Conflict, Energy Crisis, Rising Inflation and Interest Rates Continue to Unsettle Markets

What a year 2022 has been. Certainly not one to celebrate.

To summarise the year as far as Industry Watch goes – in March the focus in most of the world switched from COVID to the war in Ukraine. In June, as a result of the war, we began to experience a global shortage of fuel, food, fertiliser, aluminium, other commodities and products, leading to price escalation.

By September the war was at a peak, inflation was gaining momentum, interest rates continued to rise and recession seemed inevitable. In the three months from end September, the war in Ukraine has continued unabated, and the fuel crisis has worsened. The latter, as well as stoking inflation, is bringing great hardship to the less well off in many countries.

Many governments continue to take steps to reduce the impact of the increased cost of fuel, food and inflation generally with subsidies or cash payments. To do so they are generally forced to borrow money on global markets, causing interest rates to increase through demand, increased risk and uncertainty.

To control inflation, central banks have responded by increasing interest rates. Exchange rates have fluctuated– sterling and the euro were at record lows against the US dollar at the time of Industry Watch at end September, but have since regained considerably as the dollar itself has come under pressure.

The current economic outlook is gloomy – energy prices may have fallen from their high point, but inflation remains rampant. A recession is forecast for many if not most countries.

Not surprisingly, most stock markets have continued to fall in value, as have the values of most companies in our industry.

Market trends during 2022

In the full year, only three markets were less than 10% lower compared with the beginning of the year – the FT 100, the FT ALL share and NASDAQ. Eight lost between 10% and 20% – CAC, the SMI, FT EUR 350, Dow Jones, S&P, FTSE XINHUA, Nikkei and Shanghai Composite and three, DAX, S&P/TSX and Hang Seng, lost between 20% and 30%.

So 2022 was a year of market value decline, and in three cases significant decline. But given the circumstances – it is hardly surprising.

The key question is, as the year end approaches, will 2023 be better or worse?

Companies versus markets

Only three of the 14 companies gained in value in the year – Spectra Systems (+8%), Loomis (+3%), and Prosegur (+17%).

Four companies outperformed their markets – Crane Co (+9%), Spectra Systems (+11.6%), Loomis (+35%) and Prosegur(+35%).

The companies significantly underperforming in their markets were Diebold Nixdorf (-80%), De La Rue (-46%) and NCR (-33%).

Substrates and banknotes – mixed results

De La Rue reported its interim result last month. Revenue fell by 8.3%, and gross profit from continuing operations was down 13.8%, with adjusted operating profit falling by 46.6% to £9.3 million, but in line with the company’s guidance.

Using IFRS standards, the company reported an operating loss from continuing operations of £12.6 million compared with a profit of £13.6 million in the same period last year, the major difference being an exceptional items charge of £21.4 million. Currency division revenues fell by 12.3% to £116.4 million.

The company’s share price fell 11.5% in the period and it underperformed its market in the period by 13.4%. In the full year it underperformed by 46%.

Crane Co’s results have impressed so far this year. Its first half adjusted operating margins were 17.3%, core sales growth 7%, and order growth 14%, enabling the company to declare it was likely to achieve its full year guidance results.

It confirmed this again when announcing its 3rd quarter results, in which its adjusted operating margin at 17.4% exceeded last year’s figure of 16.6% by 0.8%. Adjusted operating profit at $443.6 compared with $428.5 million in the same period last year.

In this period Crane Co’s share price gained 10.5%, it equalled its market’s performance and in a full year has outperformed it by 9%.

Next year, the company will divide into two, with the Payment and Merchandising Technologies business, including Crane Currency and Crane Payment Innovations – spun out as Crane NXT.

Orell Fussli’s first half operating profit (EBIT) increased by 16% to CHF 7.4 million. The security printing division’s operating profit (EBIT) increased by CHF 3.6 million to CHF 7.8 million, and the division had a high order backlog.

Despite these results, the company’s share price fell in the previous period by 3.2%. This period it fell by 1.2% and underperformed its market by 3.1% and in the full year by 5.5%.

Spectra Systems reported revenue up 15% and adjusted operating profit (EBITDA) up by 8% in its first half year ending 30 June. In that period its share price increased by 18.9%, and it outperformed its market by 15.5%.

This period its share price gained 9.7%, it outperformed its market by 6.2% and in the full year by 11.6%.

CIT companies – continue to grow

Based on encouraging results for its half year announced in the last period, Brinks reconfirmed its forecasts for the year, despite which results, its share price fell by 10%.

Brinks, report for the first nine months to end September indicated revenue growth of 8%, operating profit (non GAAP) growth of 15% to $363 million and operating profit growth of 4% to $218 million.

Although its share price increased by 4.15%, it underperformed its market by 6% and in the full year by 7.7%

In the previous report, Loomis announced a successful first half. Its share price increased by 3.8%.

Its performance improvement has continued. This period, its first nine months results show revenue increased by 29.1% to SEK 18.6 billion and operating income (EBITA) by 44.9% to SEK 1.9 billion. In the period its share price increased by 5%, it outperformed its market by 1% and in the full year by 35%.

Like Loomis, Prosegur also reported a good first half in the previous period – revenue increased by 22.3% and operating profit, EBITDA by 27%. Surprisingly its share price did not increase and it underperformed its market by 2.1%.

This period, its third quarter results indicated a sales increase of 24.2%, and an EBITDA increase of 23.9%. In the period its share price increased by 13.9%, and it outperformed its market in the full year by 35%.

Tough times for ATM and Service Providers

Diebold Nixdorf’s half year results released in the previous period showed an operating loss of $174.9 million compared with profit of $49.1 million in the same period in 2021. But the company reaffirmed its adjusted EBITDA guidance of $320-350 million for the year. Its share price gained 1%, presumably based on this forecast.

However, third quarter results released this period showed non GAAP operating profit down from $223.3 in 2021 (margin 7.8%) to $111.4 million (margin 4.5%). In GAAP accounting, the profit of $87.9 million in Q3 2021 compared with a loss of $169.4 million this year.

In the period its share price fell by 54.3%, it underperformed in the period compared with its market by 65.1%; in the full year it underperformed by 80%.

NCR’s half year operating profit fell from $194 million to $136 million and, in September, the company announced plans to separate the company into two independent publicly traded companies – one in digital commerce, the other in ATMs and financial systems. In that period NCR’s share price fell by 32.2%, and it underperformed its market by 31%.

This period its 3rd quarter results show revenue up by 14% to $5.8 billion, with adjusted EBITDA increasing by 11% to $990 million.

Yet, in the period its share price fell 5.8%, and it underperformed its market by 5%. In the full year it underperformed by 33%.

Glory reported its first half for year 2022/23 on 8 November. Net sales increased by 8.7% to ¥112.1 billion but operating income (EBITDA) fell to a loss of ¥5.9 billion from a profit of ¥5.7 billion in the same period in 2021.

One of the reasons given for the reduction in profit was that sales of its main products, especially in the domestic market, were postponed due to the difficulty of parts procurement and also the higher price of materials.

Despite these setbacks, Glory’s share price fell by only 0.93% in the period, underperforming its market by 4.6% and in the full year by 2.25%.

Company Performances – December 2022