Investors’ Chronicle: Oxford Biomedica, Wood Group, Just Eat

HOLD: Oxford BioMedica (OXB)

The market fears that the enhance offered by Covid-19 could also be coming to an finish, writes Mark Robinson.

Covid-19 proved to be a boon for sure firms, however pandemic-linked advantages are starting to dissipate. Oxford BioMedica’s share worth has been in retreat because the starting of November. That development was maintained on outcomes day because the vaccine producer guided for lowered income in 2022 attributable to a pause in vaccine manufacturing exercise.

Much relies on the end result of negotiations with AstraZeneca over a attainable extension to a provide settlement in relation to its Covid-19 vaccine.

Oxford BioMedica has manufactured over 100mn doses because it went into partnership with the pharma heavyweight, with orders accelerating via the second half of 2021. The deal generated about £100mn in income since inception, with the optimistic influence on working money move additionally evident within the interval beneath evaluate.

The surge in income was offset to an extent by a lower in industrial growth receipts from present clients, as actions transitioned to medical and industrial batch manufacture. Cost-of-sales was up by round one-third when non-cash objects are excluded, however the upscaling of actions linked to the vaccine settlement is maybe finest appreciated via a near-fourfold improve in adjusted working money income to £35.9mn.

The income base is increasing via new contracts with US-listed trio Arcellx, Immatics and Cabaletta Bio, along with bioprocessing and industrial growth actions, however the market stays centered on the vaccine deal. Put merely, the trajectory of the share worth stays intertwined with the medical relationship with AstraZeneca. It’s no shock, subsequently, that quick positions on the inventory elevated all through March, whereas consensus forecasts level to an adjusted earnings lack of 14.4p in 2022.

HOLD: Wood Group (WG.)

The consulting, building and operations agency has excessive debt and had a poor 2021, however a brand new power safety focus and division sale may shore up the books, writes Alex Hamer.

As funding seems to skyrocket within the power sector throughout each oil and fuel initiatives and renewables, power and sources companies and consulting agency Wood Group continues to be counting the prices of the previous lossmaking contracts and the influence of 2020’s freeze of recent initiatives. “Challenging” was the key phrase for Wood Group in its presentation of the weaker 2021 numbers.

Chief government Robin Watson and finance chief David Kemp had been eager to spotlight the hit to the underside line from continued Covid-19 situations and the carry-over of hesitation round new oil and fuel initiatives into final yr.

The outlook is enhancing — the order guide is up virtually a fifth on the yr earlier than — however Wood Group stays saddled with a excessive degree of debt and has stored the dividend on ice whereas it will get its books so as. Net debt climbed virtually a fifth final yr to $1.8bn (£1.4bn), taking Wood Group near its debt covenants of three.5 instances adjusted money revenue. This sat at 3.3 instances as of December 31.

The adjusted money revenue for 2021 was down 12 per cent on the yr earlier than, at $554mn, though the margin improved by three proportion factors to eight.6 per cent. The free money move outflow grew considerably, nonetheless, from $46mn final yr to $398mn, attributable to a serious working capital outflow due to “reduced activity in our projects business”. 

Adjusted earnings had been proper on analyst forecasts at 17.5¢ a share, in contrast with 23.2¢ final yr. Consensus estimates compiled by FactSet see this returning to 26¢ a share this yr.

Looking forward, Watson stated there had lately been an uptick in contracts round “maximising production volumes in conventional upstream assets”, notably within the Middle East, and reported greater headcount within the North Sea throughout UK and Norwegian territory.

Wood Group operates throughout consulting, operations and building jobs, break up between typical power, course of and chemical compounds, renewables and ‘built environment’ divisions. This final one is on the market, and a remaining deal is predicted by the tip of June. Watson floated a number of choices for the division, which introduced in $1.5bn in gross sales final yr, largely via consulting work.

The chief government additionally used the outcomes to announce he could be retiring after seven years within the job. A successor is but to be picked.

The board delayed releasing the 2021 numbers due to accounting questions across the Aegis missile mission in Poland, which went so far as an exterior investigation into its worth. The results of this was no change, Wood Group stated, and it has taken a $99mn hit on the mission on the 2021 backside line, and a complete loss at $222mn. 

There are clearly loads of alternatives proper now for an organization that may each improve oil and fuel output and minimize emissions from belongings on a mission degree. Wood Group additionally has publicity to the UK’s fast-growing hydrogen sector. While the stability sheet will not be in a powerful state, a money injection from the constructed setting sale and a stronger pipeline means we’re extra optimistic of the dividend coming again.

HOLD: Just Eat (JET)

The struggling acquisition may very well be disposed of, because the meal supply group additionally downgraded its forecasts, writes Christopher Akers.

Just Eat revealed in a buying and selling replace that it’s contemplating promoting Grubhub, the web meals ordering and supply platform, which it acquired for $7.3bn (£5.6bn) in June 2021.

Management stated that it “is currently, together with its advisers, actively exploring the introduction of a strategic partner into and/or the partial or full sale of Grubhub”.

The acquisition has struggled with declining orders and charge caps in its key markets, notably New York. Numis analysts stated final month that Grubhub is burning via money at a run-rate of round €200mn (£166mn).

The buying and selling replace, protecting the primary quarter of the corporate’s 2022 monetary yr, additionally disclosed that complete orders fell by 1 per cent to 264.1mn whereas gross transaction worth (GTV) climbed by 4 per cent to €7.24bn. Northern Europe was the most effective performer when it comes to orders, up 4 per cent to 76.5mn. The UK and Ireland market posted probably the most fast GTV development, spiking by 7 per cent to €1.65bn.

The firm expects to return to profitability in 2023 and has downgraded its GTV forecasts. Management stated that GTV will now develop by mid single-digits in 2022 reasonably than the mid-teens steering beforehand shared, and warned it expects a comparatively excessive degree of churn in its shopper base within the first half of the yr.

Despite the dangerous information, development drivers akin to common month-to-month order frequency and returning customers are nonetheless anticipated to “remain above pre-pandemic and even above pandemic levels” in line with administration. We keep on with our maintain advice for now and await additional information on Grubhub.

Chris Dillow: Rate troubles for equities

How massive an issue are rising rates of interest for equities?

The fairness premium (the distinction between returns on equities and returns on secure belongings akin to money or bonds) is unbiased of the extent of risk-free charges. If that is the case, then greater yields on money or bonds ought to imply greater anticipated returns on equities too.

This isn’t an entirely good factor. One means during which anticipated returns on equities can rise as rates of interest rise is that if their costs fall to a degree at which they’re low-cost sufficient to rise thereafter. Once we’re at the next degree of charges, although, fairness returns ought to be greater. The journey to greater charges is perhaps uncomfortable, however the vacation spot is nice.

Sadly, nonetheless, this idea is just half-true. And it’s the dangerous half that’s true.

Rising charges have been related to worse returns. Since 1986 there was a small however statistically vital unfavourable correlation between month-to-month modifications in three-month charges and month-to-month complete returns on the All-Share index. Months during which charges rise are likely to see poor fairness returns.

High charges, nonetheless, don’t result in excessive returns. Since 1986 there was no correlation between the extent of three-month charges on the finish of a month and fairness returns the next month. Nor has there been a correlation between fairness returns relative to money and the extent of rates of interest. This is true whether or not or not we management for the dividend yield (which does predict returns) and whether or not we take a look at the entire post-1986 interval or simply the 1986-2009 interval, when charges had been above 0.5 per cent.

History, then, is obvious. While rising charges are typically barely dangerous for equities, excessive rates of interest don’t result in greater returns.

I believe there’s a purpose for this. It’s as a result of low charges are ambiguous for equities.

On the one hand, they’re a symptom of a weak economic system. And you’d count on equities to do badly beneath such situations due to earnings disappointments and a scarcity of urge for food for danger.

On the opposite hand, although, low charges are an indication that the economic system faces massive dangers, that are additionally dangers to equities. Investors ought to, in precept, be rewarded for taking up such dangers.

On common, these two mechanisms have cancelled out.

One factor corroborates this — that the dividend yield on the All-Share index has not modified a lot because the Nineties though actual rates of interest have fallen massively. This is in step with falling bond yields being an indication of decrease development expectations, which ought to justify decrease fairness returns — a truth which offsets the tendency for elevated danger to require greater returns.

Herein, nonetheless, lies a distinction between the UK and US. David Blitz at Robeco Quantitative Investments has proven that within the US greater rates of interest result in decrease fairness returns: within the UK, in contrast, there’s simply no hyperlink.

Since January 2009 (when the fed funds fee was minimize to just about zero) simply 4 shares — Tesla, Amazon, Apple and Alphabet — have added $6.7tn to the market capitalisation of the S&P 500. Which implies that these 4 alone have contributed over one-fifth of the rise within the S&P on this interval.

The UK market, in contrast, is dominated not by fast-growing tech firms however by mature shares. Low rates of interest is perhaps nice for Facebook, Tesla or Alphabet, however they’re much less so for Shell or Unilever. And so they’re much less good for the fairness market in complete.

The prospect of upper charges, then, is hard for each US and UK shares — however extra so, maybe, for US ones.

Chris Dillow is an economics commentator for Investors’ Chronicle

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