Top UK Stocks to Watch: HSBC shares edge up as profit more than doubles

HSBC beats expectations as profit soars, the takeover battle for Sanne Group heats up, SSE sells its stake in Scotia Gas Networks for £1.2 billion, XP Power raises expectations and hikes its dividend, and AstraZeneca gets approval for the first new drug to treat lupus in over a decade.

UK

Top News: HSBC pays $3 billion dividend as profit more than doubles

HSBC beat expectations this morning as it revealed profits more than doubled in the first half of the year, supported by the release of cash set aside to cover bad loans during the pandemic.

Revenue fell 4% to $25.6 billion due to lower interest rates and a drop in income from Markets & Securities Services.

But reported pretax profit more than doubled to $10.83 billion from $4.31 billion the year before and basic EPS surged to $0.36 from $0.10. That was better than the $9.45 billion and $0.35 expected by analysts. Earnings were boosted by the release of $700 million worth of credit impairment charges that had been set aside for potentially bad loans spawning from the pandemic, whereas last year results were dragged down by an almighty $6.9 billion charge the year before.

HSBC said it ‘possibly’ expects to book a net release of provisions over the full year.

These are good results that reflect the return of growth in our main markets and marked progress in the execution of our strategy. We were profitable in every region in the first half of the year, supported by the release of expected credit loss provisions. Our lending pipeline began to translate into business growth in the second quarter and we further strengthened that pipeline during the half. This performance enables us to pay an interim dividend for the first six months of 2021,’ said chief executive Noel Quinn.

HSBC is paying an interim dividend of $0.07 for the first half. HSBC did not pay a first-half interim dividend last year as the pandemic erupted, but did make a $0.15 payout in the second half when  payouts were restricted. The Bank of England removed the last of the restrictions on UK bank dividends last month, allowing them to return as much cash to shareholders as they like. In total, the interim payout is worth some $3.05 billion.

HSBC said it expects to be hitting its dividend payout ratio of 40% to 55% of reported EPS in 2021 as the economic outlook continues to improve.

Looking forward, HSBC said there are ‘emerging signs’ that unsecured personal and commercial lending is starting to rebound.

Where next for the HSBC share price?

After rising steadily across the start of the year, HSBC hit a post pandemic high of 462 in late May. Since then, the share price has eased lower, trading in a descending channel. 

The HSBC share price trades below its 200 and 50 sma on the daily chart. The RSI points higher although remains in bearish territory.  

Any meaningful recovery in the share price would need to retake the 200 dma at 410p and the upper band of the descending channel at 414p before testing the 50 dma at 423p. A break above this zone of contention could see the share price head towards 462p. 

Failure to retake the 200 sma could see the price test 385p the lower band of the descending channel and the July low ahead of 376p the year to date low. 

Takeover battle for Sanne Group heats up as rival bidder surfaces

Sanne Group said it has told Apex Group that it would be inclined to support a takeover offer worth 920 pence per share as the battle to buy the FTSE 250-listed specialist alternative asset fund intensifies.

Sanne said it has been in advanced discussions with Apex about a possible offer. Apex will have until August 30 to make the offer firm or walk away.

That price, if offered, would represent a 52.6% premium to its closing share price on May 13, when offers started to come in for the business.

Sanne Group shares soared 8.5% in early trade this morning to 916.0p.

The battle for Sanne kicked-off in May when Cinven tabled several offers for the business. The first one to be made public was at 830p per share and was raised to 850p before being rejected by Sanne and described as ‘opportunistic’. A fifth and still unsolicited bid was made by Cinven worth 875p per share, which was enough to entice Sanne into talks.

Notably, the deadline for talks with Cinven are due to expire at the end of play on Friday.

Apex will be able to revise its offer if another party, including Cinven, tables another bid for Sanne.

The latest offer comes after Sanne Group released a first-half trading update last week, where annualised new business wins in the first half of 2020 were up 38% from the second half of 2020. It plans to release interim results on September 14. It also announced the acquisition of PraxisFM’s European fund administration business for £54 million.

SSE sells stake in Scotia Gas Networks to complete asset-sale programme

SSE has agreed to sell its stake in Scotia Gas Networks to a consortium of companies for £1.22 billion in cash, concluding its asset-sale programme as it continues to shift toward low-carbon electricity generation and supply.

SSE shares were up 1.1% in early trade this morning at 1467.0p.

The company is selling its 33.3% stake in Scotia Gas Networks, which owns gas distribution networks Southern Gas Networks, Scotland Gas Networks and SGN Natural Gas. SSE is selling the stake to a consortium that is being led by one of the existing partners in the business, Ontario Teachers’ Pension Plan Board. Brookfield Super-Core Infrastructure Partners is also a part of the consortium of buyers.

SSE originally bought a 50% stake in Scotia Gas back in 2005 for £505 million and then sold a 16.7% stake to the Abu Dhabi Investment Authority in 2016. Notably, the consortium is also purchasing that stake from the Abu Dhabi Investment Authority as part of the deal.

SSE said its current stake in the business was valued at £744.4 million at the end of March, demonstrating the premium it has managed to achieve. The business contributed £88.6 million worth of after-tax profits in the last financial year.

The sale means SSE has now completed its plan to offload £2 billion worth of assets that was launched in June 2020, with asset sales since then having mounted up to £2.7 billion in total. SSE has been doing that to generate value and as part of its strategy to focus more on generating and supplying low-carbon electricity.

The proceeds will be used to repay debt and for capital investment, with further details about what it plans to do with its cash to be revealed when it releases its interim results in November.

‘SGN has been a hugely successful investment for SSE during the past 16 years. It is a strong business delivering consistently for customers and will have a key role to play in the future development of the hydrogen economy. However, it has become purely a financial investment for SSE as we have sharpened our focus on our low-carbon electricity core, and it is therefore the right time for SGN to continue to thrive under new ownership,’ said finance director Gregor Alexander.

‘We see significant growth opportunities in our core networks and renewables businesses in the transition to net zero and the capital we are releasing through our disposals programme will help enable us to maximise the delivery of our low-carbon electricity orientated strategy and ultimately create sustainable long-term value for customers, shareholders and society. Completion of our disposals programme will leave SSE more streamlined and strategically aligned than ever before, with a business mix that is very deliberate, highly effective, fully focused and well set to prosper on the journey to net zero and beyond,’ he added.

XP Power raises expectations and hikes dividend

XP Power said it is on course to beat expectations this year after delivering solid growth and record order intake during the first half as it hiked its dividend thanks to an improving economic outlook improving its confidence.

The manufacturer of power supplies and converters said revenue increased 14% year-on-year in the six months to the end of June to £119.9 million from £105.1 million the year before.

That was coupled with an improved gross margin of 46.6% versus 44.9% in the prior year, helping deliver a step-up in profitability. Adjusted pretax profit jumped 32% to £22.5 million while reported pretax profit surged 59% higher to £16.4 million.

‘We maintained our strong momentum in the first half, building on our robust performance in 2020 to deliver another period of significant revenue and profit growth. Our progress reflects the consistent application of our strategy, and we continue to see a positive future for the Group driven by encouraging market growth dynamics, exposure to secular growth trends related to Big Data, Artificial Intelligence, the Internet of Things and the Fourth Industrial Revolution, and the potential for further market share gains as we broaden our addressable market and product range,’ said chairman James Peters.

XP Power said the main driver of the better-than-expected performance came from the continued strength of the semiconductor manufacturing equipment market as well as a recovery for industrial technology.

‘We expect the momentum to continue, supported by our strong order book, and while mindful of headwinds including price and availability pressures within the component supply chain, the board expects full year trading to be modestly ahead of current analyst consensus,’ Peters added.

Currently, XP Power is forecast to deliver annual adjusted pretax profits of £41.5 million to £47.0 million in 2021 as a whole, compared to the £44.3 million profit reported last year.

XP Power shares were trading 1.5% higher in early trade this morning at 5165.0p.

XP Power said it delivered record order intake in the period after it increased 17% at constant currency to £157.6 million and enters the second half with a record order book worth £150.3 million, up from £124.1 million at the end of 2020.

XP Power said it has hiked its interim dividend to 37.0 pence from the 18.0p paid out the year before, when the payout was hit by the eruption of the pandemic.

AstraZeneca gets approval for first new lupus drug in a decade

AstraZeneca said Saphnelo has been approved in the US to treat cases of systemic lupus erythematosus (SLE), making it the first new medicine able to treat the disease to be given the green light in over a decade.

Saphnelo is a first-in-class type I interferon receptor antibody that will be used on patients receiving standard therapy for moderate to severe SLE.

‘Our treatment goals in systemic lupus erythematosus are to reduce disease activity, prevent organ damage from either the illness itself or the medications, especially steroids, and improve one's quality of life,’ said Richard Furie, one of the principal investigators in the Spahnelo clinical development programme.

‘Today's approval of anifrolumab represents a big step forward for the entire lupus community. Physicians will now be able to offer an effective new treatment that has produced significant improvements in overall disease activity, while reducing corticosteroid use,’ he added.

The approval by the US Food & Drug Administration comes after the latest trials of the drug, including two Phase III trials and a Phase II trial. Those showed that patients experienced a reduction in disease activity across their organ system, including skin and joints, than those given a placebo.

It makes it the first new drug to be approved for the disease in over 10 years. The most common form of lupus affects up to 300,000 people in the US alone, with it disproportionately impacting the African-American, Hispanic and Asian populations.

The drug is also being considered for approval in the EU and Japan.

Notably, AstraZeneca acquired the global rights to Saphnelo with an agreement with Medarex signed back in 2004. Medarex missed the opportunity to co-promote the product when it was bought out by Bristol-Myers Squibb back in 2009, but AstraZeneca will still pay the US company a ‘low to mid-teens royalty’ on sales depending on the geography.

AstraZeneca shares were trading marginally higher in early trade this morning at 8264.5p.

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