AMZN – Focusing on costs
AV/ – Q3 update
DCC – Solid H1 results
GSK – Pipeline update; Tender offer
HLN – Bullish Q3 update, upgrades FY guidance
HMSO – Q3 update; FY earnings forecast upgraded
IR5B – Yet another buyback!
MKS – H1 results, well positioned
PRX – Renounces VK investment
RHM – Q3 update, reaffirms guidance
RWI – H1 results, holds FY guidance
RYA – Strong H1 results
SPDI – Arcona Q3 results
HLN – Bullish Q3 update, upgrades FY guidance
Haleon released its Q3 trading statement on Thursday. This revealed a strong performance in the quarter with reported revenue +16.1% (+8.1% organic, split 2:1 price:volume/mix), bringing the year to date performance to reported revenue +14.1% (+10.3% organic, split 2:3 price:volume/mix). E-commerce has seen “high teens” growth and now accounts for 9% of total revenue. Reported operating profit in Q3 was +12% to £569m, with a 19.7% margin (-70bps). On the balance sheet, net debt was £10.8bn at the end of Q3 (was £8.8bn at end-Q2), while the Group has recently repaid a further £250m of its £1.5bn term loan, following repayments of £500m in August and £250m in September. The term loan balance is now £0.5bn. Haleon has upgraded its FY guidance and now sees organic revenue growth of 8-8.5% (was 6-8%), with the adjusted operating profit margin expected to be slightly above FY21’s 22.8%, helped by FX tailwinds (previously guided as slightly down at constant FX). With relevance to the rest of my portfolio, I note that Haleon said its “respiratory performance was strong given sustained incidences of COVID and cold and flu”, which should be supportive of demand for RKT’s consumer healthcare brands. While the upgraded guidance is very welcome, perhaps the most significant aspect of this release was that its publication means that GSK and Pfizer can now contemplate disposing their interests (which total 38% of the share count, or 45.5% adding in the SLPs holding GSK UK pension assets). My hunch is that this will lead to a technical overhang on the stock, which may result in an attractive opportunity to up my shareholding in the Group. HLN trades on 14.1x consensus 2023 earnings and offers a prospective yield of 2.4%.
RWI – H1 results, holds FY guidance
Renewi, which is my largest position, released its H1 results on Thursday. Its headline is “strong first half performance, with good strategic progress”, which is a fair summation, in my view. Revenue was +4% to €1.0bn while underlying EBIT jumped 16% to €75m (EBIT margin +80bps to 7.9%). Core net debt was €388m at end-September, +€85m since end-March, of which €66m is due to the acquisition of Dutch recycling firm Paro and €16m relating to innovation capital investments. This net debt equates to 1.7x annualised EBITDA, so very manageable. Renewi expects to commission its first advanced sorting line in Ghent in H2 2023 (i.e. before end-March) to allow customers comply with Vlarema 8 legislation (a prohibition on incinerating recyclable materials). The recycling rate across the Group has improved to 68.4%, +120bps since March. On the outlook, management says that its FY expectations “are unchanged despite a stronger than anticipated first half performance”. Looking further out, the Group is on track to deliver the +€40m of incremental earnings from its multi-year transformation programme, while the structural growth around demand for recycled materials isn’t going anywhere. I am a big fan of Renewi. Bloomberg consensus has the Group trading on a surprisingly low 7.3x FY 2024 (year-end March) earnings and offering a prospective yield of 1.6%.
MKS – H1 results, well positioned
Marks & Spencer released interim results on Wednesday. The tagline on the release was “Strong trading performance as M&S reshapes for growth”. PBT was however lower (£206m vs £269m, but ahead of consensus of £199m) than year earlier levels, despite a 5.6% uplift (outperforming the market, and even more impressive considering this doesn’t count sales in the Ocado JV) in food sales and a 14% jump in Clothing & Home sales. “Value investment and cost pressures” weighed on margins in Food, while Ocado Retail fell to a loss of £0.7m versus last year’s profit of £28m due to a normalisation in demand (vs COVID comparatives) and capacity additions (which weigh on margins in the short term due to negative operating leverage dynamics). The Group has completed the £95m (initial cash) acquisition of distributor Gist, a helpful vertical integration move (the CEO says this “gives us control of one of our biggest cost and efficiency levers”), while the Group continues to execute on its strategic priorities of store rotation and digital growth (on the latter, a third of C&H sales are now originated through the M&S App, which now has 4m users). Net debt, excluding leases, was £0.63bn at the start of October, down from £0.82bn at the same point in 2021. On the outlook, management says that trading since the start of H2 is in line with forecasts, with adjusted earnings also tracking to expectations, pro forma for the exit from Russia and the changed outlook for Ocado Retail. Management is more cautious on the outlook for FY24 (“we expect market conditions to become more challenging”). An efficiency programme is underway which is expected to deliver >£150m of cost savings in 2023/24. There is no update on distributions at this juncture, as expected. I am a big fan of MKS, which I see as having strong cost dynamics (more digital, particularly through Ocado Retail and C&H fulfilment, but also through App benefits / customer targeting, and store relocations); brand power that makes margin recovery easier; and a strong balance sheet, which I see as transitioning to net cash (pre-IFRS16 leases) in the not too distant future. On the subject of cash, I note that the Group had gross cash of £0.8bn at the start of October. In terms of upcoming maturities, MKS has a bond maturing in December 2023 (£199m outstanding) with the next maturity after that not being until June 2025 (£350m outstanding). I wonder if the Group will take advantage of the discounted cash prices (Bloomberg has them trading at between 85 and 98p in the pound) to launch another tender offer for some of its bonds. Bloomberg consensus has M&S trading on 8.9x expected FY24 (year-end March) earnings and offering a prospective yield of 4.5%.
RHM – Q3 update, reaffirms guidance
Rheinmetall released its Q3 results on Thursday. The results for the quarter show good momentum, with sales +12% to €1.4bn; and operating margins widening to 8.3%. Management has reaffirmed its guidance for the FY 2022 outlook (organic sales growth of c.15%, operating margin >11%). As expected, the Group is “seeing an increase in orders” reflecting new product innovation; increased defence spend generally and the easing of restrictions on activity in China. Across the Group I note marginally higher Vehicle Systems sales despite tough comparatives, while the year to date margin has climbed from 8.0% to 9.1%. The order backlog for that unit was €10.0bn at end-September (-5% y/y). In Weapon & Ammunition, sales of €849m were +21% y/y, unsurprising given the wider European security backdrop. The order book here has jumped 47% y/y to €4.0bn at end-September. The operating margin improved from 10.4% to 12.6%. In Electronic Solutions, sales were +15% in 9M22, while the order book of €2.7bn is +9% y/y. The operating margin dropped 90bps to 7.7%, relating to mix (the acquisition of drone maker EMT). In Sensors, 9 month sales of €1.0bn are +4% y/y while the order book has grown 41% to €2.0bn. However, the operating result has fallen to €66m from €74m in the same period in 2021 due to higher raw material prices. In Materials & Trade, sales of €562m are +16% y/y while the margin of 8.1% is +20bps y/y. In all, these results show strong momentum across the Group while RHM is underpinned by structural growth drivers (higher Western security investment generally; replenishment of stocks donated to Ukraine; and Russia is unlikely to be featuring as strongly in the export markets for a long time to come). Bloomberg consensus has RHM trading on 11.9x 2023 earnings and offering a prospective yield of 3.3%.
AV/ – Q3 update
Aviva released its Q3 update on Wednesday. The update revealed positive momentum across the Group. Management reaffirmed dividend guidance and the outlook for capital returns, supported by strong capital and liquidity positions. Flows were good across Wealth (£7.0bn versus £7.3bn in 9M21, which is a robust performance considering market conditions); UK&I Life (£466m vs £319m) and General Insurance (£7.2bn vs £6.5bn). The General Insurance COR was a still respectable 94.3% (+1.9pp y/y, reflecting more normal claims frequency). The Solvency II cover of 223% was -11pc y/y and 215% pro-forma for planned further debt paydown and pension contributions, which is well ahead (£2.5bn equivalent) of the target 180% cover ratio, leading management to reaffirm its intention to launch another share buyback at the FY results stage. Management continues to do a solid job on ‘controlling the controllables’, with baseline costs -2% y/y to £2bn, with the gross savings target of £750m by end-2024 (relative to the 2018 baseline) still on track. All in all, a very reassuring update, while the size of the surplus capital relative to the £12.4bn market cap raises the prospect of meaningful distributions. Bloomberg consensus has AV/ trading on 8.0x 2023 earnings (underlining the attraction of further buybacks) and offering a prospective yield of 7.4%.
RYA – Strong H1 results
Ryanair released a strong set of H1 (to end-September) results on Monday. Half-year net income of €1.37bn (H122: -€48m) was supported by summer traffic and fares tracking 11% and 7% respectively above pre-COVID levels. Customers carried were 95.1m, +143% y/y; while loads of 94% were +15pc y/y. The Group has taken delivery of 73 more fuel efficient and quieter B737-8200 aircraft, with another 51 en route. Net debt has fallen to just €0.5bn at end-September from €1.45bn at end-March, which to me hints at the potential for a dividend and/or share buybacks when FY results are released in calendar year 2023. The Group has also restored full pay to all crew five months ahead of schedule, reflecting the rebound in activity post-COVID, while agreeing long-term (to 2026 or 2027) pay deals with over 90% of pilots and cabin crew. On the outlook, management is generally cautious about the “risk of COVID variants and the Ukraine overhang” in the short term. While it has nudged up FY23 traffic guidance from 166.5m to 168m passengers, it sees a FY net profit of €1-1.2bn (implying a loss of up to €0.4bn in H2). This seems conservative to me given the H1 outturn and recent PAX trends. For the longer-term, management reaffirmed its target of lifting annual passenger numbers to 225m by FY26. I see RYA as the undisputed sector leader within Europe, aided by lowest cost economics and a balance sheet that is the envy of peers. The Group has ample room to grow at the expense of weaker competitors. Bloomberg has RYA trading on a forward FY 24 (year-end March) earnings multiple of just 9.6x.
DCC – Solid H1 results
DCC released a solid set of interim results on Tuesday. Helped by M&A, the Group delivered 13.0% growth in adjusted operating profit (to £221m), led by Energy and Technology, with Healthcare profits slipping back due to combination of tough COVID-related comparatives and supply chain issues. Adjusted earnings climbed 9% y/y, while the interim dividend was hiked by 7.5% to just over 60p. Reflecting the impact of acquisitions, net debt (before leases) was £782m at end-September, up from £54m in the prior year. The Group has invested £300m in corporate development since the FY results announcement in May, including on Medi-Globe, its largest ever Healthcare deal, while Energy has acquired solar panel distributor PVO; heating solutions provider Protech; and UK heat pump distributor Freedom Heat. The Group reiterated previous guidance for FY 2023 being “another year of profit growth and development, notwithstanding the challenging macro environment at present”. Overall, a solid update and given the external environment I am unmoved by the absence of upgrades. DCC is a quality business with an excellent track record, delivering CAGR of 14% in adjusted operating profit and an average ROCE of c.19% in its 28 years as a public company. To this end, I view its prospective FY24 (year-end March) multiple of 9.5x (and yield of 4.4%) as very attractive.
HMSO – Q3 update; FY earnings forecast upgraded
Hammerson released a trading, operational and rent collection update on Tuesday. The main takeaway was that the Group now expects FY 2022 adjusted earnings to be “not less than £100m”, which compares to the pre-release consensus of £92m. Year to date, LFL gross rents have increased by 11%, while NRI continues to benefit from a strong leasing performance (221 ytd leases signed at 2% ahead of ERV on average), improved collections (93% for Q3 to date and expected to improve) and lower bad debt charges. Earnings have had further tailwinds from lower administration and net finance costs, and a better than expected performance from Value Retail. Across its end markets (UK/France/Ireland) footfall is back to 90-95% of 2019 levels, while Q3 sales were 2-4% above equivalent 2019 levels. Group occupancy is strong at 95%, while HMSO says its “pipeline for Q4 is strong”. Valuations are the big unknown, however, with HMSO saying that “yields remained stable in aggregate in Q3 with only marginal adjustments to ERVs” – this feels like the calm before the storm, with commercial real estate valuations likely to have a soft Q4, in my view. In terms of the balance sheet, Value Retail completed the refinancing of Bicester Village in September; last week the Group said it would call €235.5m of 2023 eurobonds; and HMSO has no further debt maturities falling due until 2025. The Group sold £194m of assets during H1 and expects to complete £300m of further non-core disposals before the end of 2023. Uncertainty around real estate valuations makes P/NAV multiples unreliable for REITs at this time, but on Bloomberg consensus HMSO trades on 13.0x expected 2023 EPS and offers a prospective yield of 4.9%.
AMZN – Focusing on costs
Amazon shares surged on Thursday on reports that the CEO has embarked on a cost review. While the parameters of this are yet to be known, it is worth noting that market expectations for FY 2023 are for AMZN to deliver $25bn of EBIT on revenue of $568bn – a 4.4% margin – so even a modest uptick to margins would deliver a material uptick in underlying earnings. Bloomberg consensus has AMZN on 12.0x 2023 EV/EBITDA, falling to 9.5x in 2024, which strikes me as cheap for a globally significant business.
GSK – Pipeline update; Tender offer
GSK provided an update on the DREAMM-3 phase III trial for Blenrep in relapsed / refractory multiple myeloma (the second most common blood cancer in the US) on Monday. Unfortunately, the trial “did not meet its primary endpoint of progression-free survival”. Blenrep had been granted accelerated approval by the US FDA as a monotherapy for treating adult patients with RRMM who have received at least four prior therapies. The Group will progress additional trials within the DREAMM (Driving Excellence in Approaches to Multiple Myeloma) clinical trial programme. While this is disappointing on a number of levels, it is worth mentioning that GSK had a pipeline of 65 potential vaccines and medicines at the end of September, of which Blenrep was one. Elsewhere, I note that on Tuesday GSK announced that it was tendering to repurchase up to £1.25bn of sterling notes falling due between 2027 and 2045 that carry coupons of between 3.375% and 6.375%. This is a prudent step to optimise GSK’s capital structure. Per Bloomberg consensus, GSK trades on just 9.1x 2023 earnings and offers a 4.2% yield.
IR5B – Yet another buyback!
On Monday Irish Continental Group announced that it repurchased for cancellation 820,000 of its shares last Friday at a price of €4.06 per unit. This equates to 0.47% of its issued share capital prior to purchase. Pro-forma for this latest buyback, ICG’s share count has reduced by 10.8m shares (-6%) since the start of the year in what is surely a clear vote of confidence by management in how they view the Group’s prospects. Bloomberg has ICG trading on 11.7x consensus 2023 earnings and offering a prospective 3.3% yield.
PRX – Renounces VK investment
Russian social media firm VK has announced that Prosus has “renounced” its stake in the Group. In March Prosus said that it would write-off $769m linked to this investment following Russia’s invasion of Ukraine, so this is not a surprise. Last month Prosus announced the $2.4bn sale of its Russian classifieds business, Avito, which was ahead of its book value of $1.4bn. I have yet to see clear guidance on how PRX expects to repatriate the proceeds from this sale from Russia, but hopefully we will get an update on this when PRX releases its interims on 23 November.
SPDI – Arcona Q3 results
Arcona Property Fund, the Dutch listed real estate group that SPDI is transferring most of its property assets to in exchange for shares, released Q3 results on Wednesday. Its NNNAV increased by 3.1% in the quarter to €12.37, more than double the current (€6.05) share price. The year to date operating result of €174k compares favourably to the loss of €310k in the same period last year. Occupancy has slipped to 89.1% from 92.0% at end-June due to the surrender (by AT&T) of the lease of a floor of an office building in Kosice, Slovakia, although the impact of this is cushioned by the receipt of a €400k break fee. I also note that Arcona’s ytd interest costs of €1.5m have fallen by 10% y/y as a result of ongoing deleveraging offset by rising market rates. The LTV across the portfolio reduced by 130bps in the quarter to just 40.5%. All in all a solid update from Arcona. SPDI (market cap £7m) holds 1.1m shares and a further 259,627 warrants in Arcona, which are worth c.€7m at the current market value but >€12m at the current book value.
Theodosian Capital 