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Five shares to watch – third quarter update

All five announced half year results. See what's been changing.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The third quarter included half year results for all of our five shares to watch. The numbers were generally well received, with all five comfortably in the black for the year as a whole, and four ahead of an upbeat market.

Please remember though that all investments and the income they produce, fall as well as rise in value. You could get back less than you invest, especially over the short term. This article isn’t personal advice and if you’re not sure if an investment is right for you, please seek advice.

Activision Blizzard

Activision’s second quarter sales fell 14.9% year-on-year, following the lack of any major releases in the first half. However, both revenues and profits were actually some way ahead of previous guidance.

The stronger than expected performance comes as the group doubles down on investment in its major franchises; Call of Duty, Candy Crush, Warcraft, Hearthstone, Overwatch and Diablo. While it’s been a relatively quiet quarter in terms of new announcements, the extra investment does show some early signs of bearing fruit.

Call of Duty: Mobile launched earlier this week, and the new platform has the potential to significantly increase engagement and player numbers in what is already one of the world’s most valuable gaming franchises. How successful it is in turning the extra eyeballs into hard dollars remains to be seen though.

In other news Activision announced in August that it’s signed a sponsorship deal with Kellogg’s relating to its Overwatch League – an eSports event.

Now it’s early days in monetising these kinds of events – and we wouldn’t expect the deal to contribute meaningfully to revenue. But signing up a big name sponsor is certainly promising, and makes the segment an interesting one to watch going forwards.

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Half year results in August gave us an early look at how GVC’s Ladbrokes and Coral stores are coping with changes to Fixed-Off Betting Terminals (FOBT) rules.

Since April, betting on in-shop machines has been capped at a maximum of £2 a spin. We’ve known the change was coming for some time and it was expected to dramatically reduce the profitability of the company’s 3,400 shops, where gaming machines account for large chunk of revenue.

Despite high street gaming revenue falling 10% year-on-year, the effect has actually been less dramatic than feared – with some customers placing over the counter sports bets instead of betting on machines. Management still expect to shut 900 shops, but that’s less than originally planned.

A strong result from the online business, which saw sports betting surge 14% and gaming revenue rise 18%, meant full year profit guidance has been nudged upwards.

The other big story at GVC is the launch of a sports betting operation in the US. The joint venture with casino operator MGM was looking to launch a full online offering in New Jersey by September – with others states to follow.

The opportunity in the US is significant but the challenges of launching from scratch shouldn’t be underestimated. We look forward to hearing how that’s performed at the next set of results.

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Intertek’s second quarter results were very much a case of business as usual. Revenue rose 4.9% thanks to a combination of small acquisitions and modest organic growth. Underlying operating profits were up 6.8%.

While such modest revenue growth may not seem particularly exciting at first glance, improving margins and great cash conversion mean profits are very high quality. The fact the group – which has significant exposure to global trade flows – has been able to deliver steady growth despite the tensions between China and the US is testament to how critical its services have become.

Management are confident Intertek’s Total Quality Assurance offer – which involves working at all levels of corporate supply chains to ensure appropriate standards are being met – will continue to see a steady increase in demand in the years ahead. That’s expected to underpin organic growth, and with net debt at the lower end of the target range more acquisitions look set to add a sweetener going forwards.

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Primary Health Properties (PHP)

The integration of MedicX, acquired back at the start of the year, was the main focus of half year results. The £4m in cost savings promised at the time of the merger are in the bag, and further financing savings have added another boost to profits.

All of that’s underpinned a 12% increase in earnings per share and 3.7% increase in dividend per share. That puts the group on track for its 23rd consecutive year of dividend growth. Remember that dividends are not guaranteed and past performance is not a guide to the future.

The company also raised £100m in the quarter through a share placing, completed at a 4.3% discount to the prevailing share price. The additional funds are being used to develop new, larger medical facilities – which PHP sees as more attractive investments.

Raising cash like this is common for growing REITs, and we’d expect them to remain a feature going forwards. REIT rules require that the vast majority of income is paid out to investors, and that means companies have to turn to investors to fund the purchase of new properties.

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Second quarter sales came in ahead of a weaker first quarter, which is good to see, but volume growth remains sluggish.

Efforts to improve margins seem to be delivering results. Combined with a share buyback programme following the sale of the Spreads business last year, earnings per share rose 3%.

We also take comfort from the fact that sales growth was driven by a strong performance in the key Emerging Markets business. These are likely to be the ultimate drivers of long term success, and already account or the lion’s share of sales.

Emerging markets don’t come without risk, though. Recently Unilever’s encountered problems in Argentina, where hyperinflation knocked 9.1% off volumes.

Nonetheless there’s work to be done at Unilever. Squeezing consumers on price and cutting costs can both support profits in the short term, but there’s no substitute for selling more when it comes to sustainability.

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The author holds shares in GVC.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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