June 30, 2023

The delayed reaction to rising rates

Macro & Overnight

The FT reports a deal drought in London, highlighting the fizzling out of M&A activity that started so briskly in Q1. The lower number of public-to-private transactions must be a function of the higher cost of debt required to implement such deals.   

As is often the case, there is a lag before we see the impact of rising rates. It is like fishing with a hand grenade; it kills fish, but it takes time for the bodies to float to the surface. Thames Water is a case in point.

The departing founder of his eponymous currency manager and respected monetary economist, Neil Record, commented about the financing of debt today in his final chairman’s statement: Across the board, Western governments have arguably over-extended themselves both in the scope and scale of public expenditure and in their method of financing this expenditure – namely through debt. Much of this debt is, in practice, monetary financing via “Quantitative Easing”. Central banks, and their sponsoring governments, may find this financing becoming increasingly onerous as short rates rise. The same issue has already hit some regional banks in the US and may hit more. This monetary dislocation is running concurrently with very low or zero productivity growth in much of the global economy. It remains to be seen whether Western democracies can find policies to re-establish low-inflation growth.

Poor Chinese PMI data overnight continues concerns regarding its opening-up prospects. However, Chinese stocks rose in anticipation of further POBC stimulus. 

UK Company News

Two housebuilders reported separate schemes to sell houses to financial partners—Barratts to Lloyds Bank owned Citra Living Properties and Gleeson to Carlyle Group. 

This type of deal is a neat way of reducing debt, easing discounting pressures on new homes for sale and providing better forecast visibility for housebuilders. 

Today is the last day for December year-end companies to produce results for the CY 2022 without being suspended. It was an unusually busy Friday for reporting for this reason. 

Concurrent Technologies, the ruggedised embedded computer supplier to the defence industryreported its twice delayed FY results to Dec 22. The Company has historically over-capitalised development costs and has made some prior year accounting adjustments. However, in H1 23, key component shortages eased, and supply chain improvement was evident. Order intake should be at least in line with the prior year. Therefore the Company will transition into growth as component supply further improves. There is a healthy order backlog of £26.7m, reflecting the willingness of customers to order further in advance allowing the Company to manage the supply chain to meet delivery times.

DP Poland, the Domino’s Pizza operator in Poland, delivered FY results to Dec 22. Revenue increased by 19.5% to £35.7m; LFL revenue grew by 21.0%, and EBITDA increased from £1.1m to £1.7m. Delivery times were reduced by 14.5% in H2 2022. Following the merger with Dominium, all stores are now rebranded as Domino’s. Key new board appointments include Nils Gornall (CEO), Edward Kacyrz  (CFO), Andrew Rennie (Non-Executive Director) and David Wild (Non-Executive Chair). Inflation rates were 14.4% for Poland and 10.7% for Croatia last year. This unprecedented inflationary environment had an impact on 2022 profitability. However, it said that food price rises are beginning to abate, with some food costs dropping throughout Q2 2023. This trend should support profitability in the coming quarters. It sees its competitive strength as driving market share and growing brand awareness. DPP is keen to consolidate the market further.

Record, the currency manager reported FY results to March. Revenue grew by 27% to £44.7m, AUME grew by 6% to $87.7bn, and PBT increased by 34%. Performance fees increased by £5.3m to £5.8m. The Company remains confident that its strategy points the business in the right direction. 

Revolution Beauty issued another chapter in the Manchester saga and ongoing spat with 26% shareholder, Boohoo

Prognosticator 

 

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