There was one strong subliminal message from H&T Group’s trading update: we are not our fellow pawnbroker Albemarle & Bond. Both, and the rest of the sector, have been hit by the fall in the gold price since the spring.
This is a double whammy for pawnbrokers. The fact that people’s unwanted trinkets are worth less means they are less willing to “pop” them, while the resale value of items not redeemed is lower.
A year or more ago, both companies were booming. “Pop-up” shops, temporary outlets, were being set up in busy retail locations to unburden people of their unwanted gold. The price is now down by almost a third since the spring.
The difference between the two is that Albemarle & Bond is so heavily burdened with debt that it is in danger of breaching its banking covenents early next month and a fire sale is taking place.
H&T is less heavily burdened. Debt fell by almost £7 million to £20.8 million through 2013 and, as post-Christmas stock drifts out of the stores, it will fall further.
The company has called a halt to new store openings and acquisitions, and this will save a couple of million or more this year. There is a limit to the extent of further savings, given the need to keep a minimum number of staff in each of its 194 stores. This first half will be awful, contrasting as it will with the first quarter of 2013, when the gold price was still high.
H&T took the sensible view that the gold bubble was just that and did not gear up too much on the back of it. As all pawnbrokers, including the unquoted ones, are in the same boat, the competitive environment suggests good opportunities for consolidation.
The company has said it has been offered less attractive chains already. H&T was being coy on its intentions for Albemarle & Bond, but if no buyer can be found for the business, there is the option of picking up some of its stores. This remains an imponderable, though. The company also reassured that results for 2013 would be no worse than feared. This still means a collapse in profits from £16.8 million to less than £7 million. Analysts, therefore, expect a cut in the dividend.
The general outlook is still negative. Caution among consumers does not encourage extra borrowing and profits for this year will be lower still. The shares, up 10¾p at 156p, have more than halved since I advised steering clear in the spring. Acquisition possibilities are a plus, but, on 15 times this years earnings, there seems no compulsion to buy.
Analysts are a funny bunch. Costain served up a perfectly acceptable end-of-year trading statement, and still they had concerns.
This is thought of by many as a civil engineer, but nowadays it offers the ability to fulfill entire large engineering and infrastructure contracts, rather than merely the bits requiring large amounts of concrete. For example, Costain has just won the eleventh contract to work on Crossrail. It will work on the huge super-sewer in London for Thames Water, too, and for Severn Trent on the next round of investment there. It is also working on all ten of the ageing Magnox nuclear reactors.
This sort of contract is quite different from straightforward civil engineering. It does not hand the company large amounts of cash upfront. Costain probably saw its cash balances fall by about £70 million to £50 million in 2013 and this drain will continue until, eventually, it turns positive.
The company gets very little work from overseas these days. Andrew Wyllie, the chief executive, says that there are far too many opportunities in Britain already. The total order book ended the year at £3 billion, up 25 per cent, with more than 90 per cent repeat orders from existing clients. The final concern is its acquisition policy. Costain mercifully failed to buy Mouchel and lost out on May Gurney to Kier. Mr Wyllie says that plenty of other opportunities are out there, although the timing is unclear. The concentration on infrastructure and a few blue-chip customers is a plus. The days when decent margins could be made on bog standard building projects are over. That cash outflow should not be a problem.
The shares have traded between 250p and 300p over the past year. At 296p, up 12p, they are at the top of that range and on about ten times earnings, which does not suggest any reason to chase now. But the long-term story is there; buy on weakness.
Here is a question: which commands the higher profits, dermatological treatments that treat genuine medical conditions, or those that merely make people look better?
The answer is the second. Once a ragbag of different products, Sinclair IS Pharma is now largely focused on a few skin treatments; the latest purchase, of the global rights to Perfectha dermal fillers, means it is split equally, in sales terms, between medical and aesthetic treatments.
Perfectha is an injectable filler that treats lines and wrinkles. It fits neatly with Sinclair’s other aesthetic products — Sculptra, another injectable skin treatment, and Kelo-Cote, which, as the name suggests, covers up wounds.
It is a complicated deal. Sinclair is taking only half the sales now and the impact on the financial year to the end of June will be muted. It is paying up to €32.2 million (£26.7 million) in cash for a business that eventually will contribute £4 million of earnings. The product can go through the company’s dedicated sales network in Europe and distributors globally. The potential for aesthetic skin treatments in newly prosperous emerging markets is obvious.
Sinclair shares added 3½p to 32p. The main appeal is that one day a larger company may decide to buy its stable as a way into this growing market. Interesting for that alone.
With recent contract wins or renewals in Botswana, Angola (twice), the US Virgin Islands and Martinique, APR Energy has the bit between its teeth. A note from Numis Securities is encouraged by the transformation since the group bought GE’s turbine business, moving away from the pure rental of temporary power equipment and further into higher-margin, full-power solutions.
Gilts
In an absence of any meaningful domestic economic data, solid demand in an auction of nearly £1.4 billion of gilts due in 2029 was enough to energise UK government bonds. March gilt futures settled28 ticks higher at 107.44. Meanwhile, in the cash market, the yield onten-year gilts eased by two basis points to 2.96 per cent.
Bet of the day
JD Sports Fashion shares may have doubled last year, but spread-betters were still buyers ahead of a trading update on Friday. They backed Mike Ashley’s sportswear empire to maintain its momentum with innovations such as in-store payments over mobile phones via PayPal. Spreadex offered £15.03¼ to £15.19¾ on JD Sports.
Deal of the day
Great Western Mining shares more than doubled yesterday, surging by 133.3 per cent to 2.28p, after the explorer said that it should bein a position to submit permit applications to drill in Mineral County in Nevada within the next month. Shares in the AIM-listed company changed hands for more than 12½p in 2011.
