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BUY: Bloomsbury (BMY)
The publisher has hailed an “exceptional” year, but sales and profits are due to settle down again, writes Jemma Slingo.
The UK publishing house has been fuelled by the success of fantasy writer Sarah J. Maas, revenue jumped by 30 per cent to £342mn and adjusted profit before tax leapt by 57 per cent to £48.7mn. Shareholders are being rewarded with a 25 per cent dividend hike.
This rapid growth is not set to continue, however. Indeed, analysts expect sales to fall by roughly 17 per cent this year to £284mn, and pre-tax profits are due to decline by 27 per cent to £35.4mn. Management said this reflects the fact that no new Sarah J. Maas title is scheduled for the period – but noted that trading should be “slightly ahead” of forecasts.
The “extraordinary upside potential” of consumer publishing has been proved again and again by Bloomsbury, which published Harry Potter and the Philosopher’s Stone in 1997. However, the state of its non-consumer division needs closer analysis. Non-consumer revenue dipped by 4 per cent to £93.4mn in the period and profits tumbled by almost a quarter to £9.9mn.
Meanwhile, sales growth slowed right down in the digital resources division, from 41 per cent in full-year 2022 to just 2 per cent in 2023.
Management blamed this on a “more normalised” post-Covid higher education market, but said it “remains confident in the long-term trends”. Specifically, it believes the digital resources business is still on track to achieve £37mn of turnover by February 2028. The difficulties faced by academic publishers such as Pearson cast a shadow, however, and Bloomsbury is competing in a new world of generative artificial intelligence.
Adding to the uncertainty is the retirement of chair Sir Richard Lambert after seven years in the job. He is set to be replaced by John Bason, who is currently an independent non-executive director.
Bloomsbury is a business of two halves. While the consumer division delivers spectacular but volatile growth, its non-consumer arm is steadier, with recurring revenues and more predictable demand. This is a very attractive combination, and has benefited shareholders for many years. As the Sarah J. Maas effect wears off, however, we will pay greater attention to the academic division and monitoring how it is faring in a new digital world.
SELL: Pennon (PNN)
Amid a wave of bad publicity, Pennon offers investors few crumbs of comfort, writes Julian Hofmann.
The competition is undeniably stiff, but Pennon, owner of South West Water (SWW), is making a good attempt at becoming the most unpopular utility company in the UK after the residents of the pretty fishing port of Brixham had to boil their water following a recent cryptosporidium outbreak.
This, combined with ongoing rows over sewage dumping and the huge question mark over the future ownership of the industry, meant the market was happy to dump the shares indiscriminately on results day.
The cost of the Brixham outbreak alone is put at £3.5mn as SWW must refund affected customers and, being post period, investors can expect this to feed negatively into the 2025 results. In the context of widening losses, these operational costs are becoming increasingly material events. For example, this also follows on from the £2.4mn hit to dividends that investors had to swallow this year after an Environment Agency-imposed fine.
All this comes at a time when costs are shooting up due to a massive increase in capital expenditure. When spending for SWW and the group is added together, Pennon’s capex was £1.22bn, compared with £716mn at this point last year. Admittedly, capex should peak within the next couple of years, but the numbers are notable when the company is sitting on combined net debt of over £6.76bn.
Hedge funds have reportedly taken out large short positions against many listed water companies. With uncertainty over Thames Water’s future still dominating the headlines and public and political patience with the industry dangerously low, the returns on offer just aren’t worth the risk.
HOLD: Kainos Group (KNOS)
The IT services group increased profits despite a “backdrop of macroeconomic uncertainty”, writes Jemma Slingo.
Kainos has reported a mixed set of full-year results. Revenue across the IT services group edged up by 2 per cent to £382mn in the year to March 31 and adjusted profit before tax jumped by 14 per cent to £77.2mn. Margins were boosted by a reduction in the number of contract staff and higher utilisation rates.
However, there were big discrepancies between the different divisions. The Workday products arm — which provides software that complements the software of US giant Workday — was the standout performer. Revenue jumped by 28 per cent to £57.3mn, driven by a surge in bookings, and management said it was on track to achieve £100mn of annual recurring revenue by 2026.
The Workday services business — which helps clients use Workday’s software suite — also had a strong 12 months, with sales up by 6 per cent to £113mn. Kainos remains the only specialist Workday partner based in the UK, but 75 per cent of its projects are now undertaken for clients in central Europe and North America. Its 13-year partnership with Workday lends it important credibility, and helps fend off potential rivals.
The sticking point was digital services, where revenue dipped by 5 per cent to £213mn and bookings declined by 4 per cent to £228mn. While demand from public sector clients was robust in the period, commercial sector sales were impacted by reduced customer expenditure, and tumbled by almost a fifth to £30.8mn. Project deferrals, cancellations and cost cutting all hit the business, as did the lack of pandemic-related projects.
Looking ahead, management expects Workday products, Workday services, and the public sector segment of digital services (together, 80 per cent of revenue) to keep delivering growth. However, the commercial segment casts a shadow, with further “modest reductions” in revenue expected.
The group is also in the midst of boardroom change. Russell Sloan took over as chief executive just months ago, and chair Tom Burnet and senior independent director Andy Malpass are now poised to step down too.
There is a lot to like in Kainos’s results, and the market was clearly pleased: the shares jumped by 13 per cent after they were published. However, we remain a little wary of problems in the commercial sector and upheaval in the management team.
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