Interactive Investor

Stockwatch: this bullish company is positive indicator for global economy

Success and optimism at a FTSE 250 business bodes well for the world economy, argues analyst Edmond Jackson. He’s tipped them before and thinks the uptrend is likely to continue.

5th March 2024 10:09

Edmond Jackson from interactive investor

An improved outlook from mid-cap shipping services firm Clarkson (LSE:CKN) is reassuring for the global economy, relative to cautious guidance at its August 2023 interim results.

It contrasts with a financial analyst arguing a fortnight ago that the real yield curve that matters – in inflation-adjusted terms – has just recently inverted. This is the financial indicator, supposedly with dead-cert predictability of a recession – until the last year or so, when it inverted.

“Inverted” means short-term debt is priced to return higher than the long term, which is where most uncertainty ought to lie. It says markets are more worried about the near term (although I would say, that is essentially sentiment rather than a genuine economic indicator). Anyway, if you adjust for the recent inflationary trend, the yield curve has just inverted – and we should worry, perhaps.

Hence my interest in a leading shipping services group having this to say about prospects:

Chair: “Sector trends remain favourable, global trade continues to grow in both scale and complexity, and the green transition in shipping is moving ahead apace...With a record 2024 order book of $217 million (£171 million), the board looks to the future with confidence.”

CEO: “...our much larger forward order-book stretches further into the future...”

That is quite some reassurance about the underlying global economy.

Underlying pre-tax profit is up 8% to £109 million on revenue up 6% to £639 million; underlying earnings per share (EPS) is slightly better, up 10% to 275p, and the dividend similarly to 102p. It marks 21 years of consecutive dividend growth, although the table shows two years with negative earnings cover. That cash was able to rise even so, affirms a strongly cash-generative operation.

Clarkson - financial summary
Year-end 31 Dec2017201820192020202120222023
Turnover (£ million)324338363358443604639
Operating margin (%)13.912.60.4-4.116.016.615.6
Operating profit (£m)45.042.61.4-14.770.8100100
Net profit (£m)31.429.8-12.8-28.950.175.683.8
Reported earnings/share (p)10498.6-42.3-95.2163246275
Normalised earnings/share (p)122103118105164249274
Operating cashflow/share (p)15975.1224217371583506
Capital expenditure/share (p)22.520.229.432.321.531.349.2
Free cashflow/share (p)13754.9195185349551457
Dividend/share (p)73.075.078.079.084.093.0102
Covered by earnings (x)1.41.3-0.5-1.21.92.72.7
Return on capital (%)10.19.30.3-3.716.721.518.8
Cash (£m)168166191205272388399
Net Debt (£m)-167-166-128-148-218-340-356
Net assets per share (p)1,3881,4201,2431,0661,1711,3381,486
Source: historic Company REFS and company accounts

The shares have risen 3% to near 3,780p which marks a 45% rebound from last September’s low and approaches a November 2021 all-time high of 3,900p.

The recent consensus of analysts has been for a 4% drop in earnings this year on flat revenue, which at first sight looks as if it needs upgrading and would bring the forward earnings multiple down from around 15 times. Yet a circa 5% rise in the dividend is also targeted, roughly in line with Clarkson’s long-term trend. It would still mark a prospective yield only of around 2.8% at this share price, nothing special.

Possibly a reason for analyst caution is rising capacity of container ships post-Covid, thus pushing down prices (affecting both revenue and profit). Clarkson says it expects global capacity to rise over 7% but demand only 3%. However, disruption in the Red Sea hence re-routing around South Africa could provide “significant upside to the market outlook.”

It all hardly screams “buy”, yet Clarkson’s operations look well-managed and unless this yield curve-bearing Cassandra is soon to be vindicated by economic slump, I would expect Clarkson’s overall uptrend since the 2008 crisis to continue. Its stock therefore rates a firm “hold”.

Meanwhile, UK trade data looks weak in global context   

It is relevant to compare Clarkson’s progress and outlook with latest disappointing data from the UK Office for National Statistics.

Overseas trade in goods has seen its steepest fall since comparable records began in 1997. Last year, the volume of imports fell 7.4% on 2022 and 3.8% on 2018. Meanwhile, exports fell 4.6% year-on-year, with drops both to EU and non-EU countries. Export volumes have fallen 12.4% over five years.

Yes, there was a period of distortion – initially from Covid, then war in Ukraine spiking energy prices. But the UK’s weak trend in goods contrasts with other advanced economies which saw a post-pandemic rise – something we see affirmed by Clarkson’s latest strong numbers. They are effectively double what this group was achieving pre-Covid – from providing services in 24 countries and in diversified commodities.

Clarkson derives 80% or so of revenue/profit from shipbroking, the remainder a mix of finance and support services – making it a useful reflection of global demand for commodities and goods.  

Post-Brexit trade barriers appear the problem for UK goods. If you want to be in a trade “club”, there are rules.

Yet services’ trade has grown strongly albeit focused on London which accounts for nearly half of UK services exports. Services as a proportion of global trade are projected to rise from 25% in 2020 to 28% by 2035, a mild positive if no genuine dynamic.

The UK remains the world’s second-biggest exporter of services, which account for around 70% of British exports’ value and have nearly doubled as a share of total exports, to 56% over 25 years. Over the same period to the third quarter of 2023, services imports have grown nearly two-thirds to represent 37% of total imports.

Information and Communication Technology (ICT) is proving the driver, followed by professional services and banking in third.   

It is unclear quite whether services are a satisfactory replacement, say for high-value manufacturing where chemical exports are down 15% on 2018, or whether this will weigh on already poor UK productivity.

But I recall similar angst in the 1980s when tough monetary policy was deployed to counter inflation, swathes of manufacturing industry folded and Margaret Thatcher championed services. Over 40 years later, the UK is the fifth-largest global economy.

It is all relevant to considering how an investment portfolio might be geographically exposed.

An improved outlook versus mid-2023  

When I wrote last August at 2,730p, the interim results contained elements of caution. The chairman declared: “in an uncertain geopolitical and global macroeconomic environment, we are now starting to see a softening of rates in some sectors.”  

First-half revenue was driven by energy-related markets whereas softer conditions had prevailed in the container and dry bulk market. Yet interim pre-tax profit still rose by nearly 26% like-for-like on revenue up 20%, which according to the annual results implies a relative slowing in the second half – vindicating caution in the interim outlook. Management’s tenor now seems markedly more positive.

The strong share price rebound in recent months implies the market has on this occasion been correct in discounting prospects. In chart terms, Clarkson has effectively resumed a steadily upward trend-line since the 2008 crisis.

Interestingly also, in terms of Clarkson’s relevance as a wider indicator, in August 2017 I wrote that risk/reward tilted positively on the shares at 2,700p – in response to “in-line” interims yet the narrative having scope to beat expectations. There were signs of recovery in major shipping markets which “hints at a Goldilocks scenario for equities...where growth is neither too hot nor cold, and interest rate policy remains accommodative.”

I also thought Clarkson shares were a useful hedge against sterling trending lower in the post-Brexit years given its international revenues.

Adjusting for the “black swans” of Covid and Russia’s antics, this group has been a helpful indicator, which lends encouragement amid current uncertainties.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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