Murray Income hurt by Provident Financial profit warning – Murray Income reports that, over the year ended 30 June 2018, it returned +3.9%, which the board considers to be disappointing when compared to the All-Share Index return of +9.0%. The chairman’s report says that performance attribution analysis shows that UK sector allocation accounted for about three quarters of this underperformance, with UK stock selection the other quarter. Being less than half weighted in the strongly performing oil and gas sector was the main culprit; although Provident Financial, now sold, was the worst performing stock. The board is proposing a total dividend for the year of 33.25p, an increase of 1.53% on the 32.75p per share paid in the previous year and the 45th year of consecutive dividend increases. The discount increased from 7.6% on 30 June 2017 to 8.4% at 30 June 2018.
Extract from the manager’s report
“Stock selection and asset allocation were both negative. Within oil & gas, the underweight exposure to oil & gas producers was detrimental. Within basic materials, good stock selection in the mining sector was offset by being underweight the sector. The overweight position in healthcare coupled with poor stock selection hurt performance. In consumer services, being underweight food retail and poor stock selection in media impacted returns. Finally, stock selection was beneficial in the technology sector but a significant drag in the financials sector.
Turning to the individual holdings, there were a number of companies that demonstrated substantial share price increases. Aveva’s share price more than doubled during the period due to its merger with Schneider Electric’s software business and a recovery in its end-markets. Strong demand for its cloud products helped Microsoft to perform well. XP Power’s exposure to strong capital equipment markets coupled with new design wins entering production resulted in an impressive uplift in profits. At the end of the period Dunedin Smaller Companies Investment Trust announced that it intended to merge with Standard Life UK Smaller Companies Trust. Finally, Rotork performed well buoyed by a recovery in the expenditure of its oil and industrial customers.
On the other hand, there were a number of disappointments. By far and away the most significant of these was Provident Financial which issued a profit warning towards the beginning of the period in which it announced that there had been a significant deterioration in trading at the company’s Home Collected Credit business, an investigation into Vanquis Bank by the Financial Conduct Authority (“FCA”), the decision to cancel the company’s dividend, and the removal of the company’s Chief Executive. We were particularly disappointed and puzzled to discover that that as a result of intervention by the FCA the company had stopped selling its highly profitable “Repayment Option Plan” in April 2016 to new customers but did not deem this worthy of public disclosure. Following a strong performance in the prior year, Nordea Bank’s share price weakened over the period given delays to its cost savings programme, competition in the Swedish mortgage market and the likelihood that interest rate increases would be delayed. Weakness in Inmarsat’s maritime business, delays to the company’s aviation revenues and the additional capex required to achieve these resulted in lower earnings estimates and a fall in the share price. However, in June the company was approached by EchoStar, a US peer about a potential acquisition which resulted in a sharp recovery in the share price although the share price still fell by a quarter during the year. Finally, despite also staging a part recovery in its share price, Ultra Electronics performed poorly due to a profit warning caused by budgetary pressure on UK defence programmes and the resignation of its Chief Executive.”
MUT : Murray Income hurt by Provident Financial profit warning