19th February 2014
Revenues of UK plcs have risen at the fastest rate in over a year, up 3.0% to £109.8bn according to the Share Centre’s latest Profit Watch UK report.
The latest batch of companies to report, who had financial year ends in the third quarter and who published their annual results by the end of December 2013, grew their total revenues 3.0% to £109.8bn. Although this is still rather sluggish on a historic comparison (the average annual growth rate in revenues each quarter since 2008 is 8.3%), it is nevertheless the fastest increase since the second quarter of 2012 and suggests the UK recovery is now showing up more clearly in company results.
The broker says that margins expanded from gross profit, through operating profits, all the way to the bottom line. Pre-tax profit rose 43.7% to £6.6bn, the first increase in seven quarters, six of which saw double digit declines. The firm says companies pushed rising sales without raising costs significantly, while lower financing costs, and with lower asset writedowns. Profit after tax rose 52.1% to £4.8bn, the fastest growth rate since mid 2011.
The highly operationally geared travel and leisure sector doubled its profits to £920m and support services increased theirs by 259% to £238m says the broker.
It says this operational gearing effect is also very clear in cyclical vs defensive companies. The report says: “Tobacco is a classic defensive stock because demand from smokers is fairly stable regardless of the state of the economy. Profits from defensive companies tend not to vary too widely year on year. Cyclical companies tend to have broad swings in their profits as the economic cycle works in favour or against their sector. In an economic upturn, most cyclical companies will do very well. Among the companies in this report, profits from cyclical companies rocketed 74.7%, while defensives rose 26.4%. On the whole, the last eighteen months have seen cyclical companies do worse than their defensive counterparts. Fourteen sectors grew their net profits and only three saw them fall. This is the best result since the beginning of 2011.”
Overall 11 sectors increased sales, while six saw them decline. This is the second best ratio of risers to fallers in over a year, and is a good sign of a balanced recovery. At the net profit level, the ratio was 14:3, the best since the beginning of 2011.
FTSE 100 companies saw stronger growth in revenues and operating profits than their mid-cap comparables, but the FTSE 250 companies saw net profits rise almost tenfold from near break even a year ago.
Helal Miah, investment research analyst at The Share Centre said: “The UK economy has a spring back in its step and this is now clearly showing up in company results. Companies have produced feeble sales growth and declining profits for eighteen months, but fortunes are now rebounding.
“We expect sales and profits to continue to improve in the coming reporting periods. What’s more we think they will do so faster than most commentators currently expect, meaning the outlook is good for the stock market and investors. Trading updates from company management teams are also more positive than they were this time last year, indicating a growing confidence across the board. With the UK expected to be one of the top performing economies in the developed world, we anticipate results from the mid-cap FTSE 250 companies to outstrip their FTSE 100 counterparts too.
“We maintain our conviction that equities are currently the preferred asset class for investors, not only because of the improving economic fundamentals, but also because the alternatives of cash and bonds offer meagre returns. Interest rates are not expected to rise for about a year, after which it is only likely to rise in gradual steps. Even when they do begin to rise investors should not be concerned as historically in this period of the economic cycle, interest rate rises coincide with rising markets. This is a powerful case for investors.”
The methodology of the survey
The Share Centre analysed raw data from the financial reports of the UK’s largest 350 listed companies (provided by Factset, excluding equity investment trusts), cross referencing with additional data from the London Stock Exchange. The researchers compiled the data for the whole market and analysed by sector and index. For the first report, the current constituents of the FTSE 350 were analysed back to 2007, whether or not they were members of the index at that time. Where possible, results for companies listed since 2007 (e.g. Glencore) have been included back to 2007. Current and future reports use the index as it evolves over time. This report analyses financial data for companies with year ends up to 30th September 2013 and which reported up to 30th December 2013.