What could happen to Pennon, Marks & Spencer, Micro Focus and more next year?
Thursday 19 Dec 2019 Author: Martin Gamble

Knowing what’s on the road ahead for companies can help you make better investment decisions. It can help you form a bigger picture of the potential risks and rewards for certain stocks.

With that in mind, we now look at six companies in the FTSE 350 and one of the biggest names on AIM where there are some potential big events in store for 2020.

WILL MICRO FOCUS BE TAKEN OVER?

Micro Focus (MCRO) has effectively been in play since its latest profits shock in August sparked a strategic review that many analysts felt was a euphemism for raising the ‘for sale’ sign.

The company, which provides software that bridges the gap between new and old technology systems, has been a bag of bits for a while so it is no surprise that selling unwanted parts of the business is the official line.

Yet speculation persists that the entire company is on the block and various rumours have come  and gone.

It is quite possible that the publication of its full-year results on 4 February 2020 could finally draw genuine offers, with analysts anticipating 35% to 40% premiums to be offered to the current £10.36. You should expect trade and private equity to be interested in parts of, or more likely, the entire business.

WILL FIRSTGROUP EXIT THE US COMPLETELY?

Under attack by activist investors, the board of transport company FirstGroup (FGP) will have to make some trade-offs next year.

Does the company bow to activist pressure and sell all of its US assets? One major shareholder, Royal Bank of Canada, says if FirstGroup does exactly that, its share price could go up to around 245p, well ahead of its current price of 121.3p.

The company has already relented to some pressure, putting its struggling North American coach business Greyhound up for sale.

But its US student bus service, First Student, is the second best performer in the business when it comes to revenue and profit, behind only its UK rail division, while another American bus division, First Transit, has also performed strongly.

FirstGroup has come under pressure from several shareholders to sell all its US assets, but the business has previously said it would rather sell off the less profitable parts and argues the company’s pension deficit would soar if it sold the best bits. However, the board seems to be changing its mind with an announcement on 16 December that it is now looking at options for the First Student and First Transit operations, including a potential disposal.

CAN MARKS & SPENCER MAKE ITS NEW ONLINE SERVICE WORK?

Next year marks a major milestone for two of the UK’s best-known retailers, the 135-year-old veteran Marks & Spencer (MKS) and the 19-year-old upstart Ocado (OCDO).

In February this year the two firms agreed to form a joint venture to supply M&S groceries to UK shoppers using Ocado’s ‘out of the box’ software platform.

In September 2020 Ocado will stop selling Waitrose products and switch to M&S products. In exchange M&S is buying half of Ocado’s UK retail business for £750m, some of which is deferred.

Ocado’s retail arm is already doing very nicely, with trading for the three months to 1 December up by more than 10%. By contrast M&S food sales were up just 1.4% in the three months to the end of September.

Food now accounts for more than half of sales at M&S and it needs the deal with Ocado to work seamlessly. Research by YouGov suggests that Ocado’s current customers are likely to embrace M&S products as both brands are seen as offering ‘quality’.

In fact the M&S ‘Simply Food’ brand was recently voted the UK’s favourite retailer, ahead of John Lewis, while Waitrose failed to make the top 10.

Naturally for Ocado, a successful transition to M&S products matters but its ambitions are further afield as shown by its recent deal with Aeon to enter the £25bn-a-year Japanese online grocery delivery market.

WILL BLUE PRISM NEED A BIG SLUG OF CASH?

Blue Prism’s (PRSM:AIM) ongoing challenge to lead the fast-growing robotics process automation sphere is exciting and seldom does the UK produce a genuine contender to the Silicon Valley elite in cutting edge technology.

Locked into an industry land grab with venture capital-backed rivals Automation Anywhere and UiPath, Warrington-based Blue Prism has tapped investors for more than £120m since its IPO in March 2016 including a £100m fundraise at the start of 2019.

That may pale against the $1bn-odd raised by its two rivals over the past couple of years yet since 30 April Blue Prism’s cash pile of £129.4m has dwindled to £74m, implying a burn rate of nearly £10m a month.

You should expect Blue Prism to ask investors to back its ambitious growth strategy with fresh cash again in 2020, probably following any run of share price strength.

WHEN WILL KAZ MINERALS MAKE ITS BIG RUSSIAN MOVE?

Copper miner KAZ Minerals (KAZ) has a big call to make next year on when it wants to develop a mine it spent $900m buying in far eastern Russia. The construction cost is currently estimated to be $5.5bn.

A potentially lucrative but high risk project, the Baimskaya copper deposit sits in an area so remote that 250km of roads need to be built just to connect the mine to an existing road, which is then 100km away from the nearest town.

The benefits are obvious. The project is one of the largest undeveloped copper deposits in the world, and copper demand is forcast to soar in the next few years.

But the market has little confidence in KAZ, with its shares halving to £5 after announcing the deal in August 2018, albeit also weighed down by copper price weakness earlier this year.

A feasibility study will be completed in the first half of 2020, while talks on financing continue and partnering options assessed.

WILL FORESIGHT SOLAR ENTER THE SUBSIDY-FREE MARKET?

Next year could prove momentous for the Foresight Solar Fund (FSFL), which makes money by selling power from its solar farms to electricity suppliers and it recently entered the FTSE 250.

Thanks to increasing momentum behind renewable energy, building and running a solar farm in the UK is now becoming an economically viable thing to do without needing to rely on government handouts.

This is something which could transform the industry and its growth potential going forward.

Yet in addition to reviewing investment opportunities in UK subsidised solar markets, the investment manager Foresight is closely monitoring the development of subsidy-free markets in Spain, Portugal and the UK.

This area has developed rapidly in Southern Europe, where a number of relevant transactions have been announced in Spain and Portugal, so 2020 might just mark the fund’s debut foray into the subsidy-free arena.

WILL PENNON BE BROKEN UP?

Water, waste and recycling company Pennon (PNN) announced on 27 September that it would conduct a strategic review of the business, raising the prospect that 2020 may see the company demerge the Viridor waste management business or its water businesses to become a pure recycling play.

Strong investor demand for green investments makes it an opportune time to consider the best options to maximise value for shareholders.

In addition, growth capital expenditure for Viridor is due to peak in the current financial year to 31 March 2020. The business model has been de-risked with 100% of revenues under contract including 80% under long-term index-linked contracts.

Three of its energy recovery facilities are in operational ramp-up which should translate into healthy earnings growth in the next two years.

Having proved its credentials, Viridor is in an enviable position to take advantage of strong market dynamics. In 2020 investors will find out whether they can invest in that opportunity through a separate, listed vehicle.

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