ABDN – £150m share buyback
BT/A – Interims
EEP – Share register developments
GRP – NAV and Dividend updates
GSK – Q3 results; Pipeline updates
HBR – Q3 update; new $100m buyback
HMSO – Scrip dividend update; Bond redemption
IDS – VESA shareholding and strike reports
PRX – Denies Tencent report
RYA – Continued strong traffic growth
SN/ – In-line trading update
THW – Interims, NAV is nearly 4x the share price
THW – Interims, NAV is nearly 4x the share price
Daniel Thwaites released its interim results (six months to end-September) on Wednesday. The company said it “turned in a respectable performance” given macroeconomic and geopolitical uncertainties, while the withdrawal of COVID business supports also had an imprint on the results. Turnover in the period of £57.9m was +21% y/y but more significantly this is also 8% ahead of the comparable period in 2019, pre-COVID. The Group delivered an operating profit of £9.9m, up from H1 2022’s £9.3m (although disposal gains of £1.3m are £1.0m higher than the prior-year period) and £9.5m in the same period in 2019. Net debt of £61.1m at end-September is £0.5m lower (better) than at the end of March. In terms of corporate development, the Group says it continues to “look at opportunities for high quality properties”, while it has sold four non-core pubs for £2.7m, representing a £1.3m premium to book value. An interim dividend of 0.75p/share has been declared and will be paid in early January. Management note pressures from input costs and consumer sentiment, which is hardly a surprise. Helped by a mark-to-market swaps gain, net assets have grown to £224.6m at end-September, up from £212.6m at end-March. In per share terms, the NAV is now 382p/share (versus a share price of 102.5p!) versus 362p/share at end-March.
HBR – Q3 update; new $100m buyback
Harbour Energy released an update yesterday on its performance to the nine months to end-September. The Group has turned in a strong production performance of 207kboepd, +27% y/y and it now sees FY production at the upper half of its previous 200-210kboepd guidance. Unit OpEx of $14/boe is -18% y/y and now expected to hold at that level for the FY, which is better than prior guidance of $15-16/boe. There was continued progress across its drilling (UK, Indonesia, Vietnam) and development (Mexico, Indonesia) projects, although the Group has pared 2022 capex guidance to c.$1.0bn (was c.$1.2bn) due to the late arrival of drilling rigs and the weak pound relative to the USD. Harbour warned that UK government tax moves may lead it to prioritise international projects over the UK North Sea. The Group expects to generate $2-2.2bn of free cash flow this year, up from previous guidance of $1.8-2.0bn, and be net debt free in 2023. A new $100m buyback has been launched, which follows shareholder distributions of $500m in the first nine months of the year and a further $100m interim dividend which was paid on 19 October. Bloomberg consensus has HBR trading on just 3.6x expected 2023 earnings and yielding 6.0%, which seems very good value to me, especially considering the balance sheet strength.
BT/A – Interims
BT released its H1 results on Thursday. While management struck a confident tone (“BT Group remains on the front foot…our strategy is working, we’re executing against our plan and we’re confident that we’ll deliver our long-term ambition”); guidance on modest revenue and EBITDA growth was retained; and the cost take-out target was increased from £2.5bn to £3.0bn; the bears focused on weaker than expected cash flow generation (now expected towards the lower end of the £1.3bn-£1.5bn guided range) and an outflow of broadband customers. On the FTTP programme, build has now passed 8.8m premises, with c.62k premises a week added during Q2. FTTP net adds in Q2 were 331k, which is good to see, although Openreach shed 89k customers in Q2, of which c.40k is attributed to industrial action. The pension deficit surprisingly increased to £1.7bn from £1.1bn at end-March due to higher real gilt yields. Bloomberg consensus has BT trading on just under 6x expected FY 2024 (year-end March) earnings and yielding 6.9%.
SN/ – In-line trading update
Smith + Nephew released its Q3 trading update on Wednesday. The release shows reported revenue of $1.25bn, +4.8% on a constant FX basis but -1.2% on a reported basis due to the FX (USD) headwind. On an underlying basis, all three business lines – Orthopaedics; Sports Medicine & ENT; and Advanced Wound Management – reported growth of between 2.1% and 7.1%. The Group has slightly tightened its FY underlying revenue growth guidance to in the middle of the previously guided range of 4-5%, while management continue to expect a c.17.5% trading profit margin (a good outcome given the inflationary backdrop). The Group further notes that it is “executing at pace” on its strategic plan to improve business performance, which is welcome news, although given that the plan was only launched a quarter ago it’s too early to draw any firm conclusions. Overall a solid update. The stock is trading on 13.7x expected 2023 earnings and yields 3.1%, per Bloomberg consensus data. This seems too cheap to me, particularly considering the long-term structural growth drivers for its core lines.
GSK – Q3 results; Pipeline updates
GSK delivered a strong set of Q3 results on Wednesday, with sales of £7.8bn and adjusted EPS of 46.9p +18% and +25% respectively in actual exchange rate terms (+9% and +11% in constant FX terms). Revenue growth was broad-based, with AER sales growth of 36%, 14% and 7% across Specialty Medicines, Vaccines and General Medicines respectively (+24%, +5% and +1% in constant FX terms). The Group has made good progress on its R&D pipeline in the period. For the FY, GSK now expects to deliver CER growth in revenues of 8-10% and adjusted operating profit of 15-17% – for both items guidance was increased by 2pp at both the top and bottom ends of the range. It has held the DPS guidance for the FY steady at 61.25p/share. I also note a £45m legal charge was booked by GSK in the quarter in respect of Zantac, an issue that is likely to rumble for quite some time in my view. Elsewhere, GSK said that the US FDA has granted its RSV vaccine candidate priority review status, marking the third major regulatory milestone following acceptance of regulatory submissions in Europe and Japan. The FDA has to make a decision by 3 May. If the candidate is approved, then it will be the first vaccine available to help protect >60s from RSV. Staying with GSK’s pipeline, on Thursday the Group said that Phase III trials for it gepotidacin antibiotic have “stopped early for efficacy following pre-planned interim analysis by Independent Data Monitoring Committee”. GSK plans to submit a new drug application for gepotidacin to the US FDA in H1 2023. If approved, GSK says it will be the first new novel oral antibiotic treatment for uncomplicated UTIs in over 20 years. GSK trades on just under 10x expected 2023 earnings, per Bloomberg data, and offers a prospective yield of 3.7%. This seems very inexpensive to me for a major global pharma player, notwithstanding the Zantac risk.
GRP – NAV and Dividend updates
Greencoat Renewables announced on Tuesday that its unaudited NAV at end-September was 110.1c a share, unchanged versus end-June. The moving parts in the NAV were a 5c headwind from an increased (+50bps to 6.7%) discount rate offset by a 5c tailwind arising from power price and short-term inflation assumptions. A quarterly dividend of 1.545c/share in respect of Q3 has been declared, to be paid on 2 December. This is consistent with management guidance for a 6.18c FY DPS (equivalent to a yield of 5.4%). Earlier today GRP was trading at €1.145, a tiny premium to the end-September NAV.
ABDN – £150m share buyback
Abrdn announced on Monday that it has completed the first £150m phase of its share repurchase programme which commenced on 6 July. The Group has now commenced the second phase, entailing the repurchase of up to a further £150m of its shares in the period to end-January 2023. Abrdn says that “the company’s capital resources remain strong which enables the company to continue to return capital to shareholders in excess of business needs”. Since the start of the year ABDN’s share count has reduced from 2.18bn to 2.08bn. The launch of this new £150m buyback provides a useful signal to the market, in my view, about the sustainability of the Group’s 14.6p dividend (equivalent to a yield of 8.6%).
RYA – Continued strong traffic growth
Ryanair released October traffic data on Wednesday that show the carrier carried 15.7m passengers last month, +38% y/y, while load factors of 94% were 10pc above year earlier levels. On a rolling 12 month basis RYA has carried 157.4m passengers (+178% y/y, reflecting COVID) while the rolling load factor of 91% is 12pc above the prior 12 month period. RYA is targeting passenger numbers of 165m in the year to end-March 2023, a target that seems very achievable given the above performance, even after taking the macro backdrop into consideration. RYA trades on just 8.7x expected FY 2024 (year-end March) earnings, which seems remarkably cheap to me given the strength of its franchise.
IDS – VESA shareholding and strike reports
International Distributions Services said on Tuesday that the UK Secretary of State for Business has deemed that no action is to be taken under the National Security & Investment Act 2021 in respect of a potential increase in VESA’s shareholding from the current 22% level to more than 25%. This is a welcome development in that it removes a potential technical overhang on the stock. Elsewhere, on Monday a series of strikes by Royal Mail workers affiliated to the CWU were called off following an apparent legal challenge by the company. Both Royal Mail and the CWU are holding talks at the conciliation service Acas in a bid to resolve a damaging dispute about pay and productivity. Media reports suggest that Royal Mail is looking to discontinue Saturday letter service to reflect falling volumes and seek 6,000 redundancies (with a headcount of 115,000 employees, presumably Royal Mail could achieve a lot of that through natural attrition). Bloomberg consensus has IDS trading on 10.1x expected FY 2024 (year-end March) earnings, with a yield of 6.3%.
PRX – Denies Tencent report
Prosus said on Tuesday that an article published by Asian Tech Press claiming that a CITIC-lead group is in talks to buy all the Tencent shares owned by the Group is “speculative and untrue”. Prosus said that it is progressing with its ongoing open-ended share repurchase programme funded by regular sales of “small numbers” of ordinary shares in Tencent. It is somewhat unusual for a company to publicly comment on a report it deems “speculative and untrue” and I wonder if this will lead to further speculation about Prosus’ approach to its largest store of value. In any event, the stock has rallied this week on rumours of a Chinese roll-back from its COVID Zero policy. Nonetheless, with PRX trading at a discount to the value of its shares in Tencent alone, meaning you get all of its other businesses for free, the stock remains very inexpensive.
EEP – Share register developments
Eastern European Property Fund, one of the two private (delisted) companies that I have in the portfolio, made an interesting announcement on Monday. Following an off-market transaction in late October in which “an existing EEP shareholder” acquired 500,000 ordinary shares at a price of 10p, “further expressions of interest from existing EEP shareholders have been received to acquire a minimum of 2,000,000 EEP ordinary shares at an offer price of 10p per share”. EEP has only 15.6m shares in issue, so these are meaningful developments for the register. I have no appetite for selling my shares in the company, whose strategy is to dispose of its (now sole) remaining property and remit the net proceeds to shareholders, given that the latest published (end-2021) NAV was nearly 5x the level this bid has been pitched at. While I appreciate that the risks to this NAV lie to the downside given market developments since the start of 2022, it is worth highlighting that EEP had net cash equivalent to 9p a share at end-2021.
HMSO – Scrip dividend update; Bond redemption
Hammerson announced on Tuesday that shareholders holding 3.9bn shares elected to take up the enhanced scrip alternative for their Interim 2022 dividend. This meant that 388m new shares were issued and admitted to trading on 3 November, bringing the share count up to just over 5bn shares. Before HMSO first started offering scrip alternatives in late 2020 it had 3.8bn shares in issue. The Interim 2022 scrip was worth 10x the cash alternative, so it is no surprise to see a high take-up for it. However, flooding the market with extra shares will not do anything to help the NAV per share, making conventional P/NAV valuation even less useful at this time (when we already have a lot of uncertainty around discount rates, underlying earnings and refinancing costs). Elsewhere, regular readers of my musings on HMSO will know that I have been hoping that the company would take advantage of the beaten-up prices of some of its bonds to make opportunistic repurchases at discounts to par, cutting down on interest expenses. On Wednesday the Group announced that it was exercising a call option in respect of its 1.75% bonds due 2023 (€236m outstanding). Calling this bond a year early will save about €4m in interest costs, less than what HMSO might have saved had it targeted other issuance (for instance, the cash price on the 3.5% 2025 bonds, of which there are £350m outstanding, is 84.6 today), although to be fair there may be covenant and/or liquidity management considerations at play here too. Hammerson note that it has cash at hand to cover all further debt maturities until 2025. Bloomberg consensus has HMSO on 10.8x expected 2023 earnings and yielding 5.9%.
Theodosian Capital 