Earnings look ahead – Sports Direct, Petrofac, Ocado

A look at companies reporting next week.

Sports Direct
Source: Bloomberg

Sports Direct (first half results 14 December)

The controversial firm is unable to stay out of the spotlight, as recent stories regarding workers’ pay, and plans to pay out £11 million to Mike Ashley’s brother attest. A recent trading update points to a rise in earnings that is expected to be in the range of 5%-15% for financial year (FY) 2018.

A significant store upgrade programme is underway, designed to tempt back lost customers. International expansion has not been a great success, but then Sports Direct would hardly be the first British firm to try overseas operations and run into difficulties. Revenue is expected to rise by 4% to £1.7 billion for the first half, while Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is expected to be 9.1% higher at £158.5 million. Like-for-like growth has declined for two successive years, so real confidence will only return when Sports Direct turns this around. At 20 times forward earnings, the shares are expensive relative to a two-year average of 15.3.

The surge in the shares in July and August peaked at 424p, and since then we have seen a steady decline back towards support around 370p. It would need a move above 392p to break the downtrend from the September highs. A close below 367p could see the 328p level come into play. 

Petrofac (trading statement 14 December)

The plummet in Petrofac’s share price in the first half of this year has clouded the outlook for the firm ever since. While it saw adjusted net profit drop 4% to $158 million for the first six months, new orders of $2.7 billion could indicate that the situation is not as bad as may first appear. Indeed, the new contracts keep coming, in despite the Serious Fraud Office (SFO) investigation, with $700 million won in early September.

Still, the firm has stuck with the dividend, albeit at a reduced level, but estimates suggest a payout of around 25p, which would still be a chunky yield of 6.7%. And at 5.5 times forward earnings, the shares are very cheap, which makes sense for a company that has yet to emerge from an SFO investigation (5 is the cut-off point, with valuations below this signifying trouble rather than cheapness).

Since plummeting to 345p, the shares have recovered slightly, but are now finding it hard to break above a descending trendline off the early August high at 488p. Each rally is being sold, with every bounce so far being smaller than the last. Continuing to act as support is 395p, with a daily close below this opening the way to the June low at 345p. A break above 450p is needed to negate the current shallow downtrend. 

Ocado (trading statement 14 December)

Ocado’s doubters suffered a severe test of their faith when the shares soared 25% recently on news that it had agreed a tie-up with French firm Groupe Casino. In recent months, Ocado’s management have sought to pivot themselves away from being ‘just’ a supermarket, and towards licensing out its technology to other firms.

This looks like both good diversification, and a commendable realisation that the online supermarket has not conquered the UK grocery sector in the way it hoped. Indeed, with Amazon now on the scene, and Morrisons already selling its products through the online titan, Ocado must work hard on these licensing deals. The management have declared the deal with Casino to be one of many, but the proof of the pudding will be in the eating. At a price-to-earnings (PE) ratio of over 350 for the current year, there isn’t much room for disappointment.

Ocado shot higher in late November, thanks to the Casino news, pushing through the 2016 high of 353p. While it then dropped back, the shares have since held this ground. The next areas to watch on the upside are 391p, and then 412p. If the trading statement disappoints, then we look at support at 340p, 320p, and then back to 280p.

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