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Cyber attacks, such as that carried out on Marks and Spencer (M&S), are not uncommon. They are events that are increasing in number and sophistication, making them a big challenge for businesses — and what’s an issue for companies, is an issue for investors.
The risks posed are enormous, from theft, disruption to trade and ruined reputations to significant financial losses and potential lawsuits when customers’ personal data is hacked. Failure to notify customers of a breach can mean a fine of 2 per cent of a company’s global turnover from the Information Commissioner’s Office.
What’s particularly troubling about the M&S incident is that larger businesses are perceived to have better protection in place. The retailer estimates the hack will cost it around £300mn, which it will claw back through insurance and other “mitigating actions” — that’s money that would otherwise have been ploughed into the business. And it’s accelerating planned network upgrades to increase its cyber resilience.
Shareholders need to see that companies are well prepared against the threat, invest heavily in technology and have insurance. You don’t want to buy a business that believes security measures for customers’ money are an unnecessary cost.
The cyber security threat also provides investment opportunities. US companies such as Palo Alto Networks and CrowdStrike (the company that caused, and survived, a worldwide IT outage last July) have seen strong share price gains in recent years.
London-listed cyber security specialists include NCC, Softcat, Computacenter, BATM and GB Group. Demand for insurance will continue to rise, to the benefit of insurers such as Beazley and Hiscox, which are both growing their cyber risks businesses.
The safety net for insurers is that claims are capped to prevent open-ended liabilities. This was a bad stumble by M&S but it has learnt a lesson. Investors should too.
BUY: Marks and Spencer (MKS)
Full-year figures for Marks and Spencer demonstrate that digitalisation can be a double-edged sword, writes. Mark Robinson.
It has helped the group to drive structural cost reductions of around £300mn over the past three years, which has supported underlying profitability. Despite this, the market’s focus has switched to last month’s cyber attack that has led to a suspension in online shopping and reduced availability of some food items.
Measures are in progress to “reduce the interdependency of systems”, but the incident underlines how vulnerable businesses have become to attacks of this nature.
The financial impact of the cyber attack will be apparent in the retailer’s interim figures, but shareholders can take some solace from the fact that underlying profits — up 22 per cent to £876mn — beat market expectations, while management felt able to bump up the annual dividend by a fifth.
The rise in profitability was largely down to 8.6 per cent like-for-like growth in food sales. This reflected volume growth in core areas
HOLD: Vodafone (VOD)
For a while now, Germany has been dragging down the performance of Vodafone, and now this has been officially recognised in the form of a multi-billion-euro impairment, writes Arthur Sants.
In the year to March, Vodafone recorded impairment charges of €4.4bn (£3.7bn) for investments in Germany because of “materially higher competitive intensity in the mobile market”. This swung the group from an operating profit of €3.7bn last year to a loss of €0.4bn.
The German business has been impacted by a combination of changing regulation, more competition and a slowing economy. In some ways, it is a microcosm of the wider problems suffered by telecoms companies.
Organic services revenue fell 5 per cent to €12.2bn, while its adjusted cash profit margin slipped 2.7 percentage points to 36 per cent. But management believes the worst is over and expects Germany to return to growth this year.
Strong growth in Africa and a steady performance from the UK business helped to offset the German decline.
BUY: SSP (SSPG)
SSP flagged lower demand in North America “following recent geopolitical events” as its like-for-like sales in the region fell 2 per cent in the first six weeks of the second half of its financial year, writes Christopher Akers.
But the FTSE 250 Upper Crust owner, which sells food and drinks to travellers at airports and railway stations, maintained annual guidance for revenue of £3.7bn-£3.8bn and an adjusted operating profit of £230mn-£260mn.
For the half year, like-for-like sales growth came in at 5 per cent. Muted growth of 2 per cent in North America and 3 per cent in continental Europe (SSP’s biggest market) was offset by growth of 8 per cent in the UK and a 13 per cent uplift in Asia-Pacific and related markets. Adjusted operating profit was up by a fifth to £45mn.
Management said the benefits of its profit improvement plan in Europe, where profit fell 12 per cent in the half, would be seen in the second half.
SSP’s undemanding valuation of just 5 times EV/ebitda (enterprise value against cash profits) keeps us bullish.
