AUG – Scheme document published
BHP – Strong results, major corporate developments
BT – Adam Crozier appointed as Chairman
HMSO – Meaningful director share purchase
KMR – Strong H1 results
LLOY – Aiming to become the UK’s biggest landlord?
MKS – Strong trading update
BHP – Strong results, major corporate developments
BHP reported very strong FY results on Tuesday. Fuelled by soaring commodity prices, revenues widened to $61bn (a nine year high) from the previous year’s $43bn, leading to a step change in profit metrics (EBIT $30bn versus last year’s $16bn). The dividend was hiked to 301c from 120c in FY20. Net debt, as per my definition (including other financial liabilities and assets) improved to $5bn from $13bn at end-FY20. This is well below BHP’s previous $12-17bn target range for new debt, but this target has been parked until the interims, when the Group has more clarity on corporate developments. These developments are: (i) The sanctioning of the $10bn Jansen potash project in Canada (of which $4.3bn has already been invested), which will create a world class mine with a long (100 year) life and very strong economics (7 year payback from first production in 2027); (ii) the spinoff of its petroleum assets through an all-share merger with Woodside which will establish a top 10 independent oil and gas producer with a 71% production skew towards gas and 94% of production from OECD member states; and (iii) the unification of the corporate structure under the Australian holdco. BHP has streamlined production towards the resources of the future (nickel, copper, potash, iron ore and metallurgical coal) while pivoting away from oil, gas and energy coal. While it is still exposed to the vagaries of resource prices, the through-the-cycle demand/supply profile of its asset deck is very attractive, supported by a very strong balance sheet (net debt / EBITDA of <0.2x) which offers significant optionality in terms of the means for propelling shareholder returns higher.
KMR – Strong H1 results
On Wednesday Kenmare Resources published strong interim results. Reflecting the benefits of higher prices and the major capex projects (the latter facilitating a 43% increase in HMC production) completed in recent quarters, the Group reported a step-change in financial performance. H1 EBITDA and net income were +121% y/y (to $82.3m) and +278% y/y (to $48.0m) while the interim dividend was more than tripled to US7.29c from US2.31c in H120. The Group has reaffirmed its FY production guidance of 1.1-1.2m tonnes of ilmenite this year (H1: 559,000, so I suspect there is an upside risk bias here), while noting that the pricing backdrop remains supportive (increasing). On capex, the Group has sanctioned the $18m RUPS decarbonisation project, which will pare carbon emissions (and associated diesel usage) by 15%. Some minor incremental capex associated with the WCP B and WCP C projects is signposted, but this is immaterial in a Group context. The Group is preparing a feasibility study for the Nataka ore zone, where production is due to commence in 2025. This will be a large project, (of a similar scale to the WCP B move to Pilivili, which cost $127m, but this must be considered against the context of annualised EBITDA of more than $160m and the Group being likely to move into a net cash position next year). Net debt was $76.2m at end-June, so trending to less than 0.5x EBITDA for the FY, but up from $64m at end-2020 (the year to date increase is explained by capex and lower utilisation of invoice discount factoring, which temporarily ties up more money in working capital but saves on finance costs). At end-H1 KMR had $128m of reported debt, of which c.$20m relates to the RCF and the balance to the term loan facility, the first principal repayment (of $15.7m) is due in March 2022. Interestingly, the weighted average interest rate on Group debt at period end was 5.5%, -60bps y/y. The term loan facility matures in 2025, offering the potential for KMR to negotiate new facility on better terms assuming no adverse pricing and/or production developments. In terms of the investment view, KMR trades on a forward (2022) EV/EBITDA of less than 3.3x and a little over 6x PE, making it one of the cheapest stocks on the market. This seems anomalous considering it has: (i) around a century of reserves remaining; (ii) produces around 7% of global titanium feedstock supply, underpinning the importance of its asset base; and (iii) is poised to transition to net cash during 2022. For me, this stock could double and still appear cheap. As an aside, the security situation in Mozambique’s Cabo Delgado province has been a source of concern to some investors in that part of the world, but the recent arrival of a multinational force seems to have turned the tide against the rebels – see here: https://allafrica.com/stories/202108190026.html
MKS – Strong trading update
On Friday Marks & Spencer released a trading update covering the 19 weeks to 14 August. The update revealed a strong start to the year across both Food (+10.8% y/y and +9.6% on 2019/20) and Clothing & Home (+92.2% y/y and -2.6% on 2019/20, but the latter performance should be framed against ONS data that show the seasonally adjusted value of clothing sales -9.3% in July 2021 versus the February 2020 (pre-pandemic) level). The same ONS data show that sales in Food stores on the same seasonally adjusted cash basis are +4.4% (as of July 2021) versus February 2020. The release is a reminder that M&S is gaining share in both Food and Clothing & Home (Clothing makes up c.90% of C&H sales). The outlook for both Food and C&H sales is positive, enabled by rising footfall as people return to the office while online sales growth will be supported by the investments across the Ocado JV and M&S’ own investment in automated warehouse capacity for C&H. The benefit of online investment (and, to be fair, the effect of the shift to online caused by the pandemic) has supported a 61.8% increase in online C&H sales (in-store C&H sales are -19.8% y/y). This customer pivot allows MKS to take steps to optimise its physical footprint. International revenue is +39.7% y/y and -5.2% vs 2019/20, the latter being a satisfactory outcome given the impact of ongoing COVID-19 restrictions and Brexit disruption. Here again the digital news is positive – “the push into global online remains positive with sales up c.40% on last year and more than doubling on 2019/20”. Management has increased guidance for adjusted PBT from a range of £300-350m to “above the upper end” of this range (so, say, a 10% upgrade from the middle of the previous guidance range. Given the early stage of the year (interims won’t be published until 10 November) I suspect that management is being conservative with this new guidance. MKS closed at £1.628 on Friday, putting on about 10x PE, which seems very cheap for a stock with a menu of potential catalysts (economic reopening; ongoing benefits from transformation; a likely near-term restoration of its previous investment grade rating, which will trigger coupon step-downs on its bonds; and debt paydown).
LLOY – Aiming to become the UK’s biggest landlord?
The Financial Times, which first broke the news of LLOY’s push into the UK PRS sector, reported on Thursday that the Group aims to become the biggest private landlord in the UK, a contrast to more guarded public utterances from management about its intentions in this space. The article says that LLOY’s Citra Living brand aims to build a 50,000 unit strong portfolio by the end of the decade through partnerships with housebuilders. By 2025, when the portfolio is guided to stand at 10,000 units, this would provide Citra with a £4bn balance sheet and £300m in annual pre-tax profit (this seems ambitious – it implies £2,500 contribution per unit per month, whereas average UK rents are £1k pcm). For context, LLOY’s balance sheet at end-June 2021 had assets of £880bn while the Group made pre-impairment operating profit of £5.8bn in FY 2020. The article points to cross-selling opportunities including home insurance and deposit loans. So, while this will not be a major driver of performance, it provides a helpful tailwind to revenue.
AUG – Scheme document published
On Monday evening the scheme document for the proposed takeover of Augean by a Bidco established by Morgan Stanley Infrastructure was published. The relevant shareholder meetings will be held on 9 September with the effective date of the scheme being 27 September. Assuming this takeover is nodded through, shareholders will receive 280p a share in cash and a contingent value right worth up to 20p a share depending on the outcome of AUG’s tax claim proceedings against HMRC.
BT – Adam Crozier appointed as Chairman
As had been widely reported in the media, BT announced on Tuesday that Adam Crozier will join as Chairman in Q4. He brings a wealth of operational and transformational experience from CEO roles at ITV, Royal Mail, the Football Association and Saatchi & Saatchi while he is also Chairman of Whitbread, ASOS (from which he will step down on assuming the BT gig), Kantar and a NED at Sony (a position he will also relinquish in Q4). Welcoming the appointment, CEO Philip Jansen said: “I really look forward to working with him as we target returning BT to consistent growth” – a theme that chimes with my recent write-up on the stock: https://tbifund.wordpress.com/2021/08/08/bt-bt-a-ln-a-value-stock-transitioning-into-a-growth-stock/
HMSO – Meaningful director share purchase
On Monday Hammerson announced that a non-executive director, Adam Metz, has acquired 200,000 shares in the Group, which is £70k worth.
Theodosian Capital 