UK Stocks Buoyant Despite Brexit

THE WEEK: Easyjet issues a profits warning after the EU referendum, but - as Morningstar columnist Rodney Hobson finds - the stock goes from strength to strength

Rodney Hobson 7 July, 2017 | 2:55PM

Brexit features very little in this column, partly because I want to take as unbiased a view of investments as possible and partly because readers are probably fed up of the endless stream of pronouncements. However, I was struck this week by how well company results are still holding up.

The great fear of imminent doom didn’t happen a year ago but the UK did suffer a wobbly when first quarter GDP figures showed that growth had slowed ominously. That doesn’t seem to be reflected in company announcements, though, and not only because international-based companies are seeing the fall in the pound translate into artificially higher overseas earnings.

Specialist technology company Fenner (FENR), for example, issued a glowing trading update showing strength across all products that is likely to continue long term. A loan note has been paid off at par out of spare cash, which will mean lower interest charges from now on. Operating profit for the year that ends next month will be “comfortably ahead of previous expectations”.

The shares jumped 28p to 320p on the announcement but were still below the April peak. Shareholders must be feeling really positive.

Housebuilder MJ Gleeson (GLE) is another company set to beat expectations in its financial year just ended. House sales were up 12% but even more impressive was a 45% leap in reservations in its second half. It has bought up more sites and is ramping up the number of homes it completes.

The shares reacted well to the announcement but again were below recent highs.

I also note the remarkable way that easyJet (EZJ) keeps filling more planes even fuller. It carried 800,000 more passengers in June compared with the same month last year with a remarkable 94.8% of seats filled. Unless these are all European workers fleeing home, I assume traffic between the UK and the Continent remains buoyant.

The shares actually slipped on this glowing update and although they recovered sharply next day they were still below highs reached little over a month ago. It underlines as well that if a company’s shares fall unfairly after positive news the best opportunity to buy may be short-lived.

Associated British Foods (ABF) said the latest quarter was ahead of forecasts, which means the whole year will be slightly better than expected. Even taking out the benefits of currency translation, sales are well ahead.

It’s not a company I’m all that keen on because its performance seems to go in cycles but shareholders can enjoy the good times while they last.

Board Burys Dividend Cut

At first sight specialist manufacturer Plastic Capital (PLA) seemed to have slashed the dividend by two thirds despite a surge in revenue, profits and earnings per share. Wrong. The dividend had actually been stopped.

No fewer than 12 bullet points dodge the issue, as do two gushing paragraphs from the chairman that make you wonder why the pay-out isn’t being raised instead. A staggering 36 paragraphs later comes an explanation, and even that is mealy mouthed.

The reason is that the company has overstretched itself in expanding and debt has been pushed higher than intended. So the final dividend for the past year and the interim for the new financial year’s dividends have been scrapped to save £1.7 million.

That is the minimum period for which there will be no dividend – it is impossible to say when it will return, or at what level. Shareholders should assume that the hiatus will be extended and that if the dividend is restored it will be at a substantially reduced level.

Dividends are the most important, one might say only, reason for investing in a company. I never trust a board that can’t be upfront on the issue. The shares fell 6p to 113.5p on the announcement, 20p below the February peak. Stay well clear.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Associated British Foods PLC2,452.00 GBX-3.04
easyJet PLC1,181.50 GBX-5.48-
Fenner PLC  -
MJ Gleeson PLC670.00 GBX-1.47-
Plastics Capital PLC108.00 GBX0.00-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.