UK Edition
Questor: strong brand, high yield, even bearish analysts: there’s contrarian value at Next
A 13pc jump in the shares of high-street bellwether Next following last week’s interim results isn’t going to prompt too much rejoicing from this column, as the gain only just takes us back above last November’s entry point, and the numbers themselves show there is still much work ahead for Lord Wolfson, the chief executive, and his team.
Nevertheless, strong free cash flow, a healthy yield and the shares’ ability to surge after moderate earnings figures all support our case for the stock, and patient investors should hold on, especially if they want income.
On the face of it, the interims were ugly. Full price retail sales fell by 7.7pc, even as floor space grew by 2.5pc. A 6pc increase in operating profits from the Directory business was nowhere near enough to offset a 33pc plunge at the retail arm, and operating margins shrank as earnings per share fell by 6pc.
But the market had been prepared for this outcome and the shares had already fallen after a series of bleak trading updates and cautious outlook statements from management, which this time had the luxury of being able to nudge sales and earnings expectations higher.
That was enough to fuel the share price rise, especially as Next kept its interim dividend unchanged at 53p and maintained its commitment to pay four special dividends of 45p apiece over the year. If the final payment is unchanged at 105p, those payments add up to 338p, enough for a 6.7pc yield. An additional £53m share buy-back programme suggests that there is surplus cash flow and the prospect of more cash returns in the fiscal year 2018-19.
Concerns understandably linger about consumer sentiment, while Next still has to prove that its IT and website improvements mean its “multichannel” offering is sufficiently competitive. But the brand is strong, the yield is attractive, the valuation reflects a lot of the potential bad news and (best of all) analysts are bearish.
It is barely two years since Next shares were trading at £80 and analysts were egging their clients on to buy them on a forward price-to-earnings ratio in the high teens on the assumption that record high earnings numbers would always go higher.
Now investors can buy the shares at £50 on a forward p/e of barely 13 as analysts assume that earnings will be flat or falling for three years. Of the 21 brokers that cover the stock, only three are buyers. The low valuation and bearish sentiment both suggest that there may be contrarian value to be had at Next.
Questor says: hold
Ticker: NXT
Share price at close: £49.73
Update: Savannah Resources
Sometimes the message from “Mr Market” is too strong to be ignored. It is, therefore, worrying that Savannah Resources’ shares failed to respond to a rise in the price of copper, especially as the metal has failed to break clear of the $7,000 (£5,200) a ton mark and begun to sag again.
When we first tipped the stock at around 5p, copper was beginning to surge amid hopes for the “Trump bump” in America and the prospects for two mines in Oman.
But Mr Trump has yet to deliver, and the news from Savannah continues to focus on other projects. This could suggest that the company is spreading its capital and management resources too thinly. This tip does not seem to be working out so it is time to cut and run, and deploy capital elsewhere.
Questor says: sell
Ticker: SAV
Share price at close: 4.62p
Update: Sky
To the surprise of many, the Culture Secretary now seems poised to refer the £11.7bn bid from 21st Century Fox for Sky to the competition watchdog on the grounds of broadcasting standards. Investors should nevertheless remain patient.
Sky is still trading below the £10.75 offered for each share, suggesting that investors remain nervous that the deal could be blocked, especially as it will be harder for Sky to argue its case in the more nebulous area of “standards” than it would be in the more tangible area of competition.
The bid is likely to drag on into 2018, although this does mean investors are now likely to receive a 10p-a-share special dividend from Sky owing to the delay. Sky still looks like a cash machine and analysts’ earnings estimates are beginning to edge higher.
Questor says: hold
Ticker: SKY
Share price at close: 925.5p
Russ Mould is investment director at AJ Bell, the stockbroker