is ongoing. It reported on cash and undrawn facilities of c.£430m and lower stock levels. While guidance remains for cash outflow in the current year, ASOS continues to expect significantly improved profitability and cash generation in H2 FY23 and beyond, following H1 FY23 loss. This troubled business may just be turning the corner. 

Consumer ceramics vendor Portmerion Group reported a strong Christmas trading period with robust demand across its portfolio of consumer goods brands. It expects sales to be 4% ahead of 2021 and 4% ahead of consensus market expectations. Group sales are now 18% above pre-Covid 2019 levels. It remains cautious in its outlook for 2023 given the backdrop of expected weaker consumer demand but sees itself as well positioned when conditions improve. 

The pet ownership boom continues as animal healthcare supplier Dechra has seen revenue growth for the first half of its financial year against a tough comparator. The outlook for the full year remains positive, and the Board is confident in achieving current market expectations. 

Online media company Digital Box, which owns Entertainment Daily, The Daily Mash, The Tab and The Poke, continued to deliver strong margins. As a result, it expects profit for the year ended 31 December 2022 to be comfortably ahead of 2021 and broadly in line with the most recent market guidance.

Foresight Group, the infrastructure and private equity investment manager, guided to a profit upgrade of 8-10% on an unchanged AUM and challenging macroeconomic conditions. It expects recurring revenue to remain within its target of 85-90%.

Franchise owner and developer Franchise Brands Group‘s revenue and profits are expected to be slightly ahead of recently-increased market expectations. It reported strong growth in the B2B division (Metro Rod, Willow Pumps, and Filta UK). The strength in B2B was partially offset by headwinds seen in the B2C division (ChipsAway, Ovenclean and Barking Mad). While it considers these headwinds temporary, it is undertaking a strategic review of the Group’s B2C operations, given the more significant opportunities for both organic and acquisitive growth within the B2B sector.

Enterprise communications vendor Gamma Communications’ UK business has continued to perform strongly, demonstrating solid performance and robust cash generation. While Germany continues to perform well, and the Netherlands’ business continues to progress. However, the smaller Spanish business has seen challenging local market economic conditions. Therefore, the Board anticipates that the achievement of future business performance targets may take longer than forecast. Its net cash balance was £92.2m (2021: 349.5m), demonstrating Gamma’s continued high operating profit cash conversion. See the link for the Progressive note

Low-cost fitness provider Gym Group saw membership increase by 14.3% from last year. Revenue was up 63.1%, and its membership profile reflected a more normal seasonal post-Covid pattern, with visit frequency and satisfaction scores remaining materially higher. The CEO is to step down, and its founder will become Executive Chairman as the search for a replacement is ongoing.   

Online ratings business Trustpilot sees revenue +23% in line with expectations. However, as it pivots towards profitability, it sees profits ahead of expectations. At year-end, they had $73.5m of cash and no debt

Industrial printhead provider Xaar saw revenue for the period grow by 24%, despite printhead volumes continuing to be affected by the uncertainty in China. They cautioned that it remains to be seen when normal levels of business will return. See Progressive note here

Components supplier XP Power starts the new financial year with a significant order book, which provides good visibility for 2023, particularly the first half. However, it remains mindful of the ongoing uncertainties relating to component supply, China, inflation and recessionary concern. Based on trading momentum and the benefits of price increases, it generally remains optimistic regarding prospects for the current year. 

Prognosticator  

This communication is provided for information purposes only, and is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. Investors should seek advice from an Independent Financial Adviser or regulated stockbroker before making any investment decisions. Progressive Equity Research Ltd (“PERL”) does not make investment recommendations.

Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

Any prices quoted in our research are as at the previous day’s close.