Investec and JD Wetherspoon

Friday, September 14, 2018 - 10:15

“The FTSE 100 has been a source of frustration for investors for several months and hopes that it would spring back to life after the summer ended haven’t been fulfilled. While the index of London’s largest listed companies was in positive territory on Friday, trading 0.4% higher just after the market opened, the performance is nowhere strong enough for investors to become more optimistic. It looks like a challenging time ahead,” says Russ Mould, Investment Director at AJ Bell.


“They say breaking up is the hardest thing to do, yet there increasingly doesn’t seem to be any problems with corporates splitting into two.

“Investment bank Investec is set to join the ranks of Whitbread, Old Mutual, BHP Billiton, Esure, BGEO and Prudential in breaking up its business and demerging some operations into a separately-listed entity.

“Investec’s plan to spin off its asset management arm looks like a sensible decision as it should allow management more freedom to drive that business forward and not be constrained by having to follow the strategy of the current parent which is predominantly a specialist banking business.

“Unbundled companies have the freedom to be more entrepreneurial. From an investment perspective, demerged companies are often valued at a greater sum than when they were combined – which explains why Investec’s share price jumped on the break-up announcement.

“Separation can sometimes entice takeover interest should a predator have been interested in part of a company but was previously put off from making an offer as it didn’t want to swallow the whole group.

“That was evident with GoCompare which attracted a bid from Zoopla’s owner ZPG following its demerger from Esure. In 2015, chemicals group Alent was acquired for £1.35bn after it was demerged from former FTSE 250 engineer Cookson.”

JD Wetherspoon

“Investors should not be surprised to see JD Wetherspoon’s full year profit and revenue come in at the lower end of expectations.

“While many of its peers enjoyed a big boost from the summer heatwave and England’s strong run in the football World Cup, the budget pub chain lacks two of the big ingredients central to others’ success.

“Firstly, Wetherspoon rarely shows live sport outside of big events like the World Cup so it is not an obvious destination for people looking to follow the Three Lions.

“Secondly, relatively few of its premises have much of a beer garden, making it a less appealing venue to soak up some rays while enjoying a drink.

“It would be wrong to get too hung up on these short-term factors, and the fact profit reached record levels suggests the company’s model is continuing to deliver. Though, despite a ‘reasonable’ start to the new financial year, higher staff costs due to the living wage as well as increased taxes and interest payments mean it will not be easy to repeat the record performance.

“As usual executive chairman Tim Martin, a prominent leave campaigner, has had his say on Brexit. Martin reckons by rejecting the ‘Chequers Deal’ and slashing EU import tariffs businesses and consumers can enjoy a ‘huge gain’.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market comment is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.