Morning Note: Market news and an update from aerospace company Senior.

Market News

Friday’s US jobs data came in well below expectation, suggesting the Federal Reserve should have already cut rates and installing fear in investors that the US economy could be heading into a recession. The non-farm payrolls were 114k, below the market forecast (175k) and the previous month’s reading. The unemployment rate was 4.3%, above the 4.1% expected.

Bond traders are now pricing in a series of deep cuts by the Fed through year-end, betting that authorities will need to ease aggressively to stave off a recession. The 10-year Treasury yield has fallen to 3.70%. Gold remained fairly steady at $2,430 an ounce.

Recession fears come on top of disappointing earnings from a number of US large caps the last week. US equities fell heavily on Friday – S&P 500 (-1.8%); Nasdaq (-2.4%) – and the sell-off has intensified around the world this morning.

In Asia, Japan suffered the worst of the rout, with the Nikkei 225 down 12%, albeit up 5% in the futures market after the close. The yen continued to soar – the dollar now buys Y142, compared to almost Y162 at the start of July. Bank of Japan board members discussed how the yen’s weakness was an upside risk to prices, according to minutes from its June meeting, a month before it raised the key rate.

The Hang Seng (-2.2%) and Shanghai Composite (-1.3%) suffered milder reversals. US futures are currently predicting a 2.2% decline in the S&P 500 and a 4% slump in the Nasdaq at the open this afternoon. The FTSE 100 is currently trading 2% lower at 8,000, while Sterling buys $1.2740 and €1.1680.

Source: Bloomberg

Company News

Senior has this morning released a robust set first-half results and maintained its guidance for the full-year. In response, the shares are down 3% to 152p, still well below the 200p offer from Lone Star that management rejected back in 2021.

Senior is an international manufacturer of high technology components and systems, principally for the worldwide aerospace, defence, land vehicle, and power & energy markets.

In the six months to 30 June 2024, revenue grew by 7% on a constant currency (CC) basis, to £501.4m. The group has enjoyed continued growth in its order book, with a book-to-bill of 1.15. There were some notable contract wins including from Airbus, Collins Aerospace, Spirit AeroSystems, and land vehicle OEMs, demonstrating the broad, diversified and high-quality nature of the business. Adjusted operating profit rose by 13% at CC to £25.1m, with the margin up from 4.7% to 5.0%.

By division, Aerospace revenue (+14%) and profits (+40%) grew strongly notwithstanding 737 MAX volumes being subdued as a consequence of the ongoing situation at Boeing. The increase reflected the ramp up in civil aircraft production rates, steady growth in the defence market, and a return to growth in sales to semiconductor equipment customers.

The Flexonics division maintained double-digit margins (10.9%), albeit revenue (-6%) and profits (-8%) were lower as land vehicle markets started to normalise and upstream oil & gas customers reduced inventory levels.

The group’s cash performance has improved, moving from a free cash outflow of £11.8m to an inflow of £3m. This was driven primarily by lower working capital outflows and higher cash profits more than offsetting higher investment in capital expenditure and higher tax and interest payments.  The group paid £10.7m of contingent consideration for Spencer Aerospace following its strong growth since acquisition. At the end of June, net debt (including capitalised leases of £77m) stood at £233m (1.8x EBITDA), up £29m since the start of the year. The interim dividend has been increased by 25% to 0.75p.

The outlook for the full-year outlook is unchanged, with good growth anticipated.

·       In Flexonics, H1 is expected to be slightly higher than H2 due to a return to more typical levels of land vehicle demand.

·       The group’s diversified position across key civil and defence aircraft platforms, strong order intake and increasing aircraft build rates are expected to drive good growth in Aerospace for the full-year. Higher volumes, operational efficiency benefits, and improved pricing are expected to result in H2 performance being higher than H1.

Source: Bloomberg