AMZN/BT/A – Football deal
BOCH – A fifth of branches to close
GSK – Closes Sierra Oncology deal
IAG – Fleet renewal
PPA – Union deal gives certainty
PRX – FY results, massive discount to NAV set to narrow
SPDI – FY results, base case NAV is more than 2x the share price
STVG – Another win for Studios unit
ULVR – Closes tea sale
SPDI – FY results, base case NAV is more than 2x the share price
Secure Property Development & Investment plc (SPDI) released its FY 2021 results on Thursday. Clearly a lot has happened in Eastern Europe since the end of December, but the results themselves (and post balance sheet events) show that considerable progress has been made in effecting property asset transfers to Arcona (ARCPF), a larger Dutch listed Eastern European fund, in exchange for ARCPF shares, while management continue to tidy up legacy matters. NAV was 18c / 15p a share at end-2021 which compares to today’s share price of 6.25p. Since the start of 2022 the Group has transferred its Romanian office holdings to ARCPF, which it now holds 1,072,910 shares in (worth €6.7m at the current share price) and a further 259,627 warrants that are convertible into ARCPF shares, subject to the share price reaching certain (higher) levels. On the asset side of the balance sheet, the main items are Financial Assets (this includes the Arcona shares and warrants) of €7.5m; Prepayments of €4.5m (of which €3.8m are loan receivables); Properties held for sale of €39.0m; and cash of €2.2m. On the liability side the main items are borrowings of €1.7m; Payables of €4.4m (which includes a €2.5m provision in respect of an ongoing legal matter); Liabilities linked to the properties held for sale of €15.8m; and preference shares of €1.0m. The NAV, after deducting minorities, is €23.25m. Let’s take the liabilities as read – although the legal provision is clearly meaningful in a Group context and the notes to the accounts show that Bluehouse’s original filing in 2018 sought €7.5m from SPDI – SPDI has filed a counter-claim against Bluehouse; and a hearing in relation to these matters will be held in September. So, how solid is the €23.25m of shareholders’ funds? It’s probably worth starting off with the remaining property assets. Following the post-balance sheet Romanian office transfers, SPDI’s remaining property assets are the Innovations Logistics Park (65% leased) in Bucharest; 11 residential units and associated land plots at the Green Lake development in Bucharest; a building housing an international school (fully let) in Bucharest; and three land plots in Ukraine (all of which are located in or near to Kiev). The book value of the Ukraine assets was €3.6m at end-2021 or 2.8c a share and my sense is (as ARCPF has done with its Ukrainian assets) to mentally write these down to zero until there is more clarity on the political situation there. At the time of the interims in September I was nervous about the loan receivables, but developments here are quite positive – the balance has reduced from €4.6m to €3.8m over the past year and all accrued interest was fully paid in 2021. SPDI is charging 10% interest on this loan and I suspect that the borrower will look to refinance sooner rather than later, which would lead to a welcome cash inflow for SPDI. What next for SPDI? In the CEO’s letter to shareholders notes understandable delays with transferring Ukrainian assets to Arcona (clearly on ice while the war rages on) but comfort can be drawn from the comment that “[ARCPF] is committed to meeting its obligations”. Management is also “monetising the remaining SPDI assets that are not part of the [ARCPF] deal and settling any remaining liabilities, while reducing operating expenses to a minimum”. He goes on to say that “2022 is expected to be the last year of SPDI operations as we know them with its net assets turned into [ARCPF] shares and cash, within the year or soon after, and OpEx being reduced to mostly listing and legal related costs”. So how to view SPDI now? I would take the starting position of shareholders’ funds of €23.25m and exclude the value of the Ukrainian properties (€3.6m), which gives a pro-forma €19.6m NAV. Let us be very conservative in relation to the Bluehouse lawsuit, which on the face of things has downside risk of €5m (i.e. the €7.5m Bluehouse is looking for less the provision), so let’s move the pro-forma NAV to €14.6m. To be clear, I don’t really think there is €5m of downside risk in practice here, but there’s no harm in ‘kitchen sinking’ estimates to see what the bear case looks like. That €14.6m of pro-forma NAV is 11.3c / share (rising to 15.2c/share if you don’t haircut the NAV for Bluehouse). On the other hand, the Arcona share price of €7.50 at end-2021 sits well below the latest (end-March 2022) disclosed Arcona NAV of €11.88/share. Based on SPDI’s 1.1m shares in Arcona, that’s >€4m of upside if the shares reprice to 1x NAV before you even take the warrants into account. Pulling it all together, you get a range of €14.6m (Bear, i.e. kitchen sinking Bluehouse); €19.6m (Base) and (let’s say) €24.6m for Arcona’s share price rising to meet its NAV, giving price target scenario outcomes of 11.3c-15.2c-19.1c (depending on scenarios used). That compares to today’s share price of 6.25p (7.2c at the current FX rate) so SPDI trading below the bear scenario suggests very limited downside risk, in my view. Interim (end-June) results are due in September.
PRX – FY results, massive discount to NAV set to narrow
Prosus had a busy Monday, releasing four RNSs covering its FY results; Annual Report and Dividend; the sale of a stake in JD.com; and a share buyback. To start with the results, these contain the customary huge amount of noise given Prosus’ structure as a holding company for a broad array of investments, many of which have been impacted by the global tech sell-off, FX volatility, the war in Ukraine, Chinese regulatory headwinds and the shift in monetary policy globally. Despite EBIT coming in at -$859m, statutory net income was $18.7bn, mainly arising from net gains on disposals. Since the start of the current financial year the Group has raised c.$3.67bn from the sale of its shareholding in JD.com, although this is c.$0.3bn below the end-March book value.
The Group invested $6.2bn to up its stake in a number of Food Delivery and Edtech sectors and committed $4.7bn to acquire BillDesk, India’s leading bill payment processing company. The Group also returned $5bn to shareholders through buybacks. Management is seeking “an appropriate buyer” for its Russian business. The results provide a lot of rich colour on the Group’s verticals (Classifieds, Food Delivery, Payments & Fintech, Edtech, Etail, Other Ecommerce, and Social & Internet Platforms) but I think I’ll leave those for another blog. An unchanged dividend of 14 euro cent a share was declared for the FY. A major factor behind my decision to invest in Prosus this year has been that the Group has repeatedly traded at a deep discount to the value of its net assets and I expected management to take action to narrow this gap. On Monday the Group announced the beginning of an open-ended share repurchase programme which “will run as long as elevated levels of the trading discount to the Group’s underlying net asset value persist”. Management incentives are being recalibrated to the narrowing of this gap. This programme will be funded by an orderly on-market sale of PRX’s shares in Tencent. PRX (market cap €91bn, net debt $2.1bn at end-March 2022) has a shareholding in Tencent which is worth c.€118bn. So, in buying Prosus you get Tencent shares at a discount and shares in dozens of promising technology companies thrown in for free. The 16% jump in PRX’s share price on Monday suggests that the market is waking up to this disconnect, while a positive re-rating of technology stocks globally would further enhance the value opportunity here. I’m happy to be long Prosus.
BOCH – A fifth of branches to close
Local press (Financial Mirror) reports this week show that Bank of Cyprus is closing 15 more branches and removing six ATMs “as it speeds up its digital presence and reduces operational costs”. Following these closures the Group will have 60 remaining branches in operation across the island. Some 500 employees (15% of the headcount) are expected to depart under a voluntary redundancy programme. The reductions in BOCH’s physical network reflect the embrace of technology by its customer base. In 2019, 724,000 transactions were conducted with the assistance of a teller, but this had fallen to 440,000 transactions in 2021. Furthermore, 92.5% of payments and transfers in April were conducted through BOCH’s digital channels. I expect to see a material expansion in profitability at BOCH from a combination of lower costs and rising interest rates. Bloomberg has BOCH trading on a forward (2023) PE of just 3.4x.
STVG – Another win for Studios unit
STV announced on Monday that Channel 5 has commissioned it to produce a new daytime series. ‘The Great Auction Showdown’ will run for at least 80 one hour long episodes. This follows recent wins announced for STV’s Studios business from Channel 4 and Apple TV+ and adds to the momentum behind a business unit where revenue is growing from £8.7m in 2020 to >£40m in 2023.
AMZN/BT/A – Football deal
Earlier today it emerged that BT Sport and Amazon will share UK rights for top flight European football (Champions League, Europa League and Europa Conference League) for the three years until 2027. BT/A will pay c.£305m per annum for its rights, which is a sharp reduction on the £400m per annum it had previously been paying. This is clearly welcome, although it should be noted that BT Sport is expected to transition to a 50-50 JV with Warner Brothers Discovery at year end, subject to regulatory approvals. Given this, it is no surprise that BT/A says that its “financial outlook for FY23 remains unchanged”, with revenues falling £0.5-0.6bn as BT Sport moves to the associates line, although the EBITDA impact is not material. BT/A says it will “confirm the full impact on all our outlook metrics following completion [of the merger]”. For Amazon, this deal should enhance its competitive position in the UK, enhancing switching costs for football-mad subscribers. Bloomberg has Amazon on an undemanding EV/EBITDA multiple of 11.9x for FY 2023, while BT/A is on just under 9x 2023 earnings and offering a prospective yield of 4.2%. Staying with BT/A, I note that its workers voted this week for their first strike since 1987. Media reports suggest this may be a tactic to force management back to the negotiating table. Watch this space.
IAG – Fleet renewal
Consistent with previous capex guidance, IAG announced on Thursday that it is converting 14 A320neo family options, which it originally announced in August 2013, into firm orders for 11 A320neos and three A321neos. This follows the conversion earlier this year of eight A320neo family options for six A320neos and two A321neos. The new ordered aircraft will be delivered in 2024 and 2025 and replace A320ceo family aircraft in IAG’s short-haul fleet. These are not simply like-for-like replacements, being cheaper (more fuel efficient) and more environmentally sustainable (quieter, less fuel) to operate. No information on cost or financing was disclosed, but given that IAG operates >500 aircraft this is not going to be material for the Group. Nonetheless, this fleet renewal is a positive vote of confidence from management. Bloomberg has IAG on 6.25x FY 2023 earnings. For the current year it is interesting to note that statutory net income is now expected to -€162m from breakeven at the end of March – I wonder if that is sufficiently conservative given the rising numbers of IAG flights that are being cancelled due to COVID and ATC strike issues.
PPA – Union deal gives certainty
On Monday Piraeus Port Authority announced that it has signed a new three year Collective Labour Agreement with the Union of Supervisors & Foremen. The agreement was also signed by the President of the Greek Federation of Loaders and Uploaders. No terms were disclosed (PPA did say the terms were “mutually beneficial…ensuring the workers, but also the port service”), but inking a three year pay deal in the current environment is helpful in terms of reducing labour risk at the port.
GSK – Closes Sierra Oncology deal
Earlier today GSK confirmed that it has closed the $1.9bn purchase of Sierra Oncology, which was first announced in April. This strengthens GSK’s pipeline, with Sierra having some promising oncology drugs.
ULVR – Closes tea sale
Unilever announced today that it has completed the sale of its Ekaterra tea business to CVC for $4.7bn. The €4.5bn disposal was agreed in November 2021 so it is good to see this finally close. The market has ULVR trading on a forward (2023) PE of 16.4x and offering a dividend yield of 4.1%.
Theodosian Capital 