Companies
Darktrace trading update averts share price slump
Darktrace (DARK) has delivered a well-timed positive trading update. For the six months ending 31 December, it delivered a 39.6 per cent increase in customers and a 45 per cent rise in annual recurring revenue (ARR). This has encouraged management to raise FY 2022 ARR guidance to between 37 and 38.5 per cent, up from 35 per cent previously.
Market sentiment turned on the cyber security business at the end of last year when Peel Hunt released a Sell note. This was quickly followed by a stack of shares being sold by Vitruvian Investments after the initial post IPO lock-up period ended. This rocked the market’s confidence and the share price dropped around 60 per cent from October to the end of December.
The guidance upgrade today has slightly averted this narrative and the share price has jumped up 18 per cent as of 10am this morning. Peel Hunt sees these results as positive and has upgraded Darktrace from a Sell to a Hold given it has now approached its previous target price. But it says that churn rates appear lower during times of high growth and, presumably, still believes the low customer ratings it referenced in the Sell note last year remain an issue.
Growing ARR is gold dust for investors and the pandemic fuelled acceleration towards digital has only increased demand for greater cyber security measures. For those rooting for British tech, that’s something to hold onto. AS.
Earnings watch…
Marks & Spencer (MKS) – This is not just a trading update, it’s the key Christmas trading update from Marks and Spencer on Thursday. Investors will be looking for reinstatement of the dividend after management raised the full year profit outlook to £500m, from the £300m-£350m guided back in May.
There clearly must have been a big improvement in the last quarter for such a strong upgrade to the profit forecast – as recently as August the guidance was for the upper end of that range only. Supply chain trouble likely still a theme but not as bad as feared. At the last update, MKS said profit before tax & adjusting items of £269.4m was up more than 50 per cent, with food sales up 10 per cent and ex-hospitality +17 per cent. We know the Ocado partnership is paying off and look for more of this in the Christmas update.
As far as the share prices goes, the recovery from the pandemic is complete, with the stock up 95 per cent in the last 12 months, but there are yet questions about whether it can reach 2015-18 levels. Reinstating the dividend would help. The restructuring is clearly paying off – the pandemic allowed Marks to accelerate a process that had been taking far too long, and in many ways could have been a blessing for the business.
Tesco (TSCO) and Sainsbury’s (SBRY) – A big theme from the retailers is that the supply chain thing probably wasn’t that bad, although it’s still a ‘thing’ and they won’t miss an opportunity to keep a lid on expectations. A lot of the worries about supply chain trouble, shortages etc were likely overblown to a degree, though we expect warnings about rising costs – labour, material, transport – to be a major theme for retailers in the coming months. Tesco though was notable last year for saying it was doing just fine.
Against very tough comparisons, it looks like supermarkets saw a slightly weaker 2021 Christmas than 2020. However, the sharp recalculation by consumers to stay in more and cancel restaurant bookings and the like may have just delivered a late bump that the data doesn’t show yet. Tesco looks like it has experienced less of a decline in Christmas sales than competitors: -0.9 per cent for Tesco, -4.4 per cent for Sainsbury’s.
At its half-year results in October, Tesco upgraded its full-year adjust operating profit guidance to be between £2.5bn and £2.6bn. Looking for some moderation in retail growth but much stronger recovery at Booker as restaurants and events had some semblance of normality – albeit the collapse in the Christmas trade may have had an impact on wholesale.
Meanwhile Aldi’s price pledge this week points to potential for lower margin growth for the majors as they are bound to keep in line. The problem they have today is that pricing pressures are acute – higher cost of commodities, raw materials, labour and transportation mean supermarkets can ill afford a price war as it could stuff their margins. They had it good over the last two years in terms of sales as they benefitted from the pandemic – but with pandemic tailwinds to growth turning into headwinds, there is already huge pressure on pricing anyway. What supermarkets would like is just to inflate prices in line with costs (or a little more), but the Aldis of the world make this impossible, leaving the options a) cut costs and/or b) endure lower margins.
