Morning Note: Market news and updates from Spirax Group and Aviva.

Market News

The US October consumer price index came in at 2.6% at the headline level, in line with expectations, while core inflation remained unchanged at 3.3%. Several Fed officials reiterated their caution on rate cuts. Logan (non-voter) noted progress bringing down inflation but warned Fed should now proceed cautiously, while Musalem (non-voter) said policy should remain moderately restrictive while inflation remains above the 2% target. Today’s speeches from the Fed’s Powell, Williams, and Barkin may provide further insight. The dollar remains firm, hitting a two-year high, while the 10-year Treasury yield ticked up to 4.47%. Gold continued its recent slide and currently trades at $2,555 an ounce.

US equities consolidated last night – S&P 500 (flat); Nasdaq (-0.3%) – while in Asia this morning, stocks were broadly lower as the dollar’s sustained strength and weakness in China weighed on the region’s risk appetite: Nikkei 225 (-0.5%); Hang Seng (-1.9%); Shanghai Composite (-1.7%).

The FTSE 100 is currently little changed at 8,020. Companies trading ex-dividend this morning include Bunzl (0.58%), GSK (1.10%), Sainsbury (1.60%), and Shell (1.07%). The FT reports that three major investors have called for break-up of Smith & Nephew. Sterling trades at $1.2690 and €1.2030.

Bank of England Governor Andrew Bailey speaks later today, while Catherine Mann said policymakers can afford to wait on rate cuts. Rachel Reeves plans to introduce legislation to pool £1.3tn of pension savings into “megafunds” to unlock £80bn of extra investment to boost growth. She’s due to give her Mansion House speech today.

Republicans held on to their narrow majority in the US House, giving Donald Trump and his party unified control of the elected branches of government. Emmanuel Macron warned that Europe risks a simultaneous trade war with the US and China, as the bloc faces tensions with both nations over tariffs and subsidies.

Source: Bloomberg

Company News

Spirax Group has this morning released a reassuring trading update and reiterated its guidance for the full year. In response, the shares are up 5% in early trading.

Spirax (formerly Spirax-Sarco Engineering) is a UK-listed industrial company, with annual sales of £1.7bn. The group is a world leader in each of its three businesses. In Steam Thermal Solutions (54% of 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 Fluid Technology (23%) 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.

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.

However, in 2023 and the first half of 2024 the group experienced a materially weaker macroeconomic environment and in response took early action across all three businesses to appropriately right-size capacity and overhead support costs as well as implementing temporary cost containment actions and reducing variable compensation.

In the four months ended 31 October 2024, the company continued to be impacted by the weak macroeconomic environment in key markets. Against this backdrop, the company has continued to focus on driving organic sales growth and preserving its adjusted operating profit margin.

Group organic sales growth for the ten months ended 31 October was ahead of the first half of the year, with sales above the prior-year comparator in all three businesses, excluding currency effects.

The Steam Thermal Solutions (STS) business returned to organic sales growth in the four months ended 31 October. Sales in China, which accounted for close to 20% of STS sales in 2023, continued to be impacted by the weakness in large orders highlighted during the first half.

In the Electric Thermal Solutions (ETS) business, organic sales growth was higher than the 5% generated in the first half. Shipments were increased in Industrial Process Heating, while organic sales were modestly positive in the Industrial Equipment Heating segment, with a lack of recovery in demand from customers in the Semiconductor sector.

At Watson-Marlow, sales to Biopharm customers were supported by an order book that has continued to normalise towards lower historic levels. Process Industries organic sales growth improved further, above the first half of the year, supporting overall organic sales growth in Watson-Marlow.

As expected, the update lacked detail on margins, although the group’s balance sheet remains robust – gearing fell from 1.9x to 1.7x net debt to EBITDA over the four-month period. The group has a strong track record of dividend growth, with 56 years of progress. With the half-year results in August, the 2024 interim payment was increased by 3% to 47.5p. A similar increase at the full-year stage will generate a yield of 2%.

Looking to the full year, the group’s outlook remains unchanged – mid-single digit organic revenue growth and an adjusted operating profit margin broadly in line with the 2023 margin of approximately 20% (adjusted for currency headwinds).

Source: Bloomberg

Aviva has this morning released a third-quarter update which highlights strong trading across the group. The company remains confident it will achieve its financial targets. In response, the shares are up 3% in early trading.

Aviva provides a wide range of insurance and saving products including car, home, and health insurance, to pensions, investments and asset management. The business is well placed to benefit from several industry trends such as: an ageing population and income in retirement gap; greater individual responsibility for retirement; the shift from Defined Benefit to Defined Contribution schemes and corporate de-risking; and a heightened focus on health and wellness.

Over the last few years Aviva’s financial and strategic position has been transformed, with the refocus of the portfolio now complete. The core markets are the UK, Ireland, and Canada where the focus is on markets where management believes the company has high quality franchises which can achieve scale, profitability, and competitive advantage. Over the last four years, the group has increased customer numbers by 1.2m to 19.6m.

The aim is to generate strong organic growth, accelerated through bolt-on M&A. The target is to generate £2bn of operating profit by 2026. Over time, a combination of improved earnings quality, lower debt costs, and stronger-than-expected cash flows from a business which has become less capital-intensive means the group can grow its dividend and make regular capital returns.

In the first nine months of the year, Wealth net flows grew by 21% to £7.7bn, an acceleration versus the 16% growth in the first half. This was driven by continued growth in workplace pensions and strong demand from the financial adviser platform business. Retirement sales rose by 67% to £7.3bn.

General Insurance premiums were up 15% to £9.1bn, with UK & Ireland up 18% and Canada up 11%. The combined operating ratio (COR) is a measure of underwriting profitability made up of the sum of claims and expenses divided by the earned premium – the lower the better – with anything below 100% implying an underwriting profit. During the first nine months of the year, the COR rose from 96.3% to 96.8% but still well below 100%.

The group’s liquidity and capital position remain extremely healthy – £1.7bn as at the end of October 2024, primarily reflecting payment of the interim dividend, remittances received, and centre costs.

The Solvency II debt leverage ratio rose from 31.1% to 29.5% following the redemption of the €700m Tier 2 notes in July. The estimated Solvency II cover ratio remains robust, falling from 205% to 195%.

The dividend guidance is for mid-single digit growth in the cash cost of the dividend. At the half-year stage, the group has declared an interim payment of 11.9p, up 7%. A £300m share buyback was executed in the first half, and the company anticipates further regular and sustainable returns of capital in the future.

The group highlights it is confident about the outlook for the rest of 2024 and in meeting its financial targets for 2026.

Source: Bloomberg