BHP – Enters into Scheme Implementation Deed with OZL
BT/A – UK government orders sale of rival
CRH – Continues buyback programme
HMSO – Submits plans for regeneration of The Oracle
PCA – Disposal and debt updates
RHM – Puma tamed? Ongoing contract success elsewhere
RYA – Pilot pay deal provides visibility
ULVR – Buyback programme update
RHM – Puma tamed? Ongoing contract success elsewhere
Rheinmetall shares came under pressure this week after a disastrous exercise involving 18 of the Puma IFVs it produces in conjunction with KMW, all of which suffered failures. The vehicles’ electronics were a particular area of concern. The respected German military blogger Thomas Wiegold wrote that: “Even though electronic problems with the Puma are known, they have never occurred in this frequency. Thus, despite all the good preparations, the operational readiness of the weapon system becomes a lottery game”. On a potentially more positive note, however, Wiegold also writes: “It is unclear to what extent a lack of technical agreements between the Bundeswehr and industry contributed to the debacle. For example, the troops are said to have neither taken the necessary spare parts nor all the necessary special tools for the Puma with them before the training run. It is also unclear to what extent the 18 IFVs were serviced again before the exercise”. Furthermore, it is noteworthy that RHM and KMW have said that they aim to have the vehicles repaired in 2-3 weeks. Nonetheless, this is clearly an unhelpful development, although we are a while away from understanding fully what caused these problems. It is also worth noting that the Puma IFV was designed over 1995-2009, while design work on Rheinmetall’s exclusively produced Lynx IFV was completed in 2015. So, it could be the case that this leads to increased orders for the Lynx (which RHM has so far sold to Hungary, who picked it over the Puma) over the Puma (whose sole user is the Bundeswehr). Elsewhere, on Monday Rheinmetall announced that its 51% owned South African subsidiary RDM has been awarded a contract by a NATO country for the supply of 155mm shells “in the mid three-digit million euro range”. The contract will run over five years. Yesterday Rheinmetall said that it will supply 26 new HX 8×8 logistic trucks to Ukraine in a “double-digit million euro” contract. These are the latest in a long line of contract wins for RHM, with the multi-year nature of many of these wins providing helpful visibility on revenue. Bloomberg consensus has RHM trading on 14.0x expected 2023 earnings and offering a prospective yield of 2.7%.
PCA – Disposal and debt updates
Palace Capital provided an update on its balance sheet position and non-core disposal programme on Thursday. Since the start of H2 (on 1 October), the Group has disposed of £7.6m of non-core properties at an aggregate 3% premium to the end-March book value. These comprise a leisure asset in Southampton sold for a 21% premium to book value (a potentially encouraging mark given the Group’s other leisure assets); an office building in Winchester that fetched 10% below book; a residential unit in Banbury sold for £0.3m, in-line with book value. On the apartment development at Hudson Quarter in York, a further 8 apartment sales have completed since the start of H2 for a total of £3.4m, with one unit exchanged to the value of £0.7m, bringing cumulative proceeds from the 98 units completed or exchanged to date to £35.5m. A further seven units are under offer to the value of £2.8m, which leaves 22 units remaining. Helped by these disposals, net debt has reduced to £66.4m as at 21 December from £75.8m at end-September. The pro-forma LTV of the portfolio has reduced from 32.2% at end-September to 29.6% currently. Clearly, the uncertainty in the UK commercial property market is weighing on PCA, whose share price of 213p sits 40% below the end-September NTA of 356p per share. However, with the disposals in H2 to date coming in marginally ahead of blended book value, the market seems to be mispricing PCA. The low gearing provides further reassurance in this regard. My expectation is that PCA’s property assets will be disposed of in an orderly manner, facilitating a capital return to investors.
BHP – Enters into Scheme Implementation Deed with OZL
On Thursday BHP announced that it has entered into a Scheme Implementation Deed with OZ Minerals to acquire the latter for A$28.25 per share (A$10bn). This follows the completion of a four week exclusive due diligence period. The Scheme has been unanimously recommended by the OZL board. BHP will finance the deal through a combination of its existing cash reserves and a new loan facility. All going well, the deal will complete in Q2 of calendar year 2023. On completion, the takeover of OZ Minerals will strengthen BHP’s position in copper and nickel, supporting management’s well established strategic push towards future-facing commodities. BHP trades on an undemanding multiple of 11.4x FY (year-end June) earnings and offers a prospective yield of 6.2%.
BT/A – UK government orders sale of rival
Tuesday’s FT reported that the UK government has ordered the sale of a Russian-backed regional broadband provider, citing national security grounds. LetterOne, an investment vehicle controlled by Russian oligarchs, bought Upp last year. At the time, LetterOne intended to invest £1bn to build a network to rival BT, with the aim of covering 1m premises in Eastern England by 2025. BT’s FTTP (fibre to the premises) capex programme will see it connect 25m UK premises to high speed broadband by the end of 2026, so Upp was only ever going to be a small rival to it. However, to the extent that Upp’s plans are now up in the air, this is likely to prove a marginal positive for BT/A. Bloomberg data have BT trading on just 6.1x expected FY (year-end March) 2024 earnings and offering a prospective yield of 6.9%.
RYA – Pilot pay deal provides visibility
Ryanair announced on Tuesday that it has signed a 4 year pay agreement with the Forsa trade union and its Irish pilots under which the Irish pilots will receive an accelerated restoration of the pay cuts agreed during the COVID pandemic. The agreement also incorporates three years of pay increases spread over the period up to March 2027, providing useful cost visibility to the Group. Bloomberg data show that RYA trades on 13.3x consensus FY (year end March) 2024 earnings, which seems very cheap for a sector leader to me.
CRH – Continues buyback programme
CRH said on Monday that it had completed the latest phase of its share buyback programme, returning $0.3bn to shareholders through the repurchase for cancellation of 7.7m ordinary shares between 20 September and 16 December. This brings cumulative cash returned under the ongoing buyback programme to $4.1bn since May 2018. The Group has tapped Bank of America to repurchase up to $0.3bn of shares between 19 December and end-March 2023. CRH trades on an undemanding 11.6x consensus 2023 earnings and offers a prospective 3.3% dividend yield.
ULVR – Buyback programme update
Unilever announced on Monday that it has completed the second tranche of €750m of its programme to buy back shares with an aggregate market value of up to €3bn. Between 6 September and 19 December the Group repurchased 16.4m shares. “Further tranches of the share buyback programme will be announced in due course as appropriate”. Unilever hit a 52 week high this week. The stock trades on 17.7x consensus 2023 earnings and offers a prospective yield of 3.7%.
HMSO – Submits plans for regeneration of The Oracle
Hammerson announced this week that it has submitted a planning application for the regeneration of part of The Oracle in Reading. The plans envisage 449 new rental apartments and 94,000 sq ft (28,000 sq ft cinema; 28,000 sq ft of entertainment / leisure / flexible workspace; 38,000 sq ft of retail) of reconfigured retail, entertainment and workspace. The Oracle opened in 1999 and attracts 12.7m visitors a year. This is part of HMSO’s wider strategy to bring more mixed use elements to its retail estate, although the slow pace of delivery of this ambition has been a frustration for me. Reflecting the uncertainty around commercial real estate valuations (and, presumably, its high leverage), HMSO trades at a 56% discount to Bloomberg consensus expectations for the end-2022 NAV.
Theodosian Capital 