Stocks Update 17/5/2024

AMZN – Going global 

BHP – Anglo take 2

BOCH – Q1 results

BT/A – FY results; cash is king

DCC: FY results; solid

HBR – Indonesia gas find

HLN/GSK – GSK out, free float up

IDS – Will a bigger Czech suffice?

IR5B – A bigger boat

RHM – Q1 results; strong momentum

 

IDS – Will a bigger Czech suffice?

International Distributions Services announced on Wednesday that its largest shareholder, businessman Daniel Kretinsky, has submitted a revised non-binding proposal to acquire the Group. The new proposal is pitched at the 370p/share level, 15.6% above the original 320p proposal lodged on 9 April. Kretinsky said that the revised proposal follows “significant negotiation”, which alongside the deal being structured as 360p in cash plus two separate cash dividends totalling a further 10p, may hint that this is the high end of where he is willing to go to. Kretinsky has also provided undertakings on IDS’ Royal Mail’s public service obligations and employee rights. IDS’ Board says “it would be minded to recommend an offer” should one “be made at the level of the total value [i.e. 370p]”. The PUSU deadline by which a formal bid must be made is 5pm on May 29. While 370p is meaningfully above 320p, it is not a knock-out proposal – and I note that the shares (trading at 323p this afternoon) don’t suggest that the market expects this to succeed. IDS trades on an undemanding 13.3x FY 2025 earnings multiple, with analysts expecting a 3.1% dividend in respect of the current financial year.

 

BT/A – FY results; cash is king

BT released its FY results on Thursday. Ahead of these there had been a lot of bearish views circulating around the market, including people who predicted a dividend cut, but this was never likely given that the Group has a clear glide path to structurally higher cash flows as capex linked to the FTTP programme comes to an end, while there are massive cost take-out initiatives across headcount, premises and network that I don’t think are properly appreciated by the market. In the event, BT notes that it has “passed peak capex” on FTTP (more than 14m of the UK’s 25m premises have been connected already) “and achieved our £3bn cost and service transformation programme a year ahead of schedule”, leading the CEO to conclude that “we’ve now reached the inflection point on our long-term strategy”. BT now guides to “significantly increased short term cash flow and (…) more than double our normalised free cash flow over the next five years”. Illustrating this confidence, the FY dividend has not been cut but rather raised by 4% to 8.0p per share. BT has set a new £3bn cost reduction target. Another reminder of the benefits of BT’s new network is that deep within the cash flow statement there is a £0.1bn inflow for prepayments on sales of copper from the decommissioned legacy network. Likely nodding at recent press reports about a possible sale of BT Ireland, the Group says it will “focus on the UK; we will explore all options to optimise our global business”. As a side point, the Group’s Annual Report, due for publication in the coming weeks, will also provide some helpful updated stats around the Group’s pension schemes. My initial thesis on BT set out a view that it was transitioning from an income to a growth stock. That view is very much intact after these positive results. BT is cheap – trading on just 7.2x FY 2026 earnings and yielding 5.8%.

 

DCC – FY results; solid

DCC released its FY (year-end March) 2024 results on Tuesday. They were an in-line set of numbers, with adjusted operating profit +4% to £683m, driven by a strong performance from DCC’s Energy business (+9.9% y/y, with operating profit per litre of volume-based energy products increasing from 2.22p in FY 2023 to 2.49p in FY 2024) which countered weaker performances from Healthcare (-4.0% y/y due to destocking) and Technology (-13.6% y/y due to a weaker market for consumer technology products). Highlights within the results include excellent free cash flow conversion of 100%; a 5% increase in the annual dividend, marking 30 years of consecutive DPS growth; a ROCE of 14.3%; and £490m in committed M&A spend. The free cash flow performance was helpful in ensuring that net debt (£785m pre-leases) was essentially flat y/y despite the acquisition investment. One example of the success of DCC’s roll-up acquisition strategy is that DCC Energy’s share of profits from services, renewables and other products (‘SRO’) hit 35% in FY 2024, up from 28% in FY 2023 and 22% in FY 2022. Looking ahead, DCC sees the current year being one of “strong operating profit growth and continued development activity”. All in all, a customarily solid set of numbers from DCC. The stock is cheap, trading on 11.4x next year’s earnings and yielding 3.7%.

 

RHM – Q1 results; strong momentum

Rheinmetall released its Q1 results on Tuesday. As had been well communicated from a steady flow of positive news announcements, the results show strong momentum and continued build in the order book. For Q1, RHM consolidated sales were +16% y/y to €1.6bn while operating earnings increased 60% to €134m, with margins expanding 230bps y/y to 8.5%. Rheinmetall’s order book was €40.2bn at end-March, +43% / +€12bn y/y, providing very strong revenue visibility from a roster of blue chip (mainly Sovereign) customers. The Group has confirmed its FY 2024 “current guidance” of sales of c.€10bn and a 14-15% operating margin (2023: €7.2bn and 12.8%), but I suspect the risks to this guidance lies to the upside. RHM trades on 17.8x 2025 consensus earnings and yields 2.0%, which doesn’t strike me as expensive given the growth profile (by way of illustration, revenue is expected to grow from €9.9bn in 2024 to €16.5bn by 2027, per Bloomberg consensus).

 

BOCH – Q1 results

Bank of Cyprus released its Q1 results on Thursday. Supported by a favourable macroeconomic backdrop, BOCH had a very strong performance in the period. New lending of €0.7bn was +8% y/y, helping the gross performing loan book to finish the quarter at €10.0bn, +2% q/q. NII was -3% q/q at €213m, reflecting Euribor, hedging and “marginally higher cost of deposits” (the use of surplus liquidity to repay €1.7bn of ECB TLTRO in March is presumably a headwind for the remainder of 2024), while OpEx was -14% q/q (flat y/y), producing a remarkable CIR of just 29% (5pts below Q123). ROTE was a super-strong 23.6% in Q1, while basic EPS was 30c. Asset quality metrics are favourable, with the NPE ratio of 3.4% -20bps year to date, while the Group has a very strong NPE coverage of 77%. The cost of risk was just 27bps. Pro-forma for profits in the quarter and a dividend accrual, BOCH’s CET1 ratio at end-March was a very healthy 17.6%, pointing the door (in my view) to further sizeable distributions in due course. Management note that the Group’s performance is “tracking ahead of our 2024 targets”, hinting at upgrades to come. BOCH’s TNAV at end-March was €5.23. A bank producing >20% ROTE, as BOCH does, should be trading at a premium to NAV, but BOCH was trading at just €4.26 this afternoon. The stock is expected to yield 7.9% in 2025. 

 

HLN/GSK – GSK out, free float up

GSK announced at the market close yesterday that it was selling its remaining 4.2% stake (385m shares) in Haleon by way of an accelerated bookbuild. This morning it confirmed that the placing (at 324p) was successfully executed. At the time of Haleon’s IPO in July 2022, GSK retained a 12.94% stake, which has now been fully disposed of, resulting in HLN’s free float increasing by the same amount – very helpful as it mechanically increases the number of shares that index tracking funds have to buy in Haleon. Since the IPO, Pfizer has also pared its interest in HLN from 32% to just under 23%. One interesting aspect of yesterday’s sale is that HLN had flagged that it would spend £500m on share buybacks this year – £315m of this was subsequently utilised in the March 2024 placing by Pfizer, leaving £185m of capacity for further buybacks, but at the time of writing it was unclear whether or not this was used in the bookbuild. The ‘overhang’ from Pfizer remains a technical headwind for HLN, likely limiting share price upside, but the silver lining is that it has provided shareholders (including this one) an opportunity to buy more HLN at a cheaper price. HLN trades on 16.7x consensus 2025 earnings and yields 2.0%.  

 

BHP – Anglo take 2

BHP and Anglo American traded RNS releases on Monday. BHP outlined its revised proposal for Anglo American, where ‘more money’ is essentially the only revision, as the deal structure (Anglo to spin out its platinum and Kumba iron ore assets; the rest of the Group to merge with BHP in an all-share deal) was left as is, save for Anglo shareholders being left with 16.6% of the combined Group (was 14.8%, so a c.15% increase in the merger exchange ratio). Anglo American rejected this revised proposal on Monday, saying it significantly undervalue[s] Anglo American and its future prospects”, adding its belief that the “proposal also continues to have a highly unattractive structure”. It is hard to square the latter statement with Tuesday’s strategy refresh with Anglo American, where its management team proposes to spin out or sell its diamond; platinum; coal and nickel assets, and shrink capex investment at its polyhalite mine in the UK; as it seeks to refocus on copper and iron. It seems that Anglo American management wants to effectively reposition the Group into being built around the same assets BHP covets, while lumping its own shareholders with the costs of divesting these assets (instead of sharing them with BHP’s shareholders). BHP has until 5pm on 22 May to either announce a firm intention to make an offer or announce that it does not intend to make an offer, but I wonder if BHP would be better to wait in the long grass for Anglo American to simplify its own portfolio before trying to acquire a smaller (but strategically more coherent) Anglo American at a later date. Watch this space. BHP trades on an undemanding 11.5x consensus FY 2025 earnings and yields 5.0%.

 

IR5B – A bigger boat 

On 12 April I noted speculation regarding a potential purchase by Irish Continental Group of P&O’s Spirit of Britain ferry. On Wednesday the maritime transport group confirmed that it has agreed to pay DP World €89.4m in staggered payments over the next two years for the vessel, which is to be delivered immediately and will enter service with Irish Ferries during June (presumably after a paint job!). The ferry was purpose built for the Dover-Calais route in 2010, entering service in 2011. This represents a material upgrade in capacity for ICG on Dover-Calais, where its current three ship fleet range from 22,152 tons – 34,031 tons – Spirit of Britain is 47,592 tons. Post modifications to remove its ‘cow-catchers’, one of the current Dover-Calais fleet (Isle of Innisfree, 28,838 tons) will be redeployed on Rosslare-Pembroke, replacing the temporarily chartered Norbay (17,464 tons). So, the net result is bigger and better capacity on two of Irish Ferries’ routes. In a separate announcement on Wednesday, ICG said it had inked a space charter agreement with P&O on Dover-Calais, which means that each other’s (initially) freight and (later) passenger customers can board whichever one of P&O or Irish Ferries’ ships is the next to depart. Interestingly, P&O already has a similar deal with the other Dover-Calais operator (DFDS), so the question arises as to whether P&O is happy for ‘co-opetition’ with both rivals on that route, or if it intends to deepen its relationship with Irish Ferries and not renew the DFDS partnership. Finally, I note a number of press reports this week about the challenges being faced by shipyards with skinny orderbooks, which makes me wonder if ICG would decide to take advantage of favourable negotiating terms to deploy strategic capex in commissioning new vessels – two of Irish Ferries’ fleet of seven owned ferries entered service in the 1990s. ICG shares have had a good run of late, +25% since the start of the year, but are inexpensively priced at 12.9x consensus 2025 earnings and yield 3.0%.

 

HBR – Indonesia gas find

Harbour Energy announced on Monday that the Tangkulo-1 exploration well has made a “significant discovery” on the South Andaman licence (which Harbour holds 20% of). This follows December’s “major discovery” at the nearby Layaran-1 well. The rig will now move on to appraise the Layaran discovery. All in all, this sounds promising, but we will have to wait for further details to emerge. HBR is extremely cheap on conventional metrics – the shares trade on 4.9x consensus 2025 earnings and yield 7.1%. 

 

AMZN – Going global 

Press reports on Monday say that Amazon will invest a further $1.3bn in France, creating 3,000 jobs in the process. The Group has invested more than €20bn in its French operations since 2010. Most of the latest investment is centred on cloud infrastructure in the Paris area and logistics infrastructure in the Auvergne-Rhone-Alpes region. This follows last week’s announcement that Amazon will launch a dedicated Amazon.iewebsite to serve Irish customers, and is a further reminder of how much room AMZN has to expand internationally – in 2023 only 31% of AMZN’s net revenues were ex-US. Amazon trades on a cheap 2025 EV/EBITDA multiple of 12.3x.

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. 

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 23/2/2024

BHP – Solid H1 results

BOCH – Very strong FY results

BT/A – Sells BT Tower 

CLIG – Solid H1 results

GSK – Pipeline progress 

LLOY – Solid FY results

RHM – Deepens Ukraine partnership; Austria contract

SPDI – Arcona NAV update

STM – Trading and takeover update

STVG – Contract wins

WDS – Scarborough farm-out

 

BOCH – Very strong FY results

Bank of Cyprus released a terrific set of FY 2023 results on Monday. The Group delivered an exceptional 24.8% ROTE last year, helped by its leverage to the rate environment (its net loans to deposits ratio is just 51%). NII of €792m was +114% y/y, while other income of €300m grew at a more pedestrian 3% y/y. Total OpEx rose just 5%, giving a Cost/Income Ratio of only 31%. Net income jumped to €487m from €57m in 2022, with EPS of 109c. On asset quality, despite a 62bps cost of risk, BOCH’s NPE ratio improved by 40bps to 3.6%, while NPE coverage is a very reassuring 73%. Given the strong profitability, it is no surprise that TNAV jumped 24% y/y to 493c last year, while organic capital generation of 482bps helped the Group to finish the year with Regulatory CET1 and Total Capital of 16.5% and 21.5% respectively. BOCH’s minimum capital requirements on 1 January 2024 were 10.91%+P2G (the latter is not disclosed) for Regulatory CET1 and 15.61% for total capital – both of these will rise by c.50bps due to a higher countercyclical capital buffer on 2 June, but it is clear that BOCH has very large headroom versus minimum capital requirements. On the outlook, BOCH guides to >17% ROTE for 2024 and >16% for 2025, based on a 15% CET1 ratio. The Group expects to deliver NII of >€670m (it previously guided >€625m) in 2024, and to pare NPEs to 3% this year and sub-3% in 2025. The Group expects to build prudently and progressively towards a 30-50% dividend payout ratio (it is engaged with regulators on the quantum of 2023 distribution). Mindful of its leverage to rates, BOCH is taking steps to reduce this through investment in fixed rate bonds, use of reverse repos, offering fixed rate loans and by expanding its structural hedge. All in all, a super set of numbers for 2023 albeit this is likely to be the peak in the cycle if the Group’s rate expectations play out. Nonetheless, even with a moderation in earnings, the Group is still very inexpensively valued and management has a “high quality problem” in terms of what to do with its glut of capital – the Group expects the CET1 ratio to climb to c.19% by end-2025 (unsurprising, given the 30-50% payout ratio). Subject to regulatory approval, buybacks are an obvious use of surplus capital at the current valuation, in my view, while the Group may also wish to further consolidate Cyprus’ highly fragmented banking market. BOCH trades on just 4.8x 2025 consensus earnings and yields 9.2%.

 

LLOY – Solid FY results

Lloyds Banking Group released solid FY results on Thursday. The Group continues to execute against its strategic objectives and expect to meet short- (2024 c.£0.7bn of incremental income and £1.2bn of gross cost savings) and medium-term targets (c.£1.5bn of incremental income). For FY 2023, the Group delivered a statutory net income of £5.5bn, with NII of £17.9bn +3% (+5% underlying), and a strong RoTE of 15.8%. Underlying other income was +10% y/y to £5.1bn, but operating lease depreciation jumped to £956m from £373m in the prior year, reflecting Q4 declines in used car values. Costs were +5% to £9.1bn, in-line with guidance and a creditable performance given the inflationary backdrop. The Group incurred remediation costs of £675m, +3x y/y, with two-thirds of this relating to a provision for the recently announced FCA review into historical motor finance commission arrangements. Impairments were only £308m net, equating to a 7bps CoR, well below the normalised CoR, helped by the well-flagged significant write-back in Q4. Bringing it all together, the Group delivered strong pro-forma CET1 capital generation of 173bps, bringing the pro-forma (post distributions) CET1 ratio to 13.7%, comfortably ahead of the revised ongoing target of 13.0% (was 13.5%) which LLOY “expects to pay down to…by the end of 2026”. TNAV finished the year at 50.8p, +9% y/y. On distributions, LLOY will pay a total ordinary dividend for 2023 of 2.76p, +15% y/y, and it will augment this with a £2bn share buyback programme. For 2024, the Group guides to c.175bps of capital generation, rising to >200bps by 2026. Marrying that to the guidance on the closing 2026 CET1 ratio, this implies strong distributions over the period. One side (and not unrelated) point is that the pensions triennial valuation completed in the period, leading management to pay £250m to clear the remaining deficit in December, with no further contributions in this triennial period. Since LLOY launched a series of buybacks in 2018, the share count has reduced by 11% from 72bn to 64bn. Given the discount at which the shares trade to TNAV, further buybacks is a good use of surplus capital. LLOY is very cheap, trading on 5.9x consensus 2025 earnings and yielding 7.7%.

 

BHP – Solid H1 results 

BHP released solid interim results after the market close on Monday (European time). Expectations were muted coming into the release as a result of the well-documented challenges in nickel, rising Samarco costs and uncertain commodity demand and pricing. In the event, BHP turned in an underlying attributable profit of $6.6bn, flat y/y, while signalling that “all assets are on track to meet their FY24 production and unit cost guidance”. Reported profits were -86%, reflecting the previously discussed nickel impairment and increased provision relating to the Samarco dam failure. BHP continues to invest in its portfolio of future facing commodities – capex was +57% to $4.7bn. The massive Jansen Stage 1 potash development in Canada (total planned capex $5.7bn) is 38% complete. Net debt was $12.6bn at end-December 2023, +$1.5bn h/h, reflecting $4bn of dividends and the aforementioned capex investment. While this is within the target range of $5-15bn, it was nonetheless unsurprising to see that the dividend was reduced to US72c/share, -20% y/y but a still respectable 56% payout ratio. Overall, a solid performance. Whatever about short term performance, BHP is fundamentally a play on future-facing commodities (copper, iron ore, potash) which leave it very well positioned to deliver attractive long-term returns. BHP trades on an undemanding 11.2x consensus FY 2025 earnings and yields 5.1%.

 

CLIG – Solid H1 results

City of London Investment Group released a solid set of H1 (end-December) results earlier today. The key item where CLIG is concerned is FUM and this was solid at $9.6bn at end-December, up slightly from $9.4bn at the start of the financial year on 1 July and also ahead of the $9.2bn end-December 2022 figure. For good order, FUM was marginally lower at end-January 2024, at $9.5bn. Given the quasi-mechanical relationship between net fee income and FUM, it is unsurprising that NFI was $33m in H1, up slightly from $32m in H1 2023. Profit before tax was $11.1m in H1, up marginally from $11.0m in H1 2023. An unchanged interim dividend of 11p/share has been declared. CLIG has ample capacity to add assets and in this regard it is encouraging to see management say that “marketing and sales activity picked up significantly in January 2024…the Group is focused on new mandated in a number of CLIG’s asset classes with very good long-term performance as [closed-end fund] discounts are at compelling levels”. All in all a solid release, but the pendulum will need to swing more towards active asset managers to effect a meaningful re-rating, in my view. The shares are inexpensive, trading on 9.9x 2025 earnings and yielding an attractive 8.6%.

 

STM – Trading and takeover update

STM Group issued an update on 2023 trading and the takeover of the company earlier today. On trading, STM said that 2023 revenue was £28.0m, ahead of market expectations, driven by interest income tailwinds. This benefit has, however, been offset by a further £0.7m of exceptional (non-cash) costs relating to the ongoing takeover of the Group, leaving earnings guidance for 2023 in-line with consensus. On the takeover, this continues to progress, with the expected timetable tracking to the schedule in November’s Scheme Document, with a long stop date of 28 May 2024. Given the multijurisdictional nature of the Group and associated multiple approvals, a lengthy takeover was always likely. On closing I will achieve a c.2x return on investment from STM, which is a very satisfactory outcome. 

 

BT/A – Sells BT Tower 

BT announced on Wednesday that it has agreed to sell the BT Tower in London for £275m to MCR Hotels. BT no longer needs the asset as a result of the network upgrades of recent years, including the migration of services into the cloud. BT has owned the building since 1984 so presumably there will be a CGT consideration in relation to the proceeds, which will be received “over multiple years, as BT Group equipment is progressively removed from the building, with final payment on completion of the purchase”. More fundamentally, this disposal is a reminder of the imminent step change in BT’s cost base, which I suspect is currently overlooked by the market (due to the low rating) arising from strategic initiatives – an upgraded network with lower run costs; a structurally lower headcount; and a planned reduction in the number of offices operated by BT from “more than 300 to around 30”. In addition to the obvious cost implications from a much reduced property estate, there is an associated capital efficiency benefit set to flow through to the Group as disposals of owned properties complete. The net book value of BT’s land and buildings was only £449m at end-March 2023, and I suspect the risks to this lie to the upside. BT is very cheap in my view, trading on just 5.7x 2025 earnings and yielding 6.9%.

 

WDS – Scarborough farm-out

Earlier today Woodside Energy announced that it has agreed to sell a 15.1% stake in the Scarborough LNG development, located 375km off the coast of Western Australia, to Japan’s JERA (owned by Tokyo Electric and Chubu Electric). The transaction involves three core elements – equity in the JV, LNG offtake and collaboration in new energy and lower carbon services. The consideration is US$1.4bn, with completion expected in H2 2024. WDS will supply six LNG cargoes a year for the 10 years from 2026 to JERA. Woodside previously agreed a similar deal with LNG Japan, which owns 10% of Scarborough. This reflects the strategic lens through which Japan views Australia as a supplier. Post completion, WDS will own 74.9% of Scarborough and remain as operator. Further farm-outs cannot be ruled out to help finance the delivery of WDS’ attractive development portfolio. WDS trades on 16.9x consensus 2025 earnings and yields 4.7%.

 

GSK – Pipeline progress 

GSK announced on Wednesday that LATITUDE Phase III interim trial data indicate that its majority owned ViiV Healthcare’s injectable Cabenuva treatment has superior efficacy compared to daily oral therapy alternatives. Encouragingly, the Data Safety Monitoring Board has recommended that the study be modified to stop randomisation and to give participants on the alternative therapy the option to transition to Cabenuva. While there is still a road to travel with this treatment, the headlines around it are very encouraging for GSK. The Group has 71 vaccines and medicines across Phase I-III/registration, a pipeline that I don’t believe is reflected in GSK’s cheap valuation of 9.6x 2025 PE and 3.9% dividend yield.

 

RHM – Deepens Ukraine partnership; Austria contract

Rheinmetall announced on Saturday that it plans to open a new plant in Ukraine with a local JV partner. The agreement was signed at the Munich Security Conference. The facility is intended to produce “a six digit number” of 155mm artillery rounds per annum, plus ancillary products. RHM will own 51% of the JV. This follows a recent announcement of a similar investment in a new production line at RHM’s Unterluess plant in Germany, which is set to open in 2025. The lead time on that (12 months from announcement to commission) presumably suggests a similar timeline for this Ukrainian initiative. RHM is also involved in initiatives to repair vehicles for Ukraine and is already a key supplier from facilities in partner countries for a range of its products. Elsewhere, Rheinmetall announced earlier today that Austria has ordered 36 of its Skyranger 30 system, to be deployed on the Pandur 6×6 wheeled vehicle, providing a highly mobile SHORAD capability. The systems will be delivered in 2026 in a contract that RHM says is worth “in the mid-three-digit million euro range”. Given recent developments around the use of drones, it is not hard to imagine other orders flooding into Rheinmetall for this system – at a minimum, RHM expects to sell this system to Germany, Denmark and Hungary too. RHM trades on 16.5x consensus 2025 earnings and yields 2.2%, undemanding given the structural growth in Western security investment.

 

STVG – Contract wins

STV announced contract wins for its Studios division on Thursday. Two Cities Television, which STV recently agreed to increase its shareholding in from 25% to 51%, has been commissioned to produce a new drama, Amadeus, for Sky. BBC has also commissioned Two Cities to deliver a further two series of Northern Ireland police drama Blue Lights. When STVG announced in January that it was increasing its stake in Two Cities, it flagged that the unit had secured revenues of £55m over the next three years – these commissions were included within that guidance. STVG’s Studios strategy is to use the linear broadcast unit as a cash cow to enable it to place bets on multiple creatives by taking stakes in production houses, provide them with back office/shared services to free the creatives up to make content, and gradually buy out the other shareholders over time. I think that’s a compelling strategy and am very positive on STVG’s long-term prospects. As an aside, with streamers under pressure to maximise cash flows, I think that will funnel more revenue to reliable larger production houses with a proven content roster, which will benefit consolidators like STV. The next scheduled newsflow from STVG is FY results on 5 March. STV is cheap, trading on 6.7x consensus 2025 earnings and yielding 5.5%.

 

SPDI – Arcona NAV update

Secure Property Development & Investment’s associate, Arcona Property Fund, released an update on its portfolio valuation on Tuesday. The Group had a good finish to 2023, which helped the value of its real estate portfolio close the year at €79m, +€1.55m y/y. On a less cheerful note, however, the adoption of the ‘Monetisation Process and Incentive Plan’, which will see an accelerated paydown of its remaining real estate assets, Arcona is recognising the full nominal value (previously 50%) of all DTLs in the calculation of its NAV. Bringing these together, this brings the provisional (audited results are due in April) end-2023 NAV to €10.97 per share, down from €11.55 after the payment of the dividend in October. Nonetheless, with this NAV still more than 2x the Arcona share price (€4.98), there is decent value to be had here, although the glacial pace at which SPDI is monetising its remaining assets makes me suspect that owning Arcona outright may well prove to be the more attractive option than holding it indirectly through SPDI. 

Stocks Update 26/1/2024

ABDN – Transformation/Trading/Ratings 

BHP – Brazil bill

BOCH – Checks out of Russia 

CLIG – Trading update

DCC – Bolt-on acquisition

HLN – Divestment 

IDS – Positive Ofcom noises

RHM – German contract

RYA – Boeing risks

WDS – Trading update

ABDN – Transformation/Trading/Ratings 

Abrdn announced details of a new transformation programme and a trading update on Wednesday. Both had been extensively leaked to the media in advance, but the key points are: (i) ABDN is looking to remove £150m of annual costs by end-2025, addressing its structurally elevated cost/income ratio; and (ii) The Group saw continued net outflows in H2 2023 which, while disappointing, are also unsurprising given the well documented challenges facing active asset managers in the present climate. ABDN noted that it exceeded its previous £75m cost reduction target for 2023, which should give comfort around the execution of this new programme, most of which will be implemented in 2024, creating c.£60m of in-year benefit. Encouragingly, the cost of the transformation programme is guided to c.£150m, implying a strong payback profile. ABDN saw net outflows of £12.4bn in H2 (£6.7bn in Q3, £5.7bn in Q4), an acceleration on the £5.2bn that went out the door in H1. Corporate actions also pared AUMA by £6.9bn in H1 (disposal of the discretionary fund management (£6.1bn) and US PE (£4.1bn) businesses partly offset by the acquisitions of healthcare fund management business Tekla (£2.3bn) and four closed-end funds from Macquarie (£0.7bn). However, the tailwind from the rate environment has led to higher NII, leading the Group to expect “2023 adjusted operating profit to be broadly in-line with consensus, and adjusted capital generation to be above consensus”. All in all, no surprises here, but the Group can’t cut its way to glory – a rerating will likely require a return to growth in FUM (which will reduce lingering questions around things like the sustainability of the dividend). Elsewhere, Moody’s cut its rating on ABDN by one notch from A3 to Baa1 this week, citing: “idiosyncratic weaknesses in its credit profile, exacerbated by industry-wide headwinds”. Plainly, Moody’s is nervous around the potential impact of fund outflows on ABDN’s credit profile, although it should be noted that Baa1 is still three notches above speculative grade. On a more positive note, Moody’s noted that last year’s divestment of stakes in Indian insurance and asset management businesses would reduce the volatility of reported earnings going forward. Before those stakes were sold I had flagged the distortions, not just in terms of statutory earnings but also in terms of conventional valuation metrics (ABDN had a very elevated P/E relative to peers) caused by the investments in the Indian firms and also in the UK’s Phoenix (based on today’s prices, ABDN’s stake in Phoenix is worth £555m or 17% of ABDN’s market cap). So, the ABDN story has been simplified by the strategic consolidation around its core markets. ABDN trades on 13.2x consensus 2025 earnings and yields 8.4%, although consensus has the dividend above the EPS until FY 2026. 

 

CLIG – Trading update

City of London Investment Group released a trading update covering H1 of its financial year (6 months to end-December 2023) on Tuesday. The Group reported closing FUM of $9.6bn, up from $9.4bn at end-June. This was driven by strong performance across its core EM and KIM propositions, which helped to offset Group-wide net customer outflows of $294m. The Group says that “marketing and sales activity has picked up significantly in January as clients and prospects review their investment allocations”. CLIG sees good opportunities in closed-end funds, seeing discounts “at compelling levels” and noting that it has “ample capacity”. The current run rate for operating profit (pre-profit share) is $3.2m per month, down from the $3.4m run-rate reported in October, although the announcement of cost reductions that will deliver annualised savings of $2.5m offsets that (and any further growth in FUM should be a tailwind to income, absent any further attrition in asset management fees). An unchanged interim dividend of 11p/share has been declared, which will be paid in late March. The next scheduled CLIG news flow is H1 results, which will be published on 23 February. CLIG trades on an undemanding 9.5x consensus FY 2025 earnings and yields 9.3%.

 

WDS – Trading update

Woodside released a FY 2023 pre-close trading update on Wednesday. The Group delivered FY production of 187.2MMboe, at the top end of guidance of 183-188. This was delivered at an average realised price of $66.8/boe. Last year saw strong progress on its key development projects (Scarborough (Australia LNG) 55% complete; Sangomar (Senegal oil) 94% complete; Trion (Mexico oil) progressing procurement activities), while FID was taken on a three-well tieback extension to Mad Dog in the Gulf of Mexico. In terms of carbon and new energy initiatives, Woodside Solar Project in Australia has now received all necessary approvals; Angel CCS is going through the FEED stage; and the H2OK project is working out proposed US Federal tax incentives to see how they impact economics. For the FY, WDS had revenue of $14.0bn, -17%  from 2022’s $16.9bn. Full results for 2023 will be released on 27 February. For FY 2024, WDS guides to production of 185-195MMboe, split 70% gas 30% oil. Capex is guided at $5-5.5bn, slightly down on 2023’s $5.7bn, reflecting the stages of the aforementioned development projects. I’m positive on WDS, which offers a favourable asset mix for what I expect to be a non-linear energy super-cycle, with an attractive development portfolio. WDS trades on 17.0x consensus 2025 earnings and yields 4.6%.

 

HLN – Divestment 

Haleon announced on Thursday that it has agreed to sell its ChapStick brand to Yellow Wood Partners for a keen $510m (£400m) comprising cash proceeds of $430m and an $80m “passive” minority interest in the acquiring entity. HLN says it will use the cash proceeds to delever, pushing net debt to sub-3x EBITDA during 2024. ChapStick had £112m of revenue in FY 2023, so this is a good EV/Sales multiple of 3.6x – Haleon trades on a 2023 EV/Sales multiple of 3.4x. The disposal is expected to close in Q2. HLN has form for portfolio management – ChapStick’s sale follows the divestment of Lamisil in 2023 for £235m, while press reports have recently linked HLN to a potential sale of its Nicotinell brand for up to $800m. While HLN talks up its deleveraging plans, I’ve previously noted that it may look to buy back some or all of GSK’s remaining 4.2% stake in the Group this year. Haleon is cheap relative to consumer healthcare peers, trading on 15.3x consensus FY 2025 earnings and yielding 2.4%. Consensus also expects net debt to fall to £7.7bn by end-2024, comfortably below 3x consensus EBITDA of £3.0bn, and to fall by a further £1bn in FY 2025 (bringing it close to 2x EBITDA).

 

DCC – Bolt-on acquisition

On Monday UK firm eEnergy Group plc announced that it has agreed to sell its Energy Management division to Flogas UK, a DCC subsidiary. The division had revenues of £13.6m and adjusted EBITDA of £4.4m in the 12 months to end-June 2023. On completion, DCC will pay an initial £29.1m in cash, with additional contingent consideration (estimated by the vendor at £8-10m) to follow, based on performance for the period to 30 September 2025. eEnergy shareholders will be asked to approve the sale at a general meeting to be held on or about 7 February. DCC says the acquired business will further expand its energy management services capability, “providing a comprehensive range of products and services to partner with our customers on their journey to Net Zero”. DCC has been investing in enhancing its Energy proposition by growing into higher margin segments, so this deal, while small in a Group context, is strategically in-tune with DCC’s Energy ambitions. For a quality business, DCC is cheap, trading on 11.6x consensus FY 2025 earnings and yielding 3.6%.

 

BHP – Brazil bill

The fallout from the 2015 Samarco tailings dam issue continues to rumble on, with the Brazilian Federal Court this week making a ruling on the US$32bn Federal Public Prosecution Office claim. In May 2016 the prosecutor filed a claim for BRL$155bn which at the time was equivalent to US$43bn, but the Brazilian currency has devalued by around a quarter against the dollar since then, against Samarco’s 50-50 owners Vale and BHP. Reports this week say that an interlocutory decision relating to one of the categories of damages sought has been filed, seeking BRL$47.6bn / US$9.7bn, but BHP says it has not yet been served with any decision. BHP is also keeping its options open in relation to an appeal and hasn’t opined on whether it needs to amend its US$3.7bn provision stack against this matter. That BHP’s share price was little changed today suggests the market is keeping an open mind on where this litigation may end up. BHP trades on an undemanding 11.8x consensus FY 2025 earnings and yields 4.9%. 

 

RHM – German contract

Rheinmetall announced on Thursday that, alongside consortium partners, it has been awarded part of the development contract for Germany’s “advanced short- and very short-range air defence system”. The consortium members are RHM, Diehl and Hensoldt. The contract is worth €1.2bn, with Rheinmetall’s share of this at €607m. This has all the hallmarks of RHM’s typical contract wins – government partner, multi-year revenue, opportunities to leverage it to win similar contracts from other friendly Western nations. RHM trades on an inexpensive 13.0x consensus 2025 earnings and yields 2.7%.

 

IDS – Positive Ofcom noises

Wednesday’s FT reported constructive comments from Ofcom on Royal Mail’s lossmaking letter delivery service. IDS has been looking to axe Saturday deliveries, moving the business to a five-day-a-week model, but Ofcom publicly noted that while cutting Saturday deliveries would save £200m annually, moving to a three-day-a-week model would save £650m. Ofcom CEO Melanie Dawes said the postal service “is getting out of date and will become unsustainable if we don’t take action”. That’s all well and good, but I again note that changes will require legislative action and the mood music here is unhelpful, with the Tories clearly worried about leaking further support ahead of the next UK election. PM Sunak’s spokeman claimed that Saturday letter deliveries “provide flexibility and convenience for businesses” while the Postal Affairs Minister, Kevin Hollinrake said that the government views Saturday deliveries as “sacrosanct”. Royal Mail has said before that its letter delivery infrastructure has been designed for volumes of 20bn per annum, but letter volumes are running at 7bn p.a. and falling. Perhaps the best course of action for IDS would be for this decision to be deferred until after the election (expected in the autumn but at any rate no later than January 2025). IDS trades on just 10.8x consensus FY 2025 earnings, with analysts forecasting a dividend yield of 3.5%.

 

RYA – Boeing risks

The US FAA announced on Wednesday that it was halting Boeing 737 Max production expansion pending a resolution of Boeing’s well-documented quality control issues. While the Max 9 ‘door plug’ problem is not something that directly affects RYA, which doesn’t operate that model, the wider constraint on Max production may exacerbate risks to delivery timelines for RYA’s fleet investment plans. At the same time, RYA may be able to offset some of the volume downside if this risk materialises through stronger pricing. Q3 results from RYA on Monday will provide an opportunity for management to update the market on how it sees the outlook for deliveries. RYA is extremely cheap, trading on 8.8x consensus FY 2025 earnings and yielding 2.3%, so the downside risk from Boeing’s production constraints is likely modest.

 

BOCH – Checks out of Russia

The Bank of Russia confirmed on Monday that Bank of Cyprus has closed its two representative offices (in Moscow and St. Petersburg) in that country. Representative offices are not authorised to conduct banking operations, so this is a largely symbolic move, albeit one that arguably should have happened sooner given the optics around Cyprus’ past business dealings with Russia and the very changed geopolitical backdrop since February 2022. Of the 37 foreign credit organisations with accredited representative offices in Russia at the beginning of 2022, nine were shut down during 2022 and a further three in 2023. To be fair to BOCH though, we have seen many companies struggle to close Russian units so the delay may have been due to factors beyond its control. In terms of more tangible ties between BOCH and Russia, the Group’s Q3 2023 results show that, at end-September, BOCH had €607m of deposits from Russian passport holders (3% of the Group total), which was -13% since the start of the year. On the same date, the Group had only €14m of gross loans (essentially zero on a net basis) outstanding to Russian counterparties out of a total Group loan book of €10bn. Once again, that Russian exposure has been shrinking (loans to Russian counterparties were -29% in the first nine months of 2023). All in all, BOCH’s direct exposures to Russian entities are very small in a Group context. BOCH still has representative offices in China and Ukraine. Bank of Cyprus is extremely cheap on conventional metrics, trading on 4.6x consensus 2025 earnings and yielding 10.0%.

End of Year Review 2023

As markets have now closed for the year across Europe, including here in Dublin, it seems timely to review how the portfolio performed in 2023. Unlike a lot of investors, I don’t generally monitor short-term (weekly/monthly/annual) returns at the portfolio level – I find metrics like that to be just ‘noise’ considering that I am investing on a ‘forever view’ and would hope to never have to draw down on my capital. 

 

For what it’s worth though, my portfolio was +18.7% in 2023, which compares very favourably to both the FTSE All-Share (+3.9%) and the Eurostoxx 600 Index (+12.8%), which I view as more natural benchmarks than the relatively more tech heavy S&P 500 (+24.6% at the time of writing – US markets will close tonight my time) given that my track record in picking tech winners is very poor compared to most other sectors (and you see this mapped to my portfolio components and weightings below). Whilst the 2023 outcome is pleasing, I know the market can be fickle at the best of times and I see no reason to deviate from an investment strategy that is focused on finding businesses with strong balance sheets, good market positions and obvious long-term value creation catalysts.

 

Before we get into the review itself, a reminder that absolutely none of this – or anything else on my blog – is investment advice – I don’t make any recommendations, these are simply my own subjective opinions that may prove to be on the money, hopelessly wrong or simply somewhere in between. As always, you should do your own research.

 

Getting back to the job at hand, coming into 2023 I said that I was “looking to up my exposure to healthcare, energy, TMT, industrials and retail” and also said I expected “to see a number of takeovers/value realisation (sale of assets and return of cash proceeds to shareholders) events across the portfolio”. On the first part of that, I added to existing shareholdings in Aviva, BT, Harbour Energy, Haleon, Marks & Spencer and Premier Miton, while I bought shares for the first time in Alliance Pharma. While I am happy with all of those names, hindsight is 20/20 and I would have done better had I topped up my Amazon and DCC positions too.

 

In terms of disposals, I exited Hammerson, where I viewed the rising interest rate environment as unfavourable for a business with elevated borrowings and consumers who are exposed to cost of living pressures. STM Group agreed to be taken over at c.2x what I originally bought into the company at, with this sale expected to close during H1 2024. Eastern European Property Fund (EEP) sold its remaining property asset during the year and made an initial distribution that was larger than what I paid for its shares in the first place, with two further distributions guided for 2024. 

 

Looking ahead to 2024, I expect to buy more energy, healthcare, financial and media names where I see helpful structural drivers. STM and EEP aside, I also expect to see further transaction-related (i.e. sale of some/all of their assets) distributions coming from the likes of Palace Capital and Peel Hotels.

 

Financial Services (6.7% weighting)

The interest rate environment weighed heavily on three of my four positions in this pot, with middling performances from Abrdn (-5.6%); City of London Investment Group (-24.5%); and Premier Miton (-36.9%) as AUM struggled due to clients pivoting to safer assets that offered reasonable yields for the first time in many years. Assuming we are at peak yields now though, risk-on sentiment should support growth in AUM for equity-focused asset managers. 

 

I see attractive drivers of value for each of these into the future – Abrdn has been: (i) meaningfully paring overheads, such as through fund closures/mergers; (ii) Simplifying the business by divesting non-core assets such as minority shareholdings in Indian insurance and asset management companies; and (iii) Slashing its share count through buybacks – shares out fell from 2.00bn at end-2022 to 1.86bn by the end of November, which is especially significant given the Group’s uncovered dividend. Assuming it materialises on the back of falling risk-free rates in 2024, the bounce of the ball on market conditions (and associated AUM inflows to its equity funds) and a lower share count should see concerns about the dividend reduce. One threat to this thesis is falling NII, as ABDN has benefited from the rising interest rates in recent times.

 

For CLIG, the narrative is similar – falling rates should lead yield hunters to look for other income sources. PMI is in a similar boat, but with an extra kicker, namely the acquisition of Tellworth Investments (AUM £0.6bn) which is due to close in 2024. 

 

The three asset managers all offer good yields – ABDN 8%, CLIG 9.5%, PMI 9% per Bloomberg consensus – which compensate patient investors pending a re-rating. Sure, a prolonged market slump would pose risks to these dividends, but I suspect the bad news is in the price for these names. 

 

The fourth Financial Services company I have is STM Group, which gained 90% this year after agreeing to a takeover. This represents a satisfactory 2x return on investment. 

 

Industrial Goods & Services (11.0% weighting)

I have five holdings in this sector pursuing differentiated strategies and executing well against these. 

 

Rheinmetall, which is strongly exposed to the structural growth in Western defence budgets, gained 54% this year as its order book swelled on foot of rising threats to the free world. 

 

International Distributions Services rose 28% as investors bet that the resolution of a ruinous industrial dispute will lead to a step change in performance. 

 

DCC gained 42% on a re-rating driven by strong underlying performance and (I suspect) an investor re-evaluation of ESG rules of engagement. 

 

Irish Continental Group had a quieter year, adding just 1%, not helped by challenging deep sea trading conditions, but the Group’s ongoing opportunistic on-market share purchases suggest management sees a better underlying performance. 

 

Piraeus Port Authority (+47%) continues to reap the benefits from the rebound in cruise travel and its partnership with China’s COSCO, although security threats in the Red Sea and Eastern Mediterranean are a challenge given its position as the largest port in South-East Europe.

 

Personal / Household (9.1% weighting)

External headwinds (inflation-linked both in terms of input costs and consumer disposable incomes; and also FX) and tough comparatives turned off investors from the two brand behemoths in my portfolio, Reckitt (-6%) and Unilever (-9%) in 2023. Uninspiring strategy refreshes did little to excite the market either, although neither business model lends itself to excitement.

 

That being said, both companies have been buying back their own shares this year, which seems like tidy business given their undemanding (mid-teen earnings) ratings. Both businesses have also been modestly reshaping their portfolios in recent times, which should provide a further tailwind when the aforementioned external headwinds give way to more normalised trading conditions and volume recovery.

 

Healthcare (5.6% weighting)

Addressing my underweight position in this sector has been a priority for some time. This year I added Alliance Pharma to the portfolio – I view this as a cheap (2024 consensus PE of just 7.5x) business with a nice product suite and strong focus on free cash flow generation. I also doubled my holding in Haleon. I know this is a 2023 review but it is worth mentioning that I increased my holding in Smith + Nephew in 2022. I expect to invest more capital in this sector in 2024.

 

Haleon is essentially flat (-1.7%) this year, but that doesn’t surprise me given that c.40% of the share register is ‘loose’ – still held by the original selling shareholders GSK and Pfizer – GSK sold stock at 328p in October, close to the 330p IPO price, and I suspect it will look to sell more of its remaining 7% holding at or around this level in 2024. This technical overhang is holding back the share price, but the fundamental HLN story is one of strong brands generating strong cash flow, leading to rapid debt paydown. I also wonder if HLN may consider using its cash flows to offer to repurchase some of the GSK shareholding in 2024.

 

GSK was also flattish (+0.9%) during 2023, despite making strong progress on its development pipeline – at the end of September it had 67 vaccines and specialty medicines at various stages of development – and also making progress in resolving the Zantac distraction. A multiple of only 9.3x consensus 2024 earnings suggests the market is giving minimal credit to the firm for the clear progress it is making.

 

Smith + Nephew is executing well against its strategic priorities, raising FY revenue guidance in its Q3 trading update in November, while all three divisions are showing healthy momentum. The market is not yet giving management credit for this, with the shares -2.8% this year, but if the recovery is maintained, I think the stock will perform well in 2024. As an aside, I think the GLP-1 impact on orthopaedics is overplayed by the market – there are clear demographic tailwinds (ageing and wealthier populations) for the likes of SN/.

 

Alliance Pharma is essentially flat on where I bought it earlier this month.

 

Basic Resources (12.5% weighting)

In this vertical I have BHP (+4.7% in 2023) and Kenmare Resources (-10.0% in 2023).

 

As one of the world’s largest mining groups, BHP is somewhat at the mercy of economic developments, including commodity pricing. But the Group has continued to execute nicely on the corporate development side, completing the A$10bn OZ Minerals acquisition, strengthening its position in copper (and to a lesser extent gold), while its giant Jansen potash mine in Canada is now expected to commence production in CY2026. The Group is also working on projects to materially increase iron output at WAIO, a timely move with pricing strengthening to an 18 month high this week. As a globally significant producer of future-facing commodities, including those essential to progressing decarbonisation and supportive of increased urbanisation, BHP is perfectly strategically positioned, in my view.

 

Kenmare Resources (market cap £352m) is of a different scale to BHP, but it is nonetheless a very attractive proposition, producing 7% of the world’s titanium feedstocks from a single asset with a c.100 year remaining reserve life. The Group is highly cash generative, allowing it to undertake accretive capex and share buybacks. A severe lightning strike and upward inflationary pressures on capex weighed on the share this year, as did expectations of weaker commodity prices, but its low rating (Bloomberg has it on 4.1x consensus 2024 earnings) surely discounts more than enough bad news. I think this stock would be cheap at twice the price.

 

Oil & Gas (2.6% weighting)

Similar to healthcare, I have been adding to positions here in a push to increase my weighting to this sector. My conviction view is that we are in an energy supercycle, driven by years of underinvestment. Yes, decarbonisation is a laudable policy objective, but the effective achievement of this is decades away.

 

Harbour Energy (+1.4%) was headed for a lacklustre 2023, weighed down by restrictive UK government energy policy. In the background though, it has remained cash generative and focused on distributions, including buybacks that reduced the share count from 847m shares at end-2022 to 770m at end-November 2023. That share count will grow again in the short term once the recently announced transformative acquisition of Wintershall Dea closes next year, but that will leave HBR in a far stronger position, with much larger scale, low leverage, increased reserve life and higher exposure to gas.

 

For Woodside Energy (-16.4%), despite the poor share price performance, 2023 was a year in which it made significant progress on its development portfolio, which should unlock structurally higher cashflows from here. Like Harbour, it is looking at a transformative acquisition through a potential merger with Australian gas peer Santos.

 

Banks (9.9% weighting)

The interest rate environment gave both of my holdings in this sector a tailwind coming in to 2023. While we may well be at peak rates, the banks have other cards to play – strong distributions, revenue resilience through structural hedges and benefits from diversification initiatives, while disciplined post-GFC underwriting should minimise soured loans.

 

Lloyds Banking Group (+5.1%) and Bank of Cyprus (+102%) have both seen strong profitability (and associated capital generation); resilient asset quality; and disciplined cost management. 

 

Distributions are key parts of both banks’ investment cases. Lloyds pared its share count from 67.3bn at the start of the year down to 63.6bn at end-December through buybacks. Bank of Cyprus received the green light to pay dividends for the first time in 12 years back in April, which is a testament to the remarkable job management has done in turning that business around.

 

Retail (3.6% weighting)

My decision to double my holding in Marks & Spencer at the very start of January proved to be an inspired one, with the stock increasing by 121% this year. 

 

The transformation in the prospects of both Food and Clothing & Home are a testament to the management team, with the Group gaining market share in both segments despite the well-documented pressure consumers are under. One underappreciated part of the MKS story is its rapid financial deleveraging – it is headed for net cash on a pre-IFRS16 lease basis in the not too distant future on my numbers – and while a number of commentators are saying its low double digit earnings multiple is up with events, I would argue that it hasn’t seen balance sheet strength like this since before the GFC (at least).

 

Another consideration is that several of its rivals look to be under significant pressure, which may create opportunities for MKS to mop up more market share if the High Street retrenches further. 

 

Insurance (2.9% weighting)

Like Retail I only have one name in this segment, with Aviva flying the flag here. The shares have had a flattish 2023 (-1.8%) despite continuing to make strong distributions – I suspect the interest rate environment did the damage here (as income investors could – and did – look elsewhere for yield), but that seems likely to reverse in 2024 – Aviva yields 8%, roughly double the yield on the FTSE All-Share.

 

Food & Beverage (8.6% weighting)

A tougher year for my names in the sector. Nonetheless I see both Kerry and Origin as being well positioned for the megatrends of nutrition, sustainability and food security.

 

Kerry Group had a more challenging 2023 (shares -6.6%), with the Q3 trading update seeing EPS guidance pared to the “low end of the previously stated 1% to 5% CER range”. Similar to the likes of Unilever and Reckitt (both qv) it has compensated for some of the pressure by launching a share buyback (€300m in its case), its first since 2007. Kerry had a relatively quiet 2023 on the M&A front, but its strong balance sheet (consensus net debt / EBITDA of only 1.1x for end-2024) means it could step up the pace of dealflow (with obvious implications for EPS momentum) in 2024.

 

Origin Enterprises has also seen more challenging (recent) external trading conditions, with its share price falling 20% in 2023, but like Kerry it remains very cash generative and is currently working through another (€20m) share buyback programme – an excellent use of surplus capital given its current low rating (Bloomberg has it on 6.7x FY 2024 earnings).

 

Travel & Leisure (5.9% weighting)

My exposures here are mainly in Ryanair, with smaller shareholdings in two UK hotel businesses.

 

Ryanair (+56%) had a super 2023, benefiting from the ongoing resilience in international air travel and structural advantages over a number of its competitors. Its significant cash generation is supporting a multi-billion euro fleet programme and shareholder distributions.

 

Peel Hotels delisted a number of years ago. It sold two hotels in April, which moved the Group into a net cash position. It has a NAV of just over £1 a share while its shares last traded on the AssetMatch platform at just 30p. Buybacks plainly make sense given such a mismatch, which would provide the twin benefits of an exit for the impatient and NAV accretion for those of us in no hurry to check out. Hopefully 2024 will see the Group sell some or all of its four remaining hotels.

 

Daniel Thwaites (shares -17% in 2023) is similar to Peel in that its shares (currently 85p on the Aquis index) are at a huge discount to the latest (September 2023) NAV of 420p a share. Where the two differ is that Thwaites has (manageable) net debt, a function of its growth strategy (it has been investing heavily in its hotel portfolio in recent years). Buybacks look less likely here, but I think Thwaites can (and should) look to grow its 10-strong hotel portfolio by one hotel a year out to the rest of this decade at least.

 

Media (1.3% weighting)

My sole exposure to this sector is Scotland’s STV, which completed the transformative acquisition of Greenbird Media earlier this year, lifting its Studios business to >60% of earnings. The Group’s strategy of using the commercially dominant legacy linear broadcast business, which has the same audience share as its 10 or so next largest commercial rivals combined (BBC doesn’t carry ads), as a cash cow to finance its growing Digital and Studios businesses is paying off handsomely. The share price, -29% in 2023, isn’t yet reflecting this, with a valuation of just 7.5x consensus 2024 earnings suggesting that the market sees STV as ex-growth. I believe the opposite is true, and that these shares can re-rate strongly from here. 

 

Utilities (9.9% weighting)

My ‘green’ exposures in the portfolio had a mixed 2023, with Greencoat Renewables (-10%) struggling as a result of the interest rate environment (it’s a favourite of income investors) while Renewi posted a 7% gain, helped by bid interest (later withdrawn) from Macquarie.

 

I do think Renewi was right to reject the Macquarie approach as, in my view, it fundamentally undervalued the Group – the initial proposal of 775p/share in September represented a multiple of just 8.4x EBITDA – which seems skinny for a leading circular economy player. I think RWI’s fair value is at least £10/share (For balance, Bloomberg analyst consensus gives a blended price target of 829p).

 

Greencoat Renewables’ strongly cash generative model means that it should, in my view, be able to continue to add to its pan-European renewable assets portfolio. If policy rates start to come down in 2024 as expected, this should give the shares a lift, as utilities are viewed as ‘bond proxies’ by income investors. 

 

Real Estate (4.4% weighting)

My four remaining real estate holdings (the residual Hammerson position was offloaded in early 2023) had a mixed year.

 

EEP sold its remaining asset, the Markiz building in Istanbul, at a good price and made an initial distribution in late 2023 of 45p/share that more than covered my original in-price. This was a very satisfactory outcome given the challenging conditions for Turkish real estate in recent years. Further distributions are guided for 2024 as the company winds itself up.

 

Palace Capital posted a modest gain of 4% this year despite the interest rate headwinds for property stocks and concerns about UK commercial real estate valuations. This is because the Group has reduced net debt to de minimis levels, while also successfully executing multiple better-than-book-value disposals and ongoing share buybacks at a meaningful discount to NAV. It’s not unrealistic to think that PCA could sell all of its remaining properties by the end of 2024 if rates come down as much as futures pricing suggests they will.

 

PRS REIT (-3%), as an income play, struggled in this rate environment. However, the completion of substantially all of its development pipeline means development risks have sharply reduced and the dividend should be covered by underlying earnings in 2024. Lower risk free rates should be a tailwind for the share price in 2024, in my opinion.

 

SPDI (-30%) had a sluggish 2023, making some progress on the Arcona tie-up but the Ukraine war remains a headwind for fully completing that transaction. Arcona is delivering well on its strategy though, which offers the prospect of indirect NAV accretion via SPDI’s shareholding in Arcona. The stock is not without its risks though.

 

Telecoms (1.2% weighting)

My sole exposure to this space is BT/A, whose shares rose ‘only’ 10%, held back by what I suspect are technical factors (perception of loose shareholdings). As with the likes of Haleon though, these technical factors mask a fast-improving fundamental story, with BT/A returning revenue and EBITDA growth, while it has a clear glide path to a step-change in free cash flow generation from the completion of the FTTP capex and execution of its cost take-out programme. The stock is very cheap at 6.6x consensus 2024 earnings and yields 6.2%.

 

Construction/Materials (2.2% weighting)

My sole exposure here is CRH, which had a sparkling year, rising 73% as the market cheered on improving fundamentals (including its positive exposure to US government infrastructure-led stimulus) and the technical lift from changes to its listing arrangements. It has a highly cash generative business, supporting accretive M&A, buybacks and dividends.

 

Technology (2.6% weighting)

My exposures here are two megacaps, Amazon and Prosus.

 

For Amazon (shares +83%) 2023 was a terrific year, with the Group advancing on all fronts (AWS, retail, advertising, subscriptions). The Group seems on track to lift revenue from 2022’s $514bn to $1trn+ by 2028. Profitability is about to lift off too, due to cost take-out initiatives and the Group’s growth into its previous excess capacity. The stock is not the cheapest at 13.4x consensus 2024 EV/EBITDA, but that is not a demanding multiple for a business of this quality. 

 

Prosus had a very frustrating 2023, with the share price falling 8%, essentially mirroring its main asset, a quarter share in Tencent (-7%). However, PRX trades at a discount to the value of its shares in Tencent alone, so the underperformance makes no sense given that: (i) PRX has been selling shares in Tencent to finance ongoing buybacks at a sharp discount to NAV; and (ii) PRX has brought forward plans to deliver profitability from its own-operated asset base. If sentiment towards China turns more positive, PRX could have a very good 2024.

Stocks Update 15/12/2023

BOCH – S&P upgrade

GSK – Early Christmas presents

IDS – Czech mate? 

KMR – Capex update 

KYGA – Bolt-on M&A

RHM – Austrian contract win

ULVR – Disposal reports

 

KMR – Capex update

Kenmare Resources provided an update on its capital projects and (not unrelated) outlook on Thursday. As expected, the Board has signed off on the relocation of WCP-A to the Nataka ore zone, which is a far less risky project than the most recent (successful) relocation of a wet concentrator plant, as this time around WCP-A will be mining its way to its new location. However, capex for the upgrade of WCP-A and ancillary infrastructure is now guided at between $316-331m, versus the previous $295m. FID on the upgrade of WCP-B (which will increase its capacity by nearly 42% over 15 months once sanctioned) has been deferred while the WCP-A investment is prioritised, so it is unsurprising to see that Kenmare has renewed its $40m RCF by 12 months to end-2024. In terms of current performance, production expectations for 2023 remain in-line with the guidance provided in July, while maiden 2024 guidance will be provided in mid-January, “with production expected to be broadly in line” with 2023. The Group unsurprisingly (given commodity price curves generally) expects lower pricing for ilmenite in 2024 than in 2023, although the longer-term fundamentals for this remain well underpinned. On distributions, KMR sees 2023 dividends “broadly in line with 2022”, although a lower share count will presumably mean higher per-share dividends. Kenmare had net cash of $42m at end-June 2023, or $12m pro-forma for the share tender that was completed in Q3 2023. Between the starting position of this strong balance sheet and the Group’s annual EBITDA of $170-230m over the next three years (per Bloomberg consensus), Kenmare has the financial resources to execute on its capex programme, which upon completion will leave it with a very well invested (and significantly de-risked) asset base encompassing c.7% of global titanium feedstock production from a c.100 year mine life. Absent a meaningful re-rating, I think Kenmare could also be seen as a takeover target for a larger mining group once this capex phase is over. All in all, higher capex costs plus a longer lead time for WCP-B aren’t welcome, but a rating of 3.7x consensus 2024 earnings is super cheap for this stock, in my view. Furthermore, consensus is for a dividend of 10.8% in 2024.

 

KYGA – Bolt-on M&A

Kerry Group announced on Tuesday that it has entered into an agreement to acquire part of the global lactase enzyme business of Chr. Hansen and Novozymes “on a carve out basis”. This transaction, which is subject to customary approvals, “forms part of the Novozymes and Chr. Hansen merger approval process”. On completion, this unit with further bulk up Kerry’s biotechnology solutions capability following the acquisitions of Enmex in 2021 and c-LEcta in 2022. The lactase enzymes business had revenue of c.€40m in 2022, with sales in over 50 countries. Kerry will pay a consideration of €150m (so nearly 4x revenue), subject to routine closing adjustments, with closing expected in H1 2024. While the price paid appears steep for a disposal that was presumably driven by competition considerations, it is modest in a Kerry Group context (market cap is €13bn). Kerry has a solid track record of integrating acquired businesses to drive strong through-the-cycle returns. The stock trades on an undemanding 15.6x consensus 2024 earnings and yields 1.7%. 

 

GSK – Early Christmas presents

GSK announced on Monday that the EU has approved Jemperli (dostarlimab) plus chemotherapy as the first and only frontline immuno-oncology treatment in the bloc for dMMR-MSI-H primary advanced or recurrent endometrial cancer. There are c.417k new cases of endometrial cancer reported world wide each year, of which c.15-20% are advanced at the time of diagnosis and c.20-29% of all endometrial cancers are dMMR-MSI-H. On Tuesday GSK said that Japan’s Ministry of Health, Labour and Welfare has accepted the regulatory application for Arexvy to prevent RSV in adults aged 50-59 at increased risk, giving the GSK RSV vaccine a first mover advantage for that cohort. Japan had previously approved Arexvy’s use for the over-60s. RSV causes 63k hospitalisations and 4.5k deaths annually in Japan. GSK says that “further announcements on regulatory progress in the US and EU are expected in early 2024”. Taken together, these announcements are the latest in a long line of positive updates from GSK’s pipeline throughout 2023 as the Group progresses a pipeline running to 67 specialty medicines and vaccines under development. I don’t see this pipeline reflected in GSK’s rating of just 9.3x consensus 2024 earnings and 4.2% yield.

 

RHM – Austrian contract win

Scarcely a week goes by without Rheinmetall announcing at least one contract win – indeed, its order book now runs to more than €34bn, providing multi-year visibility on revenue and earnings. On Tuesday RHM announced that it has won a €532m order to upgrade Austria’s air defence systems, in a contract that will run for 48 months starting in February. The contract includes spare parts, training and 35mm rounds. With drones posing a growing threat, RHM’s family of solutions (whose effectiveness is demonstrated daily in Ukraine) look sure to be in demand across many Western countries. Rheinmetall trades on an undemanding 14.8x consensus earnings and yields 2.5%.

 

ULVR – Disposal reports

Reuters reported on Thursday that Unilever is in talks to sell its Elida Beauty division, which has brands such as Q-Tips, Impulse, Timotei and St. Ives, to PE firm Yellow Wood Partners. The unit generated about $760m in revenue in 2022 and is expected to fetch “less than $1bn”. Unilever trades on an EV/Revenue multiple of 2.20x, so a sales multiple of (say) 1.2x wouldn’t seem particularly compelling, although to be fair $760m of sales is small beer for Unilever (expected to do €60.0bn of revenue this year) and management presumably would prefer to focus on a smaller number of power brands. ULVR trades on an undemanding 15.8x 2024 earnings multiple and yields 4.2%.

 

IDS – Czech mate?

Press reports (The Times) this week suggest that International Distributions Services is considering a €500m bid for the Czech headquartered parcels group Packeta, which operates across Slovakia, Poland, Hungary, Romania, Germany and the Czech Republic. Packeta was put up for sale in May, with the latest bidding round due to close today. The reports say that a number of other parties are interested in the business. A successful acquisition would strengthen IDS’ GLS unit, which is the main profit centre within the Group, bolstering its competitive position in CEE. Presumably a deal would also meet with the approval of IDS’ main shareholder, Czech billionaire Daniel Kretinsky, who upped his shareholding in IDS to 27.6% from 26.2% last month. Elsewhere, I note that shares in IDS jumped 11% on Tuesday following an upgrade from BAML, which commented favourably on the Group’s strategic transformation. While IDS is expected to lose money in the current financial year (to end-March 2024), profits look set to rebound to £250m (statutory net income) in FY 2025 and £371m in FY 2026. IDS trades on an undemanding multiple of 11.7x consensus 2025 earnings, with analysts pencilling in a 3.6% dividend for that year.

 

BOCH – S&P upgrade

On Thursday S&P announced that it has upgraded its long-term issuer credit rating on Bank of Cyprus Public Company Ltd from BB- to BB, while it has raised its long-term issuer credit rating on the nonoperating holdco BOCH to B+ from B. S&P also ticked up the rating on the holding company’s subordinated debt to CCC+ from CCC. Last month Fitch raised its issuer rating on Bank of Cyprus Public to BB from B+. On both Fitch’s and S&P’s scales, BB is only two notches below investment grade. The direction of travel in Bank of Cyprus’ ratings has been consistently positive for some years now, reflecting the strong progress the Group has been making. Bloomberg consensus has BOCH trading on just 3.7x 2024 earnings with a prospective yield of 9.1%, suggesting to me that the market has yet to fully catch up with this positive story.

Stocks Update 1/12/2023

AV/ – Bolt-on acquisition

BOCH – Tidying up

BT/A – musicMagpie fails to take off

GSK – Pipeline progress

HBR – Solid trading update

LLOY – Telegraph dividend?

MKS – Clarification 

PRX – Interims

RHM – CMD 

THW – Hotel reopens 

 

HBR – Solid trading update

Harbour Energy released a trading and operations update covering the nine months to end-September on Wednesday. Production in the period averaged 189kboepd, split 50-50 between liquids and gas, within the unchanged FY guidance of 185-195kboepd. Operating costs were $16/boe, again in-line with unchanged FY guidance of $16/boe. The Group continues to progress development projects in the UK (Tolmount East production start-up underway; Leverett discovery undergoing planned final appraisal side track; and Talbot on track to deliver first oil around the end of 2024); while also enhancing its International business (Layaran drilling campaign underway in Indonesia’s Andaman Sea; Zama FEED preparation underway in the Gulf of Mexico; while elsewhere in Mexico the Kan appraisal plan has been submitted to regulators following April’s oil discovery). There was no new news on the CCS projects. In terms of the financial highlights, revenue for 9M23 of $2.9bn reflected post-hedging oil and UK gas prices of $77/bbl and 53p/therm. The Group has reiterated FY guidance of c.$1bn of capex, along with free cash flow guidance of c.$1bn (post-tax but pre-distributions). HBR had net debt of just $0.3bn at end-September and reiterates the “potential” for it to have zero net debt in 2024 (in practice though, I expect the Group to continue to make distributions above its $200m annual cash dividend target and invest in M&A). On M&A, it is striking that management says “our own discussions with potential counterparties indicate that market conditions for M&A are improving”, which suggests activity on this front is likely, in my view. Harbour is remarkably cheap, trading on 4.9x consensus 2024 earnings and yielding 9.3%. While I can understand the strategic temptation for M&A, I suggest the bar for deals should appropriately reflect the attractiveness of continuing to repurchase its own stock. HBR’s share count has reduced from 847m to 770m at end-November.

 

PRX – Interims 

Prosus released its H1 (end-September) results on Wednesday. It has been a busy period for the Group, as it simplified its ownership structure; maintained its open-ended and accretive share repurchase programme; and quite clearly continued to execute on business improvements, given that the Group has brought forward its profitability ambition from 2025 to H2 2024. The Group says the crystallisation of value from its sprawling portfolio of assets, through IPOs, trade sales, and mergers is a “work in progress”. Despite the uncertain global macro backdrop, the Group delivered revenue growth across all of its verticals – Food Delivery +17% y/y; Classifieds +32% y/y; Payments & Fintech +32% y/y; Edtech +11%; and Etail +4% y/y. Importantly, all verticals also saw an expansion in trading margins of between 2bps and 15bps. Trading losses in H1 2024 were just $36m, versus a loss of $256m in H1 2023. Distributions will remain an important part of the PRX investment case for the foreseeable future – “while the discount remains elevated, we envisage no changes to the parameters of the programme”. The PRX balance sheet is in great shape, with an LTV of sub-12%, average cost of debt of just 3.1% and interest cover of 3.0x. Prosus has essentially zero net debt, and it is striking that the Group’s market cap (€80.3bn) is less than the value of its shareholding in Tencent (€92.7bn), meaning that PRX’s other assets are being valued at -€12.4bn. Given the upgraded trading profit guidance and the Group’s ability to monetise its non-Tencent assets (it has shareholdings in at least nine publicly quoted companies other than Tencent), this valuation seems ridiculously cheap, in my view.

 

AV/ – Bolt-on acquisition

Aviva announced on Monday that it is to acquire Canadian vehicle replacement insurance business Optiom for a consideration of c.£100m. Canada is one of three core markets (alongside the UK and Ireland) for Aviva. AV/ is an existing underwriting capacity provider for Optiom, so this is a forward integration move that strengthens its position in Canada. Given its scale (AV/’s market cap is £11bn), this acquisition won’t move the needle for the Group, but it is a reminder of management’s ambition to deploy surplus capital not just on dividends and buybacks, but also on bolt-on M&A to enhance its proposition in principal geographies. During Q3 Aviva agreed to buy AIG’s UK Protection business for £460m, while last year it agreed to buy Succession Wealth for £385m. Aviva is very cheap, trading on 9.1x consensus 2024 earnings and yielding an attractive 8.2%.

 

LLOY – Telegraph dividend?

Media (Sky) reports today say that, if approved, the sale of the Telegraph and Spectator titles to the Barclay family is expected to result in a £500m provision write-back by Lloyds Banking Group. Assuming the deal goes through, this presumably heightens the potential for a meaningful share buyback to be announced when the Group releases FY results in February. LLOY compiled analyst consensus points to likely buybacks of £2bn per annum from 2023-2026, lowering the share count by >8bn (all else being equal) over the period (LLOY had 63.6bn shares at end-November 2023, so this should reduce by around a tenth by the end of 2026, ceteris paribus). LLOY trades on just 6.2x 2024 earnings and offers a cash dividend of 6.8% (and a double-digit distribution yield taking buybacks into consideration). It’s very cheap, in my opinion.

 

THW – Hotel reopens 

I note media reports that pubs-to-hotels group Daniel Thwaites has reopened the Langdale Chase hotel in the UK Lake District following a multi-million pound refurbishment. THW acquired the Grade II listed hotel in 2017 and closed its doors in September 2022 to allow the renovation to take place. Langdale Chase, one of 10 hotels in the Group, has 30 bedrooms and a two AA Rosette-awarded restaurant. Thwaites’ financial year runs to end-March so this will provide a modest boost to performance in the current financial year and something more meaningful in FY 2025 (when it makes a full 12 month contribution). THW’s net debt was £70.6m at end-September 2023, 4.0x FY 2023’s EBITDA, and while I suspect that management would like that to be a ‘turn’ lower (i.e. 3.0x), it’s not a stretch to imagine Thwaites adding one hotel a year in the second half of this decade to grow to a portfolio of 15 hotels by the time we get to 2030. THW reported NAV per share of 420p at end-September, which is roughly 5x its current share price of 85p. Thwaites is very cheap in my opinion. 

 

GSK – Pipeline progress

GSK announced positive results from its DREAMM-7 phase III trial for Blenrep in relation to relapsed/refractory multiple myeloma on Monday. These results will be presented “at an upcoming scientific meeting” and shared with health authorities. There are c.176,000 new cases of multiple myeloma diagnosed annually each year around the world. At end-Q3 2023 GSK had 67 vaccines and specialty medicines in its pipeline, which I don’t see reflected in a very cheap rating of 9.2x consensus 2024 earnings and yield of 4.25%. 

 

BT/A – musicMagpie fails to take off

BT announced on Monday that it does not intend to make an offer for electronics reseller musicMagpie. Last week the second hand goods specialist said it was in early-stage discussions with both BT and Aurelius Group. A transaction might have made sense, viewed through the lens of BT’s push into electronics retailing (using its EE brand), but it wouldn’t have moved the dial for BT/A (whose market cap is c.600x that of musicMagpie). BT/A is very cheap, trading on 6.6x consensus 2024 earnings and yielding 6.3%.

 

RHM – CMD 

I belatedly picked up Rheinmetall’s Capital Markets Day from last week. The Group is strongly positioned for the global security environment, with the invasion of Ukraine set to result in a super cycle for firms that can meet Western requirements. This year is expected to see an 8.3% increase in NATO members’ defence budgets, for example, while there are clear needs to: (i) replenish stocks transferred to Ukraine; (ii) increase inventories to higher than pre-2022 levels (given the alarming pace of depletion); and (iii) bring in more modern systems to cope with 21^st century requirements. In terms of financial targets, RHM sees 2026 sales of €13-14bn; operating margins >15% and 50% cash conversion (for 2023, Bloomberg consensus is for revenue of €7.7bn and margins of 12.5%). Within that, the Power Systems division is expected to contribute €2.5-3bn of sales and margins of >9%. RHM hinted that it is open to selling this business (given that >9% is below the 10% minimum hurdle for the Group), and any sale would free up cash to enhance its core security franchise. RHM sees huge potential across a number of its key markets – Hungary, where it recently opened a new plant; Ukraine, where it recently established a JV; Spain, where it recently acquired Expal for €1bn+; Germany, where policymakers are investing in the security services; the UK, where large-scale land systems contracts are available; Australia, where the Group may be able to exploit recent international security partnerships; and of course the world’s largest market, the USA. Interestingly, management were keen to highlight the potential for share buybacks alongside more conventional dividend distributions. While RHM’s share price has performed well of late, I think its rating of 14.5x consensus 2024 earnings doesn’t reflect the potential here. 

 

BOCH – Tidying up

Bank of Cyprus announced on Wednesday that it is exercising its call on the remaining the remaining €8.25m outstanding of its 12.5% AT1 instrument (originally issued in 2018). Back in June BOCH repurchased €204m of the aggregate €220m principal amount at 103%, with a further €7m repurchased in July. At €1m/year the savings from this call are immaterial, but it is nonetheless a further reminder of the progress BOCH has made – the bulk of the 2018 AT1 was replaced in June with a new issue with a coupon of 11.875%, the lower coupon compared to the previous issue – notwithstanding the interest rate environment – reflecting the market’s improved sentiment towards BOCH as an issuer as a result of the heavy lifting of recent years. Bank of Cyprus is extremely cheap, trading on just 3.9x consensus earnings and yielding a remarkable 10.2%. 

 

MKS – Clarification 

In last week’s blog I noted that S&P had upgraded Marks & Spencer to investment grade (BBB-), adding “I suspect (but am not certain – I have a query in to MKS IR on it) that receipt of one IG rating might reverse the coupon step up” on a number of the Group’s bonds that was triggered by the Group’s previous downgrade to junk. MKS IR has clarified that the step down rating change is defined as the first public announcement by both S&P and Moody’s that the credit rating of MKS’ senior unsecured long-term debt is at least BBB- and Baa3 respectively. As Moody’s is one notch below the latter at Ba1, the coupon step-down has therefore not been triggered. I estimate that the year one (on an annualised basis) savings from a step down would be of the order of c.£10m for the Group, not transformative, but nonetheless all of this should serve as a reminder of how MKS’ rapid deleveraging provides it with a competitive advantage over its more heavily indebted peers. MKS trades on an undemanding 12.4x consensus FY 2024 earnings and yields 1.2%.