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Five shares to watch update

10 April 2019

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ministerial resignations, a new independent group in parliament and seemingly endless indicative votes mean it’s been an eventful start to 2019.

There’ve been plenty of movers and shakers in the stock market too – here we check up on how our five shares to watch this year are faring.

Activision Blizzard

It was a rocky start to 2019 for Activision Blizzard. The loss of its CFO to Netflix, and split with Destiny developer Bungie, meant the shares struggled in the first few weeks of the year.

However, sentiment has since improved and the shares now trade back where they started the year.

February’s full year results saw Activision post a record high earnings per share of $2.72. However, a quiet release schedule for the rest of 2019, and increased pressure from free-to-play games like Fortnite, mean the CEO Bobby Kotick is tweaking the strategy slightly.

The gaming giant is upping investment in its core franchises, with a 20% increase in developers focussed on Call of Duty, Candy Crush, Overwatch, Warcraft, Hearthstone and Diablo. But there’ll be some significant cost cutting elsewhere.

In the long run we think it’s the right decision. Activision Blizzard’s high-quality intellectual property sets it apart from its competitors, and is what drew us to the business in the first place. Investing in initiatives like Call of Duty: Mobile, announced in March, should allow the group to make the most of what its best at.

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Intertek

March brought full year results that were solid, rather than spectacular. That’s fine by us – after all Intertek, which provides testing and quality assurance, was never meant be a racy investment.

Underlying revenue in the Trade and Resources divisions is rising, but a lower margin meant full year results saw profit dip slightly in both divisions. Still, with profits rising handsomely in the dominant products division, underlying earnings per share rose 7.7%. With the group moving to a new policy of paying out around 50% of profits to shareholders, the final dividend rose 39% to 99.1p a share.

Investors will also have been pleased to see Intertek describe its near term organic growth prospects as either ‘solid’ or ‘good’ across the board. That means we’re confident it can build on 2018’s growth and deliver more progress in 2019. Should that come to pass, that new dividend policy would mean investors get a higher payout, but no dividend is guaranteed so shareholders shouldn’t count any chickens just yet.

The shares have ticked up 2.8% so far this year, but on a valuation basis, there’s been little change. They still trade on a price to earnings ratio in the low twenties. That’s higher than the long-term average, but we think the business has high-quality earnings and good growth prospects.

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GVC

GVC also endured a turbulent few weeks, with the share price hit by the chairman and CEO both selling a significant number of shares just a couple of days after full year results. That’s rarely a good sign, and is the main reason why the shares find themselves down 15%.

Still, we’re far from alarmed by the group’s operating performance. In fact, those results confirmed trading has been strong. Profits surprised on the upside, and the group continues to win market share across the board.

Profits will be hit this year by tighter FOBT restrictions, which will limit staking on a key driver of profits in the group’s betting shops. But the key online gaming business is going from strength to strength. If that can be sustained, GVC should be able to grow robustly in 2020 and beyond.

Investors should also note that Kenny Alexander, the group’s long-serving CEO, retains shares equivalent to almost 5 times his basic salary. He’s also said he won’t be selling any more shares while he remains at the helm, and is committed to the group for at least the next three years.

The share sale took us by surprise, but the group’s underlying results mean we remain optimistic about the future, although as ever remember there are no guarantees.

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Primary Health Properties

For a business that’s meant to plod along delivering steady but unglamorous dividend growth, Primary Health Properties (PHP) has had an eventful start to the year, with the shares rising 18% to date over this short period.

Since the start of the year PHP has announced and completed a merger with rival MedicX. The deal takes the property portfolio to around 480 properties with a value of £2.3bn. Cost savings from increased scale and duplicated costs are expected to save the group combined group around £4m a year, giving it the lowest cost ratio among all the UK REITs.

Management expect the larger group to be able to access more favourable financing, and that should in turn improve the group’s ability to buy new properties when the opportunity arises.

On the business as usual front, full year results saw the dividend rise 2.9% despite earnings per share remaining broadly unchanged. Occupancy rates remain close to 100%, and the average lease has 13.1 years to run until it expires. The strong run in the share price means it’s not the high income option it once was though, with its 4.4% yield slightly behind the wider market.

Despite the excitement of the last 3 months, at its heart PHP remains reassuringly boring.

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Unilever

Full year results at the end of January had plenty of bright spots.

Underlying sales growth was 3.1%, and operating margins improved 0.9% to 18.4% – that meant earnings per share increased 13%, helping the dividend rise 8%. Not a bad opening round for new CEO, Alan Jope.

It’s not all plain sailing though – Unilever expects sales growth for this year to come in at the lower end of the longer-term 3%-5% guidance range. That’s because of hyperinflation in Argentina, and pricing pressure in the US and Europe.

Still, we think the long-run attractions of Unilever still hold true. 2.5 billion people use one of its products every day. The group’s brands, including Ben & Jerry’s and Dove soap, are strong, and it has an enviable track record of investing well in product development and marketing. More of the same should enable it to keep growing, although of course there are no guarantees.

The shares have risen 5.8% so far this year, and now trade on 19.8 times expected earnings – slightly above the longer-term average. The prospective yield is 3.6% next year.

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The author holds shares in Unilever.

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.


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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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