GVC and SIG

Friday, March 8, 2019 - 09:56

“Several bouts of poor economic news from China and Germany cast a dark cloud over global markets. The FTSE 100 fell 0.7% to 7,107 on Friday; markets in mainland Europe all flashed red and Asian shares really took a beating. Japan’s Nikkei 225 index fell by 2% and China’s SSE Composite Index dropped by a punishing 4.4%. “Chinese exports saw their biggest fall in three years in February amid the trade war with the US. And German industrial orders fell by their steepest amount in seven months in January. It is understandable why investors have been so worried about the outlook for global growth when you see figures like these,” says Russ Mould, investment director at AJ Bell.

GVC

“There is a widely used phrase in investing that says ‘follow the money’. In GVC’s case, shareholders are following this advice to the letter as the gambling company’s share price dives amid news of hefty share sales by directors.

“Chief executive Kenneth Alexander has sold £13.7m worth of stock and Chairman Lee Feldman has dumped nearly £6m of his personal holding. Investors are clearly spooked by this news and are also selling down.

“The two directors have pledged not to sell any more while they ‘continue’ at GVC. Investors may have read that statement as implying the pair aren’t going to be around that long.

“Mr Alexander reassures that he is ‘here for the long term’ because his current plan will take at least three years to accomplish. The market is clearly confused as to why the pair have decided to sell down now if there is still value to be created.

“The gambling sector continues to come under increasing regulatory pressure, clouding the outlook for earnings. GVC has done a great job of buying underperforming businesses and fixing them but has its luck run out given the diminishing number of acquisition targets?”

SIG

“Some challenges are beyond the control of a company. For example, if you make building materials you are almost certain to be affected by sluggish construction markets at present.

“This is the case for Sheffield-headquartered SIG which sees lower like-for-like sales in the first half of 2019 following a fall in revenue in 2018. “However, where management can make a difference they are doing so. Overheads are being lowered, middle management have been removed and poorly performing businesses have been sold.

“These self-help measures are improving profitability and robust cash flow is also enabling the company to get its net debt position under control.

“This process could be accelerated if the company proceeds with a potential sale of its air handling business – which is focused on indoor air quality and is not an obvious fit with the rest of the business.

“Too much importance can be attached to scale and growth for its own sake when judging a company. SIG’s plan is to demonstrate that the best things really can come in smaller packages.”

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.