Odd things, markets. The price of oil has recovered by 13 per cent since the start of the year. The share price of Weir Group has fallen by 3.5 per cent, despite a sharp rise yesterday — a fall driven by the price of oil.
In February, the maker of pumps and other equipment, half of it for the oil and gas industry, warned that the low level of investment there meant that profits would be down this year, a statement of the blindingly obvious. The shares fell.
Yesterday Weir put some detail on that decline, with first-quarter figures. The shares jumped 98p to £18.36.
This tells us that there is a lagging effect between the movement of the oil price and Weir shares. This augurs well for the second half, assuming that oil stays where it is. This seems likely, not least because American authorities expect production in the United States to start to fall this summer. This suggests that the current half may be the trough for the industry. The company will also reap the benefits of £50 million-plus of cost cuts, including another £10 million yesterday.
All this means that I am fairly relaxed about tipping Weir shares this year, because they were always meant to be a second-half play. They have already recovered a long way, having been below £16.
Weir is almost entirely exposed to US onshore oil and gas shale. Fleet use had halved by the end of the quarter. Parts can be cannibalised, moved on to rigs that are still in production. Weir is facing having to give price cuts of 5 per cent to 20 per cent across its product range.
Against this, its minerals business has held up better than expected. Owners are operating existing mines at a higher rate than previously, rather than investing in new ones, so the pumps that Weir supplies wear out more quickly.
Order input across the group was down by 9 per cent in the first quarter, with revenues down by about the same. Cash generation remains strong, though, even if debt is up at the headline level.
The shares rose again after Wall Street opened. US investors have wondered about a possible takeover. On 18 times this year’s depressed earnings, they look to have further to run in the second half.
50% plus - fall in US rig count
£10m Additional cost cuts announced
MY ADVICE Buy long term
WHY Shares have recovered but have lagged the rising oil price. Prospects for the second half look better, given cost-cutting measures
Trading updates from fund managers tend to feature a blizzard of anonymous statistics and it can be difficult sometimes to get an overview. The picture became easier at Standard Life at the start of the year, when the insurer sold its less profitable Canadian business and handed £1.75 billion to investors.
This means that the focus of the business is now on Standard Life Investments (SLI), the fund management side, and on the effects of recent changes to UK pensions, such as no longer requiring retirees to take out annuities of little worth. It is too early to assess the progress of the last; Standard Life and its rivals hope that more of the cash on retirement will stick with them, in its case to be invested through SLI.
First-quarter figures showed assets under management at SLI up by 5 per cent to £258.4 billion. The parent is continuing to build its workplace pensions business, with new savers through auto-enrollment up about 10 per cent. The main attraction of the shares, off 5¾p at 460½p but strong performers since January, has been the dividend yield.
That rise inevitably has made this less attractive, below 4 per cent prospective. Investors in for a while make consider taking some profits.
Group AUM up 5% t0 £312bn
MY ADVICE Take profits
WHY Shares have come a long way, yield is less attractive
The quoted tobacco companies continue in their business of managed decline. There is the odd mega-deal in the sector — the Reynolds American purchase of Lorillard should get through the regulatory authorities soon, which will allow a few brands to shake loose to be bought by Imperial Tobacco.
As part of that deal, British American Tobacco is being required to top up $4.7 billion to maintain its holding in Reynolds at 42 per cent. BAT is also taking out the minority holding of Souza Cruz in Brazil. The long-rumoured deal involving another of the “big four”, Japan Tobacco, has not materialised and the landscape looks unlikely to change further.
This leaves the same strategy for all of them: try to grow market share by promoting your best brands, in turn to keep volumes ahead of industry trends, whereby consumption is falling by 4 per cent to 5 per cent a year, driven by people giving up and by rising illicit sales.
BAT has been doing this quite successfully. In the first quarter, total cigarette volumes were off by 3.6 per cent. Some price rises forced through last year lifted revenue by 1.7 per cent at constant exchange rates, and there are more rises coming through in the second half.
Of its markets, Brazil and Russia were weak for macroeconomic reasons, along with Vietnam, as tax increases boosted that illicit trade. Its five top brands pushed volumes ahead by 5.7 per cent. BAT shares fell 81p to £35.88½. From an investor’s perspective, the main interest is the assured yield of 4.3 per cent, which makes the shares worth holding.
Rise in first-quarter revenues 1.7%
MY ADVICE Hold
WHY Such stocks offer an assured dividend yield
And finally...
Real Good Food has agreed the sale of Napier Brown, its sugar distribution business. This could make no headway in light of the changes to the European sugar regime and has served as a drag on the rest of the group. It is better off with one of the larger operators and Tereos, the world’s fifth-biggest, is paying £34 million in cash. Real Good shares leapt 30 per cent. The sale wipes out debt and allows the company to invest in the more profitable bits of the business, cake decorations and bakery ingredients.
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