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Investors Chronicle: Virgin Money, Pets at Home, Daily Mail and General Trust

Buy: Virgin Money (VMUK)

In the three weeks ahead of its full-year results, shares in Virgin Money rallied harder than any other listed UK lender. With a trough-to-peak share price increase of 235 per cent since March, few stocks in any sector have seen such an abrupt swing in sentiment, writes Alex Newman.

It was perhaps inevitable then that the temperature would dip once the lender published predictably loss-making numbers for the 12 months to September, and investors were once again reminded of the profound uncertainty facing UK banks.

In the event, Virgin Money also missed several analyst forecasts for its second half. Though costs matched consensus estimates, a dip in income and a higher-than-expected rise in impairments produced an underlying pre-tax profit of £4m for the period, short of the £23m expected.

Given the scale of sector-wide loan loss impairments, the miss does not look too terrible, even if income headwinds are a concern.

For the whole year, total provisions came to £501m, which explains the heavy statutory loss and a rise in the cost of risk from 21 to 68 basis points. However, investors can take some reassurance from management’s claim that “asset quality remains resilient, with no signs of deterioration yet seen”.

On average, analysts expect tangible book value to nudge up to 248p per share for the September 2021 year-end, which at the current price amounts to a 44 per cent discount. By comparison, the better-capitalised and more profitable Lloyds Banking Group trades at 0.77 times’ forward book value, though we prefer Virgin’s growth-oriented market focus and lower cost of risk at this point in the downturn.

Sell: Pets at Home (PETS)

Pets at Home issued an improved full-year profit forecast as the veterinary group capitalised on a pet ownership boom this year, writes Alex Janiaud

Demand for animal companions has soared this year, with prospective pet owners showing a particular predilection for dogs — and that is often reflected in prices. At £1,838, the average price of a pedigree dachshund in June sat nearly double the mean £973 asking price in March, according to The Dogs Trust.

Google searches for the phrase “buy a puppy” soared 166 per cent following the announcement of the March lockdown. However, there is a potential dark side to increased pet ownership. The RSPCA is preparing for its busiest ever Christmas, in anticipation that the pandemic could prompt an indirect rise in the number of abandoned animals.

Nevertheless, the group has raised full-year underlying pre-tax profit forecasts to sit in line with last year’s profits of £93.5m, compared with analyst consensus forecasts of £86.3m. It had previously warned that interim profits would sit “materially below” last year’s comparable period, fearful of the added costs of operating through the pandemic, social distancing requirements, and an unwinding of the pre-lockdown sales boom. In the end, Pets at Home’s statutory pre-tax profits of £8.9m were up 14 per cent compared with last year, although profits fell by 5.1 per cent to £39.6m based on the company’s own underlying basis,

Management said that business rates relief had not fully offset the financial toll of the pandemic, attributing £8m to Covid-specific costs, including £1.9m in additional bonus payments to staff. Pets at Home also paid £24.7m in dividends for last year’s financial period, while pledging a further £12.4m in interim payouts.

The company made greater use of its online channel and benefited from an increase in sign-ups to its clutch of loyalty initiatives. It heralded an increase in its market share across its business. Its number of VIP customers rose by 15 per cent to 6m members, accounting for 85 per cent of its entire store revenue. The company’s subscription customer base, meanwhile, lifted by more than a fifth and now provides £80m in repeat annual revenues. The Puppy and Kitten Club grew by a quarter. These customers typically spend around a fifth more with Pets at Home than non-members.

This increased source of repeat custom will have proven vital in what has been an unpredictable year for veterinary groups, which have been subject to restrictions on the practices they have been allowed to carry out.

As an essential retailer, Pets at Home has been able to continue operating during the November lockdown. The company said that it has managed to function throughout the period with minimal disruption, aided by systems implemented this year to counter the first lockdown. 

Listed entities like Pets at Home and listed peer CVS have faced increasing competition from private equity-backed players such as Medivet. Speculation is rife that one player, IVC Evidensia, may be set to join the pair through a stock exchange admission. Investors EQT Partners declined to comment on a report that IVC was exploring a possible listing next year.

For now, Pets at Home remains one of the London market’s top dogs in the broader industry. Its shares fell by almost a tenth in trading after reporting, with investors seemingly taking profits in the expectation of a slowdown in the pet market. Pets at Home shares trade at 26 times Peel Hunt’s 2021 adjusted earnings estimates of 14.7p, ahead of its recent history. 

Hold: Daily Mail and General Trust (DMGT)

Newspapers do not typically fare well during times of economic uncertainty, and Daily Mail and General Trust has been no exception this year, writes Lauren Almeida.

The group’s adjusted pre-tax profits fell by half in 2020 to £72m, as coronavirus blew a hole in advertising sales. 

At its main Daily Mail and Mail on Sunday titles, revenues fell 12 per cent to £356m and overall circulation volumes for print titles fell 7 per cent. Yet, perhaps not surprisingly, its digital service, MailOnline, managed to post revenue growth of 3 per cent to £144m, with its online audience up by almost two-fifths to 17.3m daily global unique browsers. That is excluding its growing presence on social media platforms such as Snapchat and Facebook, which are increasingly used by some users as the primary source of news.

This represents a wider move to digital consumption across the industry. A report from national regulator Ofcom found that while TV remains the most accessed platform for news at 75 per cent, it is closely followed by the internet at 65 per cent — which is also the most used platform for news consumption among 16 to 24-year-olds. 

The shift has sparked flurry of corporate activity in so-called “new media” companies. There were three major acquisitions in the industry last year, with Vice Media buying Refinery29, Vox Media buying New York Media and GroupNine Media Inc. buying PopSugar.

This bodes well for DMGT’s online proposition, which has proved this year that it can grow its audience to phenomenal numbers on important digital platforms: the Daily Mail title has 1.3m followers on Instagram and 2.5m on Twitter.

Yet a reliance on advertising still leaves the company particularly exposed to downturns in the economic cycle. Despite the fact that digital sales accounted for 65 per cent of total advertising in the Mail business, revenues here still fell 9 per cent. Ad-funded titles, including print-focused Metro and online-only The I, suffered worse falls, down 40 per cent and 10 per cent, respectively. It is also worth remembering that the print version of the Daily Mail still contributes more than half of revenues in the company’s consumer media division. 

Following the sale of its stake in Euromoney, the group is sitting on net cash of £168m, excluding the £117m paid to reduce the pension deficit and £100m of lease liabilities. The pension scheme is expected to absorb a more reasonable £11m of cash annually, which may be why management had the confidence to increase the dividend by 1 per cent to 24.1p per share. While the past 12 months have clearly not been easy for the group, we think its robust digital product can pave the way for more reliable growth.

John Hughman: Looking for a silver lining

An “ancient stockbroker” wrote to me having read my editorial last week, asking if I had got out of bed on the wrong side on the day I wrote it. I will certainly admit to feeling a bit gloomy of late, as I am sure many of us have throughout a second lockdown — I really do not enjoy watching economic activity grind to a seemingly pointless halt or having my democratic freedoms removed based on questionable evidence and haphazard government policy. 

Perhaps, as the ancient stockbroker suggested, I am being “far too pessimistic” about what the future may bring.

Maybe I am falling into the classic cognitive trap of recency bias — paying too much attention to the latest, miserable events rather than the historical evidence that mankind and markets have managed to survive far greater crises than Covid-19 and gone on to thrive. Living standards, life expectancy and wealth are all far higher now than ever before and there are many reasons to think they will remain on that trajectory.

So to balance my Eeyore-ish outpourings of last week, I’m going to try to forget about the enduring “economic emergency” that the chancellor Rishi Sunak said we face in his spending review this week, put out of my mind the “long-term scarring” he suggests Covid-19 could leave on the nation’s economic health, and ignore the mountains of debt that have been racked up tackling the pandemic and be an optimist. 

An obvious place to start is with the weekly stream of vaccine progress — the main reason investors are flocking to shares that have been battered by the pandemic. Logistics aside, there is now a realistic possibility that a working vaccine could be available this year, and that by spring normal life may resume. If that isn’t something to look forward to in itself, the achievements of the boffins at Pfizer, Moderna and AstraZeneca are suggestive of an industry that could be about to embark on a splurge of innovation that accelerates the fight against more common killers, too. 

The pharmaceutical industry has technology to thank for much of this progress, with huge leaps in computing power underpinning its ability to process vast amounts of data ever more quickly to unlock long-held secrets of the human body. And it is the explosion in data, underpinned by the growth of cloud computing and huge progress in artificial intelligence that has the potential to transform many other industries, too. And we will live in a cleaner world, too, as green technologies continue to evolve. 

Last week I suggested we would potentially see more disruption than benefit from the government’s green plans. But a more optimistic take would be that we are on the right path. And without disruption — even on a scale of the pandemic — we would never experience progress.

John Hughman is editor of Investors Chronicle

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