AV/ – Singlife exit completes
BOCH – Step-change in distributions
GSK – Pipeline progress; Dementia report
HLN – Overhang reduces
KMR – FY results; Well positioned
MKS – Financial services report
PRSR – Interims; Dividend now covered
RHM – Bolt-on acquisition; German contract
RKT – Enfamil thoughts
STVG – Further Studios wins
ULVR – I scream, you scream…
KMR – FY results; Well positioned
Kenmare Resources released its FY 2023 results on Wednesday. The results were expected to show a moderation in performance from 2022, given developments in pricing and disruption from the lightning strike early last year. In the event, EBITDA came in at $220m, down from FY 2022’s record $298m. The balance sheet remains in great shape, with net cash of $21m at end-2023 (a year in which $30m was spent on share buybacks, cutting the share count by nearly 6%). This is important, given that the Group is set to embark on a $341m capex programme to upgrade WCP A and transition it to the Nataka ore zone over 2025-2027 – the costs of which will be easily met by operating cashflows and the $200m RCF. In a sign of confidence, a full year dividend of USc56.04 has been declared, +3% y/y. A further sign of confidence is the statement that “Kenmare is on track to achieve its annual production guidance [for 2024], although production is still expected to be second half weighted. The markets for our products have been stronger than anticipated in 2024 to date”. Kenmare is very cheap, trading on just 5.0x consensus earnings and yielding 8.2%.
PRSR – Interims; Dividend now covered
PRS REIT released its H1 (end-December) results on Wednesday. The key highlight was confirmation that the “dividend [is] fully covered on an annualised run-rate basis from March 2024” which fully removes one of the question marks that had been over the Group since its IPO (albeit this question mark had steadily diminished in importance as the Group completed more of its development pipeline). Reflecting the growing portfolio of let-up rental properties, PRSR reported NRI of £23m, +17% y/y; EPRA EPS of 1.8p (+13% y/y); and operating profit of £39.2m (+73% y/y). The latter reflects fair value gains of £20.5m in the period. PRSR finished H1 with a NAV per share of 123.6p, +3.5p since the start of the financial year, as ERV growth offset a softening in the NIY. PRSR’s portfolio stood at 5,264 completed units at end-December, with a further 312 at various stages of construction. Portfolio metrics are very strong – underlying occupancy of 98%, rent collection at 99%, LFL rental growth of 11.1% and total arrears, net of bad debt provision, were £0.6m at end-January 2024. The average rent was just c.23% of tenants’ gross household income – well within the guided affordability limit of 35%. The total portfolio ERV is £63.4m (of which £3.1m relates to homes under construction), up from £57.3m at end-December 2022. Assuming a gross-to-net ‘walk’ of 20% (the H1 2024 actual was 18.5%), this produces an NRI of £50.7m. Take away annualised operating and financing costs of (say) £20m and this leaves £30.7m versus a dividend cost of 4p*550m shares out = £22m. As the pipeline completes, a 5p annualised dividend seems a reasonable possibility for some time in CY 2025. Another consideration is that the wide gap between the share price (79p this lunchtime) and NAV might leave the Group vulnerable to a takeover approach (not least given that planning and construction risk has effectively reduced to zero). While NAV has its critics where REITs in general are concerned (I’ve seen people calling it “Not Actual Value”!), PRSR’s dividend (supported by more than 5,000 revenue generating units) of 4p is rock solid. A yield of >5% seems attractive to me.
BOCH – Step-change in distributions
Following receipt of the necessary regulatory approvals, Bank of Cyprus revealed its long-awaited distribution in respect of FY 2023 performance on Wednesday. The Group is to pay a 25c dividend in respect of FY 2023, a 5x increase on the 5c paid in respect of FY 2022 performance, and also commence a €25m share buyback. The ECB’s approval of this distribution is a reflection of the Group’s strong financial performance and strategic progress. The total distribution corresponds to a 30% payout ratio for 2023 – BOCH had accrued for up to a 50% payout so its end-2023 transitional CET1 ratio has been revised up to 17.4% from the previously reported 16.5%. BOCH’s minimum CET1 requirement was 10.98%+P2G at the start of 2024, meaning that the Group has a very large buffer over this requirement which paves the way for further strong distributions over the coming years. While the dividend is extremely welcome, I am delighted to see a buyback, given how cheap this stock is (Bloomberg consensus has it on just 5.0x 2025 earnings, a 40% discount to NAV and yielding 9.4%).
HLN – Overhang reduces
In a very welcome development on Monday, it was announced that Pfizer: (a) intends to sell c.630m Haleon ordinary shares in a secondary global offering; and (b) sell £315m worth of Haleon shares to the company for cancellation. Completion of (a) and (b) would pare Pfizer’s interest in Haleon from 32% at the time of the IPO to c.24%. In the event, Pfizer upsized its public offering to 790.6m ordinary shares, priced at £3.08, with Pfizer selling a further 102.3m shares to Haleon for cancellation (reducing its share count by 1.1% to 9.1bn shares) at the same price. Post-completion on Thursday, Pfizer is now subject to a 90 day lock-up over its remaining shareholding. When Haleon first came to the market in 2022 it only had a 55% free-float due to Pfizer holding 32% and GSK c.13%. Since then, GSK has cut its stake to 4.2% and Pfizer is now down to c.22.6%, meaning a free-float of c.73%. This is all good news as it means index trackers are obliged to buy more HLN (passive investing can work to active investors’ advantage at times!). Another consideration is that Haleon said in its recent FY results that it was open to buying back up to £500m worth of its shares this year – does ‘only’ spending £315m on buying from HLN mean it is lining up a repurchase of £185m worth of shares from GSK when the latter (currently not subject to any lock-up restrictions) next comes to market? Haleon trades on an undemanding 16.4x consensus 2025 earnings and yields 2.2%.
ULVR – I scream, you scream…
On Tuesday Unilever set out plans to “accelerate Growth Action Plan through separation of Ice Cream and launch of productivity programme”. The Group will remain committed to a portfolio of power brands “in highly attractive categories [Beauty & Wellbeing; Personal Care; Home Care; and Nutrition) that have complementary operating models”. Due to Ice Cream’s “very different operating model” (frozen goods supply chain; different channel landscape; more seasonality; and greater capital intensity), “the Board has decided that the separation of Ice Cream best serves the future growth of both Ice Cream and Unilever”. The Ice Cream division, which had sales of €7.9bn in 2023, owns five of the top 10 selling global ice cream brands. ULVR says a demerger “is the most likely separation route”, but other options will be considered to maximise shareholder returns. Will full separation not expected until end-2025, this will be a management distraction for some time to come though. Separately, a comprehensive productivity programme is being launched with the aim of delivering total cost savings of c.€800m over the next three years, “more than offsetting estimated operational dis-synergies from the separation of Ice Cream”. Around 7,500 administrative jobs will be affected, while the Group will invest c.1.2% of turnover (was c.1.0%) equivalent over the next three years as part of the programme. ULVR also said that post-separation of Ice Cream, the continuing Group will have a structurally higher margin and aim to deliver “MSD USG and modest margin improvement” over time. Given recent high profile shareholder unhappiness around ULVR’s strategy, the radical steps set out in this announcement are not surprising. On Ice Cream, I expect that plenty of PE and trade buyers alike will be running the slide rule over that division, so an IPO may not be the exit route. Unilever trades on an undemanding 15.8x 2025 earnings and yields 4.0%.
RHM – Bolt-on acquisition; German contract
Rheinmetall announced the bolt-on acquisition of Dutch firm REEQ (Range Extended Electrical Quad) on Monday. The acquired firm specialises in “innovative light hybrid vehicles” which seems an attractive vertical given the increased use of air/sea/land drones in the security context. “Both parties have agreed not to disclose the purchase price”, rather unhelpfully, but as mentioned, it seems to be a field with strong structural growth drivers so this could prove a very helpful deal in time. This follows RHM’s agreement to purchase a 72.5% shareholding in Romanian vehicle maker Automecanica Medias SRL in February, a business it sees with an “annual sales potential of up to €300m”. The extent to which RHM can spur the consolidation of Europe’s deeply consolidated sector will further enhance its competitive position and (presumably) standing with European policymakers. RHM’s global vehicle production footprint extents to plants in the US, Canada, Australia, the UK, Austria, Netherlands, Romania and Germany. Elsewhere, RHM announced on Thursday that Germany’s Bundeswehr has commissioned it to supply 123 Boxer IFVs from 2025 in a contract worth c.€2.7bn. Rheinmetall has had a super run of late – the shares are +75% year to date – although a valuation of 17.9x consensus 2025 earnings (and 2.0% yield) doesn’t seem toppy for a high growth company.
RKT – Enfamil thoughts
Late on Friday, Reckitt released a statement following the awarding of $60m to a plaintiff in relation to a case concerning necrotising enterocolitis (NEC). Reckitt and its US formula subsidiary Mead Johnson emphatically rejected the court’s findings, citing that the plaintiff’s lawyers’ allegations “were not supported by the science or experts in the medical community. This was underscored during the trial by a dozen neonatologists”. While RKT goes on to say: “it is important to note that this is a single verdict in a single case and should not be extrapolated”, the market did just that last Friday, knocking 15% or £5bn off the Group’s market cap. Reckitt says it will “pursue all options” to have the verdict overturned. I understand that there are c.500 similar NEC cases pending against RKT, and while appropriate consideration has to be given to the scientific evidence supporting the RKT case, as a GSK shareholder I’ve seen Zantac cases settled despite the lack of any scientific evidence that it is harmful. It could also be a couple of years before a line can be drawn under NEC, while the huge award in the Illinois NEC case may also prompt more suits against RKT. Let’s assume 1,000 cases where the average settlements are between $100k (similar to J&J talc settlements) and $160k (similar to Bayer Roundup settlements), with legal fees adding as much again. That suggests a hit of $200-320m, immaterial in a RKT context (the Group made IFRS operating profits of £2.5bn last year), although the $60m Illinois award (which may be overturned) and last Friday’s share price reaction suggests things could end up being materially worse. And the lead-time (presumably years) before we know what the real number is going to be, warrants a higher cost of equity for RKT until that is clarified. RKT shares trade on just 12.3x consensus 2025 earnings and yield 4.7%. This discount to ULVR (qv) seems warranted pending clarification on this matter.
STVG – Further Studios wins
STV announced on Wednesday that it has been commissioned by Warner Brothers Discovery UK and Ireland to produce a brand new series of The Yorkshire Auction House; Celebrity Yorkshire Auction House; and The Derbyshire Auction House for the Really channel. The 40 episode commission is the latest of a series of wins for STV’s Studios business – it recently secured its first contract win from Netflix, while it also counts Apple TV+, BBC, Channel 4, Channel 5, ITV, Sky and Warner Brothers Discovery among its customer base. STVG is cheap, trading on 7.2x consensus 2025 earnings and yielding 5.1%.
MKS – Financial services report
Monday’s CityAM reported that Marks & Spencer is “close to a seven-year agreement with HSBC to transform its banking division into a financial services and loyalty “superapp”. November’s Capital Markets Day presentation from MKS said that Sparks had 17.7m subscribers, and “Combining the power of Sparks and the App” was cited as one of the strategic actions to drive growth “ahead of the market”. Per the CityAM report, M&S Bank, which offers personal finance products (loans, insurance, BNPL) and which HSBC took control of in 2004 (but which MKS is entitled to a 50% share of the profits “after appropriate contractual deductions”), is said to have “more than 3m customers”, so broadening its potential reach to c.6x as many customers could be mutually attractive for M&S and HSBC alike. CityAM, citing a source, says “a public announcement with more details of the revised partnership was expected in April”, although “it is unclear whether M&S is set to take an ownership position”. On the latter, I’d prefer not – a ‘capital lite’ approach where M&S receives commission on business generated through a superapp would be a low-risk model. Obviously, execution risk will be high for this, but the risk/reward profile seems attractive. M&S is cheap, trading on only 10.0x consensus FY 2025 earnings and is expected to pay a 2.6% dividend in respect of that year’s performance.
GSK – Pipeline progress; Dementia report
GSK announced on Monday that phase III data show potential for Jemperli (dostarlimab) combinations in more patients with primary advanced or recurrent endometrial cancer. “Dostarlimab plus chemotherapy is the only immuno-oncology combination to show statistically significant and clinically meaningful overall survival in the overall population”. GSK says it expects US FDA regulatory submission acceptance for an expanded indication in the overall population in the first half of this year. There are c.417k worldwide endometrial cancers every year, of whom c.15-20% will be diagnosed with advanced disease at the time of diagnosis. This is a further encouraging headline from GSK’s attractive development pipeline, which had 71 vaccines and specialty medicines across Phase I-III/registration at end-2023. Elsewhere, I note a report from Marketwatch about an internal GSK study that shows a correlation between the use of GSK’s shingles vaccine Shingrix and a lower risk of getting dementia. The report cites an analysis of 5m UK senior citizens (the UK NHS has provided shingles vaccines for the over-80s since 2013), where those who took Shingrix were 20% less likely to develop dementia over the following 7 years. GSK says that further research is needed, and while it’s too early to get excited about this, the potential here is clear. I don’t think the potential of this, or indeed the rest of the GSK pipeline, is reflected in the Group’s very cheap valuation of 9.7x consensus 2025 earnings and 3.9% yield.
AV/ – Singlife exit completes
On Monday Aviva announced that it has received total proceeds of £937m from the disposal of its shareholding and associated instruments in Singlife. This is fractionally ahead of the c.£930m guided in an RNS in December, with the difference immaterial in an Aviva Group context. The timing is also in-line with the “Q1 2024” guidance previously provided. Aviva has already recycled these proceeds in attractive M&A in both the UK and Canada. Aviva is very cheap, trading on 9.5x consensus 2025 earnings and yielding 7.7%.