There are two ways that foreign exchange movements can reduce profits of a company based in the UK. One is translational: the value of the currency in the country where you operate falls, so the amount of profit reported is reduced.
The other is transactional: a fall in the currency means operating there becomes more expensive, and lower margins mean lower profits.
It is Premier Farnell’s misfortune to be hit by both. Its first-quarter figures show the company moving forward strongly in revenue terms, perhaps better than its bigger rival in the distribution of electronic products, Electrocomponents, which at its last set of results last month admitted there was work to be done in improving its performance, even if sales were growing.
This is important, because both companies, as I have written before, are a good indicator of global economic growth, as designers of electronic goods increase orders for components.
Premier has indicated that in its first quarter from the start of February, underlying revenues rose by 5.4 per cent across the group, with growth accelerating in North America despite some disappointing economic indicators.
This was also despite a slowdown from its Akron Brass operation, which is skewed towards industrial users and was hit by the downturn in oil and gas. The problem for the market, which sent the shares 10½p lower at 179¼p, was a 2.9 point deterioration in gross margins year on year.
Some of this is down to higher than expected sales of the cheap computer Raspberry Pi, and Premier will also be distributing a similar product on behalf of the BBC to 11 and 12-year-olds in the autumn.
Most of the damage, though, is down to the lower euro, both in terms of reported earnings and from a hit from sourcing two thirds of its product range in dollars and sterling while selling into the eurozone. This should really have been appreciated by the market beforehand.
The shares, which typically at this point in the cycle trade on 13 to 15 times earnings, sell on little more than 12 times, while yielding almost 6 per cent.
This suggests there is upside in the longer term.
Year-on-year fall in margins 2.9 points
MY ADVICE Buy
WHY Revenue growth is encouraging while the decline in margins will unwind in due course, and the multiple is at a historical low
Competing with the housebuilders in London in buying sites to put up self-storage units is always going to be difficult, and Safestore admits that the supply of new stores coming through must be limited, at least until the housing market calms down. If, indeed, it ever does.
The company has only two sites in London under development, to come on stream by 2017. Investors are entitled, therefore, to ask where future growth is going to come from. The answer is that the occupancy rate at the company’s stores is running well behind the industry average, 67 per cent in the UK against the mid-70s elsewhere, though the rate at its Paris stores is already at this level.
The reason for the disparity is that in the past Safestore has become carried away with discounting to new customers, to the extent that existing ones have moved elsewhere. This has been corrected, and average rates moved ahead by 7.5 per cent in the UK in the first half. Meanwhile, inquiries from new customers rose by 12 per cent and new lettings by 31 per cent.
Safestore used to be known as a yield stock. The shares, down ¼p at 277p, have moved ahead from below £2 in October, and that yield, on this year’s payment, is now a less attractive 3.2 per cent, while the shares sell on a multiple of 18 times earnings.
If that vacancy rate can be improved, most of the additional revenue will feed through into the bottom line. On the current rating, though, most of the good news would appear to be in the price.
Revenue £50.4m
Dividend 3p
MY ADVICE Avoid for now
WHY On this multiple there appears to be little upside
I suggested in May that, given the gap between the BG share price and Royal Dutch Shell, investors might do well to buy the former as a cheap way into the latter. That gap is still about where it was; analysts at Jefferies have come to the same conclusion.
The deal will complete, if it does, early next year, and BG investors will continue to get any dividends declared beforehand, probably another 28.75 cents for 2015.
The broker suggests that by buying BG, off 3½p at £10.78, now, you get Shell B shares at a discount, because most of the offer price is in these. This means the current Shell dividend yield of 6.4 per cent, one of the best on the market, converts into 7.1 per cent once the deal completes.
I cannot fault the maths, but there is one risk, of course, of the deal not going through, in which case the BG price could fall sharply.
I do not believe that risk is that great, though. The US Federal Trade Commission this week cleared the deal; Brazil, China, Australia and the EU have to approve it, and a refusal from any would be a deal-breaker. There does not seem any terribly good reason, however, why any of them should take against it.
Value of Shell offer £12.17 a share
MY ADVICE Buy
WHY Gap between prices is cheap way into Shell
And finally . . .
P2P Global Income is coming back to the market for the third cash-raising since the fund came to the market last summer. This, as I have said, is an odd one, investing in debt from online peer platforms, but pays a good income. There are so many lending opportunities out there, the fund says, that it is raising up to £25 million by issuing new shares, to be spent immediately, and then issuing more than £250 million of new C shares, along the lines of a similar exercise in January, which will convert into ordinary equity.
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