BHP – Woodside and Noront deals latest
CRH – Trading update
IR5B – Trading update, ferry acquisition, buyback
KYGA – Sustainability linked bond issue
LLOY – Tender uptake
MKS – Buyout interest? / Liquidity musings / Bolt-on deal
OGN – Q1 trading update
PMI – Possible merger
PPA – Q3 results
General market uncertainty
Friday has seen a severe sell-off of risk assets following the emergence of a new COVID variant. Clearly this is an evolving situation and the high ratio of speculation to fact in the coverage of it needs to be kept in mind. It is a tricky time for this to have emerged given that COVID-related monetary and fiscal supports across the world have begun to be rolled back. With inflation concerns to the fore, the consideration of additional stimulus, should this situation warrant it, is more complicated than it would have been this time last year. In any event, this news once again shows the importance of sticking to companies with strong balance sheets and robust business models in one’s own portfolio.
IR5B – Trading update, ferry acquisition, buyback
On Wednesday Irish Continental Group made two announcements, a trading update covering performance to 20 November and news of another ferry acquisition. To start with the trading update, reflecting the reopening and the entry to the Dover – Calais route, car volumes are +44% y/y; container freight (twenty foot equivalent units) is +11% y/y; and terminal lifts (‘LoLo’) is +17% y/y. Trucks carried (‘RoRo’) are -13% y/y, reflecting re-profiling of customer demand away from the UK landbridge as a result of Brexit along with pre-Brexit stockpiling. There are indications of some of the lost traffic coming back to the UK landbridge, however, as RoRo volumes in the period since the interim results in August show a slower rate of decline (-9% y/y). Bringing the above together, Group revenue in the first 10 months of the year (volumes are to 20 November, financials to end-October) of €280m is +€50m / +22% compared with last year, although some of this top-line benefit is offset by a €17m y/y rise in fuel costs (some of this reflects increased sailings). The Group’s balance sheet is in great shape, with net debt of €114.4m at end-October (€64.1m per-IFRS 16 lease liabilities) which compares to net debt of €88.5m at end-2020, with the increase largely driven by non-cash lease movements. For context, ICG delivered EBITDA of €42m in 2020 and given the top-line / fuel comments above I assume that it should be north of €70m for FY 2021. Separately, ICG has announced that it has agreed to acquire the passenger RoRo ferry CIUDAD DE MAHON from Trasmed GLE. Title is expected on delivery, anticipated in late January. This vessel will be used on the Dover-Calais route, bringing its fleet on that route to three ships and enabling up to 30 sailings a day with sailings in each direction approximately every 90 minutes. The CIUDAD DE MAHON has gross tonnage of 22,152 tonnes, passenger capacity of 589 and a freight unit carrying capacity of 91 units. Earlier this month ICG announced that it had bought the CALAIS SEAWAYS as its second ferry on the Dover-Calais route, so the move from 1 to 3 vessels in a short period of time presumably augurs well for how the Group sees the opportunity on that route. Davy has ICG on 16.9x 2022 PE and 8.2x EV/EBITDA, which seems too cheap to me, given the tailwinds I expect to see from the ongoing rebuild in international travel and usage of the UK landbridge. As a PS, on Thursday ICG announced that it had bought back 1,000,000 shares for cancellation at a cost of €4.4m. While this is small in a Group context (ICG has 187m shares in issue) it provides a helpful signalling effect on how management views the outlook.
PPA – Q3 results
Staying with maritime transport, earlier this week I wrote a detailed blog on Piraeus Port Authority, which operates globally strategic port infrastructure outside of Athens. On Wednesday the Group released its Q3 results and these show a strong uptick in performance, reflecting the reopening of economies. Year to date (to end-Q3), revenue of €114m (9M20: €99m); EBITDA of €54m (9M20: €47m) and net income of €29m (9M20: €24m) are all well up y/y. In Q3 specifically, PPA delivered revenues of €42m and net income of €14m, compared to €33m and €8m respectively in Q320. While activity is behind pre-pandemic levels, the direction of travel is positive. In H1 2021 PPA received 272 cruise ships, down from 479 in H1 2019 but well ahead of the 76 that arrived during the course of 2020. Coastal (ferries to the Greek islands etc.) traffic rose 8% y/y to 9.4m, with cars +7.5% y/y to 1.9m. Container throughput rose 17% y/y. Car terminal throughput is +49% y/y. The Ship Repair Zone handled 190 ships in 9M21, down from 207 in the same period last year, which I’m guessing is due to scheduled repairs being brought forward during the initial COVID period. The Group has cut its borrowings from €50.5m at end-2020 to €47.5m, while cash is stable at €110m at end-September (€111m at end-2020). The Group has stepped up investment activity, with capex of €14m in Q3 versus €4m in Q320. NAV has strengthened to €265m at end-September (€10.6 per share) versus €246m at end-2020. The strong rebound in profitability is unsurprising to see given the COVID dynamic. Regardless, I think that the current multiple of 10x earnings for PPA is astonishing value given the earnings rebuild and growth to come from its investment programme.
BHP – Woodside and Noront deals latest
BHP announced on Monday that it has signed a binding share sale agreement for the merger of its oil and gas portfolio with Australia’s Woodside in exchange for shares in the latter. This transaction was first announced some months ago and will create a global top 10 independent E&P. From BHP’s perspective, this is the latest in a series of steps to pivot its portfolio towards a pure play on future-facing commodities. The Group has been exiting its thermal coal interests and this sale opens the door for an exit from oil and gas. BHP will distribute shares in Woodside to BHP shareholders as an in-specie fully franked dividend, expected in Q2 2022 CY. In my opinion it is likely that Woodside could come under technical selling pressure after the shares are distributed, assuming that some current BHP holders are unwilling to hold shares in a pure-play oil and gas company. Woodside is seeking a secondary listing on the NYSE and is considering additional secondary listings (presumably London), which could mitigate some of this pressure. Depending on how it all plays out, this could create a trading opportunity next year. Separately, on Wednesday BHP announced that it has extended its tender offer for shares in Canada’s Noront Resources to 14 December as continues to progress discussion with 38% shareholder Wyloo Metals. A sale of Wyloo’s shares is not a precondition for the deal. It is interesting to see that Noront’s share price is (as of Friday afternoon) C$0.76c, just above the current BHP offer of C$0.75c/share, but well down on the recent peak of C$0.87c, suggesting to me that the market is giving a high probability for the proposed BHP deal to progress to conclusion.
OGN – Q1 trading update
Origin Enterprises’ Q1 trading update, released on Thursday, shows a strong start to the year. Q1 is a seasonally quiet period for OGN, but revenue surged 43% y/y (+38% y/y in constant FX terms) to €454m, supported by the pass-through of global fertiliser and feed price movements which represent about half of the top-line growth. OGN also notes that some of the increase is down to early season forward buying by farmers. Happily for OGN, “strong crop price prices globally mean that on-farm sentiment across the Group’s markets is positive”. The Group continues to grow its digital agricultural services, with over 1.8m active hectares on-boarded to the platform during the period (vs 1.4m a year ago). RHIZA, OGN’s digital agronomy and precision farming operation, presumably gives OGN an edge over many of its traditional agronomy rivals. Given the early stage of the year and the extent to which weather can impact performance, OGN hasn’t provided quantitative guidance at this juncture, however the strong start to the year and favourable autumn/winter planting levels surely bode well for FY performance. Davy has OGN on 8.5x PE and with an 8.9% free cashflow yield, which I view as very cheap, particularly given the balance sheet strength (expected year-end net debt / EBITDA of just 0.5x).
KYGA – Sustainability linked bond issue
This week Kerry Group raised €750m from the sale of a euro denominated 10 year sustainability linked senior unsecured bond. Reflecting strong demand (the final orderbook was in excess of €1.6bn at re-offer), the bond has a coupon of just 0.875%, although there is a step-up event if it fails to meet targets relating to greenhouse gas emissions and/or food waste. Proceeds will be used for general corporate purposes. The issue helps to term out KYGA’s curve – its other bond maturities are in 2023 ($750m outstanding, 3.2% coupon), 2025 (€950m outstanding, 2.375% coupon) and 2029 (€750m outstanding, 0.625% coupon). The Group also has access to a €1.1bn revolving credit facility.
LLOY – Tender uptake
Lloyds Banking Group announced on Monday the acceptance amounts in relation to its tender for repurchasing legacy sterling preference shares. Across the three separate classes of preference shares a total of only 48m of the £365m (nominal) of shares were tendered. The annual coupon saving from this exercise is £4m, a rounding error in the context of the Group. LLOY says that its offer remains open to retail holders, so there may be some further tender acceptances to come. The preference shares will no longer count towards regulatory capital from 1 January 2022, so the outstanding preference shares post that date will represent an unhelpful (if very minor) drag on profitability without any associated capital benefit.
MKS – Buyout interest? / Liquidity musings / Bolt-on deal
The Sunday Times reported that “Apollo has been running the rule over Marks & Spencer in recent months”. The report said that the PE firm saw MKS as a bargain after the COVID-inspired market sell-off in 2020, with the Ocado JV seen as a particular pull factor. MKS’ shares have surged in recent times, so “it is unclear whether Apollo’s interest has been dampened” by this. Apollo has been previously linked with Asda, Morrisons and Sainsbury, so is no stranger to the sector. Koyfin data have MKS on 12.5x forward earnings, not cheap, but not racy either. On Monday 6 December MKS is scheduled to redeem one of its bonds (XS0715454079) which carries a 6.125% coupon and has £164m outstanding. This redemption will knock £10m a year off the Group’s finance costs. I wonder if MKS might be tempted to launch a tender offer for some of its other bonds – the Group had gross cash of £952m at the start of October – given management’s aspiration to restore the Group’s investment grade credit rating. An alternative use for this excess cash is to front-load the £190m in payments due over 2022-24 to extinguish the partnership liability to the M&S UK Pension Scheme which is counted within the Group’s reported net debt. Finally, late on Tuesday it emerged that MKS has acquired a 25% shareholding in the eco-conscious fashion brand Nobody’s Child. No details were provided on this investment, although I note that accounts filed at UK Companies House by Nobody’s Child show that it had total assets of £3.25m at end-April and net assets of -£1m as of that date, so this is unlikely to have been a material outlay for MKS. Nonetheless, this is the second investment in a brand by Marks & Spencer in recent times, following the £6m purchase of Jaeger in January.
CRH – Trading update
CRH released a 9M21 trading update on Tuesday. The release revealed a positive performance, with revenues +11% y/y, which combined with margin expansion to deliver strong growth in profitability (EBITDA +15% to $3.9bn). Aided by robust cash generation, the balance sheet is in good shape with expected year-end net debt to EBITDA of just 1.2x despite $1.4bn of acquisition spend year to date and a further $0.8bn spend on share buybacks (with more to come before the year-end). CRH is guiding for FY EBITDA of in excess of $5.25bn, which is ahead of the pre-release Bloomberg consensus of $5.19bn. Below this line of the income statement, management sees flat D&A ($1.7bn) compared to last year; a $0.1bn gain from asset sales; growth in associates’ contribution from last year’s $32m; a $50m y/y decline in finance costs (due to lower debt); contributing to a sharp increase in PBT (2020: $2.5bn, given that EBITDA was $4.6bn in 2020 this implies PBT for this year of $3.3bn+). Management is upbeat on the outlook, notwithstanding the inflationary input cost environment, due in part to the $1.2trn US infrastructure package.
PMI – Possible merger
On Tuesday Premier Miton Group confirmed that it has approached the Board of River & Mercantile (R&M) to explore an all-share offer for the residual R&M business following the disposal of its solutions business to Schroders for £230m in cash. As of Friday afternoon, the market cap of R&M (which is debt free) was £276m, so (crudely) the residual business (including cash) is valued by Mr Market at ~£46m, which compares to Premier Miton’s market cap of £270m. This crude estimate may understate the value of R&M, however, as its residual business is said to have AUM of £4.4bn versus PMI’s £13.9bn. We’ll have to await further details on this. There are obvious synergies from bashing asset management firms together across all back office functions (IT, settlements, administration, senior management, compliance, property etc.) and also scope for front office savings. So, the principle of a deal looks attractive. A potential fly in the ointment is that a peer, AssetCo, is also weighing up a bid for R&M. Watch this space.
Theodosian Capital 