Top UK Stocks to Watch: Unilever shares drop on flat margin forecast

Unilever beats estimates but disappoints with its outlook, Centrica expects conditions to improve as 2021 progresses, the UK government looks to sell more shares in NatWest, Firstgroup ups shareholder returns, and Morgan Sindall profits surge past pre-pandemic levels.

UK

Top News: Unilever beats expectation as sales growth tops targets

Unilever’s interim results beat expectations this morning as the consumer goods giant remains on track to deliver 3% to 5% underlying sales growth in 2021, but spooked investors by warning its margin will stay flat after being hit by cost inflation.  

Unilever said underlying sales growth came in at 5.4% in the second quarter, ahead of its annual target range, and revenue rose 1.2% year-on-year to EUR13.5 billion, coming in slightly better than the EUR13.4 billion expected by analysts.

For the first half, revenue rose 0.3% to EUR25.8 billion and its adjusted EPS dipped 2% to EUR1.33. Sales were slightly higher than the EUR25.72 billion expected by analysts while EPS was ahead of the EUR1.25 forecast. Reported EPS shrank 5% to EUR1.19.

The minor increase in revenue was the result of a 1.4% boost from acquisitions being offset by a 6.1% headwind from foreign exchange rates. Unilever also flagged that ecommerce sales jumped 50% in the period and now accounts for 11% of all sales.

Free cashflow fell to EUR2.4 billion in the first half from EUR2.9 billion the year before. Unilever said it is paying a quarterly dividend of 42.68 euro cents per share and continuing with its EUR3 billion share buyback programme that was launched in April. The first EUR1.5 billion of that buyback should be completed by late August, with around £900 million worth of stock already having been repurchased from investors.

‘Competitive growth is our priority, and we are confident that we will deliver underlying sales growth in 2021 well within our multi-year framework of 3-5%, despite more challenging comparators in the second half.  We have seen further cost inflation emerge through the second quarter.  Cost volatility and the timing of landing price actions create a higher than normal range of likely year end margin outcomes.  We are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat,’ chief executive Alan Jope said.

Unilever shares were trading 4.2% lower in early trade this morning at 4124.8p.

Centrica expects conditions to improve as 2021 progresses

Centrica said revenue and earnings both increased during the first half of its financial year but came in slightly below expectations as it continues to restructure the business and anticipates an uptick in energy demand as businesses reopen from lockdown this year.

Revenue rose 6% in the first half to £8.2 billion from £7.7 billion the year before and adjusted EPS fell to 1.7 pence from 2.5 pence, coming in just below the 1.8p expected by analysts. Notably, last year’s EPS figure includes the contribution from Direct Energy, which has now been offloaded, but rose from 1.6p once excluded.

Adjusted operating profit from continuing operations came in at £262 million from £264 million the year before. Centrica said colder weather spurred on higher energy consumption and that a rise in commodity prices had benefited its upstream division, but that this was all wiped out by the impact from the pandemic, the industrial action at British Gas and a loss from its division that trades energy thanks to increased losses from a legacy contract.

Reported operating profit from continuing operations swung to a £1.00 billion profit from a £338 million loss, driven by the exceptional profit booked from the sale of Direct Energy in January and one-off gains booked thanks to higher commodity prices.

Free cashflow edged up 4% year-on-year to £524 million thanks to lower capital expenditure, and Centrica said it cut debt to just £100 million at the end of June from over £3.0 billion at the start of the year, having used the Direct Energy proceeds to slash its debt burden.

Despite debt being obliterated, Centrica said it is not paying a dividend for the first half and said it plans to ‘recommence dividends to shareholders when it is prudent to do so.’

Notably, Centrica said it is making progress with the sale of Spirit Energy to further streamline the business, with a wider restructuring is expected to be completed by the end of 2021. This will deliver around £100 million worth of cost-savings this year.

Going forward, Centrica said it expects conditions to improve in the second half as lockdown eases and energy consumption by businesses rises again. However, it also warned of several headwinds that will weigh on earnings this year including a £40 million charge from one of the Bord Gais projects remaining offline and larger losses from ECO costs at British Gas.

‘Our first half financial performance was broadly as we expected overall, and we continue to make good progress towards the simplification of our company. Although there is still a lot to achieve, our turnaround remains on track, our balance sheet has been significantly strengthened and the recent changes in colleague terms and conditions will enable us to better serve the needs of our customers. We will continue to strengthen our foundations, as we help our customers on the path to net zero,’ said chief executive Chris O’Shea.

Centrica shares were down 0.1% in early trade at 50.73p.

UK government looks to sell down stake in NatWest

The UK government said it plans to reduce its stake in NatWest over the next 12 months.

The treasury has been gradually reducing its stake in the bank since it was bailed-out by the taxpayer during the financial crisis. Today, the government owns 6.33 billion NatWest shares, making it the majority owner with a 54.7% stake.

It has now instructed Morgan Stanley to conduct an ‘orderly and measured sell down of shares’ in NatWest on its behalf over the 12 months starting on August 12. This will run until August 11, 2022 at the latest.

Morgan Stanley will sell no more than 15% of the total trading volume in NatWest shares during the 12-month period and will not be sold at a price below what is deemed fair and reasonable by the government and treasury.

‘The actual number of shares sold on any day under the trading plan will depend on market conditions, among other factors,’ the statement said.

NatWest shares were down 0.5% in early trade this morning at 198.88p, around half the price what the government originally paid for the shares.

‘UK Government Investments and Her Majesty’s Treasury will keep other disposal options open, including by way of directed buybacks and/or accelerated bookbuilds. The decision to launch the trading plan does not preclude HMT from executing such other disposals that achieve value for money for taxpayers, including during the term of the trading plan,’ the statement added.

Firstgroup ups shareholder distribution from First Student and First Transit sale

Firstgroup said it will return £500 million to shareholders this autumn rather than the original £365 million promised after completing the sale of First Student and First Transit.

Firstgroup shares jumped 3.8% in early trade this morning at 82.5p.

The travel operator announced the sale of both businesses earlier this year to EQT Infrastructure, which has now been completed and generated $3.12 billion in net proceeds.

Firstgroup had originally planned on returning £365 million of that to investors but said it has bumped that up to £500 million, equal to around 41.0 pence per share. The increase has been made due to higher-than-expected proceeds due to final working capital and debt balances and because Firstgroup has greater clarity over the future of its rail contracts and seen cashflow come in ‘better than was assumed’ back in April.

Firstgroup said it has not made a final decision on exactly how it will return funds to shareholders later this year.

Shareholders could be set to receive further distributions in the future, particularly if Firstgroup secures further earnout funds worth up to $240 million. As part of the deal, Firstgroup will be paid 62.5% of First Transit’s value over $380 million within three years.

‘The board is committed to keeping the balance sheet position of the ongoing group under review and will consider the prospects for making further additional distributions to shareholders in due course, following crystallisation of the First Transit earnout noted above, resolution of the legacy liabilities related to Greyhound and the potential release of monies from pension escrow (up to £117 million). The board also notes the capacity to increase gearing over time, as end market conditions and hence business performance improves,’ Firstgroup explained.

Morgan Sindall raises expectation as profit soar past pre-pandemic levels

Morgan Sindall said profits have soared in 2021 after being severely knocked last year by the coronavirus crisis, surpassing pre-pandemic levels, putting it on course to beat expectations this year.

Morgan Sindall shares jumped 9.7% in early trade this morning at 2315.0p.

The construction and regeneration specialist saidtrading has been strong and the positive momentum across the group has continued to accelerate’ since its last update in April.

As a result, pretax profit is expected to be around £53 million in the first six months of 2021, up from just £15.7 million last year when its business was severely disrupted by the pandemic and the introduction of lockdowns. More importantly, that interim profit will be some 46% higher than what was delivered in the first half of 2019, before the pandemic hit.

Its Construction & Infrastructure division has grown margins and profit since the start of the year and a growing order book means it is expected to perform better than originally anticipated in 2021. Fit Out has seen its order book grow 42% in the last six months. Property Services has seen volumes return to normal run-rates and this should lead to an improvement in margins. Partnership Housing grew profits as a result of a spike in demand that should last for the remainder of the year. And Urban Regeneration has traded as expected.

‘As a result, the group now anticipates that its full year results for 2021 will be significantly ahead of its previous expectations,’ Morgan Sindall said.

Interim results will be released on August 4.

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