Top UK Stocks: easyJet rejects takeover and launches rights issue

easyJet looks to shore up its balance sheet, Morrisons confident it can grow profits this year, 888 looks to raise equity after buying William Hill, Computacenter remains upbeat despite supply chain problems, and Genus shares plummet on warnings of slower growth.

UK

Top News: easyJet turns down takeover offer and launches rights issue

Low-cost airline easyJet announced this morning that it plans to conduct a £1.2 billion rights issue in order to shore-up the balance sheet that has come under strain since the pandemic began after rejecting an unsolicited takeover bid.

The news sent easyJet shares tumbling over 8.6% in early trade this morning.

The airline said the rights issue will help accelerate its recovery by ‘providing resilience from downside risks’ if the pandemic continues to hamper the travel industry over the next 12 months. It also wants to have financial flexibility as new opportunities emerge in Europe.

easyJet said capacity levels are not expected to return to pre-pandemic levels before 2023.

Alongside the rights issue, easyJet said it has secured a new $400 million revolving credit facility – although this is contingent on the rights issue being completed.

‘The capital raise announced today not only strengthens our balance sheet enabling us to accelerate our post-COVID-19 recovery plan but will also position us for growth so that we can take advantage of the strategic investment opportunities expected to arise as the European aviation industry emerges from the pandemic,’ said chief executive Johna Lundgren.

‘Since the onset of the pandemic, we have undertaken decisive and robust action to restructure our operations, addressed our cost base and secured our financial position, keeping our investment-grade credit rating. We have worked hard to maintain our customer friendly brand and network and been rewarded with immediate growth in demand when travel restrictions have been lifted,’ he added.

The company has already raised over £5.5 billion in additional liquidity since the pandemic started and has been forced to cut costs. The airline is on course to deliver £500 million worth of savings in the current financial year to the end of September, with hopes of achieving more next year.

easyJet also revealed that it recently received an unsolicited takeover approach that was rejected. The unnamed bidder has since said it is no longer interested in buying the airline.

‘The indicative proposal took the form of a low premium and highly conditional all-share transaction which, in the board's view, fundamentally undervalued the company. In deciding to reject it, the board took into account all relevant factors including the highly conditional nature of the proposal and the certainty and strategic opportunity that the rights issue presented to the company,’ said easyJet.

The firm also provided an update on current trading and said domestic capacity in the UK in August was more than double what was available last year while intra-EU capacity was equal to about 81% of the prior year. It is expecting overall capacity in the fourth quarter of its financial year to be at around 57% of pre-pandemic levels, up from just 17% last year.

‘During Q4 2021, the company expects to increase capacity allocation and improve expected load factors on both UK domestic and intra-EU flying, with UK domestic capacity already at pre-pandemic levels,’ said easyJet. ‘Looking into Q1 2022, the company currently expects to fly up to 60% of Q1 2019 capacity with a continued focus on profitable flying.’

Where next for the easyJet share price?

The easyJet share price has been trending lower since early May, trading in a descending channel. It trades below its 50 & 200 sma and the 50 sma crossed below the 200 in a death cross bearish signal. 

The RSI is supportive of further losses whilst it remains out of oversold territory.  

Today’s drop lower briefly fell through the lower band of the rising channel and found support at 680p the yearly low. The price has moved back into the descending channel. 

Support sits at 680p a break below here opens the door to 610p resistance mid-September 2020. 

On the upside 840p offers resistance, the 50 sma and the upper band of the falling channel. This could open the door to 860p the August 25 high and 900p the 200 sma.  

Morrisons profits to continue growing as Covid costs ease

Morrisons missed expectations in the first half but said it still expects profits to grow this year as shareholders prepare for the takeover battle for the UK’s fourth largest supermarket to draw to a close over the coming weeks.

Revenue was up 3.7% in the six months to the start of August to £9.05 billion from £8.73 billion the year before. That was below the £9.23 billion forecast by analysts. Like-for-like sales excluding fuel and VAT was down 0.3% in the first half but that was partly due to stronger comparatives, with LfLs still 8.4% higher than pre-pandemic levels. Still, LfLs declined 3.7% in the second quarter, suggesting growth is becoming harder to generate as the year goes on.

Adjusted Ebitda was down 10.6% in the period at £439 million, which also came in much lower than the £524 million anticipated by markets.

Adjusted pretax profit was down over 37% to £105 million after being hit by £41 million of Covid-costs and £80 million in lost sales from its cafes, petrol stations and food-to-go sections. On a reported basis, profit was down 41% to £82 million.

Free cashflow improved to £266 million from £228 million and net debt held largely steady from six months ago at £3.02 billion. Still, Morrisons said it has decided not to declare an interim dividend considering there are two takeover bids on the table.

Yesterday, Morrisons said the takeover battle for the company between two US private equity groups will go to auction in the hope of bringing a fruitful end to a drawn-out process, with the hope that shareholders will get to vote on the winner’s proposal around October 18.

In early August, Morrisons accepted an offer from a consortium led by the owner of Majestic Wine, Fortress, that is worth 272p per Morrisons share, comprised of 270p in cash and a 2p dividend. However, it then went on to accept a separate bid from Clayton, Dublier & Rice worth 285p per share in cash. For now, the official view of Morrisons backs the higher offer from CD&R.

Morrisons shares were trading 0.2% higher this morning at 293p – above the current highest takeover offer.

Morrisons left its guidance for the full year unchanged this morning and said it expects adjusted pretax profit to be higher than the £431 million delivered in the last financial year, excluding the £230 million worth of waived rates relief. Notably, this assumes that it will not lose as much profit to lost sales in the second half, experience lower Covid-related costs and takes the pressure being applied on supply chains into account. On the upside, free cashflow and debt reduction are both set to be strong in the second half.

Moving forward, Morrisons believes the next financial year will see a marked improvement as it hopes to recover lost profits and stop booking Covid-costs.

888 holdings to raise equity after buying William Hill

888 Holdings has announced the ‘transformational acquisition’ of William Hill’s international business outside the US in a deal that values the bookmaker at an enterprise value of £2.2 billion.  

The company said it has reached an agreement to buy the non-US business of William Hill from Caesars Entertainment, which bought the company itself for £2.9 billion earlier this year. Caesars was only interested in the US arm of the business and has swiftly moved to sell of the rest of William Hill, including its European and UK businesses.

The acquisition will create a global online betting and gaming leader by bringing together two highly complementary businesses and combining two of the industry's leading brands. The acquisition represents a transformational opportunity for 888 to significantly increase its scale, further diversify its product mix and accelerate the upward shift of its revenue growth profile,’ said 888.

888 will be taking on William Hill’s 1,400 betting shops across the UK as part of the deal and acquire its 2 million online customers. William Hill’s strongest positions in Europe are in Italy, Spain and the Nordics, but it has also just started expanding into Latin America.

Combined, 888 and William Hill will boast annual revenue of over $2.5 billion and Ebitda of $464 million. The company also believes it can deliver pretax cost synergies of at least £100 million per year.

888 is funding the deal with $2.1 billion worth of debt secured from a number of banks, but said it also plans to raise £500 million in new equity ‘at the appropriate time’ in order to create a ‘more beneficial long-term capital structure’.

‘The board believes that this funding structure and dividend policy will result in an appropriate balance between delivering shareholder returns, enabling the enlarged group to invest in further growth and enabling the enlarged group to achieve an appropriate deleveraging profile,’ 888 said.

888 shares were down 0.8% in early trade this morning at 398.3p.  

Computacenter confident on growth despite supply chain problems

Computacenter warned that the pressure on its supply chain is likely to last well into 2022, but said it remains confident it can deliver its 17th consecutive year of earnings growth as it bumped up its dividend for the first half.

Revenue jumped over 29% in the first six months of the year to £3.18 billion, driven by a 32% lift in Technology Sourcing sales and an 19% rise in sales of Services.

‘Significant increases in expenditure from industrial customers have complemented continuing business within the public and financial services sectors,’ said Computacenter.

The rise in sales, twinned with better margins thanks to the cost cutting efforts made during the pandemic, saw adjusted pretax profit surge 59% higher to £118.9 million from £74.6 million – coming in better than the 50% rise guided by Computacenter late last month. Reported pretax profit at the bottom-line increased over 59% to £115.2 million.

‘The vast majority of our customers have returned to business as normal and, other than the reduction to our cost base due to the inability to travel and a continued improvement in the utilisation of our technical resources, COVID-19 is now having very little impact on our business,’ said chief executive Mike Norris.

But, Computacenter is being hit by the shortage of key components and Computacenter said this has now become a top priority for the business. The full impact is ‘difficult to fully quantify’ but is not expected to ease until ‘well into 2022’. Still, the company remains confident given its size in the market and the performance it managed to deliver in the first half.

‘While the second half of the year presents a more difficult comparison, the strength of our outlook means we will endeavour to beat last year's second half performance not just match it. Computacenter is therefore well set for our seventeenth year of uninterrupted earnings per share growth. Customer demand is strong, we have record order backlogs for both Technology Sourcing and Services and we continue to push into new geographies and new markets both through acquisition and organic growth, all supported by our strong balance sheet.

Computacenter hiked its interim dividend by over 37% to 16.9 pence from the 12.3p payout made last year. That decision was made as operating cashflow plummeted and the company turned to a net debt position of £29.4 million from a net cash position of £24.3 million a year ago.

Comptacenter shares were down 0.6% this morning at 2978.0p.

Genus warns growth will temporarily slow until 2023

Genus said it delivered solid growth in its recently-ended financial year but warned profit growth will be slower than anticipated this year due to volatility in China before accelerating again in 2023.

Genus shares plunged over 8% this morning and were trading at 5390.0p in early trade.

The company, which partners with farmers to help improve breeding of pigs and cattle, said revenue rose 4% in the year to the end of June. Its porcine genetics business reported 11% growth and its bovine unit reported 13% growth. It also flagged ‘good growth’ in Latin America and Europe and said royalty revenue in China doubled year-on-year.  

Adjusted pretax profit was up 21% at £55.8 million from £46.3 million the year before, while reported pretax profit increased 29% to £84.8 million from £65.8 million.

Free cashflow improved 7% to £37.5 million and Genus said it has decided to hike its dividend by one-third to 72.6p from the 54.4p payout made the year before.

‘Looking ahead, the outlook for the group remains positive and we are confident in our strategy and the many opportunities for Genus. Group performance in FY20 and FY21 was very strong, with good growth across both ABS and PIC, led in particular by strong growth in PIC China, where the opportunity remains large,’ said chief executive Stephen Wilson.

‘However, recent volatility in the Chinese porcine market is expected to continue for some months, creating a short-term headwind in FY22, primarily for PIC China. As a result of this headwind, and despite an expected strong performance in the other areas of the business, we expect Genus's growth to be lower than our medium-term goal in the current year before increasing again in FY23,’ he added.

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