Shares in Aldermore Group (LSE: ALD) soared by 8.6% to 302 pence today, as the lender reported better than expected interim results. Underlying pre-tax profits more than doubled, having risen 109% to £44 million in the first half of 2015. The small and medium business-focussed lender saw a rapid expansion in its loan book and an improvement in most of its financial ratios.
Its net interest margin widened from 3.3% last year, to 3.6%, and its cost efficiency ratio improved by 11 percentage points to 53%. Its IPO in March this year has strengthened its capital position, and has allowed Aldermore to increase the rate of new loan originations.
Looking ahead, whilst analysts expect economic conditions are expected to be relatively robust in the UK, the lender faces some headwinds in the medium term. Management warned that there could be an increase in competition in the sector, as a number of new entrants have targeted the undertapped small and business lending market.
Aldermore is heavily exposed to mortgage lending, with mortgage lending accounting for more than 70% of its loan book. In addition, more than a majority of those mortgages are buy-to-let loans, which could suffer from the recently announced reductions to mortgage tax relief for higher rate taxpayers. Furthermore, house prices in the UK have been rising at the slowest rate in two years, and there are concerns that the housing recovery is slowing down.
To fund the reductions in the UK’s bank levy, the Chancellor George Osborne had introduced an 8% surcharge on banking profits, which would take effect from 1 January 2016. But, unlike the bank levy, which was primarily paid by all but the largest financial institution, substantially all banks will be liable to the new banking profits surcharge.
Amec Foster Wheeler
Challenging oil and gas conditions continue to affect Amec Foster Wheeler (LSE: AMFW). Underlying revenues fell by 4% to £2.58 billion and underlying trading profit fell 24% to £188 million in the first half of 2015. But, the company did benefit from the strong US dollar, which is expected to have the effect of lifting revenues by around £50 million in 2015.
Unlike, many other oil service providers, Amec benefits from greater diversification. Demand from markets in downstream oil & gas, petrochemicals and clean energy continue to be robust, and Amec benefits from an order book of £6.6 billion. So, although earnings will likely be much weaker in the medium term, Amec will outperform many of its peers.
Onshore oil services company Lamprell (LSE: LAM) disappointed investors with much weaker revenues in the first half of 2015. Revenues had almost halved to $351.4 million, from $632.3 million last year, but this was partly due to phasing of construction activity. Underlying profits more than halved to $20.3 million, down from $46.1 million last year.
Low oil prices is forcing oil producers to cut their growth capital expenditure budgets, and this is beginning to take their toll on oil services sector. “These challenging market conditions are now expected to last longer than originally envisaged by the industry”, warned Chairman John Kennedy.
Although Lamprell’s earnings outlook is pessimistic, the company has a strong balance sheet and has made great effort to improve its cost efficiency. Looking forward, Lamprell should benefit from its exposure to the Middle East, because low production costs there has meant investment activity has remained relatively robust. So, although conditions are bad, it does seem that Lamprell is doing better than many of its peers.