Market news and muted update from Spirax-Sarco.
Market News
US equity markets slipped last night – S&P 500 (-0.7%); Nasdaq (-1.2%) – while the picture was mixed this morning in Asia: Nikkei 225 (+0.8%); Hang Seng (flat); Shanghai Composite (+0.3%). The FTSE 100 is little changed at 7,599. It’s a big day for stocks trading ex-dividend: Rio Tinto (2.81%), Barclays (1.84%), Shell (1.10%), NatWest (2.32%), AstraZeneca (0.65%), Standard Chartered (0.64%), BP (1.19%), HSBC (1.24%), and Pearson (0.82%).
US inflation data today will probably reinforce the argument for a September Fed pause. Both core and headline CPI are seen rising 0.2% month on month in July, the same as June’s increase. At that rate, the core reading would be consistent with the Fed’ 2% target on an annualised basis, Bloomberg Economics said. Year-on-year core CPI growth is seen edging down to 4.7%, driven by a moderation in rent increases and falling vehicle prices.
The 10-year Treasury currently yields 4.01%. Gold slipped to $1,920 an ounce. Investors wanted the newest 10-year Treasury notes badly enough that they were willing to settle for a yield of less than 4%. The $38bn auction was awarded at 3.999%. Today’s 30-year bond auction is the last sale of the week.
Brent Crude hit a high for the year of almost $88 a barrel as supply risks grow in a tight market. European gas prices rose by 30% driven by the threat of LNG supply disruptions from Australia as market bears closed out short positions. Potential strikes at three major LNG facilities in Australia may disrupt about 10% of global exports of the fuel and deliver a new energy price shock across Asia and Europe.
UK property market transactions showed signs of slowing to a crawl with the RICS measure of agreed sales falling to minus 44% in July. That was the weakest since the start of the pandemic and down from minus 36% in June. In the rental market, tenant demand rose at the strongest pace since the start of 2022 as landlords advertised fewer properties. It was reported yesterday that HSBC, Nationwide, and TSB are all cutting their mortgage rates. Sterling trades at $1.2756 and €1.1581.
Source: Bloomberg
Company News
Spirax-Sarco Engineering has this morning released results for the first half of 2023 and lowered its guidance for the full year. In response, the shares of this highly-rated stock are down 6% in early trading.
Spirax-Sarco is a UK-listed industrial company, with annual sales of £1.6bn. The group is a world leader in each of its three businesses. In Steam Specialties (50% of pro-forma revenue), Spirax Sarco and Gestra are leaders in the control and management of steam. In Electric Thermal Solutions (ETS, 22%), Chromalox and Thermocoax provide electrical process heating and temperature management solutions. Finally, Watson-Marlow (28%) provides niche peristaltic pumps and associated fluid path technologies.
The group’s products are used in almost every industry worldwide: from the food sector where steam products are used in blanching, baking, packaging, and cleaning; to the pharmaceutical industry where pumps and associated fluid path equipment are critical to the production of life-saving medicines; through to the aviation industry where electrical heating elements are used in the de-icing of aeroplanes. Overall, the group has a 12% share of a global addressable market of £12.3bn.
85% of revenue is generated from maintenance and operational (opex) budgets rather than capital (capex) budgets. Of that 85%, 50% comes from essential repair and maintenance activities, while 35% comes from small projects that improve existing systems. As a result, the group has a long history of stable, sustainable growth and strong profitability.
The first half of the year trended broadly as expected against the backdrop of continued destocking in the Biopharm and Semicon WFE sectors, as well as softening Industrial Production growth. The group generated revenue of £851m, up 2% in organic terms,
Within the Steam Specialties business, sales grew 15% organically, with strength in products and services. Watson-Marlow organic sales fell by 21%. Demand was slightly weaker than expected, driven by destocking by its Biopharm customers post the COVID-19 pandemic. This headwind is now expected to continue into 2024. Sales in the ETS business were up 7% organically. Demand from industrial equipment customers of ETS was lower than anticipated, particularly in Semicon WFE, impacting Durex Industries and to a lesser extent, Thermocoax.
The group’s adjusted operating profit margin fell by 370bps in organic terms to 20.2%. The decline reflects lower sales to customers in the Biopharm and Semicon WFE sectors that impacted the highest margin businesses. As a result, adjusted operating profit fell by 13% in organic terms to £171.7m, while adjusted EPS declined 11% to 155.2p.
The group is financially robust. However, cash conversion fell back to only 48%, although it is expected to recover to over 70% in the full year. Over the last year, the group has invested heavily in acquisitions and, as a result, net debt rose from £203m to £748m, with gearing of 1.8x net debt to EBITDA. On a pro-forma basis, following acquisitions, gearing is a comfortable 1.5x. The group has a strong track record of dividend growth, with 55 years of progress. The 2023 interim payment has been increased by 8% to 152p. A similar increase at the full-year stage will generate a yield of 1.6%.
Looking forward, the group continues to be confident in its resilience and ability to navigate the current uncertainty in the macroeconomic climate and short-term headwinds from weaker demand in the Biopharm and Semicon WFE sectors. Organic sales growth in Steam Specialties is still expected to be significantly above industrial production, albeit at a lower rate of IP outperformance than in the first half. Overall, the group anticipates sales for the full year 2023 to grow between 0% and 4%, with a year-on-year adjusted operating profit margin decline of between 100 and 200 basis points. The mid-point of the new guidance implies a high single-digit decline in profit forecasts for the full year.
Source: Bloomberg