Stocks Update 3/5/2024

AMZN – Q1 results, only getting started

GSK – Upgrades FY guidance 

HLN – Q1 update, on track for FY

IDS – Constructive union comments

KYGA – Q1 update

PCA – Nearing the finish line 

RYA – Passenger data, good start to FY25

SN/ – Q1 update, solid start to 2024

SPDI – Dutch associate’s FY results 

 

GSK – Upgrades FY guidance

GSK released an upbeat Q1 update on Wednesday. The Group has had a strong start to the year, with Q1 sales of £7.4bn +10% y/y (+13% y/y ex-COVID). This revenue growth was broad-based, with Vaccine sales +16% y/y, Specialty Medicines +17% y/y and General Medicines +1% y/y. Core operating profit was +27% y/y (+35% y/y ex-COVID), with similar momentum from EPS. GSK also reported a strong cash flow performance, with operating cash flow of £1.1bn and £0.3bn of free cash flow. Net debt was £15bn at end-Q1, a £3bn reduction vs end-Q1 2023 and -£0.1m from end-2023 (the latter as free cash flow and Haleon sales proceeds were mostly offset by the £719m Aiolos acquisition and £568m of dividend payments). As has been documented here, the Group has made very strong progress across its pipeline of vaccines and specialty medicines in the period. GSK has upgraded its FY sales (now seen towards the upper part of the 5-7% range) and EPS (now 8-10%, was 6-9%) guidance. It continues to guide to a 60p FY dividend, with 15p of this in respect of Q1 performance. There was no ‘new news’ on Zantac. At the end of Q1 GSK had 72 vaccines and specialty medicines in its pipeline. All in all, a very bright start to 2024, with a welcome upgrade to FY guidance. I don’t see the momentum and/or the attractive pipeline reflected in GSK’s very undemanding valuation of 9.8x consensus 2025 earnings. The stock also yields 3.8%.

 

KYGA – Q1 update

Kerry Group released its Q1 Interim Management Statement on Thursday. This revealed a “good start to the year”, with Group volumes +1.9% (Taste & Nutrition was +3.1% y/y), although pricing headwinds (Group -5.3% / T&N -3.9%) were evident. Net M&A was a further 5.1% headwind, while knocked the topline by a further 140bps, resulting in overall revenues -9.9% y/y. Nonetheless, cost containment meant that EBITDA margin advanced 140bps (across both Group and T&N). Dairy Ireland EBITDA margin was +70bps. The Group has launched a new €300m share buyback, which follows the previous €300m programme that ran from November 2023 to late April 2024. Since the start of Q2 the Group has completed the acquisition of part of the global lactase enzyme business of Novonesis. Net debt at end-March was €1.7bn, €1.85bn pro-forma for the Novonesis transaction, which leaves ample scope for further earnings-enhancing bolt-on M&A, even after taking the new €300m buyback into account. While Kerry struck a relatively downbeat tone in its [near term] outlook statement “well positioned for volume growth and good margin expansion, while recognising consumer demand remains relatively subdued”, the long term drivers of demand for Kerry – nutrition, sustainability, ageing and more prosperous societies – remain very much intact. The Group has also nudged up its FY adjusted EPS growth guidance to 5.5-8.5% (was 5-8%), reflecting the impact of the new share buyback programme. It’s not cheap, but Kerry isn’t overly expensive either at 16.2x consensus 2025 earnings. The stock yields 1.7% at these levels.

 

HLN – Q1 update, on track for FY

Haleon released its Q1 trading statement on Wednesday. This showed a solid start to the year, with organic revenue +3% (price +5%/volume/mix -2%). On a reported basis, revenue of £2.9bn was -2% due mainly to FX and, to a lesser extent, an M&A drag. Performance was, pleasingly, led by the Power Brands, which had organic revenue growth of 5.2%. Earnings momentum was noticeably stronger, with organic profit growth of 12.8%, and the adjusted operating profit margin of 24.2% was +220bps. As previously announced, the Group repurchased 102m shares for £315m during Q1, which should help with EPS. The Group continues to target productivity improvements. FY guidance is unchanged at organic revenue growth of 4-6% and operating profits to outpace that rate of increase. Haleon isn’t cheap in absolute terms, on 16.8x consensus 2025 earnings, but its portfolio of brands is strongly cashflow generative, allowing scope for re-ratings through a combination of buybacks, M&A and deleveraging.

 

SN/ – Q1 update, solid start to 2024

Smith + Nephew reported Q1 results on Wednesday. Revenue of $1.4bn was +2.9% underlying (+2.2% reported after taking an FX headwind into consideration), in-line with expectations. Growth was driven by Orthopaedics (+4.4%) and Sports Medicine & ENT (+5.5%), with Advanced Wound Management -2.0%). SN/ has reiterated its FY guidance of underlying revenue growth of 5-6% and a trading profit margin of at least 18%. The Group says that its 12 point strategic plan to uplift performance “is on-track”, adding “we are confident in our outlook and look forward to all three of our business units contributing as we deliver another year of strong revenue growth”. Smith + Nephew is cheap, trading on 12.2x consensus 2025 earnings and yielding 3.4%.

 

AMZN – Q1 results, only getting started

Amazon released its Q1 results on Tuesday. As expected, these showed strong momentum, with net sales +13% y/y to $143bn and, within that, there was broad-based improvement (North America +12% y/y to $86bn; International +10% y/y to $32bn; and AWS +17% y/y to $25bn). Operating income soared to $15.3bn from $4.8bn in the prior year period, reflecting cost reduction efforts and operating leverage effects. AMZN’s improving cash flow is another key highlight, with free cash flow of +$50bn in the 12 months to end-March vs an outflow of $10bn in the 12 months to end-March 2023. The results release showcases the customer improvements that the Group continues to make – across the 60 largest US metro areas, nearly 60% of Prime orders arrived the same or the next day. The Group has recently launched a grocery subscription service for unlimited delivery on orders >$35 from Whole Foods, Amazon Fresh and local grocery and specialty retailers in more than 3,500 US urban cities. AMZN is putting in place measures to support further AWS growth (the business is now running at an annualised $100bn of revenue), including investing $10bn on two new data centre complexes in Mississippi. AMZN guides to Q2 net sales of $144-149bn, +7-11% y/y, although this is only modestly above the Q1 outturn so I wonder if there is upside risk to this, with Q2 operating income of $10-14bn guided (below Q1 2024’s outturn). Irrespective of whether or not the Q2 guidance proves light, I think Amazon is only at the early stages of fulfilling its potential – International sales are only a third of the US; while AWS’ $100bn annualised revenue run-rate seems very low compared to the medium/long-term direction of travel for tech spend. Bloomberg consensus has AMZN on an undemanding 2025 EV/EBITDA multiple of 12.3x. 

 

IDS – Constructive union comments

The weekend papers reported that the CWU, which represents 110,000 Royal Mail workers, is open to changes to the universal service obligation (USO) rules. IDS wants to axe Saturday deliveries of second class non-parcel post to pare costs – Royal Mail is set up to handle 20bn letter volumes annually but currently only forwards 7bn letters. The CWU helpfully stated that the current six-day-a-week service is “no longer financially viable”. The union’s change of heart seems to have been sparked by the £3bn takeover approach for IDS from Czech billionaire Daniel Kretinsky. Interestingly, by keeping a six-day-a-week first class letter service, this would remove the need for parliamentary approval for changes to the USO. Ofcom approval would still be required, but on this I note that the regulator has taken an economically rational approach on the matter up to now. The Labour government-in-waiting will also be mindful of the CWU’s constructive comments, likely reducing political risks. A structural reduction in costs would be clearly very helpful for IDS’ earnings outlook. IDS is very cheap, trading on 10.7x consensus 2025 earnings, and it is expected to yield 3.7% next year.

 

PCA – Nearing the finish line 

Palace Capital announced on Monday that it has sold Boulton House, a central Manchester office building, for £8.75m which is at the end-March 2024 book value but 2.8% below the end-September 2023 book value of £9.0m. Management says the disposal “demonstrates continuing progress in our disposal strategy and on completion will provide additional cash for returning to shareholders in due course”. By my maths, since 1 April 2023 PCA has sold 24 investment properties at c.2% above the end-March 2023 valuation. This leaves PCA with office buildings in York, Fareham, Leamington Spa, Exeter, Newcastle; leisure assets in Northampton and Halifax; a retail premises in Dartford; and a small number of apartments in York. FY results in June will provide an end-March 2024 NAV figure, with a tender offer in the near term set to provide liquidity to investors wishing to check out early. PCA was trading at 248p earlier today versus the latest (end-September) NTA per share of 294p.

 

RYA – Passenger data, good start to FY25

Ryanair released its April passenger data on Thursday, and this show growth of 8% y/y to 17.3m guests last month, which is of course the first month of its FY 2025. The load factor was 92%, -2pc y/y. On a rolling 12 month basis, RYA has carried 185.0m PAX, +9% y/y, on loads of 93% (-1pc y/y). Overall, a solid start to the new financial year. Ryanair is very cheap, trading on just 9.2x consensus FY 2025 earnings and yielding 2.5%.

 

SPDI – Dutch associate’s FY results

Arcona, the Dutch-listed Eastern European focused real estate business that SPDI is the largest (22%) shareholder in, released its FY results on Tuesday. The Group reported a modest (€183k) profit for 2023, marking a welcome reversal from the prior year’s net loss of €4.4m. On a LFL basis, the fair value of its portfolio was +0.6% y/y, however the Group’s Triple NAV (NNNAV) per share decreased 7.5% to €10.93 due to full recognition of deferred taxes arising from plans for an accelerated sales programme for its portfolio. Interest costs rose from €2.2m to €3.1m due to the rate environment, and while this led to technical covenant breaches, the Group has secured waivers for all of these. Importantly, the LTV has improved from 43.6% at end-2022 to 39.5% at end-2023, and the planned further disposals will allow for deleveraging and a buyback (personally I don’t think they should be doing the buyback until the LTV is much lower, but Arcona’s shareholders seem to disagree). Management expects “improved market conditions and lower financing costs to support our operational performance and transaction activities in 2024”. At the NNNAV per share SPDI’s direct shareholding in Arcona is worth €12m, which is highly material relative to SPDI’s latest (end-June 2023) published NAV of €13m. I note that SPDI (market cap £5m) is to hold a shareholder call on 9 May, which will hopefully shed some light on management’s strategy for value realisation, given that the market is currently assigning a negative value on SPDI’s non-Arcona net assets. SPDI reports its FY results next month.

Stocks Update 26/4/2024

ABDN – Q1 update, positive momentum

APH – Another delay 

BHP – Approach for Anglo American 

BOCH – Senior issuance

CLIG – A good start to CY 2024

GRP – €25m buyback; NAV and dividend updates

GSK – Pipeline progress 

LLOY – Solid Q1 update

MKS/PRX – Getir news

PRX – Swiggy swag 

RKT – Q1 update reassures

RWI – Solid pre-close update

ULVR – Good start to the year

 

BHP – Approach for Anglo American

Bloomberg reported on Wednesday night that BHP is weighing a potential takeover of Anglo American in what would be one of the largest M&A transactions in 2024, if it happens. My initial reaction was that most of Anglo American’s product portfolio (Copper, Nickel, Iron Ore, Steelmaking Coal, Crop Nutrients) would seem to be a fit with BHP’s current footprint, it is hard to see how Anglo American’s platinum, diamond and manganese (the latter was offloaded by BHP to South32 some years ago) interests would fit in an enlarged Group. On Thursday morning BHP confirmed that it had proposed a combination to be effected by way of a scheme of arrangement, comprising an all-share offer conditional on Anglo American demerging its platinum and Kumba Iron Ore businesses (around a third of the Group) before completion. The proposal would value Anglo American’s share capital at £31.1bn. BHP note that a merger would create a leading portfolio of “large, low-cost, long life Tier 1 assets” with “meaningful synergies” (I am not so sure about the latter, but can see the logic of the former) arising from any transaction. BHP goes on to add that Anglo American’s non-copper, iron ore and metallurgical coal assets “including its diamond business would be subject to a strategic review post completion”. I note that Anglo American’s manganese business is in a JV with South32 (who own 60% of it), so perhaps selling to South32 is one option for an exit from that vertical, while the 85% (the Government of Botswana owns the balance) owned De Beers diamond business would likely have no shortage of suitors. While there is no certainty that a transaction will follow, I suspect that the resources sector is going to see significant M&A in the coming years as: (i) geopolitical events show the importance of securing reserves in ‘safe’ countries; and (ii) interest rates start to come down. Earlier today AAL said that the BHP proposal “significantly undervalues” the company, adding that the proposed structure is “highly unattractive” with “significant execution risks”, leading the Board to unanimously reject it. At lunchtime today Bloomberg reported that activist fund Elliott has built a $1bn AAL stake, which adds further intrigue to this story. Regardless of how this plays out, BHP is attractively rated on 10.9x consensus 2025 earnings and yields an attractive 5.3%.

 

RWI – Solid pre-close update

My largest portfolio holding, Renewi, released a pre-close trading update on Thursday ahead of the release of FY (year-end March) 2024 results on 30 May. The Group expects “to report FY 2024 results in line with current market expectations”, supported by strong performance “in three out of four divisions” (Commercial Waste Netherlands being the exception) coupled with cost actions. Recyclate prices were largely stable through H2. The strategic review of UK Municipal “remains on track for announcement by 30 June 2024” – if (emphasis) a mechanism to remove this recurring cash drag from the Group is found, even if it involves a one-off cash hit, it would likely lead to a material re-rating, to my mind. Two other strategic initiatives worth calling out are a new green gas partnership with Vattenfall (Renewi has a similar partnership with Shell); and fridge recycling unit Coolrec will launch a secondary offering for recycling electric boilers in Q4 FY 2025. RWI disclosed that core net debt was €367m at end-March 2024 (flat versus the €371m at end-March 2023, reflecting capex investment in the period). As expected, “a modest dividend is expected to be paid out for FY 2024”. Renewi is cheap, trading on 8.4x consensus 2025 earnings and is expected to yield 1.8% next year.

 

ULVR – Good start to the year 

Unilever released a well-received Q1 trading update on Thursday. Underlying sales growth was +4.4% y/y (split evenly between price and volume), with all divisions seeing growth of between 2.3% and 7.4% (the soon to be spun out Ice Cream was, interestingly, the laggard). Revenue of €15.0bn was +1.4% y/y (after a 2.0% FX impact and 0.9% net disposal impact) and, again, all divisions saw positive momentum (of +0.4% to +3.1% y/y). Importantly, ULVR’s Power Brands, which account for 75% of turnover, saw USG of 6.1% y/y. ULVR has maintained FY guidance of USG of 3-5% (I suspect the risks here are to the upside given the Q1 print) and a modest improvement in underlying operating margin. On distributions, the quarterly dividend is being held at 42.68c, while the share buyback is due to commence in the current quarter. A good update overall that hints at the potential for upgrades, although Ice Cream’s sluggish performance is unhelpful as that business is reviewed by prospective buyers. Unilever trades on an undemanding 16.4x consensus 2025 earnings and yields 3.9%.

 

RKT – Q1 update reassures

“On track for full year delivery” was the headline on Reckitt’s Q1 IMS on Wednesday. In Q1 the Group saw LFL growth of 1.5% y/y, with price/mix contributing 2pc and volume a 50bps drag, the latter (as expected) driven by very tough comps in Nutrition (LFL volumes -9.4% y/y) due to last year’s US competitor supply issues. On an IFRS basis, revenues of £3.7bn were -4.6% y/y, reflecting FX headwinds (-5.7% y/y) and net M&A impact (-40bps). Ex-US, Reckitt saw broad-based geographic growth, +MSD across Europe and Developing Markets. Importantly though, the Group says: “We are on track to deliver our FY revenue [LFL net revenues +2-4%] and profit [growth rate above net revenue growth rate] targets, led by MSD growth across our Health and Hygiene portfolios”. Litigation issues are the elephant in the room for Reckitt, but my sense is that these are overdone. A return to positive LFL growth (+1.5% y/y in Q1 means upside risks to the 2-4% FY guidance given that the US comps are far tougher in H1 than they will be in H2) and the ongoing benefits from the £1bn share buyback should pave the way for good EPS momentum from here, to my mind. Reckitt is inexpensively rated on 12.6x consensus 2025 earnings and yields 4.8%.

 

ABDN – Q1 update, positive momentum

Abrdn released a Q1 AUMA and flows trading update on Wednesday. The key takeaway is 3% q/q (2% y/y) growth in AUMA made up of both stronger markets (+£12.0bn) and positive net flows (+£0.8bn, including eliminations of £0.3bn). Across the businesses, there was good growth in ii, where customer numbers increased 3% y/y to 414k and net flows were +£1.2bn. Investments net flows were +£0.2bn and Adviser saw a net outflow of £0.9bn. Of note also was management’s comment that “our cost transformation programme is on track as we take action to sustainably restore our business to a more acceptable level of profitability”. Layering rising AUMA (and associated read-through to revenue) on to cost takeout points to margin expansion, an important consideration as the Group seeks to bridge the gap between earnings and its dividend. Like CLIG (qv), ABDN’s key attraction is its yield (10% at today’s price) and while it is currently slightly uncovered, the Group’s surplus capital and potential for market returns to continue to grow AUMA offer reassurance here.

 

GRP – €25m buyback; NAV and dividend updates

Greencoat Renewables yesterday provided its customary quarterly NAV and dividend announcement, but one welcome ‘new news’ was a €25m share buyback, given the unwarranted discount (to my mind) that the stock trades on. NAV at end-March was 111.6c/share, -0.5c q/q. The Q1 dividend, as expected, was 1.685c/share, in-line with FY guidance for a 6.74c/share dividend. The balance sheet is in good shape, with net gearing at 49%. With the shares trading at just 86c today, buying back shares at a 20%+ discount makes sense. The dividend is an attractive 7.8% and I think the outlook is very attractive for renewable electricity generation companies given the structural growth (data centres / AI related) in European electricity demand, which combined with a dysfunctional planning system where adding new capacity is concerned suggests to me that electricity prices are only going higher in the medium-to-longer term.

 

LLOY – Solid Q1 update  

Lloyds Banking Group released its Q1 IMS on Wednesday. The statement opened by saying that the Group “is continuing to deliver in line with expectations…with sold net income, cost discipline and strong asset quality. Our performance provides us with further confidence around our strategic ambitions and 2024 and 2026 guidance”. The Q1 statutory net income came in at £1.2bn, down from £1.6bn in the prior year period with the moving parts being income -9%, costs +11% (5 points of this was due to a change in the charging approach for the Bank of England levy – whose FY effect will be neutral, while severance charges were £0.1bn higher than in Q1 2023) and lower impairments (the CoR in Q1 was a negligible 6bps). ROTE was an impressive 13.3%, helping the CET1 ratio to come in at 13.9%, ahead of the ongoing target of c.13.0% (this variance suggests to me that LLOY will continue its multi-year track record of share buybacks). TNAV increased slightly to 51.2p (end-2023: 50.8p). LLOY’s FY guidance is unchanged at: A banking NIM of >290bps (Q1: 295bps); OpEx of £9.3bn plus the c.£0.1bn BoE levy; CoR <30bps; ROTE of c.13%; Capital generation of c.175bps; RWAs of £220-225bn (Q1: £222.8bn); and to pay down to a CET1 ratio of c.13.5%. All in all, a solid update, and I suspect that the FY risks are to the upside for LLOY given the very low observed CoR in Q1 and (not unrelated) more supportive UK macro outlook and its associated implications for lending growth, NII and fee income. LLOY is cheap – trading on 0.7x consensus 2025 P/B for an expected ROE of 11%

 

CLIG – A good start to CY 2024

City of London Investment Group released a trading update on Monday that show a bright start to CY 2024. FUM at end-March were $10.1bn, +5.5% from $9.6bn at end-December, with positive contribution from both market performance and (significantly) net flows of +$224m. Market expectations for asset managers in the opening months of 2024 seems to be for higher FUM driven by performance outweighing continued net outflows, so to see CLIG delivering positive inflows is a positive surprise. These inflows may well continue – CLIG says that “sales activity continues to gain momentum as CEF discounts are at compelling levels and there is significant capacity”. Given the quasi-mechanical relationship between FUM and revenues, this is a good update through a shareholder lens. CLIG paid an unchanged 11p/share interim dividend at end-March and will announce its final dividend in the pre-close update on 25 July. Management further note that “as previously announced, savings of c.$2.5m of costs per annum will be fully realised in the next financial year”. CLIG yields an attractive 9.7% and trades on just 9.4x consensus 2025 earnings.

 

PRX – Swiggy swag 

Press reports on Thursday say that Swiggy, the Indian food delivery firm with a market share of c.46%, is seeking to raise $1.25bn from an IPO after investors agreed to a public offering. According to the reports, Swiggy handled a GMV of $2.6bn in 2023, has 16-17m monthly users, and is profitable. Prosus owns 36% of Swiggy, so an IPO would offer more transparent market pricing and potential liquidity if PRX wished to sell down its interests in the company. On Thursday PRX had $111bn of investments in publicly quoted companies and $24bn in private companies. 

 

MKS/PRX – Getir news

Press reports last weekend state that fast grocery delivery service Getir intends to exit the UK and a number of other European markets. The company employs over 1,000 people in the UK. I am not surprised by this development – the previously prevailing zero interest rate environment allowed a lot of businesses with questionable economics to access funding, and Getir’s labour intensive model always looked likely to struggle given that the more automated Ocado Retail delivers a single digit EBITDA margin. I expect that some of the market share that Getir’s exit will free up will flow to Ocado Retail (which operates a fast delivery ‘Zoom’ concept for a limited range of household essentials, along with the more conventional ‘big shop’ format) – this is important, given that Ocado Retail has excess capacity so the marginal contribution from extra sales is likely to be very valuable indeed. M&S owns 50% of Ocado Retail. There has been a wider trend of food and grocery delivery services exiting underperforming international markets, which is also helpful to Prosus, which has interests in a number of large players in the sector – greater consolidation should (all else being equal) lead to improved margins. MKS is inexpensive on 10.4x consensus 2025 earnings, while PRX is similarly undemandingly rated on 11.4x 2025 consensus earnings. 

 

GSK – Pipeline progress

GSK said on Wednesday that the US FDA has accepted its application for priority review of an expanded indication of jemperli (dostarlimab) plus chemotherapy to include all adult patients with primary advanced or recurrent endometrial cancer. This applications follows statistically significant and clinically meaningful progression-free and overall survival data from the Phase III RUBY Part 1 trial. With c.417k new cases reported each year worldwide, and incidence rates expected to rise c.40% between 2020 and 2040, the target market here is meaningful for GSK. At the end of Q1 GSK had 71 vaccines and specialty medicines in its development pipeline across Phase I to Phase III/registration. I don’t think this pipeline is adequately reflected in a cheap valuation of just 9.3x consensus 2025 earnings.

 

APH – Another delay

Alliance Pharma announced on Monday a second delay to the release of its FY 2023 results, from the originally rescheduled 23 April to “early May” (subsequently refined to 8 May per an RNS released this morning). As with the first postponement, the cause of the latest hold up is the auditor requesting “additional time to finalise its work”. While “Alliance reiterates that the details provided in the full year trading update on 29 January 2024 remain accurate”, and while it isn’t unprecedented for a plc to have to reschedule results due to audit timelines, two postponements is nonetheless disappointing to see. I had been minded to buy more shares in APH but will now wait until after the release of its audited results before considering whether or not to top up. APH is optically cheap, trading on 6.6x consensus 2025 earnings, when it is expected to yield 2.3%.

 

BOCH – Senior issuance

Bank of Cyprus successfully launched and priced a new €300m 5nc4 green senior bond on Wednesday. The bond came with a coupon of 5.00%, 50bps tighter than IPT which reflects the strong demand it received – interest from more than 120 institutional investors with a final orderbook that was more than 4x oversubscribed at €1.3bn. This is another helpful illustration of the Group’s enhanced market standing. The next scheduled newsflow from BOCH is Q1 results on 16 May. BOCH is very cheap on conventional metrics, trading on 0.6x P/B for 12.9% ROTE in 2025 (and 5.2x PE) per Bloomberg consensus, which also shows the sell side is expecting a 9.0% dividend yield in respect of 2025 performance.

Stocks Update 19/4/2024

BHP – Production update 

BOCH – Launch of share buyback

BT/A – Disposal rumours 

GRP – 10 year corporate PPA

GSK – Pipeline progress

IDS – Kretinsky approach

PCA – Disposals and tender updates

WDS – Q1 report 

 

WDS – Q1 report 

Woodside Energy released its first quarter (end-March) report earlier today. The report revealed a 7% q/q reduction in production (to 44.9 MMboe) which combined with lower realised prices to produce quarterly revenue of $2.97bn, -12% q/q. The Group continues to execute on its three major energy projects, with Scarborough (Australia) 62% complete (first LNG cargo is expected in 2026); Sangomar (Senegal) is 96% complete with first oil targeted for mid-2024; Trion (Mexico) continues to progress; while for the new technology projects WDS is continuing discussions on offtake from the H2OK project and progressing commercial agreements for the Woodside Solar Project. Corporate highlights in the period include the sale of a 15.1% stake in Scarborough for $1.4bn to JERA and a further 10% sale to LNG Japan for $910m; and the completion of a sale and purchase agreement with Korea Gas Corporation for the long-term supply of LNG to Korea. Looking ahead, WDS is maintaining FY production guidance of 185-195m boe. All in all, the maintained FY production guidance and continued progress on development projects make this a reassuring update. Woodside trades on an inexpensive 15.1x consensus FY 2025 earnings and yields 5.4%.

 

IDS – Kretinsky approach

The Financial Times reported on Wednesday that International Distributions Services has rejected a takeover approach from 27.5% shareholder Daniel Kretinsky. In a statement, Kretinsky’s EP Corporate Group said it had “submitted a non-binding indicative proposal” to IDS on April 9 which was rejected, although EP Corporate says it “looks forward to continuing to engage constructively with the [IDS] board as EP Group considers all its options”. In a statement released later on Wednesday, IDS revealed that EP’s “preliminary and conditional non-binding proposal” had been pitched at 320p/share. The Board unanimously rejected this, saying it “significantly undervalues IDS and its future prospects”, adding that “the timing of the proposal is opportunistic. It does not reflect the growth potential and prospects of the Company under a new management team, a significant modernisation programme underway at Royal Mail, and the ongoing review by Ofcom in relation to the Future of the Universal Service Obligation”. I agree with IDS’ board when it comes to these points – IDS (and more specifically Royal Mail) has a number of avenues to significantly structurally higher profitability through automation and better matching its distribution network to customer demand (for example, it is currently set up to handle 3x more letter volumes than it actually does). A price of 320p/share values IDS’ equity at £3.07bn, a fraction above the Group’s latest disclosed net assets of £3.0bn at end-September 2023. Earlier today IDS shares were changing hands for 272p, well below the 320p ‘proposal’ level, suggesting the market expects a low possibility of a transaction, at least in the short term. Bloomberg consensus has IDS trading on 11.2x consensus FY (year-end March) 2025 earnings, falling to just 7.7x consensus FY 2026 earnings as earnings continue to rebuild following the resolution of the costly labour relations issues of recent years. I think the stock is very cheap.

 

PCA – Disposals and tender updates

Palace Capital provided an update in relation to the monetisation of its real estate portfolio on Thursday. Since its last update in February, the Group has unconditionally exchanged or completed on the sale of another five investment properties for £15.3m which, after adjusting for rent incentives, is 3.7% below the September 2023 valuation. Further properties are currently under offer. On the small apartment portfolio in York, since February the Group has completed the sale of one unit for £0.6m and has another five totalling £2.7m under offer, leaving 12 units remaining. These disposals have tipped the Group into a net cash position, pro-forma for this week’s dividend payment, of £19.5m, with the only gross debt remaining being a £8.3m facility fixed at just 2.9% until July 2026. PCA’s Chairman, Steven Owen, said that the Group expects “to announce a significant return of capital to shareholders, likely through a tender offer, in due course and ahead of the [FY results in June]”. PCA last reported net assets of 294p share at end-September, and while there is some downside risk to this, the delta to the current share price (235p) offers a good margin of safety, in my view. The achievement of a net cash position further reduces the risks around PCA. In an ideal world, if the UK rate environment evolves as the market consensus expects, that should be supportive of real estate valuations from here, with (I am hoping!) a tender offer pitched somewhere between NAV and the share price offering a nice balance between liquidity for the impatient and accretion for patient long-term oriented investors.

 

BHP – Production update

BHP released an operational review for the 9 months to end-March on Thursday. The update revealed that the Group is “on track to meet copper, iron ore and energy coal production for the year”, but weather is having an adverse impact on some of its operations. By commodity, copper volumes are +10%, WAIO had “consistent” production despite heavy rainfall; BMA metallurgical coal guidance for production and costs has been revised lower as a result of “significant wet weather including the impact of two tropical cyclones”; phase 1 of the giant Jansen potash project in Canada is 44% complete, ahead of its initial schedule; and “a decision on the future of [BHP’s] nickel business” will be announced in the coming months. All in all, a negative tone will hardly help near term sentiment towards the stock, although the long-term drivers of demand for its portfolio of future-facing commodities is very much intact. BHP trades on an undemanding 11.0x FY (year-end June) 2025 earnings and yields 5.2%.

 

GSK – Pipeline progress

GSK announced on Tuesday that the US FDA has accepted its 5-in-1 meningococcal ABCWY vaccine candidate for regulatory review. If approved, a single vaccine providing broad coverage against the five most common groups of bacteria causing invasive meningococcal disease would likely be very well received, in my view. The submission follows a positive Phase III trial in which all primary endpoints were met. This was followed on Wednesday by two further updates from GSK. The first, on Shingrix, outlined how an analysis of long-term data show that GSK’s shingles vaccine continues to provide high protection in adults aged over 50 for more than a decade (vaccine efficacy is 82.0% at year 11 after initial vaccination). Importantly, no new safety concerns were identified during the follow-up period. That should presumably help to push more demand for the blockbuster vaccine, given that shingles affects 1 in 3 people worldwide during their lifetimes. Elsewhere, GSK said that phase III data “show potential” for gepotidacin as a new treatment option for uncomplicated GC “amid growing resistance to existing treatments”, adding that it achieved a 92.6% microbiological success rate “and was non-inferior to the leading combination treatment” (which has a 91.2% success rate). The safety and tolerability profile was consistent with the findings from the phase I and phase II trials. With an 82m new cases globally each year, there is obvious commercial potential assuming the requisite approvals follow. At end-2023 GSK had 71 vaccines and specialty medicines in its development pipeline across Phase I-III/registration. I don’t believe that the potential of this pipeline is adequately reflected in GSK’s low rating of just 9.0x consensus 2025 earnings. The stock also yields 4.1% at the current price. 

 

BT/A – Disposal rumours 

Sky News’ well-connected City Editor Mark Kleinman reported on Wednesday that BT has appointed Citi to advise on a potential sale of its Irish corporate unit. BT previously considered a sale of this unit back in 2020. BT sources said that the review of the business, which may or may not result in a transaction, is at an early stage. BT Ireland is said to employ more than 650 employees who cater to a roster of corporate and wholesale (but not retail) customers. At the time of the abandoned 2020 sale, it was said to have a valuation of between €300m and €400m, but it is not clear on whether that is still a useful yardstick. In any event, the unit is likely to be immaterial in a BT Group (£10.4bn market cap) context. Bloomberg consensus has BT trading on just 5.5x FY 2025 earnings and yielding 7.2%, which is very cheap to my mind.

 

GRP – 10 year corporate PPA 

Greencoat Renewables announced on Thursday that it has agreed a 10 year Power Purchase Agreement (PPA) for its Ballybane Phase I wind farm in Cork with Keppel DC REIT. The wind farm has an annual output of 67 GWh, which Keppel DC REIT will purchase all of. This is the latest in a series of PPAs that GRP has agreed, which provides very helpful long-term revenue visibility as fixed price incentive regimes conclude. The outlook for electricity demand growth is strong, supported by new technologies, with renewable players like GRP perfectly placed to benefit from this. Greencoat is very cheap, trading on just 8.2x consensus 2025 earnings and yielding 8.3%.

 

BOCH – Launch of share buyback

Earlier today Bank of Cyprus announced the commencement of its previously announced €25m share buyback programme. The Group has engaged brokers to repurchase its shares on both the London and Nicosia lines. Shares repurchased will be cancelled. Bloomberg data show that BOCH trades on 5.2x consensus 2025 earnings and 0.63x end-2025 NAV, so the use of excess capital to buy back shares at such a valuation makes heaps of sense, to my mind. 

Prosus (PRX NA) – Buy one, get lots for free

With a market cap of €74bn, Prosus is the largest European listed consumer internet company. It is perhaps best known for its c.25% shareholding in Tencent, currently valued at €86bn. Unsurprisingly, and as shown below, PRX’s share price broadly tracks that of Tencent, with the market likely not affording due consideration to the Group’s other significant assets – it has €8bn of other listed investments and €21bn of unlisted investments. The Group has de minimis (c.€0.02bn) net debt. All in all, this leaves Prosus with a net asset value of €115bn (€46.3 per share) which investors can buy today for €29.4 per share, a 36% discount. Sure, conglomerates generally do trade at a discount, but a number of strategic steps being undertaken by the Group suggest to this shareholder that PRX can narrow this discount – (i) share buybacks; (ii) monetisation of assets; (iii) driving portfolio efficiencies; and (iv) simplification.

Before delving in to the strategic levers that I believe PRX can deliver value for investors from, it is worth spending some time on the Group’s portfolio of assets.

PRX has “more than 80 investments across more than 100 markets“. As mentioned, these span listed and unlisted companies; part and wholly owned and/or controlled. As of 12 April 2024, PRX had €94bn of listed investments, of which c.90% is represented by the shareholding in Tencent, a world-leading internet and technology company. Other meaningful listed holdings include a €3bn stake in Chinese shopping platform Meituan; a €2.5bn stake in the German headquartered food delivery player Delivery Hero; €1.4bn of shares in Singapore travel service conglomerate Trip.com; and smaller (sub-€1bn) shareholdings in online remittance service provider Remitly; Edtech specialist Udemy; US software firm Similarweb; (another Edtech) Skillsoft; (another food delivery firm) Doordash; and social platform VerticalScope.

PRX’s unlisted investments are mainly drawn from the same sectors as the publicly quoted names – Classifieds; Food Delivery; Payments & Fintech; and Edtech. Prosus Ventures is the Group’s VC arm and it has invested $1.4bn in more than 40 high potential firms.

By sector (combining both the private and public assets), 77% of PRX is in Social & Internet Platforms; 8% in Food Delivery; 3% in Classifieds; 4% in Payments & Fintech; 2% in Edtech; 2% in Etail; 2% in Ventures; and 2% in ‘Other Ecommerce’.

As mentioned in the introduction, PRX trades at a discount to the value of its holding in Tencent alone, so in buying Prosus you get exposure to Tencent at a discount and investments in c.80 other businesses for free. Sure, conglomerates generally tend to trade at a discount, but I believe that PRX has a number of levers that should at least narrow this discount. Let’s review these in turn.

(i) Share Buybacks. PRX announced an open-ended share repurchase programme in June 2022, funded by the sale of its shareholding in Tencent. By 30 September 2023, this programme had created over $25bn of value, as 17% of the PRX free float was repurchased at a discount to NAV, leading to 7% NAV accretion per share for continuing shareholders. PRX says that “while the discount remains elevated, we envision no changes to the parameters of the programme”. PRX further notes that its “open-ended buyback program increases our per share exposure to Tencent”. This is an important consideration, given the analyst consensus for Tencent is that it will deliver stronger dividends over the coming years, which will augment the cashflow that PRX is unlocking through its share sales from its investment in the company.

(ii) Monetisation of assets. In PRX’s latest (H1 2024) results, the Group said it would “adopt a more dispassionate approach to portfolio management”. During CY 2023 Prosus exited OLX Autos and sold PayU GPO (for $610m). On the analyst call following the release of the interim results, management was asked to elaborate on its plans to ‘crystallise’ value from its portfolio. The CEO said: “Crystallisation for me is really about highlighting value. And that could happen through a sale, but more likely, in the near to mid-term, through listing businesses. Now, I want to be very clear. Our intent is not to list every single business in our portfolio that’s privately held. Listing is appropriate for businesses when that event can actually help the business, or perhaps there a valuation disconnect between what an asset could be worth in the public markets versus what it’s worth under private ownership“.

(iii) Driving portfolio efficiencies. The end of the ‘zero interest rate environment’ from 2022 onwards has, to my mind, put more discipline on business models generally. We have seen a lot of early stage companies being compelled to accelerate the journey to profitability. Prosus is no exception to this trend. At its Capital Markets Day in December 2022, management set out its plan to achieve profitability from its consolidated Ecommerce portfolio by H1 of FY 2025. This was brought forward to H2 of FY 2024 in the most recent (H1 FY 2024) results, which showed that in the six months to end-September 2023 PRX’s Ecommerce portfolio had consolidated trading losses of $36m, a $220m improvement from the prior year period. The overall PRX portfolio delivered very impressive topline performances, with revenue growth across all divisions (Etail +4% y/y; Edtech +11% y/y; Food Delivery +17% y/y; Classifieds +32% y/y; Payments & Fintech +32% y/y) in H1 2024, and margin improvement in all divisions ranging from 2ppts to 15ppts y/y. The revenue performance is particularly pleasing as it shows the Group isn’t simply trying to ‘cut its way to glory’.

(iv) Simplification. Prosus made its stock market debut in Amsterdam in September 2019, spun out of the South African conglomerate Naspers, as the latter tried to address its valuation discount by listing in a more liquid market with superior capital allocation. Following shareholder approval in September 2023, the cross-holding of shares between Prosus and Naspers was removed, simplifying the corporate structure while maintaining the economic interest split. While this helped to make the PRX story ‘less complicated’, I think there is scope to simplify the narrative further by streamlining the number of verticals that the Group operates across through disposals – put simply, if Prosus becomes less of a conglomerate, then logically it should have less of a conglomerate discount.

Bringing it all together, as a shareholder in Prosus, I see the potential for attractive returns as: (i) loss-making consolidated Ecommerce businesses transition into profitability; (ii) the Group recycles capital from Tencent into buying back its own shares at a discount; and (iii) other (non-Tencent) assets – for which the market currently appears to be attributing a negative value – are divested. I appreciate that (i) and (iii) have a degree of overlap, but given PRX’s sprawling interests and the broad-based uplift in performance across all of its verticals demonstrated in the recent results, I don’t believe that disposals would derail the improving trend in underlying earnings.

Sell-side consensus, shown here, suggests that analysts (at least) are buying into the same narrative. At a high level, the market expects to see good top-line growth combined with margin expansion that leads to a step change in earnings. Based on this consensus, PRX is very cheap on conventional earnings metrics and the expected strengthening of the balance sheet (rising net cash over the coming years) will likely provide management with considerable optionality around further capital returns. All in all, I remain a very happy shareholder in PRX.

Stocks Update 12/4/2024

IR5B – Fleet reports

KMR – Production report

PMI – AUM update 

PPA – Crane investment 

RHM – German contract win

 

KMR – Production report 

Kenmare Resources released its Q1 2024 Production Report on Thursday. This revealed an in-line performance, consistent with guidance for the FY, which sees production strengthening as we move through 2024, reflective of seasonal factors (weather and associated power interruptions) and expectations for the evolving grade profile. On a more positive note, KMR say: “the markets for our products were encouraging in Q1, with stronger than expected demand, particularly for ilmenite. This was driven by recovering titanium pigment demand and the continued growth of the titanium metal market”. Production of ilmenite was in-line y/y, with production of other products down y/y, reflecting significant maintenance work in the mineral separation plant during the quarter. Overall though, this looks like a very satisfactory production performance given that KMR says: “the cumulative impact of the power interruptions in Q1 2024 was greater than the downtime caused by the severe lightning strike in February 2023 and materially exceeded the average impact on operations experienced during the first quarter of the past five years”. Shipments were 243k tonnes in Q1, -11% y/y, but KMR notes that a further 34k tonnes were loaded in Q1 but shipped in Q2, so not a concern. KMR further notes that it “has a strong order book for Q2”. On the outlook, the Group says it is “on track to achieve its 2024 guidance on all stated metrics”. There was no material ‘new news’ on the Group’s capital projects, which will position it for the coming decades (the mine has a 100 year reserve life remaining). Kenmare is extremely cheap to my mind, trading on just 5.4x consensus 2025 earnings and yielding 7.5%.

 

PMI – AUM update 

Premier Miton released its Q2 (end-March) AUM update earlier today. The Group finished the period with £10.7bn of AUM, +£0.9bn since the start of its financial year on 1 October helped by the addition of £560m of AUM from the previously announced acquisition of Tellworth Investments and investment manager appointment to GVQ. With £268m of net outflows in the quarter, market performance helped to drive the balance of the AUM growth for PMI. In this regard, it is reassuring to see a continued strong relative investment performance, with 68% of funds in the first or second quartile of their respective sectors since launch or fund manager tenure (69% over one year). Given the quasi-mechanical relationship between AUM and revenue, the growth is encouraging to see, albeit it is plainly flattered by M&A. The net outflows, while disappointing, are not unexpected given wider industry trends, but if risk-free rates do start to come down then I would expect to see more ‘risk-on’ behaviour and associated inflows to asset managers like PMI. Premier Miton trades on just 8.2x consensus FY 2025 earnings and yields an attractive 10.0%.

 

IR5B – Fleet reports 

Mirroring recent social media speculation, last weekend’s Sunday Times reported that P&0 Ferries is “exploring a sale of its Spirit of Britain vessel, possibly to Irish Ferries”. This follows P&O’s acquisitions of the hybrid ferries Pioneer (in 2023) and Liberté (in 2024) and speculation that this would lead to the sale of one or the other / both of Spirit of Britain and Spirit of France. Spirit of Britain, which launched in June 2010, was purpose built for P&O for use on the Dover – Calais route, so it would be an excellent fit for Irish Ferries’ operations on that route. At 47,592 tons and with capacity for 2,000 passengers and 180 lorries or 1,059 cars, it would also represent a step up from ICG’s existing three vessels on the route (Isle of Inishmore 34,031 tons; Isle of Innisfree 28,833 tons; and Isle of Inisheer 22,152 tons). Adding Spirit of Britain would free up, post modifications to remove its ‘cow-catchers’, one of ICG’s three current ferries (social media suggests Isle of Inishmore is the likeliest candidate) for redeployment on Rosslare – Pembroke where ICG is short of capacity. If confirmed, this would seem to be an elegant solution for both P&O and ICG – capital recycling for the former; and a better fleet mix for the latter. The Spirit of Britain wouldn’t be cheap – it cost €180m at acquisition in 2010, although with depreciation that’s probably somewhere around half that level now. Nonetheless, ICG has the balance sheet for meaningful capex – it closed 2023 with net debt of €107m (pre-IFRS16 leases; €144m including leases) which compares to FY 2023 EBITDA of €133m. Regardless of how this story plays out, with the Inishmore and Innisfree having been built in the 1990s though, ICG seems likely to be writing meaningful cheques for fleet renewal in the near future. ICG is inexpensively rated on 11.9x consensus 2025 earnings and yields 3.1%.

 

RHM – German contract win

Rheinmetall said on Wednesday that it has secured an order from Germany for “more than 100” (of a production run of 123 units) Boxer HWC vehicles, which will be produced at its facility in Queensland, Australia. Deliveries will commence in 2025. No details on price were supplied, however this is another helpful reminder of the nature of RHM’s order book – mostly multi-year State contracts, providing strong revenue and earnings visibility from blue chip customers. RHM’s order backlog was a remarkable €38bn at end-FY 2023, a year in which RHM had sales and EBIT of €7bn and €1bn respectively. Rheinmetall trades on 19.6x consensus 2025 earnings and yields 1.9%. Not cheap, but at the same time not expensive for the strong growth it is delivering.

 

PPA – Crane Investment

Piraeus Port Authority announced on Tuesday that it has upgraded the Ship Repair Zone at the port with an €8m investment in two new shipbuilding cranes with a lifting capacity of 40 tons each. The new quayside cranes can accommodate vessels of up to 55m in height and represent an upgrade on the previous reliance on mobile cranes. While modest in a Group context, the investment is nonetheless a useful reminder of the capex programme that PPA is implementing under the terms of its concession agreement – as at the end of 2023 the Group had invested a cumulative €155m towards the expected €294m cost of the ‘mandatory’ investments it has to make (including €39m towards the expected €55m outlay on upgrading the Ship Repair Zone specifically). PPA trades on only 8.9x consensus 2025 earnings, which is very cheap for an infrastructure play (especially one with such a strong balance sheet).

Stocks Update 5/4/2024

BHP – Disposals complete

IDS – USO proposal

PRSR – IC confusion

RWI – Delivering on organic growth commitments 

RYA – Passenger data 

STM – Takeover progressing 

STVG – Bumper Studios win

THW – Adnams reports

 

STM – Takeover progressing

STM Group provided an update on Thursday in relation to the takeover of the Group. While most of the STM business is to be acquired by Pension SuperFund, its SIPPS proposition is due to be acquired by Pathlines, a Bidco established by STM CEO Alan Kentish. On Thursday STM said the FCA has approved the regulatory change of control applications made by Pathlines in relation to its acquisition of the SIPPS companies. The overall acquisition remains subject to the satisfaction and/or waiver of the other conditions of the acquisition, including regulatory conditions. Outside of Pathlines, Jambo (the PSF entity) has submitted regulatory change of control applications to the Gibraltar and Maltese financial services regulators in relation to its acquisitions and these continue to progress. Encouragingly, STM says “The expected timetable of principal events remains as set out [in] the Scheme Document […] with a long stop date of 28 May 2024. All in all, good to see this progressing, with the funds expected to land in Q2, as guided. As a reminder, the takeover is pitched at 60p in cash per share up front, with additional deferred consideration of 0-7p, conditional on performance.

 

RWI – Delivering on organic growth commitments

Renewi announced the opening of its hard plastics sorting facility in Acht, Netherlands on Tuesday. The newly opened facility allows Renewi to recycle not only separately collected plastics, but also contaminated material from construction and demolition waste. The facility categories plastics into one of 18 distinct product streams that, through the implementation of advanced technology and incorporating sorting and cleaning processes, produces a purity rate for the key polypropylene and polyethylene streams of at least 95%. Renewi notes that in FY 2023 it recycled 7m tonnes or 63.4% of its total incoming waste, producing low-carbon secondary materials to meet the needs of the circular economy. The Acht initiative is part of the €100m investment commitment from Renewi set out in FY 2022 to drive a €20m EBIT uplift and management says the facility “is expected to contribute to achieving Renewi’s EBIT and topline growth targets”. I suspect that Renewi can leverage its technological know-how to establish partnerships with financially strong partners in other European countries to capitalise on circular economy opportunities. Renewi is very cheap, trading on just 8.7x consensus FY (year-end March) 2025 earnings and yielding 1.8%.

 

RYA – Passenger data

Ryanair released solid traffic data on Wednesday that show it carried 13.6m passengers in March, +8% y/y. The load factor of 93% was flat versus the same month in 2023. Growth was held back by the cancellation of c.950 flights (c.1% of the intended total) due to the unrest in the Middle East. On a rolling 12 month basis, RYA carried 183.7m passengers in the period to end-March (i.e. its FY 2024), +9% y/y, with the load factor of 94% +1ppt y/y. RYA’s revised FY 2024 guidance was for 183.5m PAX, so it is good to see the total come in a touch ahead of that. Ryanair is very cheap, trading on just 9.4x consensus FY (year-end March) earnings and yielding 2.4%.

 

STVG – Bumper Studios win

STV announced on Tuesday that its Studios business has secured a jumbo order from Game Show Network for 100 episodes of its Bridge of Lies quiz show format. The US edition will launch in June under the title Beat the Bridge. STV currently makes Bridge of Lies in the UK for the BBC, which airs in 16 territories, while a local version (El peunte de las mentiras) airs in Spain. STV’s fast growing Studios business was enhanced by the transformative acquisition of Greenbird Media in 2023, and has secured orders from many of the world’s biggest broadcasters and streamers including Apple TV+, BBC, Channel 4, Channel 5, ITV, Sky, Netflix, NBCUniversal and Warner Brothers Discovery. STVG is very cheap, trading on just 7.3x consensus 2025 earnings and yielding 5.0%.

 

BHP – Disposals complete 

On Tuesday BHP announced the completion of the divestment of its interests in the Blackwater and Daunia mines to Whitehaven Coal. The assets were previously part of the BHP Mitsubishi metallurgical coal 50-50 JV. Whitehaven has paid $2.0bn in cash plus a preliminary completion adjustment of $44.1m for working capital and other agreed adjustments (so c.$1.0bn to BHP). A further $1.1bn in cash remains payable to BHP and Mitsubishi over the 3 years post completion and a potential amount of up to $900m in a price-linked earnout (capped at $350m per annum). Given investment opportunities elsewhere across BHP’s portfolio, this disposal should be viewed through a capital recycling lens. BHP is inexpensive, trading on 10.9x FY (year-end June) 2025 earnings and yielding 5.2%.

 

PRSR – IC confusion

The Investors’ Chronicle this week ran an article called “How to grow a real estate investment trust”, which focused on PRS REIT, which has successfully executed a BTR model in the UK. While noting that the fundamentals for BTR are intact (a mismatch between supply and demand for housing; high interest rates meaning that developers prefer to sell to institutional buyers to ensure faster capital recycling), the magazine notes that “it doesn’t have cash in the pot to build more” than the c.5,600 homes it has between completed units and properties at various stages of development. Earlier this week the IC article appeared to suggest that management was talking to shareholders about an equity raise, but the piece was subsequently “amended to clarify the nature of PRS REIT’s discussions with shareholders” and now says PRSR “is speaking to shareholders about its next move”, which is unhelpfully vague. Plainly, with the share price (78.2p today) so far below NAV (123.6p at end-December 2023), it is hard to see the merits of any equity raise – dilutive for existing shareholders (outside of a rights issue) and given the income-oriented nature of many REIT investors, why take on development risk when the PRSR portfolio delivers a reliable c.5% yield at the current share price? Another consideration, of course, being that a c.5% yield is hardly an outlier in this market.

 

IDS – USO proposal

On Wednesday International Distributions Services set out its stall for the reform of the Universal Service Obligation, which is a millstone on Royal Mail’s performance (due to the well documented structural decline in letter volumes from a peak of 20bn in FY 2004/05 to 7bn in FY 2022/03 and guided to fall further to c.4bn in the next five years). IDS’ proposal for reform is for a continuation of the ‘one price goes anywhere’ pricing model for the UK, with first class letters to be delivered six days a week (Monday through Saturday); differentiated first and second class (the latter to be delivered every other weekday) letter pricing; and a retention of seven days a week parcel deliveries. Given the need for legislative assent, IDS is urging Ofcom to introduce new regulations “by April 2025 at the latest” (the next UK General Election must be held by 28 January 2025, so any change will be the work of the new parliament). Royal Mail estimates that USO costs it a net £1-2m per day, so even modest reforms would be material for its bottom line (IDS’ market cap is only £2.3bn). That said, I would have liked to have seen something more radical from management – Ofcom has previously set out analyses that includes paring deliveries of letters to just three times a week. IDS is very cheap, trading on 9.1x consensus FY 2025 earnings and yielding an estimated 4.5%.

 

THW – Adnams reports

Last weekend Sky News reported that the 134 year old Suffolk brewer, distiller and pub and hotel operator Adnams “is sounding out prospective buyers and investors as the wider industry grapples with higher costs and weaker demand”. One of the options is an outright sale of the Group, with a capital raise from a third party and the sale of some of its freehold assets also potential avenues. The Adnams family has been major shareholders since its establishment in 1890. Whilst operating in a different geographic footprint (Suffolk) to Daniel Thwaites, the similarities in terms of their portfolios (both operate brewing, hotel and pub businesses) and controlling family stake suggests that Thwaites is likely to be monitoring this situation, in my view. Adnams’ latest (2022) Annual Report shows EBITDA of £2.7m on sales of £64m, with the Group having net debt of £13.9m at end-2022. Tangible net assets were £22m at end-June 2023. I’ve previously noted that THW has the capacity to invest c.£10m per annum on growth capex and something like Adnams (or some of its assets) could (emphasis) be a good fit for it, particularly given the synergies that would arise from their complementary portfolios. Of course, with Thwaites (market cap £44m) trading on a steep discount to its end-September 2023 NAV of £247m, there are other value creation (buyback, deleveraging, monetisation of pension surplus) opportunities for management to consider that wouldn’t carry any execution risk. The key attraction for Thwaites is its astonishingly low valuation – its share price is just 75p, whereas the latest published (end-September 2023) TNAV is 420p.

Stocks Update 31/3/2024

BOCH – Annual Report confirms strong progress

MKS – Ocado Retail update

PPA – Record results

RHM – EU grant aid

RKT – Buyback

 

PPA – Record results 

Piraeus Port Authority released record results for FY 2023 on Friday. Revenue and EBIT climbed to €220m and €97m respectively from the prior year’s €195m and €77m as strong performances from the Cruise Liner (passengers up from 880k in 2022 to 1.5m in 2023, also well ahead of the 2019 pre-COVID total of 1.1m) and Coastal (16.2m passengers in 2023, up from 15.0m in 2022) businesses offset softer Terminal (reflecting deep sea and geopolitical developments) and Ship Repair (reflecting disruption caused by infrastructure investment) trends. Management has lifted the dividend to 133.6c (FY 2022: 104.0c). On investments, by end-2023 PPA had completed accumulated investment of €155m or 53% of the ‘Mandatory Investments’ linked to its concession agreement (which runs to 2052), up from €133m/45% at end-2022. With net cash of €94m at end-2023, PPA is very well positioned to meet all of its obligations – I won’t pretend to be an expert on Greek politics, but prompt delivery on its remaining investments would presumably help, assuming management is minded to negotiate another extension to the concession agreement in the near future – particularly given that Greece has a one party centre-right government at present. PPA closed at €28.80 in Athens on Friday, putting it on just 10.6x 2023 earnings and yielding 4.6%, a valuation that seems extremely cheap for a top performing (ROE of 19%, ROCE of 18% in 2023) infrastructure operator, in my view, notwithstanding the current headwinds to trade arising from tensions in the Red Sea (the flip side of which being that cruise ships are more likely to stick to safe havens like the Mediterranean, which is positive for PPA).

 

BOCH – Annual Report confirms strong progress

Bank of Cyprus released its 2023 Annual Report on Thursday, which provided some useful colour following the release of preliminary FY results on 19 February and confirmation of approved distributions in respect of 2023 performance on 20 March. Last year saw a step-change in performance, supported by the rate environment, with ROE soaring to 21.7% from 3.1% in FY 2022. TNAV per share closed the year at €4.92, up from €3.93 at end-2022. Asset quality continued to improve, with NPEs reducing to 3.6% (end-2022: 4.0%) or €365m, of which €185m have no arrears, and 84% of loans are in the highest quality Stage 1 (+460bps y/y). REMU, which manages legacy real estate exposures, saw its stock of assets fall to €878m (end-2022: €1.1bn), continuing the trend of recent years. There has been a lot of focus on Cyprus’ exposures to Russia and Belarus, so in this regard it it worth noting that 90.6% of BOCH’s deposits are euro denominated, with the USD accounting for 7.5% and sterling 1.6%. Rouble deposits totalled only €1m equivalent out of a €19.3bn deposit book. There were no major changes in the composition of its loan book. BOCH’s upward trend in market shares has continued, with its shares of loans and deposits climbing 130bps and 50bps respectively y/y to 42.2% and 37.7% at end-2023. A decade ago (in 2014) BOCH had 38.8% of Cyprus system loans and 24.8% of deposits. Another illustration of BOCH’s progress is that it is now rated investment grade by Moody’s – a far cry from the end-2015 rating of Caa3, nine notches below IG. Both S&P and Fitch rate BOCH at BB, two notches below IG. While BOCH is more rating sensitive than most Eurozone banks, it has taken prudent steps to address this, including enhanced structural hedge activity. The end-2023 Regulatory CET1 ratio of 17.4% (versus a minimum requirement for 2024 of 10.9%+P2G) illustrates BOCH’s huge surplus capital, pointing the way to strong distributions in the coming years. BOCH finished the week trading on just 3.3x 2023 earnings, with the dividend in respect of 2023 performance of 25c equating to a 7% dividend. I think this stock would be cheap at 2x the price. 

 

MKS – Ocado Retail update

Ocado Retail, the 50-50 JV owned by Ocado and Marks & Spencer, provided a Q1 (13 weeks to 3 March) trading update on Tuesday. The update revealed a good start to the calendar year, with volumes +8.1% y/y and average basket value +2.1% y/y, helping to produce revenue growth of 10.6% y/y (to £645.3m). Average weekly orders of 414k were +8.4% y/y, with average customers +6.4% to 1.02m at end-Q1. The average basket size was stable at end-Q1 at 45.0 (end-Q1 2023: 45.1). Given the early stage of the Ocado Retail JV’s financial year, it is unsurprising that management has held FY guidance steady (revenue +mid-high single digit %; EBITDA c.2.5% ex Hatfield fees of £33m per annum), although on the strength of this performance I suspect the risks to guidance are to the upside. More fundamentally, the performance of the JV has been held back by excess capacity, and it is good to see this problem reducing through a combination of ongoing volume growth and the closure of Hatfield, which was the oldest CFC in its distribution network. This should provide a helpful tailwind to earnings at MKS. Koyfin data show that Marks & Spencer is trading on just 11.1x forward earnings, a multiple I view as too cheap given the balance sheet strength and step change in earnings arising from its strategic initiatives and market share gains. 

 

RHM – EU grant aid

Rheinmetall announced on Tuesday that it has secured €130m or just over a quarter (which really highlights RHM’s superb positioning for the structural growth story in Western security investment) of the EU’s “ASAP” funding programme to enhance ammunition production. The funds will be channelled into six investment projects by Rheinmetall across four European countries (Germany, Hungary, Romania and Spain). These grants will help to defray some of RHM’s heavy investment programme, although an order book of €38.3bn at end-2023 illustrates that the EU cash is a nice to have, not a need to have. Koyfin data show RHM trades on a forward PE multiple of 24.5x, undemanding for a growth stock in a growth sector.

 

RKT – Buyback

Reckitt announced on Wednesday its intention to commence a third (£250m) tranche of the £1bn buyback programme announced to the market on 30 October. This tranche is expected to commence during April 2024. Given the recent concerns (which I believe to be overdone) about litigation risk at RKT, it is reassuring to see management press on with this programme. Koyfin data show RKT trades on 14.1x consensus earnings, cheap relative to peers but likely to stay that way absent further clarity on litigation risk, unfortunately.

Stocks Update 22/3/2024

AV/ – Singlife exit completes

BOCH – Step-change in distributions

GSK – Pipeline progress; Dementia report

HLN – Overhang reduces

KMR – FY results; Well positioned

MKS – Financial services report

PRSR – Interims; Dividend now covered

RHM – Bolt-on acquisition; German contract

RKT – Enfamil thoughts 

STVG – Further Studios wins

ULVR – I scream, you scream…

 

KMR – FY results; Well positioned

Kenmare Resources released its FY 2023 results on Wednesday. The results were expected to show a moderation in performance from 2022, given developments in pricing and disruption from the lightning strike early last year. In the event, EBITDA came in at $220m, down from FY 2022’s record $298m. The balance sheet remains in great shape, with net cash of $21m at end-2023 (a year in which $30m was spent on share buybacks, cutting the share count by nearly 6%). This is important, given that the Group is set to embark on a $341m capex programme to upgrade WCP A and transition it to the Nataka ore zone over 2025-2027 – the costs of which will be easily met by operating cashflows and the $200m RCF. In a sign of confidence, a full year dividend of USc56.04 has been declared, +3% y/y. A further sign of confidence is the statement that “Kenmare is on track to achieve its annual production guidance [for 2024], although production is still expected to be second half weighted. The markets for our products have been stronger than anticipated in 2024 to date”. Kenmare is very cheap, trading on just 5.0x consensus earnings and yielding 8.2%.

 

PRSR – Interims; Dividend now covered 

PRS REIT released its H1 (end-December) results on Wednesday. The key highlight was confirmation that the “dividend [is] fully covered on an annualised run-rate basis from March 2024” which fully removes one of the question marks that had been over the Group since its IPO (albeit this question mark had steadily diminished in importance as the Group completed more of its development pipeline). Reflecting the growing portfolio of let-up rental properties, PRSR reported NRI of £23m, +17% y/y; EPRA EPS of 1.8p (+13% y/y); and operating profit of £39.2m (+73% y/y). The latter reflects fair value gains of £20.5m in the period. PRSR finished H1 with a NAV per share of 123.6p, +3.5p since the start of the financial year, as ERV growth offset a softening in the NIY. PRSR’s portfolio stood at 5,264 completed units at end-December, with a further 312 at various stages of construction. Portfolio metrics are very strong – underlying occupancy of 98%, rent collection at 99%, LFL rental growth of 11.1% and total arrears, net of bad debt provision, were £0.6m at end-January 2024. The average rent was just c.23% of tenants’ gross household income – well within the guided affordability limit of 35%. The total portfolio ERV is £63.4m (of which £3.1m relates to homes under construction), up from £57.3m at end-December 2022. Assuming a gross-to-net ‘walk’ of 20% (the H1 2024 actual was 18.5%), this produces an NRI of £50.7m. Take away annualised operating and financing costs of (say) £20m and this leaves £30.7m versus a dividend cost of 4p*550m shares out = £22m. As the pipeline completes, a 5p annualised dividend seems a reasonable possibility for some time in CY 2025. Another consideration is that the wide gap between the share price (79p this lunchtime) and NAV might leave the Group vulnerable to a takeover approach (not least given that planning and construction risk has effectively reduced to zero). While NAV has its critics where REITs in general are concerned (I’ve seen people calling it “Not Actual Value”!), PRSR’s dividend (supported by more than 5,000 revenue generating units) of 4p is rock solid. A yield of >5% seems attractive to me.

 

BOCH – Step-change in distributions

Following receipt of the necessary regulatory approvals, Bank of Cyprus revealed its long-awaited distribution in respect of FY 2023 performance on Wednesday. The Group is to pay a 25c dividend in respect of FY 2023, a 5x increase on the 5c paid in respect of FY 2022 performance, and also commence a €25m share buyback. The ECB’s approval of this distribution is a reflection of the Group’s strong financial performance and strategic progress. The total distribution corresponds to a 30% payout ratio for 2023 – BOCH had accrued for up to a 50% payout so its end-2023 transitional CET1 ratio has been revised up to 17.4% from the previously reported 16.5%. BOCH’s minimum CET1 requirement was 10.98%+P2G at the start of 2024, meaning that the Group has a very large buffer over this requirement which paves the way for further strong distributions over the coming years. While the dividend is extremely welcome, I am delighted to see a buyback, given how cheap this stock is (Bloomberg consensus has it on just 5.0x 2025 earnings, a 40% discount to NAV and yielding 9.4%).

 

HLN – Overhang reduces

In a very welcome development on Monday, it was announced that Pfizer: (a) intends to sell c.630m Haleon ordinary shares in a secondary global offering; and (b) sell £315m worth of Haleon shares to the company for cancellation. Completion of (a) and (b) would pare Pfizer’s interest in Haleon from 32% at the time of the IPO to c.24%. In the event, Pfizer upsized its public offering to 790.6m ordinary shares, priced at £3.08, with Pfizer selling a further 102.3m shares to Haleon for cancellation (reducing its share count by 1.1% to 9.1bn shares) at the same price. Post-completion on Thursday, Pfizer is now subject to a 90 day lock-up over its remaining shareholding. When Haleon first came to the market in 2022 it only had a 55% free-float due to Pfizer holding 32% and GSK c.13%. Since then, GSK has cut its stake to 4.2% and Pfizer is now down to c.22.6%, meaning a free-float of c.73%. This is all good news as it means index trackers are obliged to buy more HLN (passive investing can work to active investors’ advantage at times!). Another consideration is that Haleon said in its recent FY results that it was open to  buying back up to £500m worth of its shares this year – does ‘only’ spending £315m on buying from HLN mean it is lining up a repurchase of £185m worth of shares from GSK when the latter (currently not subject to any lock-up restrictions) next comes to market? Haleon trades on an undemanding 16.4x consensus 2025 earnings and yields 2.2%.

 

ULVR – I scream, you scream… 

On Tuesday Unilever set out plans to “accelerate Growth Action Plan through separation of Ice Cream and launch of productivity programme”. The Group will remain committed to a portfolio of power brands “in highly attractive categories [Beauty & Wellbeing; Personal Care; Home Care; and Nutrition) that have complementary operating models”. Due to Ice Cream’s “very different operating model” (frozen goods supply chain; different channel landscape; more seasonality; and greater capital intensity), “the Board has decided that the separation of Ice Cream best serves the future growth of both Ice Cream and Unilever”. The Ice Cream division, which had sales of €7.9bn in 2023, owns five of the top 10 selling global ice cream brands. ULVR says a demerger “is the most likely separation route”, but other options will be considered to maximise shareholder returns. Will full separation not expected until end-2025, this will be a management distraction for some time to come though. Separately, a comprehensive productivity programme is being launched with the aim of delivering total cost savings of c.€800m over the next three years, “more than offsetting estimated operational dis-synergies from the separation of Ice Cream”. Around 7,500 administrative jobs will be affected, while the Group will invest c.1.2% of turnover (was c.1.0%) equivalent over the next three years as part of the programme. ULVR also said that post-separation of Ice Cream, the continuing Group will have a structurally higher margin and aim to deliver “MSD USG and modest margin improvement” over time. Given recent high profile shareholder unhappiness around ULVR’s strategy, the radical steps set out in this announcement are not surprising. On Ice Cream, I expect that plenty of PE and trade buyers alike will be running the slide rule over that division, so an IPO may not be the exit route. Unilever trades on an undemanding 15.8x 2025 earnings and yields 4.0%.

 

RHM – Bolt-on acquisition; German contract

Rheinmetall announced the bolt-on acquisition of Dutch firm REEQ (Range Extended Electrical Quad) on Monday. The acquired firm specialises in “innovative light hybrid vehicles” which seems an attractive vertical given the increased use of air/sea/land drones in the security context. “Both parties have agreed not to disclose the purchase price”, rather unhelpfully, but as mentioned, it seems to be a field with strong structural growth drivers so this could prove a very helpful deal in time. This follows RHM’s agreement to purchase a 72.5% shareholding in Romanian vehicle maker Automecanica Medias SRL in February, a business it sees with an “annual sales potential of up to €300m”. The extent to which RHM can spur the consolidation of Europe’s deeply consolidated sector will further enhance its competitive position and (presumably) standing with European policymakers. RHM’s global vehicle production footprint extents to plants in the US, Canada, Australia, the UK, Austria, Netherlands, Romania and Germany. Elsewhere, RHM announced on Thursday that Germany’s Bundeswehr has commissioned it to supply 123 Boxer IFVs from 2025 in a contract worth c.€2.7bn. Rheinmetall has had a super run of late – the shares are +75% year to date – although a valuation of 17.9x consensus 2025 earnings (and 2.0% yield) doesn’t seem toppy for a high growth company.

 

RKT – Enfamil thoughts 

Late on Friday, Reckitt released a statement following the awarding of $60m to a plaintiff in relation to a case concerning necrotising enterocolitis (NEC). Reckitt and its US formula subsidiary Mead Johnson emphatically rejected the court’s findings, citing that the plaintiff’s lawyers’ allegations “were not supported by the science or experts in the medical community. This was underscored during the trial by a dozen neonatologists”. While RKT goes on to say: “it is important to note that this is a single verdict in a single case and should not be extrapolated”, the market did just that last Friday, knocking 15% or £5bn off the Group’s market cap. Reckitt says it will “pursue all options” to have the verdict overturned. I understand that there are c.500 similar NEC cases pending against RKT, and while appropriate consideration has to be given to the scientific evidence supporting the RKT case, as a GSK shareholder I’ve seen Zantac cases settled despite the lack of any scientific evidence that it is harmful. It could also be a couple of years before a line can be drawn under NEC, while the huge award in the Illinois NEC case may also prompt more suits against RKT. Let’s assume 1,000 cases where the average settlements are between $100k (similar to J&J talc settlements) and $160k (similar to Bayer Roundup settlements), with legal fees adding as much again. That suggests a hit of $200-320m, immaterial in a RKT context (the Group made IFRS operating profits of £2.5bn last year), although the $60m Illinois award (which may be overturned) and last Friday’s share price reaction suggests things could end up being materially worse. And the lead-time (presumably years) before we know what the real number is going to be, warrants a higher cost of equity for RKT until that is clarified. RKT shares trade on just 12.3x consensus 2025 earnings and yield 4.7%. This discount to ULVR (qv) seems warranted pending clarification on this matter.

 

STVG – Further Studios wins 

STV announced on Wednesday that it has been commissioned by Warner Brothers Discovery UK and Ireland to produce a brand new series of The Yorkshire Auction House; Celebrity Yorkshire Auction House; and The Derbyshire Auction House for the Really channel. The 40 episode commission is the latest of a series of wins for STV’s Studios business – it recently secured its first contract win from Netflix, while it also counts Apple TV+, BBC, Channel 4, Channel 5, ITV, Sky and Warner Brothers Discovery among its customer base. STVG is cheap, trading on 7.2x consensus 2025 earnings and yielding 5.1%.

 

MKS – Financial services report 

Monday’s CityAM reported that Marks & Spencer is “close to a seven-year agreement with HSBC to transform its banking division into a financial services and loyalty “superapp”. November’s Capital Markets Day presentation from MKS said that Sparks had 17.7m subscribers, and “Combining the power of Sparks and the App” was cited as one of the strategic actions to drive growth “ahead of the market”. Per the CityAM report, M&S Bank, which offers personal finance products (loans, insurance, BNPL) and which HSBC took control of in 2004 (but which MKS is entitled to a 50% share of the profits “after appropriate contractual deductions”), is said to have “more than 3m customers”, so broadening its potential reach to c.6x as many customers could be mutually attractive for M&S and HSBC alike. CityAM, citing a source, says “a public announcement with more details of the revised partnership was expected in April”, although “it is unclear whether M&S is set to take an ownership position”. On the latter, I’d prefer not – a ‘capital lite’ approach where M&S receives commission on business generated through a superapp would be a low-risk model. Obviously, execution risk will be high for this, but the risk/reward profile seems attractive. M&S is cheap, trading on only 10.0x consensus FY 2025 earnings and is expected to pay a 2.6% dividend in respect of that year’s performance.

 

GSK – Pipeline progress; Dementia report

GSK announced on Monday that phase III data show potential for Jemperli (dostarlimab) combinations in more patients with primary advanced or recurrent endometrial cancer. “Dostarlimab plus chemotherapy is the only immuno-oncology combination to show statistically significant and clinically meaningful overall survival in the overall population”. GSK says it expects US FDA regulatory submission acceptance for an expanded indication in the overall population in the first half of this year. There are c.417k worldwide endometrial cancers every year, of whom c.15-20% will be diagnosed with advanced disease at the time of diagnosis. This is a further encouraging headline from GSK’s attractive development pipeline, which had 71 vaccines and specialty medicines across Phase I-III/registration at end-2023. Elsewhere, I note a report from Marketwatch about an internal GSK study that shows a correlation between the use of GSK’s shingles vaccine Shingrix and a lower risk of getting dementia. The report cites an analysis of 5m UK senior citizens (the UK NHS has provided shingles vaccines for the over-80s since 2013), where those who took Shingrix were 20% less likely to develop dementia over the following 7 years. GSK says that further research is needed, and while it’s too early to get excited about this, the potential here is clear. I don’t think the potential of this, or indeed the rest of the GSK pipeline, is reflected in the Group’s very cheap valuation of 9.7x consensus 2025 earnings and 3.9% yield.

 

AV/ – Singlife exit completes

On Monday Aviva announced that it has received total proceeds of £937m from the disposal of its shareholding and associated instruments in Singlife. This is fractionally ahead of the c.£930m guided in an RNS in December, with the difference immaterial in an Aviva Group context. The timing is also in-line with the “Q1 2024” guidance previously provided. Aviva has already recycled these proceeds in attractive M&A in both the UK and Canada. Aviva is very cheap, trading on 9.5x consensus 2025 earnings and yielding 7.7%.

Stocks Update 15/3/2024

KMR – Refinancing and senior management change

RHM – Explosive growth

STVG – Netflix commission

 

RHM – Explosive growth

Rheinmetall released its FY 2023 results on Thursday. As expected, these showed a strong performance, with sales +12% at CER to €7.2bn and the operating result improved 19% to a record high of €918m. The operating margin expanded by 80bps to 12.8%. Most significantly, the RHM order book surged 44% to €38.3bn (end-2022: €26.6bn), providing strong long-term revenue and earnings visibility from its roster of blue chip Sovereign customers. The order book is likely to have grown further since the start of the year, in my view, given the steady stream of announcements around contract wins from the Group (including two for a combined €300m+ this week). The dividend has been raised from €4.30 in respect of 2022 to €5.70 (a 39% payout). Rheinmetall guides to another strong year in 2024, with expected sales of c.€10bn and an operating margin of 14-15%. I’ve previously noted the structural growth drivers for the business arising from Western investment in security, and it is unsurprising to see the RHM CEO say that “a new decade of security policy has begun”, adding that “we are investing massively, building new plants and significantly increasing our personnel”. Bloomberg consensus has RHM on 17.0x 2025 earnings and yielding 2.1%, this seems undemanding to me for a high quality growth stock. 

 

STVG – Netflix commission

Earlier today STV announced that its Studios business has been commissioned by Netflix to produce a new three-part drama series, The Witness, in what is its first order win from the streaming giant. This follows recent similar wins from BBC and Sky, while the Group launched another drama on AppleTV in January. My sense is that success breeds success in the Studios game, with STV’s growing roster of commissions likely to lead to further orders. STVG trades on just 6.5x consensus 2025 earnings and yields 5.6%, meaning that it is priced like an income stock, whereas its fast growing Studios and Digital units, powered by the cash cow legacy (and, within Scotland, commercially dominant) linear broadcast business, merit a growth stock multiple, in my view.

 

KMR – Refinancing and senior management change

Kenmare Resources announced earlier today that Michael Carvill, who has been MD since he founded the Group in 1987, is to step down after the Group’s interim results are released in August. He will continue to be available to the company in a consultancy capacity “until at least the end of 2024”. Under his stewardship, KMR has evolved into one of the world’s largest producers of titanium minerals, producing 7% of the global supply of titanium feedstocks from a single resource with a 100 year remaining reserve life. The Group has commenced a process to find his successor. Elsewhere, on Wednesday KMR said it had completed a debt refinancing, with a new $200m RCF put in place. This provides ample financial support for the coming period of investment. Kenmare is extremely cheap, trading on 4.8x consensus earnings and yielding 8.5%.

Stocks Update 8/3/2024

AV/ – FY results; Bolt-on acquisition

GRP – FY results; Compelling opportunity

GSK – Pipeline progress

HBR – FY results; Solid

IR5B – FY results; Solid

OGN – H1 results; already in the price

RHM – Contract win

STVG – Solid FY results; Strong strategic progress

 

HBR – FY results; Solid

Harbour Energy’s 2023 results, released on Thursday, are somewhat of a footnote given the previously announced transformational acquisition of Wintershall Dea, which is due to close in Q4 of this year. HBR delivered production of 186kboepd in 2023, this would have been c.500k if the Wintershall assets were consolidated within the Group in the year, at a keen cost of just $16/boe which is a third below the UK average of $24/boe. In any event, the cash performance was a particular highlight, with $1bn of FCF of which $249m was returned to shareholders through buybacks and a further $200m through the dividend, and the balance contributing to the drop in net debt from $0.8bn to $0.2bn over the course of 2023. As expected, production in 2024 (guidance, excluding Wintershall) is 150-165kboepd) will be lower reflecting natural field declines, while the Group lowered cash guidance to reflect softer UK gas price assumptions. The asset base is in good shape, with HBR 2P reserves and 2c resources finishing 2023 at 880mmboe, up from 865m at end-2022. These reserves should grow further as HBR builds out its development portfolio across Indonesia and Mexico, with Wintershall set to contribute 1.1bnboe of 2P reserves at $10/boe. Koyfin data have HBR trading on just 5.9x consensus 2024 earnings, and while that is somewhat academic given the transformational acquisition, this seems like a very solid way of playing the attractive structural trends in the energy market.

 

AV/ – FY results; Bolt-on acquisition 

Aviva’s 2023 results on Thursday showed continued progress, with operating profit +9% (and 2% ahead of consensus); ROE of 14.7%; £8.3bn of wealth net flows; 13% growth in GI premiums; and efficiency, with a 1% fall in baseline costs. The Solvency Cover Ratio finished the year at a strong 207% (pro-forma lower taking into account the final dividend, the new buyback and announced acquisitions). AV/ has set new strategic targets of operating profit of £2bn by 2026 (up a third from 2023’s £1.5bn) and cash remittances over 2024-26 of >£5.8bn (was >£5.4bn over 2022-24). On distributions, a new £300m share buyback programme commenced on Friday, while as expected the Group declared a 33.4p DPS in respect of 2023, +8% y/y. The Group guides to MSD growth in dividend cash cost, so presumably HSD growth in DPS given the falling share count. I view AV/ as a cash machine that is a disciplined capital allocator, investing in sensible bolt-on deals to strengthen the core Canada / UK / Ireland franchise – markets that are growing at 5-10% p.a. – and attractive distributions through a mix of dividends and buybacks. Offering a c.10% total distribution (buyback + dividend) yield, AV/ screens attractive to me. Elsewhere, Aviva announced that it is to enter the Lloyd’s market on Monday via its acquisition of Probitas, “a high-quality, fully-integrated platform…encompassing its Corporate Member, Managing Agent, international distribution entities and tenancy rights to Syndicate 1492”. AV/ intends to leverage its Global Corporate & Specialty business to capture opportunity in the Lloyd’s market. The consideration of £242m is modest in a Group context (the acquisition price will only shave 3ppts off the Solvency II cover ratio), but the potential opportunity here is huge for Aviva if it gets it right (indeed, the AV/ RNS says “the Lloyd’s market represents a major source of untapped growth for Aviva, offering access to significant in-appetite premium volumes, international licences and broader distribution networks”) – and the downside is presumably limited if it doesn’t work out – making this an attractive asymmetric opportunity. Syndicate 1492 had GWP of £288m in 2023, which has grown at a CAGR of 21% since 2019, with the syndicate delivering an average COR of just 82% in the period. Strong growth is expected to continue in 2024. The consideration of £288m is equivalent to just c.7x estimated 2026 NOPAT, giving a high teens IRR. Aviva is due to receive £930m shortly from the sale of its Singlife stake, so this deal should be viewed as a recycling of capital in a similar vein to the recent £100m outlay on Canada’s Optiom and, subject to regulatory approvals, the £460m acquisition of AIG UK Life. Koyfin data have AV/ trading on just 10.3x 2024 earnings, which seems very cheap to me.

 

IR5B – FY results; Solid

Irish Continental Group released its FY 2023 results on Thursday. These showed a solid performance, with EBITDA +4.2% to €132.6m on revenues that were 2.2% lower at €572m. Net debt (including leases) reduced from €171m at end-2022 to €144m at end-2023; the improvement would have been stronger were it not for the return of €21.4m to shareholders through buybacks (in addition to €24.4m through dividends). EPS ticked up 6% from 33.6c to 35.5c, with the DPS being increased by 5% from 14.09c to 14.80c. Within the results themselves, a stronger Ferries performance was diluted by a softer Container & Terminal performance, the latter reflecting more challenging conditions in the deep sea market. A key highlight of the Ferries business is its growth in market share – across its routes (between Ireland, Great Britain and France) it lifted its share in cars (by 10bps to 14.0%); passengers (by 60bps to 14.6%); and Ro-Ro (trucks; by 100bps from 15.9% to 16.9%) in 2023. It is also noteworthy that car, passenger and truck volumes across the addressable market are 15%, 21% and 15% respectively below the 2019 pre-COVID levels. Given the vast operating leverage in ICG’s model – about 80c of every extra euro of revenue drops directly to net income – a rebound in volumes to the pre-pandemic total would lead to a massive jump in earnings. ICG is a class act – it delivered ROACE of 17.7% in 2023 – that has delivered a total return CAGR since its April 1988 IPO to end-2023 of 14.7%. Since the GFC ICG has returned €231m through buybacks (the share count has reduced from 245m to 171m since 2008) and €304m through dividends. ICG further notes strong YTD trading, but this is admittedly flattered by the drydocking schedule of competitors. Trading on an undemanding 12x PE, ICG looks attractive to me. 

 

GRP – FY results; Compelling outlook

Greencoat Renewables released its FY 2023 results on Wednesday. Reflecting the benefits of previous acquisitions and more favourable wind conditions, the Group generated 3,754 GWh of electricity in 2023, up from 2,487 GWh in the previous year. Net cash generation of €196.7m was down on the prior year’s €215.0m, reflecting higher finance costs and taxes, but the 2023 generation was still 2.7x the dividend outlay. NAV finished the year at 112.1c, little changed on the end-2022 position of 112.4c as organic cash generation essentially offset the impact of depreciation and dividends. During 2023 GRP completed four acquisitions for €524m, taking its portfolio to 39 renewable generation and storage assets across six European countries, with a capacity of 1.5GW (end-2022 1.2GW). The Group confirmed its previously declared 6.42c dividend for 2023 and intends to grow this by 5% to 6.74c in respect of 2024. GRP’s strong dividend cover – it guides to >€400m of post dividend cashflow to 2028 – and modest gross gearing of 51% provides it with a range of capital allocation options – debt repayment; share buybacks; and M&A are all cited, the latter inclusive of capital recycling. While electricity prices by their nature can be volatile, GRP management is to be commended for agreeing deals that mean 66% of the revenues in the portfolio are contracted to 2032 (46ppt of this is inflation-linked). GRP also hints at hidden value, with 57% of its Irish assets having exposure to merchant power prices above REFIT levels that are not priced into NAV. Stepping back, there is a structural growth opportunity in the European electricity market for GRP, between: (i) Estimated strong growth in data centre demand – I’ve seen estimates suggesting data centres could grow 5x in the next decade; (ii) More demand for “green” electricity which plays into GRP’s hand; and (iii) Europe’s need for enhanced security of supply. Greencoat Renewables has a proven track record of agreeing forward purchase agreements to buy newly developed capacity, minimising development risk. The €400m of post dividend free cashflow guided to 2028 represents 40% of the market cap, while a 6.74c DPS implies a yield of c.7.5%. So, in the five years between 2024 and 2028 GRP is likely to return nearly 40% of its market cap in dividends and have another 40% of its market cap to commit to value accretive activities. That seems a pretty compelling outlook from this shareholder’s perspective.

 

STVG – Solid FY results; Strong strategic progress

At a headline level, Scottish media group STV released an in-line set of FY 2023 results on Tuesday, with revenue of £168.4m (+22% y/y); operating profit of £20.1m (-22% y/y); net debt of £32.3m (an increase of £17.2m y/y reflecting the £15m Greenbird acquisition); and DPS of 11.3p (flat y/y) all in-line with expectations. More fundamentally though, the results reflect the very strong strategic progress that the Group has been making. As the independent research house Progressive highlights, STVG’s earnings quality has significantly improved in recent years – in 2018 the operating profit split was Broadcast 77%, Digital 22% and Studios 2%, but in 2023 it was Broadcast 39%, Digital 40% and Studios 21%. This year will see Broadcast’s share fall further as the accounts will include a full 12 month contribution from Greenbird, along with underlying Digital and Studios growth. STVG’s approach of using its commercially dominant (STV was the most watched commercial channel in Scotland in 361 days last year, with 97% of the top 500 commercial audiences for its broadcasts) linear broadcasting business in Scotland as a cash cow to finance expansion in fast-growing segments is vindicated by newly announced targets for end-2026 of: Studios revenues of £140m and a margin of 10%; Digital revenues of £30m and a margin of “at least 40%”; international revenues to grow to 15% of Group/25% of Studios; and the delivery of £5m of (presumably gross) cost savings. In other words, by end-2026 Studios and Digital will be contributing £25m of operating profit versus £20m for the entire Group in 2023, with additional profits on top from the Broadcast business. In the short term, STV says the advertising market is “showing resilience and growth so far in 2024”, with c.5% y/y growth guided for Q1. The Group notes that Q2 will include Euro 2024, which Scotland is participating in. Studios’ order book is currently £87m, +30% y/y. Two other points around the results worth mentioning are that: (i) the IAS 19 pension deficit improved last year to £54.8m (end-2022: £63.1m); and (ii) the well-regarded CEO Simon Pitt is to leave in 12 months’ time. While the latter is disappointing, STV has plenty of time to find a suitable replacement. All in all, STVG continues to show strong strategic progress, which I expect will lead to a significant re-rating from the current MSD earnings multiple and dividend yield – trading on 7.4x 2024 earnings (per Factset), I don’t see why STVG should be priced like an earnings stock when it’s clearly in growth mode. 

 

OGN – H1 results; already in the price

Origin Enterprises’ interims, released on Tuesday, showed a softer performance reflecting both weather impacts that adversely affected autumn/winter planting activity in the northern hemisphere and a correction in global fertiliser and feed prices. Revenue of €855m and operating profit of €14.1m compared to €1,180m and €21.9m in the prior year period. Adjusted diluted EPS fell to 3.75c from 8.70c, but the 3.15c interim dividend was maintained. Net debt at end-January was €215.8m , up from €130.9m at end-January 2023, with the walk here explained by acquisition spend of €54.2m; a c.€5m outlay on share buybacks and payment of c.50% of outstanding suspend supplier amounts (arising from Russia-related sanctions). Acquisition activity is split between building out the Amenity division, which OGN aims to grow to 30% of profits by end-FY 2026 (the CFO is moving to become MD of this division) and where the Group completed the acquisitions of Suregreen in August 2023 (for €755k) and Groundtrax Systems Limited subsequent to the period end; and the settlement of the Fortgreen put/call option, which gave OGN full ownership of that business. On the outlook, OGN guides to 44-49c EPS for the year, putting the stock on a HSD earnings multiple. While this is lower than consensus, I would argue that OGN’s share price was already discounting this, given that other listed companies in the space had well flagged the weather impacts in recent times. Trading on 6.2x earnings, Origin Enterprises is very cheap and a nice way of playing the megatrends of sustainability and food security.

 

RHM – Contract win

In what is becoming a very frequent occurrence, Rheinmetall announced another three-digit-million euro (in this case €300m) order win on Monday. An unnamed European NATO country has placed an order for rounds for its MLRS (Multiple Launch Rocket System) platform, which has a range of 300km. This is the first order win of this type for RHM and is linked to the recent announcement of an investment at its Unterluess plant in Germany to add additional production capacity. Deliveries will take place between 2024 and 2027. RHM is perfectly positioned to meet the structural growth in Western security investment, a positioning that I don’t believe is adequately reflected in its undemanding forward PE multiple of 21.5x, per Factset.  

 

GSK – Pipeline progress

GSK announced on Tuesday that Phase I clinical trial findings suggest that cabotegravir remains effective at four-month intervals, double the current dosing interval. This is longer than any currently approved prevention option for the human immunodeficiency virus, so the potential for this is exciting – albeit tempered by this still being relatively early days. Elsewhere, on Thursday GSK announced positive results from the DREAMM-8 phase III trial for Blenrep versus standard of care combination in relapsed/refractory multiple myeloma. With c.176k new cases of multiple myeloma diagnosed globally each year, this is positive news indeed. GSK trades on 10.9x 2024 earnings, per Koyfin data, a valuation that to me doesn’t reflect its attractive pipeline.