UK Companies Shine Some Light in the Gloom

The Week: Morningstar columnist Rodney Hobson sees reasons to be optimistic in updates from Melrose, Cranswick, Compass, Babcock and Severfield

Rodney Hobson 27 November, 2020 | 9:04AM
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The Week

Amid the economic mess, it was great to see some welcome signs of light shining through the gloom. This week was a week to feel a little more cheerful with figures and updates from a wide variety of sectors.

Turnaround specialist Melrose Industries (MRO) issued a commendably clear trading update for the four months to October 31, the upshot being that the group is trading at the top end of expectations.

Sensibly, it admitted to problems in the aerospace division, hardly surprising given the state of the aviation sector at a time when passenger travel has ground to a halt. Even with sales down 37% and showing no signs of improvement, this division should break even for the full year thanks to rapid restructuring.

In contrast, there was been a faster than expected recovery in automotive markets since the summer, leaving revenue down only 3%. There has also been a better trend in powder metallurgy. Both these divisions are operating profitably.

The group is improving margins, generating cash and reducing debt.

The update was greeted with a 4% rise in the share price but recovery has been slow since a collapse from 245p to only 75p early in the year. The shares have now doubled from the bottom but they should have further to go.

Cranswick and Severfield

Better to rise steadily than shoot up only to collapse again, as has happened at food producer Cranswick (CWK). The shares have bounced erratically between £30 and £40 this year.

Figures for the 26 weeks to September 26 show revenue up 21% and profits 30% higher. Not many companies can claim that sort of progress this year. The dividend is increased 12%. Yet the shares have slipped back over the past two weeks to stand at £35. The excellent prospects are not reflected at that level.

At structural steel group Severfield (SFR) revenue was up 40% in the first half to September 30 and underlying pre-tax profits edged 3% higher. The dividend is maintained at 1.1p.

The order book for the UK and Europe is slightly higher but the main setback has come in India, where Covid-19 has swung operations into loss and the order book is lower than in June.

A recovery in the share price after the February-March slump from 90p to 60p soon ran out of steam and Severfield has been as low as 50p since. However, the shares are now back around 66p and should edge higher, especially if the situation in India is sorted out. This has been one of my better investments and I am holding on in a spirit of optimism.

Compass and Babcock

Catering group Compass (CPG) has had its ups and downs in recent years but it looked set for its best year ever until Covid-19 struck. The figures for the year to September 30 were pretty grim, which is hardly surprising as half the business was shut down in March.

The dividend has been scrapped and a lot of damage has been done but things should start to get better again next year. The shares rose 4.8% on the announcement and are quite high enough for now just below £14. However, if you have held on through this year’s famine you should stay in and hope to feast in the long term.

The latest update from aerospace and defence engineer Babcock (BAB) was commendably clear and frank. Revenue held up well but profits suffered in the six months to 30 September.

The good news is that the order book is up on 12 months ago. Babcock typically does better in the second half than the first and the difference is likely to be more pronounced this time. While aerospace remains problematic the proposed increase in UK defence spending should help.  Eventually.

The shares are at last back above the March low but an awful lot of bad news that may not happen is still in the price at 363p so if you’re a shareholder grit your teeth and hold on.

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.

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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.