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Stock Watch: Bellway, ASOS & WH Smith

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Exactly a year ago housebuilder Bellway (BWY)  warned that Brexit uncertainty and its impact on consumer confidence posed challenges for the year ahead. And that was as it reported strong sales and a robust order book. So, Tuesday’s full year results will be interesting.

If Deutsche Bank is right though and the fundamentals have remained intact then it could be good news for shareholders. The German bank has started coverage of the main London housebuilders, Bellway included, and has put a buy rating on all of them.

There has been plenty of speculation that the slowing economy, Brexit uncertainty and the looming Help to Buy finish date would see housebuilders struggling to repeat their recent successes after years of record profits. But Deutsche Bank disagrees: it says the tailwinds, which have helped the valuations of several housebuilders rise to all-time highs, are still in place.

In a note to clients Deutsche Bank said, house building fundamentals “remain intact”, supported by low unemployment, mortgage rates at, or close to, record lows, “powerful government support” in the shape of the Help to Buy scheme which now runs until 2023, and a land market still yielding attractive returns.

It’s not all plain-sailing though. Building costs have risen faster than house prices and that is putting pressure on housebuilders' margins, but Bellway has previously said annual pre-tax profits were expected to be in line with market expectations thanks to a pickup in housing demand during the spring selling season.

For the year to the end of July 2019, the company expects pre-tax profits to meet market expectations of £664 million with housing revenue expected to rise by over 8% to almost £3.2 billion.

Deutsche Bank isn’t alone in its optimism either. It’s pencilled in a price target of £35.38, but other brokers are just - if not even more - upbeat. Jefferies International has repeated its buy rating and raised its price target to £38.75.

Now mention retail and you get an audible grown. But mention fast-fashion retailers and it’s a different story.

Unless of course you’re talking about ASOS (ASC). Profit warnings and the lack of a finance director for more than a year have seen this once shining star at risk of becoming an embarrassment.

While the retail sector has become accustomed to profit warnings, in ASOS’s case this was a more company specific problem - with a warning that difficulties with new warehouse facilities in the US and Europe, which impacted on the availability of stock, hitting sales and costs, were expected to continue for the rest of the year.

ASOS shareholders have had a bumpy ride. The company’s shares hit a high of £76 in March 2018, and a year ago three-quarters of analysts following the stock rated it a buy. But in July that profit warning sparked a flurry of broker downgrades, which saw Citigroup, Morgan Stanley, RBC Capital Market and Barclays among others, all slashing their target prices substantially. While many had previously set targets of £40-plus they were trimmed back to £21 and above.

The company cut its pre-tax profit guidance to a range of £30 million to £35 million, down from £35 million previously, with restructuring costs expected in the region of £3.5 million. If, as analysts expect, it turns in a £30 million profit this year - that will mean margins are just 1%.

Next week’s results could either be perfectly timed, or spell further trouble for shareholders. The company said it expected to have resolved the issues with its warehousing by the end of September, so we’ll see if that’s happened. On the plus-side, the company has just announced four new directors to its board, to replace two departing directors and reflect the company's increasing size. Their arrival will no doubt be welcomed, but their arrival has been a long time coming - chief executive Nick Beighton said he would strengthen the operational management team some six months ago. So, shareholders will be all ears when ASOS posts full year results on Wednesday.

Now, WH Smith (SMWH), which you could so easily have written off as a dying high street brand of yesteryear, has quite miraculously, proved the doubters so wrong, so far. While flashier retailers have come - and gone - WH Smith has not only held its own but also seen a boom in its travel outlets.

A forecast-beating 7% rise in its half-year travel store profits, to £44 million, is not to be sniffed at. Especially when you look at so many others in the sector.

Now even its high street outlets which have been managing somehow to tick over, are also looking like a more viable proposition after management have used the weakness in the sector to wangle rent reductions of 25% or more on its high street shops. And let’s not forget the two dozen or so of its stores that are paying no rent at all.

At the half-year stage, back in April, it was clear that the stationery chain is still a contender. And it’s the travel side of the business that’s taken off. Like-for-like sales were up 4% across all airports, helping lift total travel sales by 18% in the first half.  The acquisition of 115 InMotion outlets at 43 US flight hubs and the 17 units added to WH Smith International saw international sales rise 76% to £104 million.

It certainly needs this international travel profit to remain strong and offset the inevitable decline on the UK high street. Like-for-like sales there fell 2% — and that was their second-best trading performance in 10 years.

We’ll just have to wait and see now what Thursday’s full year figures have in store.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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