ABDN – Buyback
AMZN – Tucks into Grubhub
GSK/HLN – Demerger approved
IR5B – Buyback
PCA – Sharper strategy; Buyback; Discount unwarranted
PPA – Ferry link re-established
RMG – Strike
RYA – Record passenger numbers
GSK/HLN – Demerger approved
On Wednesday GSK shareholders approved (by a 99% margin!) the demerger of the Group’s consumer healthcare business, Haleon (HLN). HLN will list on the LSE on 18 July. I wrote a blog setting out my thoughts on HLN yesterday.
ABDN – Buyback
Abrdn announced on Wednesday that it will return £300m to shareholders through a buyback, with the first tranche of £150m of on-market purchases contracted to Goldman Sachs on the company’s behalf to commence immediately and conclude no later than 30 December. Back in January the Group sold 40m shares in Phoenix Group for £264m of gross proceeds, and management pledged at the time to “return the net proceeds of the placing to shareholders”. Since then we have seen a deterioration in macro (and market) conditions which has led to some questions in the market about the outlook for ABDN’s dividend. To this end, for management to press ahead with the buyback is a strong signal to the market and it was unsurprising to see the shares leap 5% on Wednesday. Management hasn’t specified what it intends to do with the balance of the £150m to be returned once the Goldman buyback concludes – I would like to see a targeted buyback with incentives offered to attract participation from smaller shareholders (ABDN has 60k shareholders holding between 1 and 1,000 shares), both to help tidy up the register (the admin costs for thousands of shareholders, many of whom hold shares in uncertificated form and receive annual reports and cheques in the post, would warrant this) and also assist those shareholders for whom dealing in ABDN shares is uneconomic due to the small size of their positions. Regardless of ‘how’ the buyback is done, the ‘why’ is obvious, given that ABDN trades on a strikingly low forward (2023) P/B multiple of just 0.46x P/B per Bloomberg consensus. Abrdn had 2.2bn shares in issue as at 1 July, so assuming a buyback is carried out at the current £1.64 share price this implies that the Group will buy back about 8% of its share count, with clear implications for EPS.
PCA – Sharper strategy; Buyback; Discount unwarranted
At its results in June Palace Capital promised that it would conduct a strategy refresh and this had its big reveal on Monday. The management team will reposition the Group with “a pure focus as an ESG driven, regional office market specialist”. As part of this pivot, an industrial portfolio comprising seven assets, and a retail warehouse, will be marketed for sale as a single portfolio. This portfolio had a book value of c.£46.5m as of end-March. The Group also noted that it has sold £4.5m of non-core properties since the start of the current financial year (on 1 April). Management says that “the proceeds of these sales will be reinvested into improving the existing regional office portfolio and also into new opportunities in the regional office market”, although if suitable acquisitions can’t be found then capital distributions will be made to shareholders. The Group aims to operate with an LTV limit of 35% and 25-35% on a normalised basis, which compares to the end-March LTV of 28%. A buyback of up to 5% of the Group’s issued shares has been announced, with purchases to be made on an ad hoc basis. Dividends are expected to be held at the current level (13.25p for FY22 – a yield of 5.0% at today’s price). Management notes that its cost base is high as a proportion of its rental income (a function of scale) and “measures to address the level of property outgoings and administrative expenses are being considered”. Notably, PCA says: “the Board recognises the trend towards consolidation in the real estate sector and this is an area that remains under constant review as part of the Board’s consideration of its strategic options”. Ok, so a lot to digest there. It make sense to streamline the portfolio to a single asset class to make PCA a cleaner proposition to the market. Industrial and retail warehousing made up 20.5% of the portfolio as of the end of March, while other now non-core segments are leisure (14.3%) and retail (9.0%). A sales programme for the small residential portfolio is already (separately) underway. Of course, there are competing priorities here – shedding £46.5m of income-producing assets will, ceteris paribus, reduce income and raise the cost/income ratio. So, perhaps the cleanest approach here is to seek an asset swap with another property group that wants to reduce its office exposure while adding to its industrial presence. On efficiency, scale matters in this game and London Stock Exchange data show that there are 63 quoted UK (including the Channel Islands and Isle of Man) real estate plcs with a market cap of below £1bn across both the Main Market and AIM. A simplified office-focused PCA would, I suspect,be an attractive merger target for some of the office REITs. As regards the buyback, this makes sense in isolation given that the share price(265p at the time of writing) sits at an unwarranted discount of 32% to the end-March NTA of 390p per share, with buybacks at this level providing useful NTA accretion. Finally, I suspect the prominence of ESG in the “new”strategy is a bit of a red herring given that management had already been partly basing disposals on buildings’ EPC ratings – at end-March 2022 89% of the portfolio had EPC ratings of A-D, up from 75% at end-March 2020, while the previous investment strategy had an EPC cut-off of B (save for buildings “viable for improvement to meet our ESG requirements”).
RYA – Record passenger numbers
Ryanair carried a record 15.9m passengers in June, representing a 203% uplift on the 5.3m it carried in the same month in 2021. On a rolling 12 month annual basis RYA carried 134.5m in the year to end-June, +283% y/y. Ryanair is guiding for 165m passengers in the year to end-March 2023, a target that looks very achievable (particularly given that the carrier is less affected by the plague of cancellations that have impacted European airlines in recent times). Load factors were a remarkable 95% in June, +23ppts y/y, and 86% in the 12 months to end-June, +14ppts y/y. Ryanair’s guidance speaks of a “load active, yield passive strategy” which I suspect is now meaningless given the recent surge in airfares in Europe. Bloomberg has RYA trading on just 9.4x FY 2023 earnings, falling to 7.4x in FY 2025 as earnings continue to strengthen.
AMZN – Tucks into Grubhub
On Wednesday Amazon demonstrated that it has lost none of its ability to surprise. The Group is to take a stake in Grubhub, the food delivery business. The timing is likely opportunistic given the collapse in share prices for the sector, but the investment makes strategic sense. Grubhub was acquired for $7.3bn two years ago by Just Eat Takeaway.com but it is no surprise to see that Amazon’s option to buy ‘over a 2%’ stake was agreed “at an undisclosed but negligible price”, according to the New York Times, who said that Berenberg recently valued the unit at sub-$1bn. Amazon can further raise its stake in Grubhub to 15% at an unspecified “formula based price” conditional on Grubhub’s performance. Grubhub lost €0.4bn in 2021 so the initial 2% stake is immaterial in an Amazon Group (market cap $1.2trn) context. What’s in it for Amazon? There are a few attractions. Grubhub is said to control c.13% of the US meal delivery market (versus nearly 60% for DoorDash and 24% for UberEats). Grubhub operates in more than 4,000 cities supporting “hundreds of thousands” of restaurants. Amazon said that US-based Prime members would receive a free 1 year Grubhub+ membership with no food delivery fees on orders over $12. So, I see some opportunities for cross-selling and/or building more of a moat around the Prime business from this tie-up. Prime’s 150m+ US members should provide a tailwind to Grubhub’s business beyond the initial 12 month free use period. Amazon is also a shareholder in Deliveroo and I wonder if there’s scope for Grubhub and Deliveroo to collaborate in areas such as technology – although this might be a stretch given AMZN doesn’t control either business. In other updates on Wednesday, AMZN announced that it was releasing a 60 second preview clip from its upcoming The Lord of The Rings: The Rings of Power, which should enhance its Prime streaming proposition, while it is offering exclusive deals on home entertainment devices and NFL fan gear for US subscribers ahead of the launch of Thursday Night [American] Football (again, this should underpin the magnetic pull of Prime). The latter follows last week’s news that AMZN had agreed to acquire a basket of European football rights for 2024-27. AMZN trades on a forward (2023) EV/EBITDA multiple of 12.9x, falling to 10.5x in 2024.
IR5B – Buyback
On Tuesday Irish Continental Group bought back 600,000 shares at €3.50 apiece. This is the fourth time this year that ICG has bought back its own shares (cumulative purchases are 4.86m shares or 2.7% of the starting share count on 1 January) and is surely a positive signal of how management view the Group’s performance and prospects. Bloomberg has ICG trading on 11.5x 2023’s expected earnings.
PPA – Ferry link re-established
A welcome development for the Piraeus Port Authority has been the re-establishment, after a 21 year hiatus, of passenger ferry services between the Hellenic Republic and Cyprus. The 24,000 tonne ROPAX vessel, MV DALEELA, is operating a seasonal service between Piraeus and Limassol until 17 September. While not a game changer in and of itself, this initiative is a further reminder of the rising throughput at Piraeus Port since the worst of the COVID pandemic. As a port operator with a significant fixed element to its cost base, PPA has enormous operating leverage, so rising volumes are very positive from an earnings outlook perspective. The 2021 results showed FY revenues rising from €133m to €154m (+16%) while PBT jumped 33% to €49.2m. Bloomberg consensus (note that this is based on inputs from only two analysts) have revenues rising to €162m and net income of €44m (implying PBT of c.€55m) in 2022. Piraeus Port trades on just 8x expected 2022 EPS and offers a prospective yield of 5.4%, per Bloomberg consensus. I suggest that this is a ridiculously low market valuation for the fifth largest port in Europe – by way of comparison, Bloomberg consensus has Hamburg Port (Europe’s third largest) on 12.5x earnings.
RMG – Strike
Following a ballot of managers at Royal Mail who are members of Unite, c. 2,400 of RMG’s 6,000 operational managers are to stage a three day walk-out on July 20-22. The catalyst for this is the Group’s plans to cut 700 senior posts in response to declining letter volumes. RMG noted that a voluntary redundancy scheme offering up to two years’ salary was oversubscribed. RMG says that it has contingency plans to minimise disruption for customers. Managing costs is a top priority for RMG – Bloomberg consensus has it delivering operating profits of £540m in FY (year-end March) 2023 on revenues of £12.7bn – a margin of just 4.2%. Clearly, industrial unrest is unhelpful for the Group, although with 162,360 employees I suspect that a hiring freeze and increased automation should counter cost pressures. Bloomberg has RMG trading on just 7.2x expected 2023 earnings and offering a 6.9% dividend yield, the stock seems very cheap to me given the strength of the balance sheet.
Theodosian Capital 