Daily market update: Mitie, Wickes, Compass, Fuller’s World Cup boost

John Healey’s surprise appointment as chancellor hasn’t troubled the markets as he is seen as a safe pair of hands.

His extensive parliamentary career including roles in the Treasury are seen as putting him in good stead.

Bond markets reacted favourably, with gilt yields easing back after a jump yesterday afternoon when prime minister Andy Burnham made remarks about fiscal flexibility. While he has pledged to stick to existing rules, he implied there is some wriggle room within them.

The comments initially caught the market off guard, but Burnham was quick to say he wouldn’t take any risks with the economy.

Burnham has wasted no time in laying out initiatives to change the country and benefit the public, including the removal of VAT on household electricity bills. This will be funded by the cancellation of the digital ID programme.

It’s a quick win for the new team, but Healey knows bond markets won’t allow him to make other tax cuts without saying how they’ll be paid for. Bond markets take no prisoners, and they will be quick to protest if government policies are viewed as irresponsible.

UK defence stocks motored higher on Healey’s appointment, given his previous role in pushing Keir Starmer to agree to higher defence spending. The market is taking the view that defence is close to Healey’s heart, and he will drive through increased funding under his new role as chancellor.

Equity markets perked up as oil prices held firm after yesterday’s rally. The exception was the FTSE 100 which was pulled down by weakness in pharma, tobacco and consumer goods.

In North America, Donald Trump imposed new 50% tariffs on various goods imported from Canada in a spat around tariffs on US cars, dairy and alcohol.

Mitie

Where there’s muck, there’s brass. Investors who bought shares in Mitie during its darkest days post-Covid stand to walk away with a handsome return. The cleaning company has received a 218.5p per share bid, which is nearly eight times what anyone who bought at the low would have paid in October 2020.

Mitie’s turnaround has been truly impressive. The company has worked hard to broaden its interests into higher-value services, improve the group’s financial strength, and embrace technology to provide more data-driven insights. It has made the company more relevant for the modern age.

Despite a solid share price run, the market still hasn’t lavished the stock with a substantially higher rating. The shares have been driven by earnings growth, not a valuation re-rating.

On the eve of the takeover bid Mitie traded just under 10 times forward earnings. It’s a classic case of the market not recognising the strategic progress and fundamentally undervaluing the group, leaving it vulnerable to a bid.

Facilities management rival OCS spotted an opportunity and pounced with an offer that might seal the deal. Pitched at a 45% premium to the undisturbed price, the bid is a touch over the 43% blended average premium for all UK-listed takeovers this year, according to AJ Bell research.

Losing another mid-cap represents another blow to the London Stock Exchange as it grapples with a major shortage of stock market flotations. It’s one-way traffic with stocks delisting and barely any of them being replaced by new names on the market.

The UK market has historically been rich with industrial support service companies, but one by one they are being picked off. Mitie has been responsible for buying some of them, including Interserve and Marlowe, and it has now gone from being predator to prey.

Wickes

Wickes looks to be on steady foundations despite a difficult consumer backdrop based on its second-quarter update.

Yes, there is evidence that customers are trading down, particularly when it comes to big-ticket orders. While they are favouring more affordable products, they are still parting with their cash, and Wickes is confident enough to stick with full-year forecasts.

Warm and dry weather has been helpful for retail demand after a wet spring affected outdoor DIY and landscaping projects and prompted a disappointing update which spooked investors back in May.

The TradePro business serving the professionals is the growth engine of the business. For these customers purchases are non-discretionary and the number of active memberships is growing – helping to provide some ballast against a broader downturn in DIY spending.

Wickes will hope for an improvement in market conditions, which will likely be dictated by interest rates and any improvement in the property market, but it has positioned itself for a less favourable outcome by maintaining a healthy cash balance. This should act as a buffer to help see it through future turbulence. 

Compass

Catering giant Compass is not the most obvious of AI winners but the company is seeing strong demand for the provision of food services to data centres during both their construction and operation. 

Easing food price inflation and the timing of major events put a slight dent in growth outside of North America, while capital expenditure is expected to be elevated by year-end thanks to the costs of mobilising on new client wins. This prompted some modest weakness in the share price following its third-quarter update.

Compass sees a significant opportunity from targeting the significant proportion of businesses which still do their catering in-house. Around 50% of the new business secured in the period came from clients outsourcing for the first time, demonstrating why Compass is hungry to take advantage of this opportunity.

Importantly, Compass is doing a good job of retaining its existing customers, giving investors some confidence and visibility on future revenue.

Fuller, Smith & Turner

The pub trade badly needed a lift and the combination of sunny weather and a successful showing for England at the World Cup seems to have provided it with one.

The latest update from Fuller, Smith & Turner reveals solid sales growth thanks to these factors and, crucially, it is converting this uptick in business into profit and cash flow.

Fuller’s premium focus gives it more scope to pass on rising costs to punters. Initiatives like training its own chefs in-house and retrofitting kitchens from gas to electric are helping to drive efficiency and protect margins.

Investors may not quite be in party mode, but they were certainly of a mind to give Fuller’s a modest toast based on this encouraging update.