QUESTOR: THIS STOCK IS POISED TO PROFIT FROM BRITAIN’S ECONOMIC RECOVERY
Many investors have concluded that the UK economy is a basket case, but the reality is very different.
Crucially, the annual rate of inflation is now in line with the Bank of England’s 2pc target. This provides scope for interest rate cuts that history shows are likely to have a positive impact on the economy’s growth rate.
They should also boost corporate performance and prompt stronger investor sentiment towards the stock market. And since interest rates presently stand at a 16-year high of 5.25pc, an exceptionally high dose of monetary policy easing is available for the central bank to administer.
Already, though, consumers no longer face a cost-of-living crisis. While pressure on disposable incomes was a very real phenomenon when wage growth failed to keep up with double-digit inflation, average pay has consistently risen at a faster pace than the rate of price increases since April last year.
A continued rise in the purchasing power of consumers means the prospects for UK-listed shares, especially those selling discretionary products and services, are highly upbeat. And with interest rate cuts having already commenced in Europe and being on the near-term horizon in the US, the outlook for globally-focused UK stocks is equally positive.
Therefore, Questor remains optimistic about the prospects for companies such as pub group Young & Co’s Brewery. The company, which is a holding in our Aim portfolio, recently released full-year results that showed it is making encouraging overall progress.
Revenue rose by 5.4pc, while operating profit was up 9.4pc year-on-year as a result of a 50 basis point expansion in the firm’s profit margin. It now stands at 14.7pc at the operating level, with the company expecting a further increase as the synergies and scale advantages of its recent acquisition of sector peer City Pub Group are fully felt. The firm also has greater scope for improvements in profitability as costs rise at a slower pace and higher discretionary incomes allow for greater price increases.
Following the acquisition of City Pubs, Young’s now has a vastly higher amount of debt on its balance sheet. Its net debt has risen by 118pc over the past 12 months, although a net gearing ratio of 46pc evidences that it nevertheless remains conservatively financed. This provides scope for additional M&A activity, with the firm making eight individual acquisitions during the latest financial year, as well as continued investment in its existing estate.
Investors, of course, remain downbeat about the company’s prospects. Its shares have fallen by 24pc so far this year and are now down 39pc since being added to our AIM portfolio in October 2017. This represents an underperformance of the FTSE AIM All-Share index, which is down 25pc since our notional purchase.
Trading on a price-to-book ratio of around 0.7, Young’s market valuation includes a substantial margin of safety. Given the potential for a further improvement in financial performance as the impact of acquisitions is felt, it appears to offer good value for money. And with the economy’s prospects set to improve as interest rates are ultimately cut, it has significant scope for a share price recovery over the coming years.
Questor says: hold
Ticker: YNGN
Share price at close: 630p
Update: Oxford Metrics
The performance of another of our Aim portfolio holdings, Oxford Metrics, has been somewhat encouraging. The motion capture technology specialist’s share price has risen by 10pc since our notional purchase in September 2019. This is ahead of the FTSE Aim All-Share index’s 13pc decline over the same period.
The firm’s recently released half-year results showed that revenue rose by around 11pc, while pre-tax profits moved 9pc lower due in part to planned investment. Although its net cash position has fallen by 14pc to roughly £55m over the past 12 months, the firm’s balance sheet nevertheless remains relatively sound. As well as reducing overall risk, substantial cash resources provide scope for the business to make further acquisitions following the recent purchase of Industrial Vision Systems.
The company remains on track to meet financial guidance for the full year. It currently trades on a price-to-earnings ratio of around 22, which is high relative to many of its small-cap index peers at a time when investor sentiment is downbeat.
However, with the company’s strategy yet to fully deliver on its potential, the stock deserves more time to come good.
Questor says: hold
Ticker: OMG
Share price at close: 98.5p
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