THG shares remain in freefall, BP beats expectations and Flutter has a bad day

THG / MARKETS

“For a while THG was a stock market darling with investors clambering to own the stock in the belief it would play a key role in helping product manufacturers sell direct to consumers. Now it is losing fans at an incredibly rapid rate,” says Russ Mould, Investment Director at AJ Bell.

“The shares peaked at nearly 800p at the start of the year, and today they briefly traded below 200p amid chatter that BlackRock is trying to dump a block of shares. Asset managers rarely sell after a stock has already fallen so much unless they’ve lost all confidence in the business and/or found something that completely changes the investment case.

“The backlash against THG seems to centre on the fact that people bought into the hype without paying attention to valuation. Now that difficult questions are being asked about costs and more, particularly if the business is broken up into three as per the suggestion from THG, investors aren’t getting the answers they want – or they are not liking what they see.

“The UK market as a whole wasn’t in the best of moods on Tuesday, with the FTSE 100 falling 0.6% to 7,246 thanks to weakness among miners amid weaker commodity prices and banks. Investors are eagerly awaiting updates from the US Federal Reserve and the Bank of England later this week which will provide a steer as to the next steps for withdrawing monetary stimulus and putting up interest rates.”

BP

“BP’s results may have been better than forecast but one could argue this isn’t really a surprise given the strength of commodity prices during the period in question.

“Notably there was a big difference between the underlying and reported figures, linked to accounting rules over hedging contracts affected by the unprecedented surge in natural gas prices. These made the numbers a bit of a messy affair.

“The oil major did have a sweetener up its sleeve for investors, committing to an additional share buyback and effectively introducing a rather smart mechanism where it will buy back $1 billion worth of shares a quarter if oil prices are trading above $60 per barrel.

“The decision to leave the ordinary dividend unchanged suggests the company is wary of overcommitting on this front and being left exposed by further volatility in energy prices.

“The company’s balance sheet also continued to improve for a sixth consecutive quarter which is encouraging given the need to invest in a transition away from fossil fuels.

“The winds of change are in sharp focus thanks to the COP 26 summit and political and regulatory pressure on BP is only likely to increase in the wake of events in Glasgow – even if there is no new landmark agreement.

“There is no suggestion that BP will respond to higher oil and gas prices by investing in lots of new fossil fuel projects, however the temptation to keep fields running a bit longer when they are generating such high levels of cash could creep in, particularly given the long-term nature of its net zero targets and the much shorter typical tenures of the people in charge.”

Flutter Entertainment

“A 7% earnings downgrade is not what one has come to expect from gambling giant Flutter Entertainment. The earnings disappointment was primarily linked to unfavourable sports results as well as a temporary withdrawal from the Netherlands.

“Ultimately, Flutter’s story remains focused on the US where there are plenty of growth opportunities. Competition is growing in this space, but Flutter is holding its own in the market.

“FanDuel is seeing encouraging staking levels, which bodes well if Flutter decides to spin off the business in the future, such is the speculation. FanDuel could command a much higher valuation as a standalone business, but Flutter is expected to keep a sizeable stake should it proceed with a demerger.

“On a group basis if you dig deeper into Flutter’s numbers, it is clear from the figures that life is not a breeze. UK revenue has dipped, partially because last year’s comparative period saw a lot of big games condensed into the quarter, but also that punters now have more options with how to spend their money in a post-lockdown world.

“Regulatory and political pressure remains intense on the gambling sector and in a world where ESG (environmental, social and governance) factors are now on the boardroom agenda, gambling companies need to do even more to stop vulnerable people getting into financial trouble through betting.

“Flutter has an approach called ‘Safer Gambling’ which includes putting some of its takings to support the research, education and treatment of problem gambling. That’s the right approach, but it is also one which does have consequences on its income, with Flutter attributing some of the staking decline in the UK to enhanced ‘Safer Gambling’ measures.”

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