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Investors’ Chronicle: Capital, Marshalls, Superdry

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BUY: Capital (CAPD)

The value of stakes in mining and exploration companies has increased substantially, writes Michael Fahy.

Mining equipment provider Capital said revenue for 2021 came in at $226.8m (£189.7m), 68 per cent higher than the previous year and slightly ahead of recently-revised guidance.

The company posted its strongest quarter of growth in the final three months of the year, with revenue up 8 per cent on the third quarter and 92 per cent on the same period a year earlier.

Throughout 2021, the company grew its fleet by 16 per cent to 109 and increased utilisation levels substantially — 78 per cent of rigs were used, compared with 57 per cent a year earlier. Average monthly revenues per operated rig also grew by 6 per cent to $181,000.

The Mauritius-based company has also been increasing stakes in mining and exploration companies, an activity it aligns with securing service contracts. These investments recorded (largely unrealised) gains of $29.1m, doubling in value compared with the second half of the prior year.

Investment in mining activity boomed last year when compared with a pandemic-disrupted 2020. Exploration budgets increased by 35 per cent globally to $11.2bn in 2021, according to a report published in November by S&P Global Market Intelligence. It predicted that growth will moderate this year, but exploration budgets will still be 5 to 15 per cent higher than last year.

Capital’s share price rose 4 per cent, bringing its 12-month gain to 47 per cent. Broker Peel Hunt said that despite its re-rating, it is still only valued at “the lower part” of its historic trading band, suggesting it has much further to go.

The broker forecasts earnings of 13.1¢ per share for the year ahead. Capital’s shares are currently valued at nine times this level, which is below both its peers and the industry average. Given that the industry shows few signs of a slowdown, we maintain our buy recommendation.

HOLD: Marshalls (MSLH)

Trading is up by 13 per cent in recent weeks in volume terms and shares currently trade at 22 times forecast earnings, writes Michael Fahy.

Paving blocks supplier Marshalls battled through tough trading conditions that included both raw material and labour cost increases to deliver sales of £589m last year, a 26 per cent rise on 2020 and a 9 per cent uplift on 2019.

Revenue growth was strongest in its domestic business, which represents 28 of its total top line. This division increased sales by 30 per cent on 2020 and 18 per cent on the previous year.

Its commercial and public sector arm, which makes up two-thirds of total sales, increased revenue by 26 per cent the prior year, or 4 per cent compared with two years earlier.

Operational challenges led to “significant” cost inflation, as the company had to pay overtime to cover coronavirus-related absences and some customer project delays, but these were largely recouped through a price rise in the second half of last year. Another increase has been implemented this month.

Trading continues to remain positive into this year, up 13 per cent in volume terms in recent weeks before price rises are factored in, the company said.

The average cost of concrete products like blocks, bricks, tiles and flagstones increased by 7 per cent in the year to November, according to Office for National Statistics figures.

Marshalls’ improved top line and a “close monitoring of cash flows” also provided headroom to allow it to pay down borrowings. Net debt at the end of last month dropped by 46 per cent year-on-year to £41m. Excluding leases, it had net cash of £100,000.

Marshalls’ shares rose 3 per cent to 712p, equating to about 22 times the current year earnings forecasts of just over 32p by brokers Shore Capital and Davy.

Shore Capital analyst Graham Kyle believes the company’s strengthened balance sheet offers the opportunity to complete bolt-on acquisitions, which could enhance earnings by a further 10 per cent by the end of next year.

With a home improvements market that shows no signs of slowing and a government pouring more taxpayers’ money into infrastructure projects, the prospects for Marshalls’ main markets are bright. Even so, its shares hardly look cheap compared to a broader index of UK building products that trades off a ratio of about 14 times forward earnings.

HOLD: Superdry (SDRY)

The group has returned to profit, despite revenues falling, with post-period results displaying tangible progress, writes Christopher Akers.

Superdry’s results were helped by a £6m gain on foreign exchange forwards. But while the group was back in the black this couldn’t obscure the fact that overall revenue was down, and by a striking quarter against two years ago.

Store revenues jumped by a fifth to £103m as the clothing group took advantage of a less restricted retail trading environment. Ecommerce income, meanwhile, dropped off a cliff — sales were down by 30 per cent to £62m. Management pinned this on last year’s heightened level of promotions, with online sales still up by 8 per cent on a two-year basis.

With revenues down, gross margin progress came to the rescue. Margins were up by 3.5 per cent, spurred on by a 12 per cent increase in the full-price sales mix.

Winter trading results — disclosed up to January 8 — were a standout and suggest better things are to come for Superdry. Both retail and wholesale sales spiked against last year, with jacket sales up by 40 per cent and positive steps made with womenswear and products aimed at younger customers. Store and ecommerce gross margin gained over 4 and 5 per cent, respectively, against two years ago, in this period.

Consensus forecasts have the shares trading on a 12-month forward price/earnings ratio of 11 times, below Superdry’s five-year average. Broker Numis expects profit before tax of £30m and earnings per share of 29p for fiscal year 2023, rising to £48m and 46p for 2024.

Winter trading was impressive, consumer footfall is improving and margins are growing. Singer Capital Markets said that “a breakout in 2022 looks increasingly likely”.



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