Cube UK Report (22 April 2021) – Morgan Sindall leads reopening rotation

Cube UK Report (22 April 2021) – Morgan Sindall leads reopening rotation

Good morning – it’s Roland back with today’s Cube Report.

This week saw streaming giant Netflix report a sharp fall in new subscribers as the world starts to returns to normal. No surprise, really, but the news hit the stock which fell nearly 10% yesterday. With NFLX still trading on 10 times sales and 55 times 2021 forecast earnings, I’d speculate that there might be room for further disappointment.

I’m not here to talk about US tech stocks. But I wonder if with hindsight, this week’s numbers from Netflix will look like some kind of post-pandemic inflection point.

Today’s UK market news is largely free of disappointments. Indeed, it’s doubles all round for most of the companies reporting today in my universe. Despite this, the market reaction to these positive updates has been mixed.

I’ll try to give a flavour of this situation with a look at the following stocks.

  • Morgan Sindall / construction sector
  • AJ Bell
  • Domino’s Pizza

Morgan Sindall Group

  • Stock data should display here.
Market cap £965m
RNS Trading update
Writer disclosure No position

Morgan Sindall’s share price is up by 11% at the time of writing, making it today’s top FTSE 350 riser. The gains follow the company’s second guidance upgrade in two months.

This FTSE 250 construction group has operations in infrastructure, commercial property fit out and housing. Secured workload for 2021 stood at £8.1bn at the end of March, which management say is 8% ahead of the same point last year (albeit 2% below the 2020 year-end position). The company says that the outlook is improving across its operations.

Average daily net cash for the year to 20 April was £288m, highlighting the company’s tight control of its working capital and — presumably — well-structured contracts.

My view

Although bitter experience has taught me to avoid most companies in this sector, I’ve long been a fan of this business, which is led by founder-CEO John Morgan, who has a 9% shareholding. My perception is that Mr Morgan imposes discipline and process, avoiding the costly contract snafus that tend to arise periodically elsewhere in the sector.

Financial performance is also strong — returns on capital are consistently in double-digits and this business has reported daily net cash for many years.

I owned the shares but sold them a while ago, a decision I regretted almost immediately. However, at a last-seen price of 2,105p, the stock is trading at an all-time high. Although I estimate this might only equate to around 12 times forecast earnings, I’m not sure I’d rush back in at this level. It is, after all, a cyclical construction business.

Construction conundrum: red flag warning?

Morgan Sindall isn’t the only construction business to report strong trading today. Steel fabrication group Severfield has also upgraded its guidance and housebuilder Taylor Wimpey has given a solid update. Brickmaker Ibstock says that trading so far in 2021 is “modestly ahead of expectations”.

Activity levels appear to be strong in housebuilding and across the wider construction and infrastructure sector.

However, the latest Red Flag Alert report from insolvency specialist Begbies Traynor warns that the number of construction companies in financial distress has risen by 47% to 96,557 over the last year. I’d guess this mostly relates to much smaller companies who’ve been caught out with unpaid bills and invoices, plus disruption to planned work.

There might not be any read-across to larger, well-financed companies — indeed, I can imagine they might even benefit. But I think it’s worth keeping an eye on the mood music from this sector.


AJ Bell

  • Stock data should display here.
Market cap £1.9bn
RNS Q2 trading update
Writer disclosure No position

Graham and I have both written positively about investment platform AJ Bell before. Perhaps not coincidentally, this is another founder-led business, where the CEO retains a material (23%) shareholding.

We know that DIY investment platforms enjoyed a strong year last year. Lockdown seems to have created new interest in investing — or possibly trading — in the stock market. However, AJ Bell shares are down today despite the company reporting a strong start to the year. Is this another step in the reopening rotation? I think it might be:

Figures for 3 months to 31 March 2021

  • Customer numbers up 11% to 346,797
  • Net inflows of £1.5bn in Q1 (2020: £1.3bn)
  • Total assets under administration (AUA) up 4% to £65.2bn

AJ Bell services financial advisers as well as DIY investors, but new customer recruitment has been weighted to the DIY crowd, who now account for around two-thirds of customers. However, net inflows are split more equally, suggesting that advised customers have higher net worth. That makes sense to me.

Interestingly, the company says its average portfolio size is £79k. As far as I can see, the comparative figure for market leader Hargreaves Lansdown is £80,615. Both companies appear to be competing for the same client base.

My view

I’ve always liked this business, but have been deterred by the price. Today’s news does nothing to change that view.

Consensus forecasts I can see suggest earnings growth will level out over the next 18 months. So with the shares trading on around 40 times forecast earnings, I’m not tempted to rush in. However, it’s certainly a stock I’d consider at a more conservative valuation.


Domino’s Pizza

  • Stock data should display here.
Market cap £1.7bn
RNS AGM & Q1 trading update
Writer disclosure No position

Domino’s had a very good lockdown, with sales up by 18.7% during Q1, compared to the first quarter of 2020. Despite this, the stock has edged lower today. The market seems to be starting to wonder how reopening restaurants and pubs might affect Domino’s.

I don’t really have much insight into this. Domino’s has always been a strong business and the recent commentary from the firm suggests to me that new CEO Dominic Paul is working hard to rebuild the company’s troubled relationship with its franchisees.

Today’s update doesn’t comment on April trading, but the company does say (not for the first time) that it’s aiming to rebuild its collection trade. Collections are currently said to be recovering and are now running at 65% of 2019 levels. I guess this number will rise as more people start picking up pizzas on the way home from the pub…

More seriously, I get the feeling that Mr Paul might be hoping to emulate Greggs‘ playbook by increasing walk-in custom, perhaps targeting the food-to-go market. We will see.

My view

I continue to like Domino’s as a long-term holding, and regret not buying the shares when they were trading around 250p in 2019.

Today they’re changing hands for around 360p, pricing the stock on about 18 times forecast earnings. Even at this level, I don’t think the stock is necessarily expensive. Domino’s has a track record of c.30% ROCE and the stock’s trailing free cash flow yield stands at around 5%.

If Mr Paul resolves the problems with Domino’s franchisees and gets UK growth back on track, then I could see this stock being a rewarding investment from current levels.


That’s all from me for this week, thanks for reading. As always, if my comments have been useful — or not — please leave feedback below.

I’ll be back next week.

Roland

 

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    Just such a shame that Domino’s Pizzas are so greasy and ghastly and contributing sdo generously to our obesity problem

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