Shares in William Hill (LSE: WMH) and UK Mail Group (LSE: UKM) moved sharply lower when this morning, thanks to a combination of disappointing results and a profit warning.
Housebuilder Bellway (LSE: BWY) avoided the same fate, but a lack of reaction suggested that investors were not exactly wowed by the firm’s year-end update.
William Hill
This morning’s interim results sent William Hill shares down by 6%, after the high-street bookie reported flat revenues and a 12% fall in operating profit.
Reported earnings per share fell by 30% to 7.9p for the half year. Despite this, shareholders are to be rewarded with a 3% rise in the interim dividend, to 4.1p.
One of the main reasons for the fall in profits was an additional £44m of tax costs resulting from the introduction of the Point of Consumption Tax (POCT) and the increase to Machine Games Duty (MGD).
These costs contributed to a sharp decline in the firm’s operating margin, which fell from 3.1% last year to 2.1% during the first half of the current year.
William Hill’s falling profit margins and flat sales suggest to me that the stock is already fully valued. Trading on a 2015 forecast P/E of 16 and with a prospective yield of 3%, I think there are better buys elsewhere.
UK Mail
Shares in parcel and post operator UK Mail are down by 7.5% as I write, following a dramatic profit warning.
I’ve always thought that this was a well-run firm, but the firm’s move to a new, fully-automated hub facility near Coventry appears to have gone wrong. A larger-than-expected number of the parcels handled by UK Mail are not compatible with its new automated sorting equipment.
The firm is facing a big increase in operational costs, due to having to manually sort parcels. UK Mail must also fix its new facility to solve this problem. As a result, full-year pre-tax profits are expected to fall to £10-12m, down from £21m last year.
UK Mail also says that the financial effects of these problems could continue into the first half of the next financial year.
I like this stock, but I suspect a further profit warning could follow this one. I’d wait to see if the shares get cheaper before buying.
Bellway
The housing market is booming and interest rates are at record lows. Given this backdrop, it would be a surprise if housebuilders were not reporting record profits.
Happily for Bellway, it is. In the firm’s year-end trading update today, it announced a 13% increase in completions, a 5% increase in average selling price and a 3% increase in operating margin, which is expected to rise to 20%.
However, shareholders might want to ask if Bellway is getting too comfortable with such easy market conditions. The firm increased its spending on new land by 35% last year, to £620m. This had the effect of pushing the firm from a net cash position back into net debt.
In my view this isn’t very prudent. At the top of a housing bull market, I’d expect to see housebuilders running with surplus cash, not relying on debt.
Bellway’s prospective yield of 3.2% is lower than most of its peers and today’s update has left the shares flat. I believe there are better buys elsewhere in the housing sector.