As coincidence would have it, there were trading updates yesterday from Meggitt, Cobham and Airbus. Not only did this keep the engineering analysts busy, it also allowed a degree of comparison to be made between the first two, both based in Dorset, both having had a difficult time in recent years and rather too many profit warnings, and both on well-established recovery trajectories.
This column has already taken a positive view on Cobham this year after the second rescue rights issue to reduce debt. Meggitt is one of the tips for the year and is further down the recovery track.
The first-quarter update was a little light on detail, but the company was unexpectedly informative in its results for last year at the end of February, setting out its strategy through to 2021 and giving detailed forecasts from each part of the business for this year. On the face of it, the first-quarter numbers would appear to have come in a little light. There are good reasons for this, while the pattern of deliveries from such businesses has tended to be weighted towards the second half. The main areas of apparent weakness have come in energy and military aircraft.
In the former, which supplies large oil and gas installations and the like, the earlier work put in place before the price of oil collapsed has come to an end. In military, the Continuing Resolution remains in place in the US, stopping increased spending on existing programmes and any on new projects. At some stage this will come to an end, while the rhetoric coming out of Washington suggests a positive outlook longer term.
That leaves civil aerospace, where spending on original aircraft and in the aftermarket is still rising, while the amount of investment needed by Meggitt on new programmes for Airbus and Boeing has peaked. Orders were ahead by 22 per cent across the group in 2016 and should have continued at the same pace into this year.
The company is confident of improving margins in the next five years from efficiencies and cost savings, cutting the amount of factory space it occupies by a fifth. The shares, tipped at 458½p, eased 10p to 463¼p and, on less than 14 times earnings, have further to go.
My advice Buy
Why This year will see a strong upsurge in second-half performance as orders feed through, which does not seem to be recognised by market
Travis Perkins
Investors in Travis Perkins will need to wait until the halfway figures in August to see what needs to be done to its perennially underperforming plumbing and heating business. This has been a difficult market for several years and accounts for only 10 per cent of profits but is the one weak spot in a set of first-quarter numbers that managed to surpass even a very strong quarter at the start of 2016.
Like-for-like sales were up by 2.7 per cent across the group, helped by a strong performance from the contracts division, which supplies housebuilders, commercial building and large projects such as Crossrail. The consumer side, mainly the Wickes chain, was up about in line with the group as a whole and would have done significantly better but for the late Easter holiday.
There is inevitably caution over future trading and the rise in prices for products sourced from outside the UK, though Travis Perkins is coping with this well enough and the shares made some headway, ending up 6p at £16.15. On 14 times earnings, though, they may not make much headway until plumbing and heating is resolved.
My advice Avoid
Why There seem no obvious catalysts for progress just now
Pendragon
There are not that many companies in retail that can reckon to be able to double volumes and market share over the next five years, but the economics of the car market are unusual to say the least. Pendragon secures its best margins and its biggest proportion of profits from the aftermarket, servicing and repairs. It is in the company’s interest, therefore, to have as many vehicles as possible that it has sold on Britain’s roads.
Pendragon believes that it can double sales of used cars by 2021 by increasing the amount going through existing outlets, adding on a limited number of new ones and moving more into the London market with small sites to which cars are delivered for customer inspection. This would mean a market share increased to 10 per cent, but it needs revenues to grow by about 15 per cent a year.
Used vehicle revenues are ahead by 23 per cent so far this year, helped by one extra trading day. The new car market looks like a bit of an irrelevance in this, flat at best this year with UK manufacturers using the weak pound to sell into Europe and elsewhere. Profits from aftersales were up by an encouraging 7.6 per cent. The low investment needed to achieve its target of doubling market share means Pendragon can even afford a limited share buyback programme.
The shares were inevitably hit by the referendum but have been recovering, adding another 1¼p to 35p. They sell on a relatively low eight times earnings. Worth buying for the long-term ambitions.
My advice Buy
Why The chance of sales and market share doubling
And finally . . .
Phoenix Spree Deutschland is the ultimate niche property play, investing in the Berlin residential market, and is also a good post-referendum bet for those nervous over the UK property scene. The shares have been strong performers over the past couple of years. The German capital, like London, suffers from a shortage of homes and is concentrated on rental. Net assets per share were ahead almost 20 per cent in 2016 to 233p. The shares, up another 4 per cent, trade at about a 6 per cent premium to the net asset value.
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