Investors’ Chronicle: Hotel Chocolat, Petrofac, James Halstead

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BUY: Hotel Chocolat (HOTC)

The group’s digital model and at-home product sales growth delivers robust results, despite high-street stores being closed for half the year, writes Christopher Akers.

Given the number of companies highlighting the deleterious impact of supply chain issues and inflationary pressures, it was almost shocking that Hotel Chocolat did not announce such problems in its full-year results to June 27. While the Aim-listed premium chocolatier is certainly not immune to problems at home, its UK-focused production base means it is not as exposed to international freight and haulage problems as competitors. Revenue soared and the bottom line outperformed market expectations as the group returned to profit after last year’s pandemic-driven loss.

Revenue was up by a fifth despite the group’s high street stores being closed for six months of the year due to Covid-19 restrictions, including for the vital trading days of Christmas and Valentine’s Day. The group’s “digital-first” strategy redressed the decline in store sales, with 70 per cent of revenues for the year stemming from digital sources. Sales of at-home products, such as the Velvetiser hot chocolate maker, grew strongly with customers responding well to subscription models. In the group’s US market sales were up 36 per cent and 16 new stores were opened by its joint venture in Japan.

While the group posted robust profits, the dividend — last paid in 2019 – was not reinstated. This will disappoint income-focused investors, though management noted the decision was due to the “opportunities to invest for future growth” taken in the year. The £19.3m allocated to capital investment included funding the expansion of UK operating capacity, which is forecast to significantly increase production limits and support £250m of sales per year. Further investment is planned, with a £40m July share placement shoring up the balance sheet after the year-end.

The group’s continued focus on sustainability means that ESG-conscious investors can take a serious look at the stock. The new Gentle Farming Charter aims for cacao suppliers to “earn a sustainable living income in return for farming in a climate-smart, sustainable way”. And 100 per cent of packaging is expected to be “widely recyclable” by the end of 2022, and a first sustainability report is due to be published in this financial year to provide stakeholders with additional disclosures.

Peel Hunt expects a forward price/earnings ratio of 21 times forecast earnings for full-year 2023, which represents good value given current and expected growth. The broker forecasts adjusted profit before tax to almost triple to £28.9m by full-year 2023. With a sturdy digital strategy and reopened stores helping drive growth further, we think the results warrant taking the plunge.

SELL: Petrofac (PFC)

The Serious Fraud Office (SFO) has fined Petrofac £77m after it admitted paying tens of millions of pounds in bribes between 2011 and 2017, writes Alex Hamer.

The exact charges related to the oil services group’s “failure to prevent bribery”. The penalty was far less than the $240m (£176m) Petrofac said it expected in a statement to the market on October 1.

“By pleading guilty, Petrofac Limited has accepted that senior executives within the Petrofac Group acted deliberately and without conscience in the pursuit of greed,” said SFO director Lisa Osofsky. The SFO said the company disguised payments through subcontractors, created fake contracts for “fictitious services” and passed payments through several agents and countries. The anti-graft body came across £32m in corrupt payments and bribes in its investigation, linked to contracts worth £2.6bn in Iraq, Saudi Arabia and the United Arab Emirates.

Petrofac made the admission of guilt as a company, and only one former employee has faced court for the years of bribery. David Lufkin, the company’s former head of sales, was given a suspended jail sentence of two years on Monday.

“This part of our history does not represent the Petrofac of today — a company that as its new CEO I am proud to lead, and which operates upon the core principle of ethical business conduct, supported by a comprehensive governance regime,” said Petrofac chief executive Sami Iskander.

The leadership from the period is still around, however. Former chief executive Ayman Asfari handed over the top role in January but has kept his seat on the board. New chief financial officer Afonso Reis e Sousa, who joined the board last month, has been at the company in various finance roles since 2012. Former CFO Alastair Cochran left last month.

Petrofac said the sentencing and fine meant the conclusion of the SFO’s investigation into the company specifically. The anti-corruption body said it “continues to investigate this case”. 

The company’s shares have almost doubled in the past fortnight as a penalty looked imminent, including a 6 per cent rise on this announcement. The stock’s recent performance has been in-line with the rest of the oil and gas services industry, which struggled last year as clients cut spending but is now looking healthier. This payment still means a dent in this year’s earnings – the pre-tax profit consensus estimate is $67m for 2021 – and for us, a conviction for not preventing bribery is enough to keep away from Petrofac, regardless of new governance standards.

HOLD: James Halstead (JHD)

The flooring manufacturer has boosted its UK market share as supply disruptions hit, writes Michael Fahy.

Although disruption to global supply chains is rarely welcome, it can benefit companies that manufacture products locally, but which can compete with imported goods on price.

James Halstead registered a double-digit increase in profits on the back of rising sales and a 94 basis point increase in the operating margin. Reported profits were ahead of their pre-pandemic levels, as the group built its share of key growth markets in the UK, Europe and Australia. In the UK, which represents 37 per cent of group revenue, sales rose by 24 per cent as competitors, who import and rebrand goods from the Far East, struggled.

Homeowners have been spending freely on home improvements throughout the pandemic, so while James Halstead provides non-slip vinyl flooring mainly for commercial customers, it has extended into the high-end domestic market as lockdown shortages have narrowed the field of competitor products. Its European arm, responsible for 42 per cent of sales, increased sales by 6 per cent as some customers opted for luxury vinyl tiles over harder-to-source wood laminate flooring.

The group suffered higher raw material and transportation costs as well as employee absences due to self-isolation protocols, but increased efficiencies saw net earnings rise at a faster rate than sales. The company also deferred some new product launches, with chief executive Mark Halstead saying there was no need to “compound the complications of supply and delivery”. There are signs that shortages in raw materials are easing, though, which should stabilise pricing.

Panmure Gordon upgraded next year’s earnings forecast by 4.2 per cent to 19.6p per share, leading to a forward price/earnings ratio of 28 times forecast earnings, which is in line with competitors. A robust balance sheet should enable the company to pursue further export opportunities, but earnings growth will tend to be incremental over time, particularly when compared with full-year 2021.