Top UK Stocks to Watch: Rolls Royce cuts forecasts and warns of slower recovery
Joshua Warner January 26, 2021 9:42 AM
Rolls Royce shares take a nosedive after lowering expectations, JD Sports considers raising equity, PZ Cussons reveals its brands remain popular during the pandemic, and UDG Healthcare targets double-digit earnings growth.
Top News: Rolls Royce lowers expectations and warns of £2 billion cash burn in 2021
Rolls Royce said it expects to report free cash outflow of around £2 billion in 2021 as the coronavirus pandemic continues to weigh on the airline industry, but said it has more than enough liquidity to weather the storm.
The company, which makes a large chunk of its revenue based on how long its aircraft engines are in use, said it performed in line with expectations during a tough year in 2020. It delivered £1 billion in cost savings and said cash outflow was in line with expectations.
Looking forward, it said the outlook remains ‘highly sensitive’ to the rapidly developing coronavirus pandemic.
‘Continued progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity. In the near-term, however, more contagious variants of the virus are creating additional uncertainty. Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations, placing further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021,’ Rolls Royce said.
It said it currently expects widebody engine flying hours in 2021 to be just 55% of pre-pandemic levels in 2019 – much lower than the 70% it expected in October. Based on its new expectations, Rolls Royce said it expects to report a free cash outflow of £2 billion in 2021.
‘Though significant uncertainty remains over the precise shape and timing of the recovery in air traffic and the phasing of engine (OE) concession payments, free cash outflow this year is forecast to be heavily weighted towards the first six months. We continue to expect to turn cash flow positive at some point during the second half, reflecting our forecasted profile of flying hours as they recover from today's low base,’ said Rolls Royce.
The company said it has around £9 billion of liquidity, providing it with a large buffer to survive 2021. That comes after the company raised £2 billion through a rights issue last November. It is aiming to deliver ‘at least’ £750 million of free cashflow ‘as early as 2022’.
Rolls Royce will publish annual results for 2020 on March 11.
Rolls Royce share price: technical analysis
Rolls Royce shares have dropped over 10% in early trade hitting a fresh yearly low.
It trades below its descending trendline which dates back to early December and below its 50 sma, an establish bearish trend. It is currently testing its 100 sma at 89.
However, the RSI is at 30 which is on the edge of oversold territory. This suggests that caution should be taken before placing aggressively short bets as a slight pick up before any move lower could be on the cards. That said it is worth noting that Rolls Royce fell deeply into oversold territory in October and March so its tolerance of this level could under some circumstances be greater.
A breakthrough 100 sma at 89 could open the door to 85.5 low November 12th before 66 low November 2nd.
Should 100 sma hold at 89, the descending trendline at 105 offers resistance.
FTSE 100 news
Below is a guide to the top news from FTSE 100 shares today.
JD Sports considers raising equity
JD Sports confirmed that it is considering raising equity after media reports suggested the company is looking to secure funds to help it expand and acquire new brands.
Sky News reported JD Sports was aiming to raise up to £400 million to provide funds for acquisitions after splashing out $681 million (£491 million) on US retailer Shoe Palace last month, half of which was funded in cash.
‘The board of JD Sports Fashion notes the recent press speculation concerning the possibility of the group undertaking an equity capital raise. The board confirms that it is exploring additional funding options with a view to increasing its flexibility to invest in future strategic opportunities and that this may involve a non pre-emptive equity placing. A further announcement will be made as and when appropriate,’ JD said in a statement this morning.
The speculation that JD Sports could be looking to buy more businesses comes after the company pulled out of the race to buy Debenhams last month. Boohoo announced yesterday it was buying the Debenhams brand for £55 million and taking them online. JD Sports was also reported to be interested in buying certain brands from struggling Arcadia Group, but ASOS revealed yesterday that is in exclusive talks about purchasing the Topshop, Topman, Miss Selfridge and HIIT brands from Arcadia.
JD Sports shares were down 0.1% in early trade at 1853.2.
AstraZeneca secures Symbicort Turbuhaler approval in China
AstraZeneca said Symbicort Turbuhaler has become the first dual-combination therapy approved in China for mild, moderate and severe asthma.
The company said the anti-inflammatory reliever will be taken as needed by people over the age of 12 that have asthma. It is already approved to be used by patients with moderate to severe asthma. Asthma affects around 46 million people in China, around 34 million of which suffer mild asthma.
AstraZeneca shares were up 1.7% in early trade at 8002.0.
FTSE 250 news
Below is a guide to the top news from the FTSE 250 today.
Crest Nicholson beats expectations and prepares to reinstate dividend
Crest Nicholson said it sank to a loss during the coronavirus pandemic but that it performed better than expected, giving it the confidence to start paying dividends again later this year.
The housebuilder completed 2,247 houses in the year to the end of October 2020, down 23% from 2,912 the year before. Revenue dropped 38% to £677.9 million and the company sank to a pretax loss of £13.5 million from a £102.7 million profit the year before.
Adjusted pretax profit dropped to £45.9 million from £121.1 million, slightly ahead of the top end of its £35 million to £45 million guidance range. It entered 2021 in better shape considering it had 2,435 forward sales on its books on January 15 with a gross development value of £564.5 million, up from 2,346 units worth £503.5 million in early 2020.
‘We have entered the new year with a strong forward order book and enhanced balance sheet. The organisational improvements we made across the business in 2020 have created a more efficient and effective operating platform, now overseen by a highly experienced new management team. We are confident that Crest Nicholson is well positioned to navigate the current uncertainty caused by COVID-19. Despite the current lockdown restrictions, we are continuing to trade in line with our expectations and will provide further financial guidance when these restrictions ease and the economic outlook is clearer,’ the company said.
Crest Nicholson said it is focusing on improving its margins during 2021 and 2022, although warned this will be harder this year because of more complex legacy sites and investment plans. Still, it is expecting to return to profit and for cashflow to improve, giving it the confidence to start paying dividends when it releases its interim results. It ended October with net cash of £142.2 million.
‘From FY22 we will begin to see the full effects of our updated strategy driving growth, as the new sites acquired at a higher hurdle rate, developed with our new standardised house type range from a significantly lower cost base, also start to contribute to stronger operating margins. Accordingly, the Board remain positive about the long-term prospects of Crest Nicholson,’ it said.
Crest Nicholson shares were up 1.6% in early trade at 310.3.
Petropavlovsk benefits from higher production and prices
Russian miner Petropavlosk said it produced 6% more gold in 2020 than the year before, allowing it to capitalise on the significant jump in prices during the year.
Annual output amounted to 548,100 ounces of gold compared to 517,300 ounces the year before. This was slightly below its guidance after a challenging fourth quarter and because of lower than expected volumes.
It sold 546,500 ounces during the year at an average price of $1748 per ounce, up from 514,000 ounces at $1,346 the year before.
‘Faced with several challenges in 2020, and in Q4 in particular, we were still able to deliver a notable 6% year-on-year increase in gold production, slightly below our guidance but broadly in line with market expectations. We also made solid progress on our development projects such as the Pioneer flotation plant and Malomir expansion,’ said chief executive Denis Alexandrov, who took over the role last November.
‘The new management team and I have started visiting the mines and conducting a comprehensive review of our operations, management structure, and budget and forecast for 2021. This work will position us to update our guidance on production and capital expenditure targets for the year ahead,’ he added.
Petropavlovsk shares were down 2.9% in early trade at 30.25.
Greencore sales slump in lockdown but it stays out of the red
Greencore, which makes convenience foods, said revenue slumped 15% to £312.7 million in the first quarter of its financial year as more people stayed at home during lockdown, but said it remained in the black.
Its food-to-go was the worst hit with sales down 21.7% during the 13 weeks to December 25, while other convenience food sales dropped by a much milder 2.1%. However, it said it delivered a ‘positive adjusted operating profit and adjusted Ebitda’ during the period.
Greencore warned the latest restrictions continues to weigh on its performance, but not as much as the initial lockdown did in March 2020. It said revenue is down 20% compared to this time last year, with food-to-go down 35%.
Greencore recently raised £90 million in equity to help it survive the tough times ahead but said it is well positioned to bounce back when the economy starts recovering and people begin moving once again.
‘The ongoing uncertainty regarding the duration and impact of COVID-19 on the group's trading environment, and in particular on demand in its food to go categories, continues to make it difficult to predict FY21 performance. In this context, the group's financial guidance remains suspended,’ Greencore said.
Greencore will release its interim results on May 25.
Greencore shares were up 0.3% in early trade at 116.8.
PZ Cussons brands remain in demand during pandemic
PZ Cussons posted strong topline growth during the six months to November 30 as its core hygiene brands remain in demand during the pandemic.
The company said revenue grew 14.6% at constant currency to £312.9 million from £284 million in the period, growing 10.2% on a reported basis. It said its core brands including Carex, Morning Fresh, Cussons Baby and St Tropez, reported even stronger revenue growth of 21.9%.
Adjusted pretax profit from continuing operations improved 18.7% at constant currency to £34.9 million from £30 million, growing 16.3% on a reported basis. However, reported pretax profit from continuing operations was down 1.4% to £36.3 million because it sold-off its business in Greece and because of one-off costs booked in Nigeria.
PZ Cussons ended the year with a much stronger balance sheet with net debt of £18.2 million compared to £137.7 million the year before. It kept its interim dividend flat at 2.67 pence.
‘Our focus in the first half of this year has been to deliver a fast start for the business, with emphasis on profitable revenue growth as well as maintaining our strong balance sheet discipline. We saw this as essential to reset both in terms of organisational pace and agility to adapt to changing consumer and shopper habits,’ said chief executive Jonathan Myers.
‘In parallel, we completed our review of the strategy to become a brand-led and consumer-focused organisation, delivering sustainable profitable growth with hygiene, baby and beauty at our core. We look forward to sharing our plans with you in more detail at a capital markets day on 25 March,’ he added.
PZ Cussons shares were up 1.4% in early trade at 241.3.
UDG Healthcare targets double-digit earnings growth in 2021
UDG Healthcare said it is aiming to grow earnings at double-digit rates during the current financial year that runs until the end of September.
The company said it expects adjusted operating profit to be 11% to 13% higher than the $165.3 million delivered in the last financial year, while adjusted diluted earnings per share should grow 9% to 11% from 47.7 cents. Both figures are at constant currency.
UDG Healthcare said it has made a ‘good start’ to the financial year as it released an update ahead of its annual general meeting today.
UDG Healthcare will release interim results covering the six months to March 31 on May 18.
UDG Healthcare shares were up 4.5% in early trade at 817.3.
Quilter’s AUM grows as migration to new platform progresses
Quilter said its assets under management grew 7% in 2020 as it continues to migrate clients to its new UK investment platform.
The company said AUM stood at £117.8 billion at the end of 2020, growing 7% year-on-year thanks to better net flows and positive market movement. Total gross sales in the year fell to £10.9 billion from £12.3 billion but net inflows soared to £1.6 billion from just £300 million. The performance in the fourth quarter was not as good, with gross sales falling to £2.8 billion from £3.5 billion and net inflows falling to £400 million from £500 million.
It said the Quilter Investment Platform saw slightly lower gross sales in the year of £5.7 billion from £6 billion the year before, but said it managed to retain more customers to improve net inflows to £1.5 billion from £900 million.
‘2020 was a year of unprecedented challenges in so many respects and one of extraordinary market volatility. It is in challenging times like these that our advice-based model comes to the fore and this is reflected through the higher levels of client retention experienced in 2020, at 92% versus 88% in 2019. We finished the year strongly with improved year-on-year net inflows, AuMA ending around 7% higher over the year, and modestly higher average AuMA over 2019 despite market volatility,’ said chief executive Paul Feeney.
Quilter has moved two large clients over to its new UK investment platform and it said around 80% of all clients had now been migrated by the end of 2020. The final migrations will be done by the end of February.
Quilter will release annual results for 2020 on March 10.
Quilter shares were up 2.8% in early trade at 157.23.
Derwent London finds new chairman
Derwent London said it has appointed Mark Breuer as an independent non-executive director from the start of February and that he will succeed John Burns as non-executive chairman once he retires at the annual general meeting this year.
Breuer has worked in investment banking for 30 years and is a chartered accountant. He currently sits on the board of DCC as a senior independent director and is a non-executive at Arix Bioscience.
Derwent shares were up 0.8% in early trade at 3105.0.
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