Investors Chronicle: AstraZeneca, Halfords, Tullow Oil

Buy: AstraZeneca (AZN)

Encouragingly, new medicines — representing half of total sales — rose by 45 per cent on a like-for-like basis, writes Harriet Clarfelt.

A late-stage trial for a potential Covid-19 vaccine being developed by Oxford university and AstraZeneca has been paused, due to a possible serious adverse reaction in a participant. Health publication Stat News, which first reported the update on Tuesday evening, said that the participant in question was based in the UK and is expected to recover.

AstraZeneca said in a statement that its “standard review process triggered a pause to vaccination to allow review of safety data”. They added that this is a “routine action which has to happen whenever there is a potentially unexplained illness in one of the trials” — noting that in big studies, “illnesses will happen by chance but must be independently reviewed to check this carefully”.

While this may be so, trials for a Covid-19 inoculation are garnering unprecedented attention. Usually, vaccines are several years in the making — but scientists across the globe are working at accelerated speeds to try to halt the ongoing pandemic.

Shore Capital pointed out that adverse events are not unusual in clinical studies — and that the issue reported could have no relation to the vaccine, for which studies have been randomised and controlled. And while the broker posited that any trial suspensions could lead to delays — with a readout of data previously expected by November — AstraZeneca said that “we are working to expedite the review of the single event to minimise any potential impact on the trial timeline”.

The Oxford vaccine is seen as one of the most promising in a string of hopeful candidates. Results from earlier phase one/ phase two trials, published in The Lancet medical journal, indicated that the candidate was tolerated and generated immune responses in participants. Later-stage trials aim to determine how well the vaccine protects against Covid-19, while gauging safety and immune responses across a number of age groups and countries.  

That said, there is no guarantee that the vaccine will ultimately prove successful. And, even if it does, investors should note that AstraZeneca plans to provide “broad and equitable supply” of the end-product at no profit during the pandemic, like its peer GlaxoSmithKline.

AstraZeneca wasn’t the only Plc under the spotlight on Wednesday. Shares in gene and cell-therapy group Oxford BioMedica, which has signed a supply deal for the large-scale commercial manufacture of the Oxford/AstraZeneca vaccine, tumbled by more than a tenth in morning trading. But analysts at RBC Capital Markets saw this as “overdone”, highlighting that the trial is paused, rather than failed.

Buy: Halfords (HFD)

An unwillingness to use public transport will probably necessitate greater car and bicycle usage, which doesn’t appear to be priced in to Halfords shares, writes Alex Janiaud.

The continued uptake of cycling in the UK has helped to offset the impact of a decline in car usage for Halfords. The retailer of cycling and motoring parts recorded sales growth of 5 per cent over the 20 weeks to August 21, registering a 59 per cent increase in bike revenues.

The coronavirus pandemic has prompted a collapse in public transport passenger numbers and a drop in car usage. Cycling activity has more than trebled at points during lockdown, and remains above normal levels this month, according to Department for Transport (DfT) data. Meanwhile, car use averaged at around 90 per cent of normal levels between September 1 and 4.

These trends have been reflected in Halfords’ latest figures. Its higher-margin motoring revenues are down by more than a quarter on last year.

At Halfords’ July results, the retailer said that its car servicing autocentres, which are separate from its motoring retail operation, had observed that nearly a quarter of drivers hadn’t used their cars in the preceding month. But there are signs of an automotive recovery, and while there remain fewer cars on the road, activity remains far above that seen in spring, which sat at around a third of normal volumes. Halfords’ motor retail revenues were up 7.1 per cent between August 1 and 21, with autocentres up 18.7 per cent.

Halfords did warn that an expected decline in revenues from cycling and staycation products, twinned with a troubling economic outlook, placed significant uncertainty on its second half.

Sell: Tullow Oil (TLW)

Though we expect some clemency from lenders, questions around solvency are unlikely to fade soon, writes Alex Newman.

This year has at times borne witness to some massive examples of equity destruction, though few more spectacular than Tullow Oil. After booking impairments totalling $2bn (£1.55bn) at its full-year results in March, the oil producer was forced to write-off a further $941m from the value of its exploration assets in its interim figures, alongside $418m in property, plant and equipment.

The result is a balance sheet in which liabilities exceed assets by $138m. Scrambling for positives, management reassured investors that good well production from Ghana, unchanged capital expenditure plans and hedges to sell 60 per cent of production for at least $57 per barrel until December would mean breaking even on a free cash flow-basis.

That still requires two caveats: that working capital movements stay favourable and oil prices climb by $15 per barrel over two years. Recent history suggests neither assumption can be guaranteed, particularly with the global supply of liquid fuels once again rising into what looks like a wavering economic recovery.

Compounding the uncertainties is the group’s debt pile. Investor attention is once again drawn to the risks involved in securing amendments or waivers to covenants on the reserves-based lending facility. Failure of upcoming leverage tests in December and June is now expected, even after factoring in the $575m Ugandan asset sale.

Consensus forecasts are for adjusted losses of 4.77 cents per share this year, and 3.76 cents in 2021.

Chris Dillow: Diversifying housing risk

House prices hit a record high last month according to both the Halifax and Nationwide, while UK equities remain well below pre-pandemic levels. Property, then, has been nice protection against stock market losses.

Which poses the question: is a portfolio of property and equities always well-diversified?

The question matters because house prices might not stay so strong. Part of their recent rise is due to a lack of supply and to the stamp duty holiday — but holidays of course come to an end. There’s a danger that rising unemployment and ongoing uncertainty will depress prices in coming months. If housing has been protection against stock market losses recently, therefore, the boot might be on the other foot next year: we might need equities to protect us from falling house prices. But are they up to the job?

History suggests so, to some extent.

There is, though, a problem here. House prices and shares respond differently to hard economic times. When these hit us, shares fall suddenly and sharply. House prices, however, are stickier. Owners are slow to cut asking prices and so transactions tend to dry up while prices hold up. Such different dynamics give the impression that house prices are more resilient than shares, when in fact they are just slower to move.

To overcome this problem, we can look at price changes over longer periods, such as three years. Doing so shows a small negative correlation between the Nationwide’s house price index and the All-share index — of minus 0.18 since 1991. Yes, both house prices and equities did badly during the financial crisis, but on other occasions they have moved in opposite directions. In the mid 90s and in 2010-13 house prices did badly whilst equities did well, but house prices did well in the early 2000s while equities fell.

Such episodes tell us that valuations matter a lot. Houses and equities tend to be over or underpriced at different times, which generates different dynamics and hence potential for a portfolio of both assets to be reasonably well diversified.

This matters. It’s quite possible that UK equities are undervalued. They are low relative to overseas ones: the All-share has underperformed not just the S&P so far this year but also Germany’s Dax index by 20 percentage points. And the dividend yield is above its long-term average even factoring in likely dividend cuts — a fact which has historically been a strong predictor of good returns. Few people, however, believe houses are cheap on average: the best that can be said is that prices are sustainable if interest rates stay low.

It’s plausible therefore that equities will offer some protection from losses on property.

But there’s an even better protector — foreign currency. My chart shows that there has been a strong correlation between house prices and the dollar/sterling rate. In particular, when house prices do badly, so too does the pound.

Which means that profits on US dollars (and in fact other currencies such as euros) can offset losses on housing. Yes, some of you find it difficult to open foreign currency accounts, but there’s an alternative here. Gold in sterling terms is also negatively correlated with house prices.

There are good reasons for this. House prices and sterling both depend upon the UK economic outlook so when this deteriorates both fall, giving us profits on foreign currency. Also, sterling is a risky asset and so falls in bad times for the world economy such as in 2008 — which are also times when house prices come under pressure.

A well-diversified portfolio of equities, foreign currency and gold might well therefore protect us from a fall in house prices. And being liquid assets, they also protect us from the fact that property is hard to sell in bad times.

Except. All this assumes that the price of your properties fluctuate in the same way as Nationwide’s index. Even if this has been true in the past, it might not be in the future. If working from home becomes permanent, we’ll see people move out of cramped city centre flats and houses and move into villages or small towns. Even if house prices hold up in aggregate we could therefore see some big falls in particular types of property — especially those that buy-to-let investors have traditionally favoured. It’s not at all guaranteed that financial assets must protect us from such a sectoral shift. This fact — more than a concern about a few sandwich shops — might explain why the government is so keen to get us back into offices.

Chris Dillow is an economics commentator for Investors Chronicle