Markets avoid new chaos after Powell remarks, Admiral hit, Darktrace profit slumps, The Restaurant Group under pressure and Breedon eyes Main Market shift

“It was the news investors didn’t want to hear, but deep down had a sneaky suspicion would come. Hawkish comments yesterday from Federal Reserve chairman Jay Powell made it perfectly clear that US interest rates would keep going up, potentially faster and harder than markets had previously priced in,” says Russ Mould, Investment Director at AJ Bell.

“The reaction was understandable – markets pulled back, the dollar jumped, and investors took a moment to digest the new landscape.

“In the grand scheme of things, a 1.5% pullback in the S&P 500 index was not disastrous. Interestingly, pre-market indicative prices show the main US indices moving higher on Wednesday, implying that we are not going to see another period of chaos.

“Asian stocks reacted to Powell’s comments with a pullback across the main indices apart from the Nikkei, which pushed 0.5% ahead. UK stocks already had time to react to the Fed chair’s remarks before yesterday’s market close and on Wednesday the FTSE 100 only dipped 0.3%, with strength in the energy sector helping to prop up the index.”

Admiral

“After Direct Line’s shocking profit warning and dividend cancellation earlier this year, it’s fair to say that expectations were low ahead of Admiral’s latest results. However, they still make for ugly reading, which is why the share price has slumped on the news.

“The full year ordinary dividend has been cut by 40%, although investors are still getting a special dividend on top. In light of what happened with Direct Line, Admiral’s shareholders should thank their lucky stars they’re getting any cash at all.

“Part of the reason why Admiral is still able to return money to shareholders is that it is better capitalised and argues that it was quicker than most to react to changing market conditions. Inflation pushed up the cost of fixing cars and homes under insurance policies, and unfavourable weather conditions have caused an increase in claims.

“Admiral pushed up its prices as soon as its could, which hurt its growth as it became less competitive but helped to protect profits to some degree.”

Darktrace

“In one sense Darktrace is in limbo until an audit of its finances – aimed at addressing concerns flagged by a New York short seller – is complete. Until then everything it says to the market is going to be lacking in credibility.

“First-half results showing a 90%-plus plunge in operating profit is not going to lighten the mood. Revenues were up but there was an appreciable and worrying slowdown in new business in the three-month period to 31 December.

“Darktrace is sticking with its full-year targets and flags ‘hacktivism’ and AI as drivers of future sales. There is logic to this argument. We live in an increasingly digitised world and cyber security is like a fourth emergency service – keeping us safe from harm online.

“The problem for the company is that its AI-driven model is difficult to understand and doubts have been raised over its accounting. Until the business is less opaque the market may well treat its promise of jam tomorrow with scepticism.”

The Restaurant Group

“Recent activist pressure on The Restaurant Group may well be dialled up after a sticky set of 2022 results from the Wagamama owner.

“The company is really suffering with rising costs across the board – on energy, ingredients and staffing.

“It’s not alone and the company is still generating sales growth which is important, but that’s unlikely to be enough for some of its detractors.

“Oasis Management and Irenic Capital Management are among the institutions pressing the company to make changes – including, reportedly, selling off its pub and travel concessions arms.

“The Restaurant Group is already announcing plans to close more sites in its leisure division – the Frankie & Benny’s and Chiquito chains which offer generic Italian and Mexican food to a captive audience of shoppers and cinemagoers.

“However, the question may well be asked, why not spin off, sell off or in some way get rid of this part of the business entirely, along with the other bits, to focus on Wagamama which is clearly a restaurant brand with genuine appeal.

“Rename the business as Wagamama, clear out the rest, and you would have a streamlined and focused operation which might have more appeal to investors.”

Breedon – Moving from AIM to Main Market

“Breedon has announced plans to move from AIM to London’s Main Market. There was a time when that was all the rage, with companies eager to step up and have the badge of honour of being a Main Market-listed business.

“There was also the argument that many fund managers weren’t allowed to invest in AIM stocks and so by moving up to the Main Market they could get on the radar of more institutional investors. That doesn’t really apply these days as most fund managers don’t have those restrictions.

“Instead, a key reason to switch is to benefit from tracker funds buying the shares. Breedon is valued at £1.3 billion which would put it in the middle of the FTSE 250 index by size. Once the company qualifies for the index, tracker funds mirroring the performance of the FTSE 250 would need to own the shares so they become active buyers.

“Reputation is the other main reason for switching markets these days as a company can say it adheres to the stricter rules that come with the Main Market.

“AIM was originally pitched as a stepping-stone for smaller companies, a place for them to tap capital markets and grow. Moving market once they’ve seen significant growth makes perfect sense and in Breedon’s case it has greatly expanded sales and assets since joining AIM.

“ASOS made the switch last year and going back a while, Domino’s Pizza and Petra Diamonds are other examples of companies to move from AIM to the Main Market.”

These articles are for information purposes only and are not a personal recommendation or advice.