Next
Pre-tax profit forecast £845m
Lord Wolfson of Aspley Guise may be considered a bit bearish but Next, the clothing retailer he heads, is often regarded as the bellwether of the British high street.
So what can we make of Next and its third-quarter trading statement?
On the face of it, things look rosy. Britain’s second-largest clothing retailer has reported a healthy 6 per cent rise in full-price sales in the quarter to October 29, with its store sales up a touch more, and its Next Directory sales a little less.
The retailer even sounded bullish by upping its full-year pre-tax profit forecasts to between £810 million and £845 million, against £805 million and £845 million, which is promising as it heads into the vital Christmas trading period.
Understanding the Next business model is not overly complex. The chain has 500 shops in the UK and Ireland and 200 franchised stores in continental Europe selling its fashion and home ranges. Its directory business also sells its full range of products in the UK and abroad.
Sales and profits at Next come from this dual-channel business as well as from lucrative interest payments made by customers who buy on credit.
Over the years, Next has, bar a few blips, shown itself to be a stable company with an entrenched management team that run a tight ship.
There are some concerns, however, about a potential slowdown at Next Directory, which analysts regard as an engine of growth, and the number of customers not buying on credit.
A closer look at Next’s third-quarter trading also reveals a more mixed performance. Store sales last month were skewed by the date of the August bank holiday and the later back-to-school rush. Sales at Next Directory rose but by less than expected because of a tough comparison with last year.
The retailer has cautioned that “continued volatile” demand in the third quarter meant that sales jumped by 10 per cent in some weeks but dropped by 2 per cent in others.
However, these ups and downs aside, Next has a consistent record in outperforming its rivals and it has paid hundreds of millions of pounds to shareholders via share buybacks and dividends.
In the first half, Next generated surplus cash of £249 million, of which £163 million was paid through a special dividend. The value of Next’s shares has steadily climbed. Five years ago they were valued at £21.62 and yesterday they closed at £79, down 45p.
MY ADVICE Buy
WHY A safe bet as a well-run, cash-generative business
Hostelworld
Net annual revenue €79.3m
Its recent advertisement showing backpackers jumping off a cliff into an open water pool might have been banned, but that should not deter investors wanting to take a leap of faith with Hostelworld’s shares.
The Dublin-based online booker, which specialises in helping millennials to travel the world on the cheap, raised £125 million through a London listing yesterday — its shares start trading on Monday.
At a float price of 185p a share, the stock is priced lower than the pre-float research suggested, pointing to potential value for those who invest early in a company that looks built for growth. Last year, 7.1 million bookings were made via the Hostelworld.com website in a youth market expected to grow to more than £200 billion within five years.
It is unsurprising that the offer was oversubscribed, particularly as Hostelworld has pledged to pay an annual dividend equivalent to 70 per cent to 80 per cent of post-tax profits.
Last year, the group produced adjusted free cash flow of €24 million, up €3 million on the previous year, pointing to a potentially attractive dividend yield. Hostelworld has said that it will pay an interim dividend and indicated its intention to hand shareholders a final dividend in line with its payout policy, pointing to a strong income flow in the years ahead.
MY ADVICE Buy
WHY Solid dividend share with good growth prospects
BT
Cost of EE acquisition £12.5bn
It has not been a bad week for big business and the UK’s competition watchdog as BT was given the provisional green light for its takeover of EE, the mobile phone operator, by the Competition and Markets Authority.
The decision boosted the shares of the telecoms to broadcasting conglomerate with its first-half results due today possibly providing another lift.
With BT now all but certain to re-enter the mobile market, it looks like a good time to make a bet on the shares. Having EE under its umbrella will offer it new markets, particularly broadcasting, in which it has become an increasingly threatening competitor to Sky on football.
However, there remains the shadow of Ofcom’s market review and the potential break up of the business. Perversely, the EE clearance could highlight the need to curb BT’s dominance and strengthen arguments to split off Openreach, its infrastructure division.
That Doomsday scenario seems unlikely and BT looks set for the future with strong underlying cashflows, so a good yield play.
Deutsche Bank viewed the CMA clearance as potentially negative for the sector because it could kickstart a fully-fledged move to convergence — or quad-play as the industry likes to call it — particularly in light of the TalkTalk scandal, which would add a level of pricing desperation to the landscape. “We view the spectre of convergence wars in the UK, triggered by BT’s move to acquire EE, as a potential, materially disruptive event for the UK telecoms market,” the bank said.
MY ADVICE Buy
WHY With EE wrapped in it looks stronger than ever
And finally . . .
Allied Minds received another endorsement from Neil Woodford as the stock picker’s stake in the intellectual property business cruised past the 28 per cent mark. Woodford Investment Management has been a big buyer of the shares, attacking a short-sale raid on them this month as “opportunistic”. With a business model focused on finding cutting-edge technologies and helping to bring them to market, Mr Woodford has made a bet on Allied discovering the next Google. Time will tell.
