BOCH – NPE sale, dividends on the horizon?
BT – Defensive move?
CLIN – Elliott raises the stake
KMR – Tender offer
MKS – Costa deal
PCA – Interims
RMG – Interims
SPDI – ARCPF non-core disposal
STM – Trading update
ULVR – Just CVC’s cup of tea
BOCH – NPE sale, dividends on the horizon?
Bank of Cyprus announced on Monday that it has agreed to sell an NPL portfolio with a gross book value of €577m, as well as real estate properties with a book value of €121m (collectively known as the Helix 3 portfolio) to PIMCO. The portfolio has a contractual balance of €993m and is highly granular (c.20,000 loans, mainly to retail clients). At completion, the Group will receive gross cash of c.€385m. Pro-forma for this transaction, which will cut the stocks of NPEs by 36% and properties by 9%, BOCH’s NPE ratio will be “less than 9%”, one year ahead of the Group’s intended timeline for the achievement of a single-digit ratio. The transaction will have very helpful capital impacts – adding 66bps to the CET1 ratio, with a further 7bps coming from a profit on disposal. Completion, which is subject to customary regulatory and other approvals, is expected in H1 2022. S&P revised its outlook on BOCH to positive from stable in the wake of the news, although its B+ long-term rating is four notches below investment grade. The achievement of a single digit NPE ratio is an important milestone for BOCH. The Group is currently under a regulatory prohibition for equity dividend distribution (save for scrip issues, as these count towards CET1 capital) following its SREP communication. However, it is worth noting that in another European island nation (Ireland), banks recommenced dividend payments a few years ago after pushing their NPE ratios into single digits. BOCH has pared its ratio from 30.3% at end-2019 into single digits, significantly de-risking its business, while CET1 of c.14.9% (taking the end-June 2021 position and adding c73bps for this transaction) sits well above its minimum requirement of 9.7%. To this end, I suspect that we are now getting close (perhaps the FY 2022 results in early 2023?) to a maiden dividend from BOCH, which should lead to increased investor interest. BOCH’s shareholders’ funds were €1.83bn at-end June, so the current market cap of €485m has the Group on a P/B multiple of only 0.27x. This multiple compares to management’s target RoTE of c.7%, which seems, in my view, to be a realistic target – as I previously set out in my detailed write-up on the Group.
ULVR – Just CVC’s cup of tea
Late on Thursday Unilever announced the disposal of its global tea business, ekaterra, to CVC Capital Partners Fund VIII for €4.5bn (cash free debt free). The business includes brands such as Lipton, PG tips and Pukka but does not include the tea business in India, Nepal and Indonesia along with the Pepsi Lipton ready-to-drink tea JV, which Unilever is retaining. The disposed brands generated revenues of c. €2bn in 2020 and appear to have been dilutive to Group performance for some years. The sale is consistent with ULVR’s pivot to higher growth segments. Furthermore, a divestment had been sign posted for some time, with ULVR having previously guided that the ‘operational separation’ of the tea business was due to conclude in October 2021. The disposal is set to close in H2 2022. ULVR did not disclose its intentions for the sales proceeds – net debt was €22.4bn at end-June, so that’s one potential avenue for the funds, although it should be noted that the Group is conducting a €3bn share buyback which is set to run until the end of this year.
PCA – Interims
Palace Capital released its H1 results on Tuesday. The Group had provided a detailed trading update last month covering performance to end-H1, so there was limited scope for surprises. Nonetheless, these are good numbers. In terms of what’s new, we learned that ETRA NTA has increased by 3.6% to 362p since March (350p); adjusted EPS came in at 8.7p, providing 1.4x cover after taking the 8% hike in the minimum quarterly dividend to 3.25p/share into consideration. We already knew that 97% of rents have been collected for the June quarter, with 90% of rents for the September quarter now collected (was 84% as at last month’s update). As previously announced, the LTV is 36% (42% at end-March). The Group’s disposal programme is going well. At Hudson Quarter PCA has now sold 64 apartments for £21m, with an additional 8 under offer for £3m (was £19.2m and £3.0m last month), leaving 55 apartments remaining – PCA says that it is targeting long term investors as well as owner occupiers for the remaining units. The £30m non-core property disposal programme is continuing at pace, with £19m of sales now completed, with all disposals above book value. Cash reserves are now up to £18.7m and net debt is £93.2m (was £118.9m at end-March). Asset management is another highlight, with 29 lease events during H1 providing £0.6m of additional income per annum, 3% ahead of ERV. The leisure assets’ trading performance is encouraging, with one now at 97% occupancy and the other at 95%.
In terms of acquisitions, the Group bought out the freehold of a mixed-use property it held a leasehold on in Southampton for £2.0m, with the view to selling the asset in 2022. The Group has one acquisition in legals. Management says that it may consider a buyback, although reading between the lines it seems to be leaning more towards M&A activity. Overall, a commendable set of results, with all indicators of performance moving in the right direction. The 30% share price discount to NTA is anomalous, in my view, particularly given that PCA is selling non-core properties at better-than-book-value prices.
KMR – Tender offer
Kenmare Resources announced on Tuesday that it is launching a tender offer to purchase up to 13.5% of its issued shares for cancellation. While the timing of this is a slight surprise (I would have guessed that the company wished to transition to a net cash position before launching a buyback, but as the transition to net cash was expected to be a 2022 event we’re only talking a matter of months ahead of what I had expected), the launch of a buyback is not a surprise given the Group’s strong balance sheet and stated unwillingness for M&A. At end-June KMR had net debt of $76.2m, less than the $82.3m of EBITDA delivered during the first six months of this year. Based on the tender price of £4.17 and current FX rates, this implies a return of up to $82.7m / £61.8m to participating investors. The tender has been structured to provide an exit mechanism for small shareholders (tendered holdings of up to 500 shares will be repurchased in their entirety) without dealing costs. Kenmare’s latest annual report shows that the Group had 4,085 shareholders at the end of March, of whom 4,001 have less than 1,000 shares (c.£4,200 worth). Directors will not be participating in the tender offer and the largest investor (the Oman SWF) will tender at least enough stock to avoid its interest going above the 29.9% level that would trigger a mandatory bid for the Group. The tender will require EGM approval, with proceeds set to land in participating investors’ accounts before Christmas. It will be interesting to see what the take-up of the tender is. I will not be participating as I see no reason to sell my shares at 5.1x earnings (per Koyfin data).
STM – Trading update
STM’s trading update (for FY 2021 and the outlook for FY 2022) on Friday was disappointing. Management said that H2 2021 has been “a frustrating period”, with anticipated new business revenues in UK SIPPs and Gibraltar life materialising slower than anticipated, while it is taking a conservative approach to revenues from the London & Colonial annuity product. As a result, it is taking a conservative approach to guidance. Management also notes that EBITDA has been impacted by c.£0.1m due to a slower than anticipated reduction in costs arising from the migration of its businesses to new IT platforms. This produces new guidance of revenue of £22.5m, EBITDA of £3.4m and a statutory PBT of £1.5m for FY 2021. Management sees PBT rising to “at least £2m” in 2022, although I suspect the market will adopt a wait and see approach to that. The Group continues to look for bolt-on M&A opportunities. The market cap is only £20m, so hardly expensive even if PBT only comes in at £1.5m this year.
MKS – Costa deal
Marks & Spencer has inked a deal with Costa where it will sell its sandwiches and hot food through Costa’s 2,500 outlets. Around 30 separate lines will now be listed by Costa. This is clearly positive news for MKS and I wonder if this may serve as a template for similar deals in the future. Elsewhere, shares in M&S’ food JV partner Ocado rose by 7% following speculation from Deutsche Bank that MKS could buy Ocado out. Personally I wouldn’t like to see Ocado exiting the JV given the benefits that its technology brings to MKS.
RMG – Interims
Royal Mail Group released its H1 results on Thursday. These show strong growth in profitability and management announced a share buyback and special dividend on top of the ordinary dividend. Revenue was +7% y/y to £6.1bn and reported PBT of £315m was well above the preceding year’s £17m. Headline net debt has halved over the 12 months to end-September 2021 (from £1bn to £540m), while on a pre-IFRS 16 (i.e. excluding leases) basis RMG has net cash of £685m (versus £47m at end-September 2020). COVID-19 has driven a structural shift in parcel volumes, with domestic (UK) parcel volumes +33% vs H1 2020 (i.e. to end-September 2019) and GLS parcel volumes +30% in the same period. Compared to H1 of the last financial year, RMG domestic parcel volumes are -4% (still very respectable given the reopening) and GLS volumes are +8% y/y. The Group continues to make progress on its change agenda, shaving unnecessary costs through automation and realignment (more than 1,700 changes to practices have been deployed). Cash generation is very impressive, with net operating cashflow rising from £359m a year ago to £471m in H1 2022. RMG guides that it expects to move to a net cash position (including leases) over the next two years. As a result, it is returning £400m to shareholders, split 50-50 between a buyback and a special dividend. This will see the Group reduce its share count by ~4%. RMG will also pay an ordinary interim dividend of ~£67m. For the FY, RMG expects Royal Mail to deliver c.£500m in adjusted operating profit, with GLS expected to deliver low single digit revenue growth and a c.8% operating profit margin. GLS did £4.04bn of revenue last year, so assuming 5% growth (it did 7.5% in H1 2022) this implies ~£350m of adjusted operating profit. So group operating profit of £850m, let’s take £50m off for below the line items and assume a 20% tax rate gets you to £640m net income versus a market cap of £4.8bn – 7.5x PE for a company in rude financial health. For me, that is simply too cheap, even despite the cost inflation pressures at this time, which RMG is working hard to mitigate. To give one example of this, parcel automation was just 12% in FY (end-March 2019); it was 33% in March 2021 and is expected to be above 50% by FY (end-March) 2022.
BT – Defensive move?
In an intriguing announcement on Monday, BT announced that it is seeking bondholder consent in respect of its subordinated bonds due 2080 to add a change of control call option with an interest rate step-up provision if not exercised. BT says that its proposed amendments are designed to satisfy rating agency requirements and align the securities’ conditions with those of other issuance. Bloomberg speculated that this move is a response to reports that billionaire French–Israeli telecoms mogul Patrick Drahi is planning to increase his 12% stake in the Group.
SPDI – ARCPF non-core disposal
Arcona Property Fund, the Dutch listed group that SPDI is transferring its property assets to in exchange for shares, announced on Friday that it has sold a non-core 1970s office building in Zilina, Slovakia for €4m to a local developer. The building was only 64% occupied, so its sale raises the portfolio occupancy percentage to 89.4%. ARCPF’s Slovakian exposure has been pared to 28% from 36% at the start of the year. €2.5m of the proceeds will be used to redeem expensive short-term debt maturities. The sale was at a discount to book value (€4.73m at end-2020), slightly trimming the NAV to €11.77 a share versus a share price of €7.15. ARCPF’s strategy of selling property assets to retire debt and repurchase shares should help to close the discount.
CLIN – Elliott raises the stake
On Monday it was announced that activist hedge fund Elliott has increased its stake in Clinigen from 5.2% to 7.6%.
Theodosian Capital 