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Questor: catching a falling knife – or the right time to buy into Ted Baker’s recovery?
Questor share tip: the founder has gone and profits have tumbled, but the fashion retailer has a strong brand and online presence
There is an old stock market saying that you should “never catch a falling knife” – and this column has had its fingers scarred by names such as Talk Talk, Babcock and William Hill, to name but three, as turnaround stories have taken longer to turn around than expected (or failed to do so altogether).
Yet contrarian positions taken following profit or share price setbacks at GB Group, Next and Nichols have all yielded positive returns and we shall therefore continue to plough our value-oriented furrow with a look at the retailer Ted Baker.
A pair of profit warnings and the departure of founder and chief executive Ray Kelvin have torn a huge hole in the share price, which has fallen from north of £31 to less than £10 in barely 18 months.
This means that investors have gone from paying more than 20 times forecast earnings, on the basis that profits would keep growing from record levels, to barely 10 hugely reduced earnings, which analysts are suggesting could yet fall further.
It is tempting to think that sentiment is washed out and the shares oversold. There is a danger that another profit warning could yet creep out (as such things tend to come in threes) and nervous investors might like to see what October’s interims bring first, especially as the year to 2019 showed a big jump in inventories, probably as a reflection of difficult end markets and self-inflicted woes in womenswear.
But Ted Baker remains a business with limited debts, a strong online offering and a powerful brand, whose charms are being reaffirmed by August’s product licence deals with both Next in childrenswear (to replace a former agreement with Debenhams) and a partner in Japan. The licensing division generates around a third of group operating profit.
Patience will be required with this one, especially as analysts are expecting only a modest profits recovery in the years to January 2021 and 2022 – so modest, in fact, that pre-tax income is forecast to reach only £56m, well below the £69m peak.
But brave investors will be paid to wait. Even with a second straight dividend cut pencilled in for the year to January 2020 the shares offer a 5pc yield, twice covered by earnings and with good cashflow behind it too.
In addition, it will be interesting to see what Mr Kelvin does, especially as he continues to deny strongly any wrongdoing with regard to allegations of “hugging” in the workplace. He retains a 35pc stake and rumours of a private equity-backed bid did briefly circulate.
This is not for the faint-hearted – but Ted Baker’s brand and online expertise mean there is scope for a strong turnaround story over the longer term.
Questor says: buy
Ticker: TED
Share price at close: 930p
Update: National Grid
The major power blackout that hit parts of Britain early last month does not look good for National Grid. The public, politicians and regulators alike continue to ask understandably tough questions of the company.
National Grid’s rapid explanation may help to stave off the threat of a fine, although some investors may worry about political risk, too, while others may fear a dividend cut as a result, especially in light of the slashed payout from Centrica, another utility.
- Read Questor’s rules of investment before you follow our tips
Yet this column cannot help but feel these concerns are overcooked. More than half of the firm’s assets are in the US, so that immediately lessens regulatory and political risk, and the shares are showing pleasing resilience in the face of the bad news.
That is a good sign and may indicate that investors are warming to both the defensive qualities in light of the prevailing global economic uncertainty and the prospective 5.7pc yield.
Grid remains a core income holding for long-term investors.
Questor says: hold
Ticker: NG.
Share price at close: 860.9p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
