CLIN – Shareholders approve takeover
DCC – IMS
GSK – FY results
IR5B – Additional capacity on Dublin – Holyhead
MKS – OCDO JV comments
PRSR – NAV update
ULVR – FY results
CLIN – Shareholders approve takeover
There was good news for shareholders in Clinigen on Tuesday, as the meetings to decide on Triton’s all cash acquisition of the company resulted in the requisite majorities in favour of the deal. Triton will pay 925p a share in cash (having previously announced that it would enhance its bid to that level from the original 883p/share). The takeover is expected to complete in early Q2. This is a positive result – I bought into CLIN at an all-in price of £5.98 in November 2020 so a return of >50% (before taking FX into account) in c.18 months is very satisfactory.
GSK – FY results
GSK released its 2021 numbers on Wednesday. The Group delivered flat sales of £34bn (but +5% at CER) and adjusted EPS of 113.2p (-2% at AER but +9% at CER). On a CER basis, the Group reported good growth (+10%) in pharma sales, vaccine sales growth was more sluggish at +2% (COVID would have disrupted vaccine programmes) and Consumer (which GSK rejected a £50bn approach for recently) was a pretty pedestrian +4% on an underlying basis. Net debt on my preferred basis (including contingent consideration, pension and liquid investments alongside traditional debt and cash metrics) reduced to a four year low £29.0bn from £30.3bn at end-2022. As guided, the Group will pay an 80p dividend in respect of 2021. It was good to see expensed R&D spend up to £5.3bn, which is presumably an all-time high (it’s certainly the highest in my model, which goes back to 2007). GSK received three major product approvals during 2021 in the areas of HIV, COVID-19 and endometrial cancer. It has a strong pipeline of 21 vaccines and 43 medicines. Costs were another highlight for me – gross margins widened 30bps to 66.0% and SG&A was just under £11bn (versus £11.5bn in 2020). Royalty income jumped to £419m, +£101m y/y and again the highest in my model. Operating cashflow was £7.95bn, in-line with the five year average. The demerger of Consumer Healthcare is on-track for mid-2022. On the outlook, management is guiding 5-7% CER sales growth in 2022 for the New GSK (ex-Consumer Health) business and growth in adjusted operating profit of 12-14% at CER, which includes the royalty benefit from the Gilead settlement but excludes any contribution from COVID-19 solutions. This is not the usual sort of performance for GSK, where adjusted EPS on my numbers reduced at a CAGR of -1% between 2007 and 2021. For me, I think this is a solid update. The Group has a massive pipeline which could invigorate earnings growth for the continuing business, while the Consumer Healthcare business spin-off simplifies the Group. I would have preferred to see a straight sale of Healthcare though – £50bn would have left New GSK with enormous net cash to augment its strategic objectives, even after allowing for a return of a portion of the proceeds to investors. Koyfin has GSK on 14x earnings, which is undemanding, although I suspect the market will want to see stronger earnings momentum to drive the multiple higher.
ULVR – FY results
Unilever released its FY results on Thursday. Following the recent debacle over the failed bid for GSK’s Consumer Healthcare business, all eyes were on whether or not management would pull a rabbit out of a hat to assuage unhappy investors. In terms of performance, underlying sales rose 4.5% y/y but underlying operating profit growth lagged (+2.9% y/y) due to margin erosion (18.4%, -10bps). Underlying EPS climbed 5.5%, however, helped by €3bn of buybacks last year. The Group had a stronger finish to the year, though, with underlying sales growth quickening to 4.9% y/y in Q4. The underlying sales growth in 2021 (price +2.9% y/y, volume +1.6%) was the fastest pace of increase in nine years. Distributions were a highlight of the release, with a further €3bn of share buybacks announced for 2022/23 and a 3% hike in the FY 2021 dividend. Another highlight is the sales growth was in its power brands (€1bn+ brands), +6.4% y/y, and e-Commerce sales grew 44% and now account for 13% of turnover. Input cost pressures are unsurprisingly flagged as a headwind, although cost recovery efforts to date look good – while price was +2.9% y/y for FY 2021, it was +4.9% y/y in Q4. On strategy, management says: “We have engaged extensively with our shareholders in recent weeks and received a strong message that the evolution of our portfolio needs to be measured. We therefore do not intend to pursue major acquisitions in the foreseeable future”. This is an interesting statement given that less than a month ago (on January 17) management said: “Unilever’s future strategic direction lies in materially expanding its presence in Health, Beauty, and Hygiene”. So to go from “materially expanding…” to “[no] major acquisitions” in a couple of weeks is a bit, well, you know. In all though, I am happy to stick with ULVR. The Group has some really strong brands; a good presence in emerging markets (sales rose >13% in each of China and India last year); and buybacks should augment returns.
DCC – IMS
DCC released a qualitative IMS for Q3 (end-December) on Tuesday. The key takeaway is that trading is in-line with expectations, with Q3 operating profit ahead of prior-year, helped by the contributions from acquisitions, which more than offset FX headwinds. Another headwind is energy prices (presumably some customers are looking to reduce consumption). DCC LPG cited this issue, although it is benefitting from diversification into areas such as renewable energy, solar and energy management solutions. DCC Retail & Oil reports benefits from cost control and growth in non-fuel income. DCC Healthcare “delivered good growth” despite elective medical procedures and GP consultations being impacted by the pandemic; and also supply chain disruptions in the Beauty segment. DCC Technology reports “very strong growth” in North America and Continental Europe, offset by a weaker UK performance (labour, logistics and product availability challenges). For FY 2022 (year end is March), DCC expects “another year of strong operating profit growth, in line with current market consensus expectations” – this is welcome to see, given the twin headwinds of FX and rising wholesale energy prices – although acquisitions (year to date M&A spend is £560m) will have helped here. All in all, the resilience of the DCC performance is great to see. Consensus has the company trading on just under 14x earnings, which seems far too low to me.
PRSR – NAV update
On Monday The PRS REIT provided an update on its end-December NAV position. The update revealed a strong performance in the second half of calendar year 2021, with a c.5% uplift in NAV in the period from 99.0p to 104.3p. The moving parts here are an investment uplift of 5.3p, net income of 1.4p and development surplus of 0.6p, partly-offset by 2p of dividends in respect of the period. PRSR’s portfolio grew from 3,984 homes at end-June to 4,489 at end-December, with the average yield on assets of 4.20% being -5bps (i.e. lower) versus June and -10bps versus December 2020. PRSR will release interims on 23 March. I’m not surprised by the uplift in NAV, which I had flagged in my recent detailed write-up on the Group. At a modest premium to NAV and yielding c. 3.8%, I do not think that PRSR is on an undemanding valuation here.
MKS – OCDO JV comments
On Tuesday Ocado Group released its FY (end-November) results. Of interest to me was its commentary on its 50-50 Ocado Retail JV with Marks & Spencer. Ocado Retail’s revenue of £2.3bn was +4.6% y/y and +41.5% versus pre-COVID 2019. The revenue growth recorded for last year was tempered by a major fire at one of the JV’s CFCs at Erith, which weighed heavily on distribution. EBITDA at the JV of £150.4m was +1.9% y/y. During the year the JV opened three new sites, a mini CFC in Bristol and larger CFCs in Purfleet and Andover. These added 40% to the JV’s capacity, easing the capacity constraints that it has experienced. Indeed, customer numbers at the JV rose 22.4% to 832,000, helping to offset a 5.8% reduction in basket size (presumably driven by the reopening of hospitality, so less at-home dining) to £129. Another CFC is due to open in the UK this year (Bicester), with Luton CFC following in 2023 and two further sites in 2024. The Zoom format is also set for growth, with a second site opening in London’s Canning Town in Q2 of this year and a further three to come over the next 18 months. OCDO reports significant progress in CFC development, with the Bristol CFC being its fastest ever go-live as “we have been improving our build processes to reduce our time for installation by several months, including through bi-direction grid build, and implementing a new method of aligning the grid build and the build of peripherals which decouples the two tasks, enabling us to go faster”. Ocado notes that Purfleet achieved 35,000 orders per week in its first 14 weeks after commissioning. At Erith, engineering costs have fallen 36% due to improvements to the reliability and maintainability of the 500 series ‘bot’. While not within the perimeter of the JV, I note that OCDO has made two strategic investments in autonomous vehicle software specialists “to tackle diverse use cases: from vehicles designed for use inside CFCs, to last-mile deliveries; and even kerb-to-kitchen robots”. This investment could well be timely, given the well documented issues with [human] driver availability. In terms of guidance, OCDO says the JV should return to “strong, mid-teens revenue growth” this year, helped by CFC capacity additions. While EBITDA margins will reduce this year due to the scale-up of new capacity, the ambition is for the margin to rebuild towards 2021 from next year onwards. All in all, the outlook for the OCDO/MKS JV is positive, underpinned by CFC additions. There is a clear shift to more online purchases of groceries, which benefits the top-line. And Ocado’s technology gives a structural cost advantage to the JV over rivals whose fulfilment does not involve heavy use of robotics. MKS is due to pay a further £191m in cash to OCDO, contingent on financial performance in FY 2023. This is very manageable for MKS, which had gross cash of £952m on 2 October 2021. MKS’ shares have been weak on inflation concerns. While I am not oblivious to the impact of inflation on disposable incomes, I suggest that this pressure is likely to be more keenly felt by some of the JV’s peers who don’t have deep-pocketed retail specialists with strong brand power.
IR5B – Additional capacity on Dublin – Holyhead
Local media (‘North Wales Live’) report that Irish Ferries will maintain the MV EPSILON on the central channel of the Irish Sea (running between Dublin and Holyhead) alongside the flagship ULYSSES and the fast ferry DUBLIN SWIFT. Irish Ferries’ parent company, ICG, previously stated that the charter of MV EPSILON would run to end-November 2021, so it is good to see that the vessel will remain in service in this year. The implied additional capacity on Dublin – Holyhead may also be an indication that the GB ‘landbridge’ – a more economical route used by truckers going between Ireland and the continent than by-passing Brexit Britain on a boat – may be starting to make a comeback as firms increasingly adapt to the new trading arrangements. If this is the case, then there are positive implications for ICG’s Dover – Calais route (where ICG has recently gone from one to three ferries) also.
Theodosian Capital 