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TEMPUS

Priming the pump for future growth

Greig Cameron
The Times

Weir Group

A gradual, year-long upward curve in the share price of Weir Group reversed direction sharply yesterday. After the engineer warned that profits in its minerals business would be lower than expected, its stock dropped by nearly 7 per cent.

No matter the largely upbeat tone of a statement on third-quarter trading, nor news of increasing activity in the minerals and oil and gas markets; investors were not satisfied. Shares that had been changing hands at more than £20 in recent days (albeit some way below the £27.45 of the autumn of 2014) tumbled 143p to £19.53.

Weir’s niche in providing pumps, valves and other components and engineering equipment remains strong, but it is heavily reliant on activity in its end markets. Exposed to the fortunes of the shale oil revolution in North America, it felt the effects of the oil price crash on its bottom line and consequently dropped out of the FTSE 100.

Yet Weir has been a recovery story. The upturn in its share price since it dropped below 800p in the early months of last year has been remarkable, given that financial performance has been steady but far from spectacular. Investors appeared to have been buoyed in part by an expectation of more large mining projects coming down the track, the start of a bounce back in American shale and a longer-term return to growth in international oil markets. Indeed, the encouraging trend in US shale was conspicuous as Weir raised its profit forecasts when announcing half-year results in July. Yesterday the company maintained that it would still be ahead of its 2016 numbers on a constant currency basis. Analysts had a pre-tax profit range of between £178 million and £278 million before the most recent update. Some cut their underlying profit forecasts by between 5 per cent and 6 per cent after the trading statement.

The trimming of minerals profit is related partly to contract delays and partly to about £10 million of investment in facilities in the United States as the company anticipates an improvement in mining markets through 2018 and beyond. Otherwise, performance across the group was generally solid. Like-for-like growth in original equipment orders was 20 per cent in the third quarter, while aftermarkets, which cover spare parts and servicing, increased by 21 per cent. Oil and gas is delivering the biggest bounce, with total orders up 53 per cent in the quarter. Minerals rose 12 per cent, but flow control, the smallest division, was down 2 per cent.

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Analysts at Goldman Sachs called it a “slightly disappointing” update and cut their profit forecasts, as well as lowering the target price on the stock to £23. JP Morgan was slightly more optimistic, suggesting that the drag on profit in the minerals unit from project delay should be temporary. “We suspect the build-up of staff numbers is in anticipation of the increase in volumes associated with the good order inflow,” it said.

Jon Stanton, who stepped up from Weir’s finance director to chief executive a little over a year ago, told analysts that the decision to increase investment in minerals would have a short-term impact on margins but would provide a long-term improvement.

He was bullish, too, on the prospects for North American oil and gas, while for such hydrocarbons at an international level it was a question of “when, not if” the return to investment and project development started to take hold, as he believed that there continued to be growing demand for oil.

My advice Hold

Why End market conditions look likely to be stronger into next year, which could leave a little bit more upside in the share price.

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Just Eat

In the build-up to Just Eat’s flotation in April 2014, there was no shortage of doomsayers ready to dismiss the eye-watering valuation of 100 times its underlying earnings as top-of-the-market stuff (Dominic Walsh writes).

The sceptics have had to eat extra-large portions of humble pie. The takeaway delivery group, which acts as an online intermediary between independent restaurants and consumers, has continued to churn out impressive underlying growth, topped off with a sound acquisition strategy.

The shares, already at an all-time high, rose another 39p — or 5.3 per cent — to 779p, a penny shy of three times the 260p issue price. That values the company at £5.2 billion, making promotion to the FTSE 100 a question of when, rather than if. Not bad considering the ever-more competitive landscape in its key domestic market.

The cause of yesterday’s share rise was another forecast-beating trading update. In the three months to the end of September, its third quarter, Just Eat reported total revenue up 47 per cent to £138.6 million. This was underpinned by a 29 per cent rise in total orders to 43.1 million, ahead of a consensus of 40.7 million.

In the UK, orders increased by 22 per cent to 26.2 million. International orders jumped 43 per cent to 16.9 million, boosted by .a strong initial contribution from Skipthedishes, a Canadian business acquired a year ago.

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The company raised its full-year revenue guidance from a range of £500 million to £515 million to between £515 million and £530 million, although guidance for underlying earnings remains unchanged at £157 million to £163 million. Its failure to upgrade its forecast profits is disappointing, but it is indicative of continued high levels of investment in technology and promotional activity. Sponsoring X Factor does not come cheap.

Analysts believe that margins will remain flat next year, though a consensus forecast for underlying earnings of £219 million does not include another £12 million to £15 million that will come from the acquisition of Hungryhouse once it secures full regulatory approval.

My Advice Hold

Why Its scale gives it the ability to continue driving growth while swallowing acquisitions

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