It might seem counterintuitive, but taking on a struggling business can be an easy challenge for a new boss. New brooms have many advantages.
A new leader’s fresh perspective can help them see where the company took a wrong turn, they can be dispassionate enough to hack off underperforming parts of a business and they probably stand a better chance of driving real cultural change.
There’ll be a degree of tolerance too from investors on exceptional costs as the problems are worked through, and apologies can be made knowing that the mistakes happened on someone else’s watch.
The company’s valuation may already match the market’s dim view of it so write-offs and dividend cuts may not send the share price down. If anything, the arrival of a solid, albeit painful, remedial plan may drive it up.
Certainly a new broom at St James’s Place has helped the company recover after the company was shamed over its high management fees and poor performance. With the City regulator taking a hard line, the share price was hammered. New chief executive Mark FitzPatrick, who took over in December 2023, made it his business to clean things up, with a plan for compensation, a fairer charging structure for clients, a dividend cut and job losses.
To be fair, turnarounds aren’t always straightforward. It took Marks and Spencer years and several attempts to escape its “burning platform”, and the reinvention of former subprime lender Provident Financial, now Vanquis Banking, under new chief executives and business models has been arduous to say the least.
BUY St James’s Place (STJ)
A surprisingly strong final quarter pushed assets under management to record levels at St James’s Place, writes Jemma Slingo.
The wealth manager achieved net inflows of £1.5bn in the three months to December 31, against estimates of £900mn. Across 2024 as a whole, inflows reached £4.3bn, lower than last year but better than the market expected. Investment returns also “compared favourably against peer groups”, helping to drive total funds under management up by 13 per cent to £190bn — a record for the group.
St James’s Place said the autumn Budget had “created uncertainty for UK consumers” and led to an increase in inflows and outflows in October. Investment platform AJ Bell reported similar client behaviour. However, analysts at Panmure Liberum said the increase in the gross inflows at St James’s Place was broadly cancelled out by redemptions, “making little difference to the net flow performance”.
In the two months that followed the October Budget, however, there were high levels of engagement, as clients sought advice on what Labour’s changes meant for their money.
St James’s Place is poised to introduce its new charging structure in the second half of 2025. The group was pushed to make its pricing more transparent after scrutiny from UK regulators. Early withdrawal fees are to be scrapped on new bond and pension investments in favour of an explicit initial charge and a clear breakdown of what the charge comprises.
This is expected to hit margins, and implementation costs are forecast to be £140mn-£160mn. Client activity remains high for now, however, and management has not made any change to its financial guidance. The group intends to publish its full-year results on February 27.
HOLD: Filtronic (FTC)
The electronic equipment group swung to a profit as space orders took off, writes Valeria Martinez.
Filtronic has had a stellar year. The electronic equipment group’s shares are up by an eye-watering 276 per cent over the past 12 months, fuelled by multiple earnings upgrades linked to a swelling order intake from Elon Musk’s SpaceX.
The Aim-traded company supplies the E-band solid state power amplifiers for the ground stations powering the Starlink low Earth orbit (LEO) satellite network as part of a five-year partnership agreed in April last year. Less than a year in, the deal is flowing nicely into Filtronic’s top line.
Revenues shot up by 201 per cent year on year to £25.6mn in the first half, with the space division more than eclipsing the 7 and 39 per cent respective falls in the defence and critical communications segments. This helped the group swing to an operating profit of £6.8mn against a loss last year and drive a 30 per cent adjusted Ebitda margin.
The return to profits came despite a 62 per cent rise in the cost base to £9.1mn. These were investments for long-term growth and included hiring 30 engineers, recruiting a design team and opening two new production lines to boost capacity. A healthy net cash position of £5.2mn provides further firepower.
Chief executive Nat Edington said more visibility into SpaceX’s plans is providing the confidence to invest, but reducing the heavy revenue concentration on a single customer is becoming a big focus. Filtronic was awarded 12 design wins with nine customers in the first half, with £30mn revenues still to be realised.
Of course, this kind of growth comes at a price. Having more than doubled its share price over the past year, the company now trades at 20.2 times 2025 earnings. This is far from cheap, but with the LEO satellite market soaring, the medium-term opportunity remains compelling.
HOLD: Diageo (DGE)
Beer volumes move higher as spirits demand goes backwards, writes Christopher Akers.
Diageo removed its medium-term guidance as challenges in its key US market worsened amid tariff complications, but the Johnnie Walker and Guinness owner returned to organic sales growth in its first half.
Uncertainty across Diageo’s biggest markets — tariff concerns have come on top of faltering consumer demand in the aftermath of the pandemic — was behind the widely anticipated guidance move. Diageo’s previous, unrealistic midterm outlook was for 5-7 per cent organic net sales growth.
While Trump has paused tariffs on Canada and Mexico, Diageo is notably exposed to the potential levies. According to analysts at Jefferies, almost half of Diageo’s US sales are imported from its two neighbours. They estimate that the company would have to raise US prices by 4.6 per cent to mitigate the tariffs.
Organic net sales were up 1 per cent in the half, as higher prices offset a volume decline of 0.2 per cent. Spirits demand continued to falter after strong pandemic demand, as volumes fell 1 per cent and beer units sold rose 6 per cent. Total volumes rose in Asia Pacific and Africa but were down across other markets and dropped by 3 per cent in North America.
Organic operating profit fell 1 per cent on higher staff costs and investment, and the margin was down 69 basis points.
In the lead-up to these results, the company had to deny that it planned to sell its Guinness brand and its stake in Moët Hennessy. It subsequently disposed of its 80 per cent shareholding in Guinness Ghana Breweries for $81mn (£65mn). Guinness volumes rose 11 per cent in the half.
Investors are also asking questions about how weight-loss drugs could hit the industry. Terry Smith’s Fundsmith Equity sold its stake in Diageo last year after holding it since inception. In a letter to investors, he argued that the sector is in “the early stages of being impacted negatively by weight-loss drugs”.
Leverage of 3.1 times at the period end was above the board’s target range of 2.5-3.0 times. It is expected to remain so at the end of the year.
Diageo trades on 17 times forward consensus earnings. Discounting the impact of tariffs, short-term expectations are for improved net sales growth and a further decline in operating profit growth in the second half. There are positives to take from these results, but also a good dollop of uncertainty.
