Early days of course but the pointless clubs at the foot of the Premier League — West Ham, Brighton, Crystal Palace, Newcastle and Bournemouth — look like they’ll be the candidates for the drop all the way through to next May. Some of these are yo-yo clubs, spending their lives migrating between the top tier and the Championship.
But does the yo-yo experience translate to the FTSE 100? It does. Without wishing to be too disparaging to Berkeley Homes, the housebuilder is shaping up to be the Norwich City (relegated four times, promoted four times in the last 14 seasons) of the blue-chip index. Berkeley dropped out two years ago, got back in, dropped out again one year ago and now is a candidate for promotion once more at next week’s FTSE 100 reshuffle.
Of the last 15 demotions over two years, three stocks have managed to claw their way back into the Footsie: Wm Morrison, G4S and Smiths Group. That might suggest Provident Financial is up against it when it exits the FTSE 100 in the quarterly index rebalancings next week.
There are other reasons to believe Provident won’t be back anytime soon. Its share price collapse over the last three months has seen the market value of the company nearly halve to way below £3 billion, leaving it struggling to be in the top 150 most valuable companies listed in London, let alone the top ton.
The catalyst has been not so much the shock profit warning in June but what lies beneaths it: an attempt to remodel its army of debt collectors which left it short of personnel and in a muddle with the implementation of new technology leading to a shortfall of £55 million in its consumer credit division, with profits about half what analysts had expected.
These things happen to companies trying to drag themselves into the 21st century but it does leave management with a serious credibility deficit. Overlay that with the perennial fear about Provident’s exposure to the overborrowed and underpaid in the economy and it feels like there is a disaster waiting to happen. That has attracted the short-sellers who are now reckoned to speak for more than 7 per cent of the stock, betting on a share price fall.
Portia Patel at Liberum says Provident is facing impairment charges, pressure on the consumer, regulatory intrusion and a potential cut to the dividend suggesting investors slam the door on the stock.
With no apparent support, the stock should be sold.
MY ADVICE Sell
WHY An expected exit from the FTSE 100 plus too much uncertainty around the economy, regulation and its operational change
Balfour Beatty
You know the recovery at Balfour Beatty is in full swing when the City is asking if the shares have got ahead of themselves. The last time there was a question of over-valuation was in the summer of 2014, five profit warnings into an eventual string of eight, when some thought the stock, far from being worth 155p, should be nearer 0p.
Last week Leo Quinn, the chief executive brought in to turn Balfour Beatty round, boldly declared that by the end of 2018 it will be earning industry-standard margins. Blending in the geographic parts and different contract types, such margins are reckoned to be about 3 per cent. On annual revenues of £8.4 billion, that is operating profits of £250 million a year. The company has £1.2 billion of investment in PPP projects. With a current market value of £1.9 billion, that puts the group’s operations on less than four times 2019 earnings.
Yet we should be sceptical of Big Construction. Their blowouts are as regular as a builder’s tea break, as we have seen in the recent crash at Carillion. But the 4Hs — Highways England, Hinkley Point, HS2 and Heathrow — are giving Balfour Beatty more work than it can tender for, allowing it to pick and choose. Yesterday it landed more: six miles of tunnelling for the cooling system for Hinkley’s nuclear reactor.
Balfour Beatty shares closed last night at 269p against City targets well in excess of £3. Mr Quinn talks of getting to margins above industry standard. If you believe that pledge and that’s he’s hanging around for a few more circuits yet, then Balfour Beatty stock is worth buying.
MY ADVICE Buy
WHY Pledging to deliver projects and make a profit
ITM Power
There’s no pleasing some people. The government has just launched a £23 million funding competition for its hydrogen-for-transport programme. Graham Cooley, chief executive of ITM Power, the Aim-listed company which turns electricity into hydrogen and has the kit to pump it into your fuel cell vehicle, applauds this but can’t resist a dig. “We note the huge disparity between the funding for hydrogen infrastructure and the charging infrastructure for battery electric vehicles,” he says.
And that is the issue for ITM. Its gear is appearing in more and more conventional filling stations and its technology can effectively be used as a proxy for storing electricity. But its future is tied to government policy, which has the power to make or break renewable energy sources and alternative fuels. Now we are on the road to eliminating petrol and diesel engines in the UK by 2040, hydrogen will surely be part of the solution.
ITM’s significant backers include the canny Peter Hargreaves of Hargreaves Lansdown and JCB. Its annual results and an update on its cash position after raising £5.7 million earlier this year are due later this week. As a bet on the future, ITM Power is more than just a speculative punt.
MY ADVICE Buy
WHY Hydrogen vehicles have a future and ITM is part of that
And finally . . .
Now that we are at the business end of cricket’s T20 Blast what does the presence in the last eight of Derbyshire and Leicestershire, both available pre-tournament at up to 40/1, tell us? That experts aren’t always right and that valuations based on old-fashioned fundamentals — both clubs are hopeless at the longer game and have no stars — are not always the right investment model. Derbys and Leics may yet fall in this week’s quarter-finals but their progression shows it’s always worth the search for mispriced assets.
