Market Report – weakening luxury market and Sainsbury’s backs away from banking
Steve Clayton, head of equity funds, Hargreaves Lansdown: “Worst news of the day looks to be coming from Watches of Switzerland (WOSG) this morning. It reports that demand fell away toward the end of the year in its luxury retail markets, especially in the UK. Demand weakened across a broad range of watch brands and especially in the non-branded jewellery markets. The group’s earnings guidance for the full year is being wound down, with revenues seen coming in around £100m below expectations, suggesting growth of 2-3% from high single digits previously. Margins take the hit, with the group seeing these drop by around 20%. Finance costs will edge up because the group now sees cash generation dropping markedly compared to previous expectations. WOSG says that customers are still registering interest in buying new watches when they become available, they’re just buying fewer right now. The luxury watch market has enjoyed extraordinary growth in recent years, with watch prices pushing ever higher, despite supply being limited purely by the manufacturers’ own decisions. Is the sound of a bubble bursting? Time will tell. WOSG shares tumbled 27% in early trading.
Sainsbury’s announced the results of a Strategic Review of its Financial Services division. In Sainsbury’s words, future financial services products will be “provided by dedicated financial services providers through a distributed model,” which will “result in a phased withdrawal from our core banking business”. This speaks volumes about the state of UK retail financial services. Sainsbury’s offers a book of generally decent quality banking customers all nicely parcelled up, but nobody is prepared to pay to acquire the book, suggesting a lack of confidence in the ability to extract a decent margin going forward. For its part, Sainsbury is looking to de-risk its exposures by earning commissions from allowing other firms to sell to the Sainsbury’s Bank clientele.
Cranswick has reported a bumper Christmas with festive products selling especially strongly, leading the group to up guidance for the full year. It marks a continuation of a trend of improving growth at the group as it reaps the benefit of years of consistent investment into boosting capacity and quality proposition, cementing its leading position in the pork and poultry markets. The group highlights its £250m of committed banking facilities, suggesting that maybe there might be deals coming down the line, which could boost growth further in years ahead. The shares responded well, rising 2.5% at the open.
Sage Group, one of the world’s leading providers of accounting software packages reports another quarter of double-digit growth. Revenues are rising strongest in its cloud-based products and services and subscription income now makes up 81% of revenues. Once again, the Intacct acquisition is proving its worth with sales growth especially strong here. All territories are expanding, with the Americas leading the way with 13% revenue growth. Laggard Europe still managed 7% revenue growth, a pace that many businesses would give their back teeth for in the current environment. Sage highlights the continued efforts to digitize its small and medium-sized business customers are continuing to make and the growing addition of AI-driven services into Sage’s products. In a UK market notable for a shortage of listed technology companies of any scale, Sage stands out. The company has recovered well from an initially clunky entry into cloud-based software delivery but are now motoring along at a robust pace. The market was expecting little else from Sage though, leaving the shares languishing half a percent lower in early trading.
Building materials group, Marshalls reports a fairly dire trading update this morning, with revenues down by double digits, but this will not be a surprise to anyone who has been following the group in recent quarters. Weakness was across the board as housebuilders reduce their volumes and consumers hold off from upgrading their garden landscaping and properties. But Marshalls has been paring costs back in response and now say they are ready to meet any increases in demand with significant latent capacity available. Interestingly, the Group has dared to point to encouragement from recent more positive inflationary trends and signs of lower interest rate expectations. They’re not saying that we’re actually at the bottom yet, but they seem to think we might be getting near.
Surveyors think we might be too. The latest survey from the Royal Institution of Chartered Surveyors shows a ten-point jump to 34 in the numbers of agents expecting improved trading in the next twelve months compared to those seeing no change or a worsening. This is the strongest reading since the pandemic began and looks to have been bolstered by improved availability of better priced mortgages in the market which are stabilising buyer demand.
Overnight, Taiwan Semiconductor Manufacturing Company, better known as Taiwan Semi, or TSMC, the world’s leading producer of state-of-the-art silicon chips has put out a strong set of results. Unsurprisingly, it says that demand is strongest in the division that makes chips for AI computing applications. It would have been a huge surprise if it had said otherwise, but the market needed to hear it regardless. The company claims that the advances in what AI can do are “all down” to TSMC’s world leading technological capabilities. The group is now investing into plants capable of manufacturing chips with details so infinitesimally minute that they are just 2 nano metres apart, a breakthrough that no-one else can yet match. Taiwan Semi predicts strong growth ahead, but ignore the elephant in the room, which is of course neighbouring China’s increasingly strident protests at Taiwan’s continuing independence.”
