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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
BUY: Clarksons (CKN)
The global nature of the maritime business means that geopolitical events are always likely to have an effect on shipbroker Clarksons, writes Michael Fahy. And so it proved in 2023, when container lines faced major disruption in the Red Sea at the end of the year, as well as a drought that temporarily restricted traffic through the Panama Canal.
This had the effect of pushing up rates in container markets that have been under pressure from the amount of new supply entering the market. This pressure is likely to be reapplied once the Red Sea situation improves.
A similar dynamic is at play for gas carriers but, in other parts of the market, capacity remains constrained. This contributed to growth in revenue and higher profits at Clarksons’ core broking arm. Profits also increased in its support and research divisions, although the financial unit was hit as higher interest rates meant companies were more focused on paying down debt than doing deals.
Still, an 8 per cent increase in group-wide underlying profit — in line with expectations — fed through to its balance sheet, and the company finished the year with £175mn of available free cash, up from £131mn a year earlier. Even after upping its dividend for the 21st year in succession to 102p, there is plenty spare to fund either organic growth or acquisitions.
Clarksons’ shares have rallied hard in recent months, up 50 per cent since hitting their 12-month low in October. And even though house broker Liberum forecasts slightly weaker earnings per share (down 2 per cent) this year, a price/earnings ratio of 14 times doesn’t look excessive.
SELL: Reach (RCH)
The market reacted positively to Reach’s full-year figures for 2023 but, given the 35 per cent year-on-year decline in operating profits to £46.1mn, it’s reasonable to assume that expectations were in the doldrums, writes Mark Robinson.
Indeed, the commercial news publisher trumped consensus earnings and matters aren’t quite so dire once a phalanx of one-off adjustments is factored into the equation. They amounted to £50.4mn in total and relate to issues ranging from an impairment of vacant freehold property to onerous costs linked to a vacant print site.
The list goes on. But there are a couple of housekeeping issues that would have played well with the market. A High Court judgment in December provided a resolution on time limitations for historical legal issues, which had weighed on investor sentiment. The cost of settling these outstanding issues has consequently been reduced by £20.2mn. There has also been progress on the question of pensions. This amounts to an “agreed pathway to fully funding the schemes”, so from 2028 pension commitments are expected to reduce by about £40mn. Retirement benefit obligations stood at £168.8mn on the year-end balance sheet.
As far as the bread-and-butter issues are concerned, print volumes were in line with historical precedents, but solidity on this front is set against a 12 per cent decline in print advertising revenue to £76.6mn. However, Reach is not suffering in isolation; the fall-away is certainly part of a wider industry trend.
Management said trading has been robust in the early part of the year and that the group is on track to deliver a reduction in full-year operating costs of 5 to 6 per cent for 2024. Despite the important resolutions outlined above, we still think the lowly forward rating of three times consensus earnings is justified.
HOLD: Inchcape (INCH)
The share price fall that accompanied the release of Inchcape’s full-year figures had less to do with financial performance than it did with market anxieties linked to the automotive sales market in 2024, writes Mark Robinson.
Admittedly, management did damp expectations, cautiously highlighting “prudent expectations for recovery in FY2024 in certain markets, which are weaker than previous years”. This is far from a damning indictment of the industry, especially given that UK new car registrations hit a 20-year high in February, but analysts at Auto Trader say significant discounting will remain a feature of the market in 2024.
Inchcape’s performance certainly belies the market reaction on results day. The group delivered 12 per cent organic revenue growth, alongside a 35 per cent rise in adjusted profits to £502mn. Reported earnings aligned with consensus forecasts and management felt able to raise the annual dividend 18 per cent.
Regardless of the positive financial metrics, you’re left with the impression that Inchcape is intent on tailoring its business model in expectation of industry change. Little further detail was provided on the review of its UK retail business, following the January revelation it was considering a possible sale of the arm.
The integration of the Derco acquisition has proceeded smoothly, deepening Inchcape’s footprint in the fast-growth Americas region. Doubtless other M&A opportunities will arise, although management reiterated that the focus was on deleveraging, yet the related multiple of 0.8 times cash profits doesn’t appear overly burdensome. Encouragingly, free cash flow conversion came in four percentage points ahead of the upper end of guidance at 74 per cent.
The rating doesn’t appear overly stretched at seven times consensus earnings but we remain on the sidelines given wider industry uncertainties.
