Daily market update: banks, Topps Tiles, On The Beach

A robust showing from the UK banking sector following financial stress tests wasn’t enough to spur the FTSE 100 into action.

Miners and healthcare stocks acted as a drag on the blue-chip index, leaving the FTSE 100 flat and only achieving minimal gains in early trading.

In Germany, chemicals group Bayer soared by 13% after the Trump administration appeared to back the company’s efforts to limit lawsuits around accusations that its Roundup weedkiller causes cancer. Bayer took over the product line as part of its 2018 acquisition of Monsanto and has been embroiled in litigation as people continue to argue the weedkiller is harmful.

Banks

The UK banking sector has passed the Bank of England’s stress test with flying colours.

The industry and authorities learned some valuable lessons from the global financial crisis in 2008 and banks have subsequently become stronger entities. No-one wanted a repeat of what happened 17 years ago when various banks had to be bailed out. That crisis led to UK banks being pushed to have more capital to withstand any shocks.

The latest stress test means that major UK banks would be able to cope with a severe decline in the economy and provide ongoing support to consumers and businesses.

These tests are held periodically rather than when there are alarm bells flashing. Admittedly, the Bank’s Financial Policy Committee says threats to financial stability have increased this year, and it flags the risks of a sharp correction to financial markets given stretched US equity valuations. However, it says UK house and corporate indebtedness remains low.

Importantly, the stress test results have given the Bank of England confidence to cut its estimate of how much capital banks need to hold. The government will no doubt welcome this news, given its desire to encourage more lending to drive economic growth.

Topps Tiles

Topps Tiles will have been floored by the reaction to what its incoming CEO Alex Jensen described as encouraging results.

For all the positives in the numbers themselves, news that sales growth has moderated in the first nine weeks of the current year was always going to draw the most focus. It offered a sobering reminder of the difficult backdrop Topps is operating against.

The protracted build up to the Budget had a chilling effect on the property market, which has a knock-on effect on businesses like Topps Tiles. Building materials providers benefit when people are doing up homes to sell or when new owners are looking to decorate a property to their own tastes.

In the areas it can control, Topps is making progress. For example, boosting exposure to trade customers, which typically offers more consistent revenue, and improving its digital platform. The company will also likely be relieved at the conclusion of a competition probe into last year’s acquisition of CTD, with three of the four stores it was forced to sell to satisfy any concerns already divested and the other deal imminent.

On top of this, the acquisition of the Fired Earth brand out of administration could prove a smart, opportunistic deal, with the company securing £2.5 million of stock, along with the brand, IP and website for £3 million.

However, the weaker sales Topps is experiencing represent a challenge for the new management team as Jensen takes the top job on 8 December and Caroline Browne joins as CFO from next spring.

On The Beach

It has been a choppy period for On The Beach. The market had previously reacted with some disquiet to the company moving away from its core focus, as well as mounting competition and a trend of holidaymakers booking their trips later.

In that context, today’s results are a ray of sunshine as the company announces a third consecutive record year of growth, improved margins and positive signs on key customer metrics. This may help restore some credibility to the company’s medium-term targets of achieving earnings of £100 million and pre-tax profit of £85 million, although these still look a big ask as they require profit to more than double from current levels.

There was an appealing simplicity to On The Beach’s previous emphasis purely on a cohort who just wanted some sun, sea and sand. Moving into city breaks may offer diversification but at the expense of diluting this strategy.

The rapid expansion of EasyJet Holidays and the continued growth ambitions of the likes of Jet2 remain a threat to On The Beach. While the lack of a fleet of planes means On The Beach has more flexibility and a significantly lower cost base, it does mean it has less control on prices and other factors – although the recently agreed partnership with Ryanair mitigates some of this.