AUG – Resolution
BHP – Nickel bidder glory?
BOCH – Axia note
BT – A sale of BT Sport?
CLIN – Another distribution deal
GSK – Another activist
HBR – Interims
PRSR – Trading Update
RKT – Trading Update
AUG – Resolution
The takeover battle for Augean was settled with an auction presided over by The Takeover Panel on Wednesday evening, which saw Eleia prevail with a 372p bid (Morgan Stanley bid 361p). This is well above the 340p bid from Morgan Stanley which had been in the lead prior to the auction to settle the matter (and turns what was a 10-bagger into an 11-bagger for me!). Augean’s board has unanimously recommended the increased Eleia offer. The Court Meeting and General Meeting to be held in connection with the increased offer are expected to be held in the week commencing 11 October. This is a welcome outcome for AUG shareholders, with the shares (which were less than 30p 10 years ago) to be taken over for an all-time high of 372p. For me, the net proceeds provide a useful opportunity to rebalance my portfolio and add exposure to segments that I’m underweight in.
HBR – Interims
Harbour Energy released its H1 results on Thursday. Reported production in H1 was 151kboepd, down from 187kboepd in the first half of the prior year, reflecting a combination of planned maintenance and unplanned outages. As a result of the lower volume, OpEx per barrel rose from $10.2/barrel to $15.6/barrel. EBITDAX of $843m was behind H120’s $920m, while free cash flow held up well at $302m (H120: $475m), when you consider that this year saw $206m of tax payments, while the prior period had $7m of net receipts. Net debt was $2.6bn at end-June or 1.2x pro-forma EBITDAX. There were some significant portfolio developments, including the decision to exit the Sea Lion project in the Falkland Islands and exploration licences in Brazil and Mexico. Finding a buyer for a development asset like Sea Lion at a good price may prove a challenge in a world where investors are demanding companies take action towards decarbonisation. Elsewhere, management’s comments on the Zama field (12.4% interest) in Mexico were interesting, with the Group saying that it is engaging with partners “in an effort to continue to advance the project towards an investment decision”, which sounds to me like they’ll hold on to it. On the outlook, management reiterated guidance for FY reported production (170-180kboepd); opex ($15-16/boe) and capex of $1.1bn. Production at Tolmount, originally scheduled for mid-2021, will commence “around year end” as previously guided, while there will also be a busy period of drilling in both the North Sea and South-East Asia in H2, with more appraisal and drilling activity guided for 2022. There was no comment on recent media speculation around $10bn merger with Neptune. The Group will hold a capital markets day on 9 December. How do I view HBR? It seems capable of producing comfortably over $2bn a year in EBITDA, leaving plenty of optionality in terms of deleveraging, capex, bolt-on M&A and dividends. At 10.7x FY21 earnings (per Bloomberg), it is on an undemanding valuation.
BT – A sale of BT Sport?
On Tuesday the FT reported that the streaming service DAZN is in “advanced talks” to buy BT Sport. While BT has invested more than £2bn in this business, whose financial performance is not disclosed separately by BT, it is believed to only operate at or close to breakeven, despite having close to 2m subscribers. An agreement between DAZN and BT Sport “could be struck within weeks, according to multiple people with direct knowledge of the talks”. BT could recycle the capital immediately into its push into 5G and full-fibre networks, driving stronger returns. The FT said that the unit could fetch “in the region of hundreds of millions of pounds”. One potential complication for the deal is that Sky has to approve the takeover, although the FT says that BT and Sky have held talks about a potential change of ownership. A sale of BT Sport is one of the potential catalysts that I identified for BT in my recent profile of the Group.
RKT – Trading Update
Reckitt released a short qualitative trading update on Thursday in which management said that “trading since the H1 results on 27 July has been in-line with management expectations”, adding that it still expects to deliver LFL net revenue growth of 0-2% in FY 2021 and adjusted operating profit margins of between 22.7% and 23.2%. This guidance excludes the recently disposed IFCN China unit. Q3 numbers will be released on 26 October. Adjusted net revenue, excluding IFCN China, was +3.7% in constant FX terms in H1, while the adjusted operating profit margin (on the same basis) was 22.7%. My gut feeling (nothing more sophisticated than this) is that they are low-balling the revenue guidance (given the H1 outturn) although the margin is likely to be under pressure from the well documented spike in inflation. These impacts likely net off though. At the time of writing (Thursday morning), RKT’s share price of £58.74 is lower than it was at the start of 2020 (£61.91) which makes no sense to me given what I see as a structural kicker for its hygiene products due to COVID-19 (are we really going to stop washing our hands 10x a day?!!) while the balance sheet has been substantially strengthened due to good trading and disposals – I wouldn’t be surprised if net debt at end-FY21 is as low as £8bn (it was £9.1bn at end-June 2021, before the $1.3bn of net cash proceeds from IFCN China had been received) versus £10.7bn at end-FY19. For completeness, Bloomberg consensus has end-21 net debt at a (higher) £8.4bn. Bloomberg also has RKT on 18.7x forward (FY22) earnings, which seems too low to me for a company with a portfolio of very strong brands.
PRSR – Trading Update
The PRS REIT released a trading update on Monday that covered its trading performance for the first two months of its financial year (to end-August). Reflecting the completion of construction works, its portfolio has expanded to 4,227 homes from 3,984 at end-June, with the estimated rental value (ERV) of the in-place portfolio at £40.3m (£37.5m at end-June). The Group has 828 homes under various stages of development, down from 1,096 at end-June (mainly due to completions, more on which anon). Adding in the ERV of the contracted homes gives a pro-forma ERV across the portfolio (in-place and contracted) of £48.0m, down from £48.3m at end-June. Why the decline? Due to the replotting of units at a contracted site, the number of completed and contracted homes has reduced by 30, driving the £0.3m contraction in ERV. Asset management remains solid, with 98% of rents collected over July and August, in-line with the year to end-June, while total arrears stand at £0.4m (so an average of just ~£100 per property). At end-August 97% of completed homes were occupied, with a further 80 (just under 2%) reserved for qualified applicants with rental deposits received. The unaudited NAV was 99p a share at end-June, up from 96.1p at end-December. Once the pipeline is completed (a matter of months away), the Group will have essentially achieved its target of a portfolio of c.5,200 homes with an ERV of c.£50m per annum. What them? The Group’s investment adviser has identified a pipeline of six sites with a potential for 670 new homes with an ERV of c.£6.5m per annum. The GDV of these is £103m (so a 6.3% gross rental yield). PRSR will consider “the most appropriate way” of financing this. As of Friday lunchtime the stock (103.5p) was trading on 1.05x end-June NAV, so a combination of a placing and debt financing seems likely to me. On distributions, the Group reiterates previous guidance of a minimum dividend of 4p/share for FY22 (a 3.6% yield at Monday’s closing price). The Group will release FY results in mid-October, but these seem an academic exercise given the detail provided here. On the investment view, I bought into PRSR at 80p so I’m pleased with a running yield of (at least) 5%.
BHP – Nickel bidder glory?
BHP seems to be falling further behind in the battle for control of Canada’s Noront Resources, with news emerging on Wednesday that Wyloo Metals, which is controlled by the Australian mining magnate Andrew Forrest, has notified Noront that it wishes to swap its $15m convertible loan for shares in Noront. This would increase its stake from 24.2% to 37.3%. Wyloo has previously offered to pay C$0.70 a share for Noront, above BHP’s C$0.55 bid. In the bigger scheme of things Noront is hardly a needle-mover for BHP – its market cap is C$400m, BHP’s is >C$100bn, although its nickel reserves in a stable Western democracy would have been a nice addition to BHP’s portfolio. It will be interesting to see if BHP opts for a higher bid or if it instead turns its attention to other assets.
GSK – Another activist
On Wednesday the FT reported that Bluebell, a small (€100m AUM) activist fund has bought a €10m stake in GSK (market cap £72bn) and written to the Chairman in support of proposals previously put forward by Elliott Management for the CEO, Emma Walmsley, to reapply for her job. Bluebell also argues for more scientific experience to be added to the board, saying that if this refreshed board were to re-hire Walmsley, then she would have “renewed credibility both internally and externally”. Bluebell is also pushing for a trade sale of the consumer health division rather than an IPO (note that GSK has previously said that its IPO strategy was “intended to be tax efficient compared to alternative separation options”). It will be interesting to see how things develop here.
CLIN – Another distribution deal
On Wednesday Clinigen announced that it has signed an exclusive agreement with Secura Bio for the supply and distribution of COPIKTRA in 39 European countries (Secura will promote and distribute the drug directly in Germany and the UK). COPIKTRA received marketing authorisation from the European Medicines Agency in May for the treatment of adults with relapsed or refractory Chronic Lymphocytic Leukaemia in patients. No details on financials were provided. What to make of this? Since the start of the year CLIN has announced a number of similar partnerships with a range of pharma and biotech players (Eyevance Pharmaceuticals, Orphelia Pharma, Horizon Therapeutics, BeiGene, Amgen and Karyopharm). The sheer volume of deals is surely testament to what CLIN brings to the table. So, while recent trading has underwhelmed (partly due to COVID impacts on health services) this seems to be one to keep the faith with. Koyfin data has CLIN on 11.5x PE, hardly a demanding multiple.
BOCH – Axia note
“There is light at the end of the tunnel. Despite challenges, we forecast Bank of Cyprus to deliver positive reported bottom lines in 2022-23, reaching a ROTBV of 7.0% in 2023. In our view, the bank’s bottom line will be supported by the lower operating expenses and cost of risk (€70m, or 68bps on net loans in 2023 vs 141bps in 2020), despite the continued top-line headwinds, which is expected to be offset by an increase in performing loans (€10.6bn in 2023, after the balance sheet de-risking, vs €10.4bn in 2020). Finally, from a capital perspective we note that the starting point in terms of capital ratios is solid and acts as an enabler for the execution of the business plan. Differently from previous years, BOCH can focus on ‘normal’ banking activities while worrying less about its capital position or a high percentage of non-performing assets in the balance sheet, currently with an NPE ratio of 14.6%. As of 2Q21 BOCH reported a fully loaded CET1 ratio of 12.9% and total capital ratio of 19.2%. We expect these capital ratios to be maintained over the next two years. As such, and provided that the ongoing COVID-19 headwinds are mitigated in the coming quarters, there could also be a dividend angle to BOCH’s investment case, which we do not incorporate in our valuation at this point”. Axia rates BOCH ‘Buy’ with a €1.90 PT, c.82% above where the shares were trading at in Nicosia on Friday lunchtime. The narrative from Axia is similar to that which I set out in my recent detailed write-up of BOCH, which I am a holder of.
Theodosian Capital 