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 8/3/2024

AV/ – FY results; Bolt-on acquisition

GRP – FY results; Compelling opportunity

GSK – Pipeline progress

HBR – FY results; Solid

IR5B – FY results; Solid

OGN – H1 results; already in the price

RHM – Contract win

STVG – Solid FY results; Strong strategic progress

 

HBR – FY results; Solid

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

 

AV/ – FY results; Bolt-on acquisition 

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

 

IR5B – FY results; Solid

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

 

GRP – FY results; Compelling outlook

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

 

STVG – Solid FY results; Strong strategic progress

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

 

OGN – H1 results; already in the price

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

 

RHM – Contract win

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

 

GSK – Pipeline progress

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

Stocks Update 2/2/2024

AMZN – Q4 results 

APH – FY trading update

BT/A – Q3 trading update

GRP – NAV update

GSK – FY results; Zantac update; Pipeline progress

MKS – JLP challenges

PHO – New borrowings

PMI – Acquisition

RHM – Acquisition; Investment; Contract

RKT – Share buyback 

RWI – Q3 trading update

RYA – Q3 results; Traffic stats

STVG – Additional investment; Channel 4 cutbacks 

 

AMZN – Q4 results

Amazon released its Q4 results last night, which show net sales +14% y/y to $170bn (+13% at CER), with strong momentum in both North America (+13% y/y to $106bn) and ‘International’ (+17% y/y to $40bn, +13% at CER). AWS sales were +13% y/y to $24bn. There was a big uplift in operating income (Q4 2022: $2.7bn, Q4 2023: $13.2bn), with a step change in North America (from a loss of $0.2bn to profit of $6.5bn; International losses narrowing from $2.2bn to $0.4bn; and AWS earnings climbing from $5.2bn to $7.2bn. For the FY, net sales were +12% to $575bn and operating profit trebled from $12bn in 2022 to $37bn last year. There was a huge improvement in free cash flow, from an outflow of $20bn in 2022 to an inflow of $32bn last year. Operating leverage; targeted cost reductions; supply chain and distribution optimisation; and pricing changes all contributed to the dramatic uplift in financial performance. AMZN struck a confident tone on the outlook: “As we enter 2024, our teams are delivering at a rapid clip, and we have a lot in front of us to be excited about”. AMZN guides to Q1 2024 net sales growth of 8-13% y/y; and operating income of $8-12bn (was $4.8bn in the prior year period). For such a quality business, AMZN is cheap, trading on just 11.1x consensus 2025 EV/EBITDA. 

 

RYA – Q3 results; Traffic stats

Ryanair released its Q3 (end-December) results on Monday, unveiling YTD profits of €2.19bn, +39% y/y, albeit Q3 itself saw net income fall to €15m from €211m in the prior year period as higher fuel costs offset revenue (traffic and fares) gains. Ryanair’s balance sheet is incredibly strong, with net cash of €150m at end-December despite very heavy capex investment of €1.9bn in the period to end-December 2023 (vs €1.3bn in the prior year period). As I mentioned in recent weeks, the risks to RYA’s outlook have become less favourable in recent weeks due to the combination of rising geopolitical issues in the Middle East, Boeing’s challenges and Ryanair’s delisting from “OTA Pirate” websites. On Boeing, RYA says that it expects to be short 7 B737 ‘Gamechanger’ aircraft for the peak summer season and “there remains a risk that some of these deliveries could slip further”, although RYA doesn’t expect the MAX-9 grounding “to affect the MAX-8 fleet or the MAX-10 certification”. On the outlook, RYA continues to expect 183.5m FY 2024 traffic (despite the headwinds mentioned above) which is presumably locked in given the visibility on forward bookings that RYA has (and I note that traffic stats released this morning show the carrier had 182.1m PAX in the 12 months to end-January, +10% y/y), but citing seasonality (Easter timing) and weaker than expected loads and yields it is narrowing FY 2024 PAT guidance to €1.85-1.95bn (was €1.85-2.05bn). Whatever about the short term, the long-term outlook remains very positive for Europe’s low cost leader, with market dynamics set to remain favourable (RYA sees continued industry consolidation in Europe, with ITA, Air Europe, TAP and SAS expected to be taken over by larger Groups over the short-to-medium term). RYA trades on a very inexpensive 9.2x consensus FY 2025 earnings and yields 2.2%.

 

GSK – FY results; Zantac update; Pipeline progress

GSK released its FY 2023 results on Wednesday. The Group delivered a strong performance, with revenues +5% (+14% ex-COVID), led by a 25% jump in vaccines sales (helped by the latest blockbuster, Arexvy). Headline specialty medicines sales were -8% but +15% ex-COVID, while general medicines sales were +5%. Adjusted operating profit (+12%) and adjusted EPS (+16%) reflected operating leverage benefits. The Group’s pipeline is in terrific shape, with 71 vaccines and specialty medicines now in clinical development, including 18 in Phase III/registration. Highlights for 2023 include approvals for Arexvy, Apretude, Ojjaara and Jemperli. GSK has augmented its R&D pipeline by targeted M&A (Aiolos Bio, Bellus Health) and licence agreements (Janssen – infectious diseases; Hansoh Pharma – oncology). For 2024 GSK guides to turnover +5-7%; adjusted EPS +6-9%; and a 60p dividend. Beyond that, the Group has upgraded its longer-term outlook and now sees CAGR of 7% and 11% (was >5% and >10%) in sales and adjusted operating profit over the 2021-2026 period, with revenues in 2031 now expected to be >£38bn (was £33bn) and broadly stable adjusted operating margins. The balance sheet is in great shape, with net debt reducing from £17.2bn to £15.0bn over the course of 2023. Elsewhere, on Thursday GSK announced the settlement of another Zantac case (in California) which is reflective of the Group’s desire to avoid protracted litigation. No liability is admitted in the settlement. Lastly, GSK released two announcements on Monday. Firstly the European Commission has authorised GSK’s Omjjara (momelotinib) as the first approved medicine in the EU for treating splenomegaly (enlarged spleen) or symptoms in adult myelofibrosis patients with moderate to severe anaemia. GSK says the “authorisation may address high unmet need, with nearly all myelofibrosis patients estimated to develop anaemia over the course of the disease”. The FDA provided a similar approval for momelotinib in the US in September. To the extent that this news broadens the addressable market for Omjjara, this is an incremental positive for GSK. Elsewhere, GSK’s RSV vaccine, Arexvy, has been accepted for regulatory review by the European Medicines Agency (EMA) for the prevention of RSV disease in adults aged 50-59 at increased risk (over 60s have already been approved in Europe by the EMA). A European regulatory decision is anticipated in Q3 2024. Similar to Omjjara, a satisfactory outcome will increase the target market size (RSV causes c.270k hospitalisations of over-60s in Europe annually) and is therefore positive for GSK. All in all, a busy week for GSK but the fundamental investment case remains very much intact – the core franchise is performing very well and there is an exciting R&D pipeline to sustain this momentum, with the upgrades to longer-term guidance being testament to that. GSK is among the cheapest large cap pharma plays, trading on 9.2x consensus 2025 earnings and yielding 4.1%.

 

BT/A – Q3 trading update

BT released its Q3 (end-December) trading update on Thursday. In the first outing for new CEO Allison Kirkby the Group delivered another quarter of revenue and EBITDA growth, while announcing a further quickening in the pace of delivery of its FTTP programme to bring fibre broadband to 25m UK premises by end-2026 (I am guessing from the series of upgrades to delivery that the risks are skewed towards FTTP finishing ahead of that timeframe). The Group has held its FY guidance steady. On FTTP, build rate is now 73k per week, with 950k premises passed in the quarter, bringing the footprint to 13m premises. Openreach saw 432k net adds in Q3, bringing premises connected to 4.4m, a 34% take-up. Reflecting retail price increases, Openreach broadband ARPU is +10% y/y while the line losses are 369k year to date (-2% y/y). Consumer broadband ARPU is +5% y/y and prepaid mobile ARPU is +8% y/y. So far so good, but another weak Business performance (higher input costs, legacy declines etc.) took some of the gloss off the Group performance, producing reported revenue growth of 1% y/y and EBITDA +3% y/y. All in all, a solid update. The completion of FTTP, allied to cost take-out initiatives, will deliver a material step-change in cash generation from end-CY 2026 onwards, in my view. This is also reflected in sell side consensus, which sees BT’s end-year net debt peaking at £18.6bn in FY (March) 2026 and falling to £18.2bn by March 2027. Consensus also has BT/A trading on just under 6x FY 2025 earnings and yielding 6.6%.

 

RWI – Q3 trading update 

Renewi released its Q3 (end-December) trading update on Tuesday. The Group noted ongoing macro headwinds, which it has been able to partly offset through margin recovery initiatives. Volumes in commercial waste, particularly construction, “continue to be subdued”. Pricing is stable, save for plastics which show continued weakness. The ‘Simplify’ cost saving project was mostly complete by end-December, and will deliver an “in year cost reduction of c.€5m”. The Group expects the aforementioned trends to continue into year end, producing a H2 skew to FY results, which are now expected to be “below market expectations”. It is clearly unhelpful to see short-term earnings headwinds, but the long-term structural drivers of a circular economy player like Renewi are very much intact (indeed, management describe them as “compelling”) and the Group further expresses confidence in its “ability to deliver on the medium term targets” set out in the October 2023 CMD. The timing of this earnings downgrade is potentially significant given the recent bid interest in the Group – assuming falls in policy rates come through later in 2024 as the market expects, infrastructure plays like RWI are likely to be in favour from public and private market participants alike. Assuming consensus reflects this update, RWI trades on a very inexpensive 8.2x consensus FY 2025 earnings and is expected to pay a 1.9% dividend in respect of that year.

 

APH – FY trading update

Alliance Pharma released its FY 2023 trading update on Monday ahead of the release of audited results in March, “which are anticipated to be in line with market expectations”. The Group delivered 6% y/y growth in ‘see-through’ (essentially, consolidating franchise sales) revenues in 2023 (+7% at CER), with LFL revenues +6% y/y at CER. As had been guided, topline growth was skewed to H2, reflecting a rebound in China, with strong performances from the Kelo-Cote franchise (revenues +29% at CER in FY 2023), while prescription medicines finished the year flat following H2 recovery as inventory issues were resolved. Underlying profits are guided to meet market expectations, helping a good improvement in free cash flow (FY 2022: £15.8m, +34% to £21.1m in FY 2023) that helped to pare net debt to £92.4m at end-2023 versus £102.0m at end-2022, with leverage in-line with guidance. On the outlook, APH sees good top-line momentum, with consumer healthcare revenues expected to outpace the market while prescription medicine revenues are seen as stable, but increased investment in sales and marketing to support medium-term growth plans should see this year’s earnings in-line with 2023’s outturn. There were no updates on the dividend or the legacy CMA report. All in all, a solid update. I see APH as a value play in the consumer healthcare space, with consensus having it on just 7.2x 2025 earnings and yielding 2.3%.

 

GRP – NAV update

Greencoat Renewables provided an end-December NAV update on Thursday. The Group finished 2023 with a NAV of 112.1c, -0.9c q/q (impacted by weak power prices) and -0.3c y/y. GRP said the FY 2023 dividend (guided at 6.42c) was covered 2.7x by last year’s net cash generation of €197m despite the headwinds of wind generation being 9% below budget last year. The balance sheet is solid, with net debt of €1.5bn equivalent to 51% of GAV (GRP has a 60% ceiling), while the Group also has cash of €143m and €20m of further headroom in its RCF, helpful when considering future acquisition opportunities. For 2024 GRP guides to a target dividend of 6.74c, +5% y/y. The Group’s expansion strategy hasn’t been helped by the wide discount to NAV that GRP trades at – a model of better-than-NAV placings to support M&A worked a charm during the zero interest rate environment – but the strong headroom that cash generation has over dividend outlays means that GRP can use internally generated cash flow to continue growing. GRP was trading at 91.4c this lunchtime, an 18% discount to end-2023 NAV, and yields 7.4% based on the 2024 target dividend.

 

RHM – Acquisition; Investment; Contract

Rheinmetall had a busy week. On Thursday the Group announced that it has taken a 72.5% stake in Romanian vehicle maker Automecanica Medias SRL, whose “truck build-ons and trailers will augment Rheinmetall’s product portfolio”. The business, whose origins date back to the 1940s, is expected to produce revenues of c.€300m a year in the medium term and further strengthens RHM’s competitive position as a key supplier to countries along Europe’s (and NATO’s) eastern flank. This follows Romania’s awarding of a €328m order to Rheinmetall recently and also RHM’s establishment of a military vehicle repair facility in Satu Mare in Romania to support Ukraine, with this latest step deepening relations in that market. RHM has vehicle plants in the US, Canada, Australia, UK, Austria, Netherlands, Germany and now Romania. On Tuesday RHM announced an expansion of its under-construction Várpalota munitions plant in Hungary, which is due to start production this year and scale up to full capacity in 2026. It will produce 30mm, 120mm and 155mm artillery rounds and ancillary products for RHM’s international customers, particularly in Europe where this plant is expected to reduce the continent’s dependence on imports. RHM already operates such plants in Germany, Spain, Switzerland, Austria, Italy, South Africa, Australia and the US. Finally, on Monday an “international partner” (presumably Algeria) has placed a three-digit million euro order for Fuchs 2 APCs, to be delivered over 2024-28. RHM trades on a very inexpensive 13.5x consensus 2025 earnings and yields 2.7%.

 

PMI – Acquisition

Premier Miton Group announced the closing of the previously announced Tellworth Investments acquisition on Tuesday. The Group has issued 4.2m shares comprising the initial consideration for the acquired business. Given the operating leveraging inherent within the PMI model, the extra assets that Tellworth bring to a larger scale platform are very helpful indeed. PMI trades on a very inexpensive 8.0x consensus FY 2025 earnings and yields 9.8%.

 

MKS – JLP challenges

Media reports (The Guardian) last weekend said that John Lewis is considering 11,000 redundancies over the next five years from its current headcount of 76,000. The Group is looking to achieve this through a combination of natural attrition and targeted redundancies. While not explicitly called out, it seems unlikely that this level of reduction won’t be accompanied by a contraction in the number of Waitrose supermarkets and John Lewis department stores. Given the overlapping customer profile, I expect that a smaller JLP footprint will result in Marks & Spencer further eating into its market share – as it stands, both John Lewis and M&S UK turn over c.£10bn, so the operating leverage benefits from higher UK sales throughput at MKS could be very helpful indeed. MKS trades on an inexpensive 9.8x consensus FY 2025 earnings and yields 2.7%.

 

STVG – Additional investment; Channel 4 cutbacks

STV announced on Wednesday that it has lifted its shareholding in “high-end scripted production company”, Two Cities, from 25% to 51%. STV says the acquisition “accelerates STV Studios’ growth plan and is materially earnings enhancing”, noting that Two Cities has a £55m pipeline of secured revenues over the next three years. The background to STV’s involvement in Two Cities is an initial 25% stake taken in January 2020 with an option to increase this to a majority stake on the achievement of profitability by Two Cities. In this regard it mirrors STV’s model in taking stakes in Studios businesses where it provides ‘back office’ (legal, finance, HR etc.) services, freeing up the creative talent to make great content, and over time buy out the other shareholders in these Studios companies. STV has interests in 24 different Studios companies. This approach caps the downside risk where investments don’t work out, but also captures the upside where they do, and in this regard the STV strategy is a compelling one, in my view. STV expects its Studios division to become “a 10% operating margin business” in time (a not unrealistic target compared to ITV’s Studios unit). Elsewhere, on Monday Channel 4 announced “an ambitious five-year strategy to reshape the organisation and accelerate its transformation into an agile, genuinely digital-first public service streamer by 2030”. Of specific interest to STVG is the shrinkages around Channel 4’s perimeter (“close small linear channels that no longer deliver revenues or public value at scale”), which will likely strengthen STV’s dominant commercial position in Scotland (a reminder that the BBC doesn’t carry advertising and STV’s linear broadcast division has the lion’s share of Caledonian TV advertising revenue), while Channel 4 also wishes to have focused “investment in distinctive, streaming-friendly British content and social media”, which will likely create opportunities for STV’s portfolio of Studios (TV production) companies to sell shows to Channel 4 (the release says it is “proposing changes to how Channel 4’s Commissioning team is organised to make it simpler for suppliers and more focused on content that drives streaming”). STVG has been ahead of the curve in terms of the structural changes affecting the TV industry, with >60% of 2023 earnings guided to have come from outside of broadcasting, a proportion that will be even higher in 2024 (and beyond) given the transformative acquisition of Greenbird Media only closed at the start of H2 2023. STVG’s legacy STV TV business should therefore be viewed as a cash cow that supports growth in the Group’s Studios and Digital divisions. The next scheduled newsflow from STVG is FY results on 5 March. STVG trades on a very undemanding 6.0x consensus 2025 earnings and yields 6.2%.

 

PHO – New borrowings 

In an intriguing development, UK Companies House filings uploaded on Monday show that Peel Hotels has drawn down finance from Lloyds Banking Group secured against its hotel portfolio. The Group transitioned into a net cash position last year following the disposal of the Norfolk Royale and Midland hotels. Peel, which is profitable, has four remaining hotels – The Caledonian (Newcastle); Crown & Mitre (Carlisle); George (Wallingford); and Bull (Peterborough). While it is possible that this facility is intended for working capital or refurbishment expenditures, another potential use of this debt financing is to launch a share buyback. I’ve long noted the disconnect between the grey market value of its shares (30p on the AssetMatch platform) and the £1/share net book value. A buyback pitched somewhere between the two would offer a balance between providing an ‘exit’ for those shareholders who wish to sell out now and NAV accretion for more patient long-term oriented shareholders.

 

RKT – Share buyback

Reckitt announced on Wednesday that it has completed the first £250m tranche of the £1bn share buyback programme that was announced in October. A second £250m tranche commenced yesterday and will run until 10 May at the latest. Given the undemanding valuation the Group trades on, this is a good use of surplus capital. Reckitt trades on an undemanding 15.2x consensus 2025 earnings and yields 3.7%.

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 3/11/2023

BHP – Jansen expansion

BT/A – H1 results

GRP – Q3 NAV and dividend update

GSK – Q3 results; Beat and raise

HLN – Q3 results; FX headwinds

IR5B – Short-term charter

PMI – Bolt-on acquisition

RYA – Strong passenger numbers

SN/ – Q3 results; “encouraging progress”

STVG – Contract win

BT/A – H1 results

BT released its H1 (end-September) results on Thursday. Given the material retail price increases that were administered earlier this year, it was unsurprising to see good revenue (adjusted revenue +3% y/y) and profit (adjusted EBITDA +4% y/y) momentum. It was also good to see ongoing strong progress with the FTTP strategic capex, with more than a third of the UK’s homes and businesses now connected to BT’s full fibre broadband network. Some 12m premises have been connected and the build rate has stepped up to 66k per week while at the same time build unit costs for FTTP have pleasingly reduced. The take-up rate is 33%, with net adds of 364k in Q2. Another highlight was the cost releases from the transformation programme, with £2.5bn in annualised savings now delivered and the Group firmly on track to meet its £3bn savings target by FY 2025. Bringing all of this together, the Group is reaffirming its FY 2024 financial outlook, save for an increase in guided normalised free cash flow to the top end of its £1.0-1.2bn guidance range. An unchanged interim dividend of 2.31p has been declared. Net debt widened to £19.7bn from £18.9bn at the start of the financial year (and £19.0bn at end-H1 2023), reflecting the timing of the payment of the final dividend for FY 2023 and pension scheme contributions. The IAS 19 gross pension deficit has widened to £3.9bn from £3.1bn at the start of the year. The cash flow guidance upgrade is excellent to see, supported by lower FTTP execution costs. As BT/A completes on FTTP in the middle of this decade and unlocks the remaining targeted cost savings, we should start to see a material step-down in net debt, changing the risk profile of the Group and providing a potential catalyst for a material re-rating from the current 6.4x forward earnings multiple.

GSK – Q3 results; Beat and raise

GSK released good Q3 results on Wednesday, with the key takeaway being an upgrade to FY guidance. This is not a particular surprise given the exciting pipeline news that I’ve been covering here for months. In terms of performance, total Q3 sales were +10% (+16% ex COVID), led by vaccines (+33%, driven by Shingrix and Arexvy) while Specialty Medicines (-1%, but +17% ex-COVID) and General Medicines (-2%) detracted from headline performance. Adjusted operating profit and EPS were +15%/+17% in Q3. As mentioned, R&D delivery has been a stand-out for GSK so far this year, with strong momentum behind Arexvy (RSV vaccine, expected to deliver sales of up to £1bn this year), Shingrix (shingles vaccine), Apretude, Ojjaara and Jemperli to the fore. GSK had 67 vaccines and medicines in all phases of clinical development at end-September. On the FY outlook, GSK now sees turnover +12-13% (was +8-10%); adjusted operating profit +13-15% (was +11-13%); and adjusted EPS +17-20% (was +14-17%). GSK’s net debt was £17.6bn at end-September, down from £18.4bn at end-September 2022. This does not reflect the sale of shares in Haleon for £0.9bn earlier this month. Elsewhere, I note that the Group has reaffirmed its confidence in its position over Zantac litigation (i.e. all 15 of the scientific studies conducted to date support its contention that Zantac does not cause cancer); while the dividend for 2023 is still expected to be 56.5p, despite the upgraded earnings guidance. GSK is on 9.0x earnings, one of the cheapest ratings of any large cap pharma stock, and yields 4.0%.

HLN – Q3 results; FX headwinds

Haleon released third quarter numbers on Thursday. Organic revenue growth of 5.0% (price +6.6%, volume/mix -1.6%) lagged the 9M performance of +8.5% (price +7.2%, volume/mix +1.3%). A softer North American performance, supposed in part due to “one-off retailer inventory adjustments” was responsible for the Q3 moderation. Operating profit growth was +8.8% in CER terms in Q3, but an FX headwind meant reported operating profit growth was a more muted 2.6%. Similarly, the adjusted operating profit margin of 24.6% was +90bps in CER terms but -50bps on a reported basis. The Group has reaffirmed its FY guidance (organic revenue growth of 7-8%; adjusted operating profit growth of 9-11% in CER; £350m net interest expense; and an effective tax rate of 23-24%). The disposal of the non-core Lamisil brand completed on 31 October. There was no update on the net debt position, which makes me suspicious that there wasn’t an improvement in the quarter (as I suspect they’d have wanted to showcase progress here if there was a positive story to tell). Nonetheless, any temporary disimprovement here would presumably only represent a ‘hiccup’ given the generally highly cash generative nature of the portfolio. HLN is on 16.9x forward earnings, not the cheapest, but certainly not expensive relative to other consumer healthcare brands (Colgate is on 22.2x, Procter & Gamble is on 23.2x).

SN/ – Q3 results; “encouraging progress”

Smith + Nephew released Q3 numbers on Thursday. The Group heralded “encouraging progress” and that is certainly borne out in the statement. Q3 revenue of $1.4bn was +7.7% on an underlying basis and +8.5% taking an 80bps FX tailwind into account. There was progress across all business lines, with Orthopaedics revenue +8.3%; Sports Medicine & ENT +11.1%; and Advanced Wound Management +3.6%. For the FY, management now expects underlying revenue growth “towards the higher end” of the previous guided range of 6-7%, although the trading profit margin is now seen at c.17.5% “reflecting headwinds from China”. This was previously guided to be “at least 17.5%”, but with analyst consensus for the FY trading margin already at 17.5% the market likely expected this. I’ve noticed some silly commentary to the effect that weight-loss wunderwaffe would crimp demand for SN/’s product offering. I think that’s silly for two reasons – one being the obvious (demographic realities – ageing and wealthier populations in most corners of the planet) and the other being that there doesn’t seem to be any consideration within the giddiness around weight loss drugs that those who are currently too obese for surgery represents a new potential addressable market for the likes of SN/. Overall though, I was happy with these results, which show strong delivery against the Group’s strategic objectives. SN/ trades on only 13.2x forward earnings per Koyfin data, which is too low for a leading medical devices company.

PMI – Bolt-on acquisition

Premier Miton announced on Wednesday that it has agreed to acquire Tellworth Investments LLP, a UK equity boutique with AUM of £559m at end-September. Tellworth was established in 2017 by the well-regarded Paul Marriage and John Warren (both ex-Schroder). The acquisition makes strategic sense in the context of PMI’s existing strength in UK equities and the synergy benefits from putting additional assets onto the PMI platform. The consideration is likely to be £5.5m (range £3.5-6.0m depending on AUM) on completion (expected in early 2024), with 75% paid in cash and the balance paid in new PMI shares, which will be subject to lock-up arrangements for 1-2 years from the date of completion. A stretch deferred consideration of £3m will be payable if AUM on the date of the first anniversary of the completion exceeds £850m. Given the recent direction of travel (driven by external factors) for PMI’s AUM, it is good to see AUM growth return, albeit it would be more valuable to shareholders if AUM increases were of the organic variety. Nonetheless, as I set out recently after doubling my holding in PMI, I think it is very strongly positioned for when the market pendulum swings more towards UK and/or small cap equities. A forward dividend yield of 10%+ offers attractive compensation for those willing to wait for this swing.

BHP – Jansen expansion

As expected, BHP confirmed on Tuesday that it has greenlit a $4.9bn investment in Stage 2 of the giant Jansen potash project in Canada. BHP has previously expended $4.5bn on pre-Stage 1 investment and is undertaking (currently 32% complete, with first production expected in late CY2026) the $5.7bn Stage 1 work presently. This is a globally significant mine – on completion of Stage 2 (first production expected in late CY2029, with ramp-up over the following three years) it will have the capacity to produce c.8.5m tonnes of potash per annum, which is more than 10% of current world output. It also fits with BHP’s pivot to future-facing commodities, with potash key to the megatrends of population growth, urbanisation, food security and sustainable farming. While this is a material capital outlay, at consensus prices Stage 2 has an IRR of 15-18% and an expected payback period of c.6 years (underlying EBITDA margins of 65-70% are expected). In the long-term, Jansen has the potential for additional expansions to reach an ultimate capacity of 16-17m tonnes (so, a fifth of world output). BHP’s strategic reshape positions it well for delivering considerable shareholder value for many years to come. I don’t see this being reflected in its current rating of just 11.2x forward earnings.

GRP – Q3 NAV and dividend update

Greencoat Renewables released its Q3 2023 NAV and dividend update on Tuesday. The release shows that NAV marginally reduced by 0.2c q/q to 113c/share at end-September, driven by lower-than-expected wind generation. An unchanged quarterly dividend of 1.605c/share has been declared, in-line with guidance for a FY dividend of 6.42c/share. The Group’s dividend cover is guided to be c.3.0x for FY 2023, which should be a bull point for income chasing investors given the skinny cover on show from many other dividend stalwarts in this macro environment. I note some recent press coverage to the effect that GRP’s growth strategy is derailed by its discount to NAV, as it can’t go back to the equity ‘well’ for now to enhance its investment capacity (the Group has a track record of accretive placings at a premium to NAV). I’m not sure I subscribe to that view – GRP’s elevated dividend cover and undemanding gearing (pro-forma 50% of GAV) speaks to significant internally generated cashflows and in-place debt capacity to continue to add to the portfolio. From the starting point of the current share price (92c) and starting dividend yield (7.0%), further acquisitions should (ceteris paribus) push this dividend yield into double-digits over the medium term. I view the 19% discount to spot NAV as completely unwarranted.

RYA – Strong passenger numbers

Ryanair carried 17.1m passengers in October, a 9% increase from the same month last year. Loads were 93%, -1pc y/y. On a rolling 12 month basis, RYA has carried 180.3m PAX, +15% from the preceding 12 month period, with the load factor of 94% up 3pc versus the preceding 12 month period. RYA guides to 183.5m passengers in FY (year-end March) 2024, which on the strength of the rolling 12 month data seems conservative to me. Ryanair is extremely cheap, trading on just 8.8x forward earnings which is too low for a business of this quality, to my mind.

STVG – Contract win

STV announced on Wednesday that its Studios business has agreed a development deal with NBCUniversal for a US series of its “innovative reality format”, ‘The Underdog’. The format was created by STV Studios’ label Primal Media. A UK version of the format “is currently in the works” for E4. STV Studios acquired a majority shareholding in Primal Media in 2019 as part of its growth strategy of acquiring strategic shareholdings in independent production companies with a view to having multiple ‘lottery tickets’ where commissions are concerned, whilst also selling back office services to these production houses. STVG is very cheap, trading on just 6.0x forward earnings per Koyfin data.

IR5B – Short-term charter

While there has been no official word from the company, I note from social media postings that P&O’s MS NORBAY has been conducting berthing trials at Holyhead this week ahead of an expected short-term charter to Irish Continental Group to replace MS EPSILON which is coming off charter. NORBAY (17,464 tonnes; 2,040 lane metres) is a little smaller than EPSILON, but it gave P&O good service over the years on the Dublin – Liverpool route which P&O will close before the year end. It remains to be seen if this develops into a longer-term arrangement or if ICG can find a larger ferry to charter in. As I’ve noted before, ICG’s fleet of ferries is old by the standards of this part of the world – six of its eight ferries are more than 20 years old – so I wouldn’t be surprised to see the Group place an order for a couple of new builds to strengthen its competitive position. Given the lead time of those, however, charters will have to do for now. ICG is inexpensively rated at 13x forward earnings.

Stocks Update 6/10/2023

AMZN – Shrewd moves 

AV/ – Takeover speculation

BHP – Development plans

BOCH – Another upgrade

GRP – Additional investment in Butendiek

HLN – GSK places more stock

RHM – More order wins

RWI – CMD

RYA – Traffic data

 

RWI – CMD 

After last week’s revelation that Macquarie is potentially interested in acquiring Renewi, Wednesday’s Capital Markets Day afforded management the opportunity to set out its stall on why the Group should remain an independent business. The CMD set out medium term targets for the Group of: (i) organic revenue growth of >5% p.a.; (ii) high single digit EBIT margin; (iii) FCF generation of at least 40% of EBITDA (with c.30% of FCF invested into growth projects); and (iv) ROCE >15%. These targets appear reasonable given the structural drivers of the circular economy but also the high investment needed in the delivery of the Group’s goals. RWI announced a strategic review of its UK Municipal business, “with an outcome targeted for the first half of 2024”; and “continued performance enhancement in the Mineralz (sic) & Water business”. Renewi also wants to reinstate the dividend whilst maintaining cover of 3-4x underlying earnings (so, a very modest dividend). In the medium term, the Group targets “value accretive acquisitions” and says that “where the Board determines there is excess capital beyond…near term investment requirements, [it will make] supplemental returns to shareholders”. In terms of current trading, management said that “demand conditions” (normalised recyclate prices; construction sector weakness) were expected to be largely offset by cost actions, resulting in unchanged expectations for the FY performance. Strong working capital focus and lower than expected capex should result in FY net debt being €10-15m lower than previously expected. The next scheduled newsflow from RWI is H1 results due out on 9 November. What to make of the Renewi update – sure, the targets look attainable, but a divorce from the misfiring UK Municipal business may prove tricky. Distributions are a carrot to shareholders but a payout ratio of 25-33% suggests modest dividends. The Group’s need for ongoing capex to meet its growth ambitions and elevated leverage means that further distributions are less likely to happen, in my view. Don’t get me wrong, I’m a big fan of Renewi, indeed, it’s the largest position in my portfolio, but if it is to deliver on its promise I think it’s going to have to be creative in terms of financing a roll-out across European markets. I’ve suggested before that an option is to establish a network of JVs in new markets where it trades its know-how for outside investment – this would have the benefits of accelerating the land-grab in an industry that lends itself to natural monopolies within regions; reducing risk by having JV partners; and creating a nice pipeline of future M&A opportunities for Renewi to buy out minority shareholders. I see that as the best way forward for Renewi and would prefer to see muted distributions while Renewi is plainly able to invest to capture attractive returns (as illustrated by the ROCE target). RWI is cheap, trading on just 10.2x 2024 earnings, with analysts pencilling in a dividend of just under 1% of FY (year-end March) 2024.

GRP – Additional investment in Butendiek

Greencoat Renewables announced on Monday that, alongside “additional funds managed by Schroders Greencoat LLP” it has agreed to purchase an additional 22.5% stake in the Butendiek offshore wind farm in Germany. Closing is expected next month. GRP’s total investment is expected to be €122m, being 72% of the 22.5% acquired stake, with Schroders’ funds acquiring the balance. On completion, GRP will own nearly 39% of the 80 turbine windfarm that has been operational since 2015. It is also noteworthy that Butendiek recently contracted a PPA with “a large multinational” for 62.5% of the wind farm’s output over the next six-and-a-half years, providing helpful visibility on revenues and associated cashflows. Post-acquisition, GRP’s total borrowings are expected to equate to 48% of GAV, leaving ample space for further investment (>€400m before taking into account net cash generation). GRP said the acquisition price is “accretive to NAV”, implying that it’s picked this asset up at a discount (as you’d expect, given where GRP’s shares are trading). Greencoat has an attractive range of growth investment options, encompassing forward funding agreements, buyout of minority shareholders in existing investments, or greenfield initiatives. Greencoat is very cheap, trading on just 10.7x 2024 earnings and yielding 7.4%. 

 

HLN – GSK places more stock

GSK announced after the market close on Thursday that it was launching the sale of a further 270m shares in Haleon, equivalent to c.2.9% of HLN’s share count (9.2bn shares), by way of an accelerated bookbuild. The shares were sold at a price of £3.28. GSK initially held a 12.94% stake in Haleon following the demerger in July 2022, which it reduced to 10.3% in May 2023 following the sale of 240m shares in the company and now 7.4%. GSK and Pfizer (which holds 32.0% of HLN) have undertaken not to sell any further shares in Haleon for 60 days after settlement (in practice, I suspect that the next sell-down is more likely to happen after the FY 2023 results are released in March). While somewhat reduced as a result of last night’s sale, the presence of an outsized (45% of the register at demerger, now 39%) technical overhang on Haleon’s share price from two large holders, neither of whom see themselves as long-term investors, has held back Haleon’s share price performance, which is broadly flat post demerger despite strong underlying trading. Nonetheless, for patient long-term investors, this creates an opportunity to buy more HLN at an artificially low price, while index buyers will ultimately be compelled to step in as the free-float increases due to the reduction in the GSK/Pfizer overhang. I doubled my own shareholding in the Group at 336p (including all charges) in August and wouldn’t rule out buying more Haleon shares in due course. HLN trades on an undemanding 17.4x 2024 earnings, inexpensive compared to other consumer healthcare peers (Colgate is on 20.0x), and yields 1.8%.

 

AV/ – Takeover speculation

The Times of London reported this morning that “City sources insisted that at least two potential suitors were running a slide rule over [Aviva], attracted by its excess capital and strong cash flow”. Allianz, Intact Financial Corporation and Tryg were said to be “considering their options, with at least one mulling a £6 a share proposal. An American insurer is also rumoured to be interested in Aviva”. A £6 bid would value the share capital at £16.4bn, which compares to IFRS shareholders’ funds of £8.9bn at end-June 2023 – a price that seems a bit rich given the Group is forecast to deliver ROE of 10.9% this year and 11.7% in 2024, per Bloomberg consensus. Regardless of whether or not there’s anything to this story, as of lunchtime today (when the shares were trading at 418p / a market cap of £11.4bn), Aviva is cheap on conventional metrics, trading on just 9.2x 2024 earnings and yielding 8.2%.

 

BHP – Development plans

In comments to the media this week, BHP’s Chief Development Officer Johan van Jaarsveld set out its philosophy on its future investment plans. The Group sees better potential to deliver value from sweating existing assets and securing early-stage entry into projects, alongside improved technology, rather than through conventional M&A, where it plans to be patient (“This is a cyclical industry, and you sometimes are going to have to wait for 10 years or maybe more to get the right opportunity at the right price”. The Group expects to remain a player in the Met coal space, but is still progressing exits of its stakes in the Daunia and Blackwater mines in Queensland. On lithium, it continues to see that as unattractive, whereas in nickel it plans to grow output to 200k metric tons a year, second only to Russia’s Norilsk Nickel. There had been speculation that BHP would flip the newly acquired OZ Minerals’ assets in Brazil, but this is not on the table, at least for now. I’ve commented on the slow pace of deleveraging at BHP previously due to the large (and highly value accretive) capex programmes underway – Bloomberg consensus has net debt peaking at $10.9bn this year and only falling to $8.5bn by end-FY (June) 2027, despite the Group being expected to produce >$100bn of EBITDA across FY24-27 – so it is unsurprising that major M&A is not seen as likely for the time being at least.

 

RHM – More order wins

It seems that every week brings more orders for Rheinmetall and this week is no different. On Thursday RHM announced that it had secured an “order in the low two-digit million-euro range” to supply Ukraine with further automated reconnaissance systems at the behest of the German government. SurveilSpire is designed to reconnoitre and engage hostile drones, with the system comprising mobile surveillance towers, camera equipment, mini-drones, a Command-and-Control system and transport vehicles. Delivery has already begun. Elsewhere, earlier today the Bundeswehr ordered “tens of thousands” of 155m rounds under the framework contract with Rheinmetall to supply Ukraine and Germany. This contract is “worth a figure in the lower three-digit million-euro range”. Delivery is due to take place in 2024. RHM has an orderbook running to in excess of €30bn that provides multi-year visibility on revenue and earnings. I don’t see this as being reflected in an undemanding valuation of just 12.1x 2024 earnings. RHM further yields 3.1%. 

 

AMZN – Shrewd moves 

I don’t normally cover AMZN outside of results periods as, given the scale of the company ($1.3trn market cap) there’s always stuff going on. A few developments of late worth calling out are: (i) the Group is recalibrating its grocery delivery charging structure in the US, with free delivery for orders >$100 to Prime subscribers ($6.95 for $50-100 and $9.95 for sub-$50 for subscribers / $7.95-13.95 for non-Prime subscribers), which should help to lift its 1% US grocery market share; (ii) two Project Kuiper test satellites were due to be launched later today, to test the Group’s ability to beam broadband internet from orbit; (iii) This was the inaugural week in service for Amazon’s new Airbus A330-300 freighter, the largest in its fleet. With nine more aircraft of this type to follow this should help lower unit-costs; and (iv) news that Prime Video will carry ads for those unwilling to pay a premium to avoid them should see a material benefit to the bottom line from both ad revenue and ‘premium’ subscriptions. Bloomberg consensus for GAAP earnings have them climbing from $2.19 this year to $3.16 next year, $4.52 in 2025 and $6.15 in 2026. The stock is trading on 20x that consensus 2026 earnings multiple, which seems too light given the still-to-be-realised potential of AMZN. 

 

BOCH – Another upgrade

On Tuesday Moody’s upgraded Bank of Cyprus’ long-term deposit rating to Baa3 from Ba1 and its Baseline Credit Assessment to ba2 from ba3. The outlook on the bank’s long-term deposit and senior unsecured debt ratings is positive. Ba2 is only two notches below investment grade, so a return to investment grade for BOCH cannot be too far away, with all the favourable implications that brings. BOCH is extremely cheap on conventional metrics, with Bloomberg consensus having it on just 0.6x 2024 P/B (for a 15% ROTE); 4.2x P/E and offering a prospective yield of 10.2%. 

 

RYA – Traffic data

Ryanair announced on Tuesday that it carried 17.4m passengers in September, +9% (+1.5m) y/y. Last month’s load factor of 94% was flat on the same month last year. On a rolling 12 month basis, RYA carried 178.9m PAX in the period to end-September, +17% y/y on loads of 94% (+4pts). Ryanair guides to 183.5m PAX in the year to end-March 2024; on the strength of these data that guidance should easily be met. RYA is as cheap as the seats it sells on its aircraft, trading on just 10.3x FY (year-end March) 2024 earnings.

Stocks Update 22/9/2023

BOCH – SocGen comments on international footprint

CLIG – FY results reflect choppy markets

GRP – H1 results, cash is king

GSK – Pipeline progress

MKS – Ocado Retail JV update

PHO – FY results – Improved performance; debt free

PRX/SPDI – Dutch tax changes

ULVR – Potential disposals

CLIG – FY results reflect choppy markets

City of London Investment Group released its FY (year-end June) 2023 results on Monday. The Group finished the year with FUM of $9.4bn/£7.4bn, up slightly in dollar terms from the $9.2bn/£7.6bn it started the year with. However, point in time data don’t give a full picture and the drop in NFI from the previous year’s £58.2m to £54.6m reflects the difficult conditions during the year (average FUM was -12% y/y in USD terms last year), which contributed to a drop in underlying PBT from £27.9m to £22.7m. Underlying BEPS of 36.5p (30.2p statutory) compares to a flat ordinary dividend of 33p (last year also had a 13.5p special, zero this year). Unhelpfully, both of the two operating companies saw net outflows (CLIM -$228m, KIM -$129m), with performance resulting in higher period end AUM in USD terms. Some 38% of the Group’s FUM is invested in the emerging markets strategy, which offers superior income characteristics (the Group’s weighted average net fee rate is a juicy 72bps). Ultimately, CLIG’s performance will be driven by markets and while investor focus is on large-cap US tech stocks at present, a pivot to other sectors/markets would be transformative for CLIG’s performance, while the Group is also targeting organic growth in FUM. The stock trades on 15.1x consensus 2024 earnings and yields an attractive 8.25%. 

 

PHO – FY results – Improved performance; debt free

I belatedly spotted that Peel Hotels released its FY (year ending 22 January) 2023 results last Thursday. The results show a continued rebuild in performance post-COVID. Revenue was £12.9m, up from £9.3m in the prior year and £4.8m in FY 2021 (where the pandemic’s impact was most acutely felt). Average revenue per room was £24,703 (or £68 per night), which is 15% above the pre-pandemic (FY 2020) level of £21,500 although this may be affected by mix (PHO had 9 hotels before COVID, and finished FY 2023 with 6). PBT was £1.1m, up from the prior year’s £0.3m, but this is flattered by net exceptional gains of £1.4m (insurance receivables of £1.9m less £0.5m write-off of rent receivables from subsidiaries that were placed into liquidation). The cash performance was strong, with net operating cashflow of £2.2m, a five year high, while net debt reduced from £7.2m to £5.8m during the year. This will have been subsequently extinguished by the receipt of £9.5m of disposal proceeds from the sale of the Norfolk Royale and Midland hotels post the period end, although frustratingly management has not disclosed what their book values were to see what, if any, impact their sales have on the Group’s NAV (which was £1.01/share at end-FY 2023, up from 96p at end-FY 2022). PHO does say that the disposed hotels contributed £382k of PBT in FY 2023, although this is also frustrating as it’s not stated if this was on a statutory (in which case 35% of the total, which feels right as these are a third of the number of hotels the Group had last year) or underlying (i.e. excluding exceptionals) basis. The book value of PHO’s six hotels was £22.9m at end-FY 2023, of which c.£1.5m relates to the leasehold hotel (Crown & Mitre in Carlisle) leaving c.£21.4m for the other five (freehold) hotels. Taking this, and the fact that the disposed hotels accounted for 35% of PHO’s hotel room count at end-FY 2023, I suspect that the £9.5m proceeds for the hotels sold probably stacks up favourably against the net book value, although we won’t know for sure until Peel releases its next set of results. What next? With the debt extinguished, I would have liked to have seen Peel launch a tender offer to give some shareholders the chance to exit. The shares have traded for as low as 20p on the AssetMatch grey market in the past year, even though the NAV is now back over £1, implying that some shareholders are impatiently looking for a quick exit. A tender offer to satisfy that cohort of shareholders at (say) 50p/share would have the twin benefits of providing liquidity for those who need it and NAV accretion for those of us who are happy to wait until PHO has sold all of its hotels and maximised the value of its estate.

 

GRP – H1 results, cash is king

Greencoat Renewables released its interims on Monday. The Group saw a marked uptick in generation to 1,489 GWh from H1 2022’s 1,127 GWh, supported by acquisitions and improved weather. This supported an expansion in net cash generation to €125.5m from the prior year’s €92.1m, with gross dividend cover at a healthy 3.5x, a welcome outcome given the inorganic growth options open to the Group (more on this anon). During H1 GRP added three more assets at a cost of €275.5m, bringing the portfolio to 38 renewable generation and storage assets across six European countries. The balance sheet is in good shape, with aggregate Group debt of €1.2bn, equivalent to 47% of GAV, providing more than €600m of potential debt investment capacity while leaving headroom to its 60% GAV limit. As expected, dividends of 3.21c were declared with respect to the period. NAV was 113.2c at end-June, which compares to yesterday’s close of just 99.5c. Greencoat’s share price has been under pressure in recent times, reflecting the spike in risk-free rates. This has pushed the dividend yield up to an attractive 6.7% (based on 2024 consensus DPS), while the pipeline of debt-funded forward-sale deals offers the potential for distributions to climb from here. On this, as mentioned, the Group has >€600m of current incremental debt capacity, while the interim results presentation provided an illustrative base case that set out “excess cash flow generation post dividends of >€500m between June 2023 and 2028”, giving GRP well over €1bn of medium-term investment firepower without recourse to shareholders – this creates a meaningful value creation opportunity given a starting market cap today of only €1.1bn.

 

MKS – Ocado Retail JV update

Ocado Retail, the 50-50 JV between Marks & Spencer and Ocado Group, released its Q3 trading statement on Tuesday. Happily, the release shows a pick up in performance, which is very encouraging to see ahead of the all-important Christmas trading period. Q3 retail revenue was +7.2% y/y to £570m, which is an improvement on the 5% reported in H1, “with a return to positive volume growth (total items) in the last month of the quarter” [to end-August]. Average orders per week of 381k are +1.9% y/y, with active customers of 961k +1.5% y/y. I suspect the JV’s customer numbers should kick on from here as some of the PE-backed grocery delivery start-ups have cut back on their offering. Ocado Retail says the “strategic momentum underpins confidence in FY guidance”. On Tuesday the JV opened up its new Luton CFC, which has double the productivity (300 units processed per labour hour) of the first generation Hatfield site. Ocado Retail’s FY guidance is mid-single digit revenue growth and marginally positive EBITDA (it was –£2.5m in H1). On the strength of this update, I suspect the risks lie to the upside. Marks & Spencer closed at a new 12 month high of 236p yesterday, where it trades on 12.8x consensus FY 2024 earnings (with analysts assuming a 2.7% dividend). I view that as a very undemanding multiple, given the fast-improving balance sheet and potential for MKS to take further market share from rivals.

 

ULVR – Potential disposals

Reuters reported yesterday that Unilever has engaged Morgan Stanley and Evercore to sell non-core beauty and personal care brands. The portfolio is being branded as Elida and includes brands like Ponds and Timotei, but only contributed $760m in revenue in 2022 (market consensus is for ULVR to do US$64bn of revenue this year). Assuming it proceeds, it is unlikely to move the needle in a Group context, at least in the short term, but if the Group can successfully recycle the proceeds into faster-growing brands then that would clearly be an incremental positive. ULVR is cheap compared to other personal care peers, trading on just 16.9x consensus 2024 earnings and yielding 3.9%.

 

GSK – Pipeline progress

GSK announced another two ‘wins’ for its development portfolio this week. On Tuesday, the European Commission authorised GSK’s majority-owned ViiV healthcare’s Apretude PrEP option, which is given as few as six times per year (as opposed to daily pills). Elsewhere, on Monday it was announced that Ojjaara (momelotinib) has been approved in the US as the first and only treatment indicated for myelofibrosis (blood cancer) patients with anaemia. GSK’s Q2 (end-June results) show that the Group had 68 vaccines and medicines in all phases of clinical development at that stage, with these latest wins underlining the attractiveness of its R&D pipeline. At yesterday’s close GSK was valued at just 10.0x 2024 expected earnings and offered a prospective yield of 3.95%, which seems far too cheap to me. 

 

BOCH – SocGen comments on international footprint

SocGen held an investor day on Monday. While it didn’t comment on its Cyprus business specifically, it has been streamlining its international footprint of late, recently putting units in four African countries up for sale. Management guided to muted (<1%) CAGR in RWA over 2024-26 and an improved C/I ratio, which hints at further disposals of non-core units in sub-scale markets (indeed, SocGen refer to “a more compact and efficient set-up” in International Retail). Might this include an exit from Cyprus? While there was no specific reference to Cyprus in the presentation, as a thought exercise – at the end of 2022 SocGen Cyprus had total assets of only €700m, of which €245m were loans to customers. On the liability side of the balance sheet, it reported €603m of customer deposits. Its income in 2022 was just €11m, contributing to net income of €539k, clearly a rounding error in a SocGen Group context. SocGen Cyprus may be a rounding error for SocGen Group, but €700m of assets would be more helpful for Bank of Cyprus, which had total assets of €25.7bn at end-June. There has been meaningful consolidation in the Cyprus banking market in recent times – while the Central Bank of Cyprus’ Register of Credit Institutions shows 28 entities operating in Cyprus, eight of these are Lebanese institutions that are in the process of exiting the market; one is a Ukrainian bank in wind-down; and Greece’s Eurobank (which has a standalone bank in Cyprus) is in the process of buying out all the other shareholders in Hellenic Bank, the island’s second-largest lender after BOCH. A more consolidated Cyprus’ banking sector is, ceteris paribus, positive for Bank of Cyprus. Bloomberg consensus has BOCH trading on just 4.1x consensus 2024 earnings and yielding a prospective 10.4%. It’s very cheap, in my view.  

 

PRX/SPDI – Dutch tax changes

In an unhelpful development overnight, the Netherlands parliament has voted to bring in a new withholding tax of 15% on buybacks by listed companies. Prosus is in the process of executing a multi-billion euro buyback relating to its ongoing share disposal programme in Tencent. SPDI is the largest shareholder in Arcona, which has been selling down non-core properties to finance an upcoming €10m share buyback. Given the sums involved, I wouldn’t be surprised if Prosus at least floats the idea of potential changes to its listing arrangements. For Arcona, from comments made by management at its 2021 AGM, I understand that it needs to file a prospectus to list its shares on the Prague Bourse. If this route were to offer a way of avoiding the buyback tax, I suspect management will consider it, despite the up-front costs involved. In the interim, Arcona has the option of being able to use its cash to retire debt (gross borrowings were €32m at end-June). Both companies trade at huge discounts to their latest NAVs (Prosus was trading at €28.59 this lunchtime in Amsterdam versus its spot NAV of €45.50; Arcona’s share price of €5.30 compares to its end-June NAV of €11.77).

Stocks Update 8/9/2023

BHP: Bond issue 

BT/A: UK consolidation

DCC: Attractive M&A 

GRP: Strengthens Irish pipeline

IDS: Regulatory tailwind? 

IR5B: Buybacks

MKS: Flexing distribution

RYA: Buoyant passenger numbers

STM: Finish line in sight? 

STVG: Interims show the strategy is working

ULVR: Share buyback

 

STM: Finish line in sight? 

STM Group announced late on Tuesday that its Board “has reached agreement in principle on revised key terms of the Possible Offer such that it would be a cash offer for the entire issued and to be issued share capital of the Company at a price of 67 pence per share”. This is conditional on the disposal of units that are non-core to Pension SuperFund Capital’s strategy to a BidCo led by the current CEO of STM Group. All of this is subject to shareholder approval; regulatory approval; and funding. On Friday it was announced that PSF Capital “has now received a letter from its lending bank confirming that it is highly confident that it could provide the level of senior debt required to implement the Revised Possible Offer”, enabling the parties to complete the work required for PSF to announce a firm intention to make an offer for the company. In addition, the company has now received irrevocable undertakings to support the Revised Possible Offer from holders controlling 32.7% of STM’s issued share capital. While, clearly, there are still a few hoops to be jumped through, a successful takeover at 67p would represent a healthy 2x return on a stock I bought for 35p in November 2021. STM shares were changing hands at 56.7p this morning, simplistically (to the extent that meaningful price signals can be drawn from a microcap) implying an 85% probability of a successful completion. Assuming a firm bid materialises, the price should hopefully have a ‘6 handle’ on it very shortly, which is something I’m monitoring closely as I’m likely to sell out ahead of time as I see good opportunities elsewhere (both within and outside of the portfolio) to recycle capital.

 

STVG: Interims show the strategy is working

Scottish media group STV released its H1 (end-June) results on Tuesday. The results reflect the benefits of its strategic pivot from traditional linear broadcasting to Studios and Digital, with the legacy TV operations representing a cash cow to finance future growth. Total revenue grew 21% y/y to £75m, with Studios revenue nearly quadrupling (+294% y/y to £27m, with more to come in H2 due to the transformational Greenbird acquisition). In Digital, STV Player streams rose 25% while new registrations were +65%. Operating profit fell by a third, however, reflecting tough advertising markets (ad revenue -14% y/y) and cost inflation, as expected. The traditional STV channel was Scotland’s most watch peak time channel for the sixth year in a row across H1, while its audience lead over (non-commercial) BBC1 was the highest in 15 years and STV’s audience beat all commercial peers on 180 out of 181 days in the half. Looking ahead, ad revenue is expected to grow 3-5% in Q3, helped by the Rugby World Cup, while the Group expects >60% of 2023 earnings to come from outside broadcasting, far exceeding its 50% target. Within the latter, the Studios business is set to deliver a strong H2 performance (its contribution in H1 was only £0.1m, versus a loss of £1.0m in H1 2022, while the Group guides to £6-6.5m of FY adjusted operating profit from Studios). An in-line dividend of 3.9p has been declared. Net debt was £16.3m at end-June, up £1.2m since the start of the year, not helped by reduced profits. Net debt at end-year is expected to double the end-June position as a result of Greenbird, closing at £32m or around 1x FY EBITDA. Elsewhere, I note that the DB scheme accounting deficit before tax reduced to £55.0m at end-June from £63.1m at end-2022, reflecting the rate environment. The Greenbird acquisition provides a huge tailwind for Studios revenue in 2024, with STV having 12 returning series at end-June but expected to finish the year with 39 returning series post-deal closing. Buried in the footnotes to the account I see that STV also bought a further 15% of quiz show producer Mighty Productions for £0.3m in July, raising its stake to 40%. STVG has a nice model of taking stakes in production houses, providing back office services such as legal and payroll to them (allowing the production houses to focus on creative work), and gradually buying out minorities over time. All in all, the strong growth from Studios and Digital vindicate the Group’s strategic push into these areas. STVG is very cheap – trading like it is an income stock on just 5.3x 2024 earnings and yielding 6.1% – which to my mind offers no consideration of the growth prospects underscored by these results.

 

DCC: Attractive M&A 

DCC held an ‘Energy Insights Day’ on Wednesday. Ahead of the gig management revealed that, since the Group’s FY results in May, DCC Energy has committed c.£160m to five new acquisitions to further build out its business. These include Solar PV businesses across the UK, Norway and France; a provider of energy efficiency and insulation services in the Netherlands; and  a US propane distributor based in Colorado. Importantly, “the acquisitions are expected to deliver a mid-teen ROCE in their first full year of ownership”. DCC aims to double its adjusted operating profit in Energy by 2030 while reducing its customers’ carbon emissions. DCC’s buy-and-build strategy has a proven track record of success, with the Group delivering CAGR of 14% in adjusted operating profit and generating an average ROCE of c.19% over 29 years as a public company. I don’t see this proven model being reflected in DCC’s very cheap rating of just 9.5x consensus 2024 earnings, while the stock yields an attractive 4.4%.

 

GRP: Strengthens Irish pipeline

Greencoat Renewables announced on Friday that it has agreed a Framework Agreement with FuturEnergy Ireland, a JV between the State forestry (Coillte) and electricity (ESB) companies, that aims to deliver over 1GW of onshore wind projects in Ireland by 2030. The agreement provides GRP with access to a long-term pipeline of asset that it may acquire stakes in on a forward-sale basis. Transactions will complete as assets reach commercial operation (GRP has a proven track record of acquiring assets on a forward sale basis). GRP says it “expects to invest over €1bn EV into its stake of the projects…by 2030”. I’ve previously expressed the view that GRP would be a “preferred acquirer” of assets under that structure of forward sales given its track record and strong balance sheet (borrowings are only 47% of GAV). Based on the current level of gearing and its self-imposed target, GRP has debt capacity of >€600m which can be augmented by its strong cash generation, so it can meet this €1bn commitment without recourse to shareholders. Acquired assets will also be transformative in terms of the scale – GRP has 1.4GW of assets currently and presumably envisages buying about half of the 1GW FuturEnergy plans to develop. Greencoat is cheap, trading on 11.4x consensus 2024 earnings and yielding an attractive 6.8%, with obvious catalysts identified from the above for future growth in earnings and distributions.

 

IDS: Regulatory tailwind? 

Ofcom has launched a review of Royal Mail’s universal service obligations, which require the company to deliver letters from Monday to Saturday. Given the structural decline in letter volumes (-46% in the past decade), Royal Mail has been lobbying for this to be pared back to five days a week. This is a welcome development, coming just three months after the UK Business Minister expressed his opposition to a change in the postal laws. The findings of Ofcom’s review are due later in 2023, but the caveat here is that any changes will have to be voted on by MPs. Ofcom has previously estimated that scrapping Saturday delivery of letters would save up to £225m per annum. There are obvious risks to this, but any relaxation of the USO would be positive for the stock. IDS is expected to be loss-making in FY (year-end March) 2024, before returning to profits next year – consensus has the Group on 9.9x 2025 earnings and set to make a return to meaningful dividends (yields of 5.1% projected for FY 2025, rising to 6.8% in FY 2026). 

 

RYA: Buoyant passenger numbers

Ryanair released its August passenger numbers on Monday, which showed that the carrier had 18.9m guests last month, +11% y/y. The load factor was flat y/y at a very strong 96%. On a rolling 12 months basis, RYA has carried 177.4m PAX in the period to end-August, +20% y/y on after loads of 94% (+5pc y/y). RYA guides to 183.5m passengers (+9% y/y) in the year to end-March 2024; on the strength of these numbers this target should easily be met. Ryanair is very cheap, trading on only 10.1x consensus 2024 earnings, despite significant (and credible) growth plans allied to superior cash generation.

 

BHP: Bond issue 

Mining behemoth BHP announced a multi-tranche USD bond issue on Wednesday. The Group successfully priced US$4.75bn of senior unsecured bonds with five tranches maturing over 2026-2053 with coupons ranging from 5.1%-5.5%. The weighted average coupon is 5.27% and the weighted average maturity is c.11 years. BHP will use the proceeds, together with cash on hand, to repay the OZ Minerals acquisition facility and for other general corporate purposes. BHP’s net finance costs rose to $1.5bn in FY (year-end June) 2023 from $1.0bn in FY 2022, while net debt rose from $0.3bn to $11.2bn over the course of FY 2023, driven by the OZ acquisition. This seems like a sensible piece of business for BHP, locking in funding costs ahead of a period of heavy capex investment (most notably at the Jansen Potash mine in Canada), with deleveraging unlikely (to my mind) to feature meaningfully for the next couple of years – indeed, Bloomberg consensus has net debt falling only from $11.2bn at end-FY24 to $9.8bn by end-FY27 despite the Group producing >$75bn of EBITDA over the period. BHP trades on an undemanding 11.4x consensus FY 2024 earnings and yields 5.1%.

 

MKS: Flexing distribution

Monday’s Times reported that M&S is to add Estée Lauder to the roster of third party brands it sells through its own channels. The Group has successfully leveraged its distribution network to sell other brands in a move that makes financial sense as it facilitates cross-selling of MKS products to customers it may not otherwise reach. MKS said that external brands now represent more than 40% of its total Beauty sales. MKS currently sells 47 labels, with obvious room to grow this. MKS is cheap, trading on 11.8x consensus earnings, with analysts pencilling in a dividend of 2.6% for the current financial year.

 

BT/A: UK consolidation

On Wednesday it was announced that VMO2 has agreed to buy broadband provider Upp from the Russian-backed investment company LetterOne for a consideration in the “high tens of millions of pounds”, according to the FT. The British government had ordered that the business be sold late last year (see BT comments passim) and it is welcome to see that the UK’s (pro-forma) second largest provider has acquired it. Data from ISP Review suggest that BT has 9m UK broadband subscribers, followed by VMO2 (c.5.7m), Sky (also 5.7m), Talktalk (4.2m) and Vodafone rounding off the top five with 1.3m. Upp is said to have had c.4k retail and business customers and offers broadband services to about 175k premises in the East of England. There are (in round figures) 30m residential premises alone across the UK, so >80% of the market is in the hands of just five players. A lot of the altnet challenger offerings were backed by PE firms, where the model presumably doesn’t work in the transformed rate environment, opening the door for further (vanilla) consolidation. Ceteris paribus, fewer competitors is an incremental positive for BT/A, while I further note that LetterOne had originally planned to develop a £1bn broadband network to compete with BT/A. BT is very cheaply rated, trading on 6.0x consensus FY 2024 earnings and yielding 6.8%.

 

ULVR: Share buyback

Earlier today Unilever announced the commencement of the “fourth and final” €750m tranche of the €3bn share buyback announced in February 2022. The first three tranches all ran for c.6 months, with the fourth tranche set to run from today to no later than 22 December (the tight window creates risks that not all of the €750m will be spent, to my mind). It remains to be seen if a new buyback is announced when the Group releases its FY numbers early next year. Bloomberg data show that, on average, 2.6m Unilever shares trade each day, or >£100m/day at the current share price. ULVR is cheap for a personal goods company, trading on 16.7x 2024 earnings and yielding 4.0%.

 

IR5B: Buybacks

Irish Continental Group announced two buybacks this week, buying back a total of 952k shares (c.0.25% of the prior share count) for c.€4.5m. These are the first buybacks this calendar year, which to my mind possibly reflects management’s improved confidence in the outlook for the Group. ICG is cheap, trading on 11.5x consensus 2024 earnings and yielding 3.4%.

Stocks Update 4/8/2023

AMZN – Strong Q2 results

AV/ – Topping up

GRP – The wind in Spain

GSK – Incremental pipeline progress

HBR – Track 2 status for CCS projects

HLN – Solid H1 results

KYGA – H1 results, Bolt-on Chinese acquisition

PCA – Another better-than-book-value disposal 

PRSR – Dividend in-line

PRX – Disposal at a very keen price

RHM – Closes Spanish acquisition

RYA – Bumper passenger figures (again)

SN/ – H1 results, upgraded guidance

 

AV/ – Topping up

On Wednesday I topped up my Aviva shareholding by around a tenth. The stock yields 8.4% (and this dividend is expected to grow as the Group reduces the share count through buybacks) which is plainly attractive; supported by a franchise that has strong market positions across its core geographies of the UK, Canada and Ireland. Management has done an excellent job of streamlining the Group in recent years, shedding non-core overseas businesses, zapping costs and reducing funding expenses by retiring legacy instruments (and I see scope for more action on this front). A solid capital base provides plenty of scope for future buybacks of ordinary and other equity instruments. Bloomberg consensus has AV/ trading on just 6.9x 2024 earnings, which seems far too cheap to me. 

 

AMZN – Strong Q2 results 

Amazon released its Q2 results last night which showed a very strong performance. Net sales of $134bn were +11%, beating consensus by 2%/$2.5bn, EBITDA of $26.5bn was $3.6bn/15.5% ahead of consensus; and net income of $6.75bn was $2.7bn/66% higher than what the market was expecting. Two particular highlights for me within the results were cash generation and AWS. On cash, operating cashflow of $16.5bn was nearly 2x Q2 2022’s $9.0bn; while investing outflows moderated to $10bn from the prior year’s $12bn, driven by a $4bn y/y reduction in cash capex as AMZN has been focused on growing into its excess capacity. The Group finished the quarter with $50bn of gross cash, providing considerable optionality. AWS revenues were +12% y/y to $22bn, although its operating income slipped to $5.4bn from $5.7bn in the prior year Q2. The margin decline appears to be mix-driven. Looking ahead, AMZN guides to Q3 revenues of $138-143bn and operating income of $5.5-8.5bn, ahead of pre-results consensus of $138bn and $5.5bn respectively. Amazon is cheap on conventional metrics – just 12.7x EV/EBITDA for 2024, falling to 10.5x for 2025 – for reference, the S&P 500 is on 12.5x EBITDA and I suggest that AMZN should be trading at a material premium to the market.

 

SN/ – H1 results, upgraded guidance

Smith + Nephew released its H1 results on Thursday. Revenue of $2.7bn was +5% on a reported basis (+7% underlying), with operating profit widening from $242m to $275m (the margin was +70bps to 10.0%) despite a 160bps contraction in the trading profit margin to 15.3% “reflecting expected seasonality and higher input inflation, transactional FX and increased sales and marketing to drive growth”. Adjusted EPS slipped from 38.1c to 34.9c. An unchanged interim dividend of 14.4c has been declared. For the full year, management has increased underlying revenue growth guidance to +6-7% from +5-6%, with the trading profit margin expected to be at least 17.5% (in line with prior guidance). A tax rate of c.17% is now expected, down from the previous c.19% assumption. All in all, the upgraded guidance is very good to see, supported by positive strategic execution on the Group’s turnaround plans. The stock trades on 14.9x consensus 2024 earnings and yields 2.8%, which seems quite inexpensive to me.

 

HLN – Solid H1 results

Haleon released its H1 (end-June) results on Wednesday. The Group revealed a very strong revenue performance, +10.6% to £5.7bn, of which +10.4% was organic driven by price (+7.5%) with volume/mix contributing 2.9%. Power brands delivered 10.1% organic growth, with 55% of brands gaining or holding market share year to date. Operating profit (adjusted, CER) advanced at a slightly slower pace of 8.9% to £1.3bn, with the adjusted margin of 22.2% -40bps in CER terms. Cash generation was strong, £749m operating cashflow (up from £680m in the prior-year period) and £369m free cash flow (down from £553m in the prior year, driven by a £216m y/y increase in finance costs), helping net debt to finish the half at £9.5bn (3.4x TTM EBITDA), £1.2bn below the July 2022 net debt of £10.7bn. The Group has agreed to sell Lamisil, with completion expected in Q4, for an associated cash inflow of £250m, which will help push net debt / EBITDA below 3x. An interim dividend of 1.8p/share has been declared, payable in October. On the outlook, HLN guides to 7-8% organic revenue growth (was “towards the upper end of the 4-6% range”) and 9-11% adjusted operating profit growth in CER, implying a different operating leverage outturn for H2 to what we saw in H1 – there may be some downside risks to this I suspect, but hardly material to the investment case. The Group reaffirmed that it intends to deliver annualised gross cost savings of c.£300m over the next three years, with the benefits largely expected in FY 2024 and FY 2025. I’m very positive on Haleon, I like its portfolio of strong brands, its cash generative qualities and the discount it trades at relative to peers (a function of the overhang from GSK and Pfizer shareholdings). It’s on my watchlist for buying more of in the short term. The stock trades on 16.8x 2024 earnings and yields 1.95%.

 

KYGA – H1 results, Bolt-on Chinese acquisition

Kerry Group released its H1 (end-June) results on Wednesday. Group revenue was €4.1bn representing 5.1% organic growth. Within that, volumes were +0.6% with pricing providing the balance. EBITDA of €518m was unchanged y/y with a 20bps margin reduction offsetting topline growth. Adjusted EPS of 180c was +2.1% in CER. An interim dividend of 34.6c has been declared, up from 31.4c last year. Net debt has reduced by €0.4bn since the start of the year to €1.8bn, reflecting the disposal of the Sweet Ingredients Portfolio. At 1.6x EBITDA, this puts the Group into a strong position to exploit growth opportunities, such as the Chinese acquisition noted below. The Group reaffirmed its FY outlook guidance of growth in adjusted EPS of 1-5% in CER terms. Elsewhere, Kerry Group announced on Tuesday that it is to acquire Shanghai Greatang Orchard Food Company in China. The business has c.120 employees and is a “leading producer of local authentic and innovative taste solutions”. It is expected to deliver FY 2023 revenues of €38m. Kerry sees the transaction as complementing its existing Chinese footprint, “most notably in the significant foodservice hotpot market”. The initial consideration is €91m, a punchy multiple of close to 2.5x sales, with potential milestone payments of a further €99m due across the next three years, depending on the achievement of performance targets. While this is small in a Group context (Kerry’s market cap is €16bn), KYGA has a proven track record of successfully acquiring and integrating businesses, driving impressing CAGR in earnings and dividends over its many decades as a public company. Kerry trades on 18.6x consensus 2024 earnings and yields 1.4%, not cheap but this is a high quality business.

 

GRP – The wind in Spain

Greencoat Renewables announced on Tuesday that it has agreed the forward purchase of the 50MW Andella wind farm, its third acquisition in the Spanish market. Separately, it has closed the acquisition of the 50MW Torrubia solar park. Andella is under construction, with commencement of commercial operations expected in Q2 2024. The project consists of 10 Siemens Gamesa 5MW turbines. This transaction makes strategic sense for GRP, providing further asset and geographic diversification to a Group that operates across Ireland, Germany, France, Finland, Sweden and Spain. The acquisition of Torrubia was agreed in December 2020 under a forward purchase agreement. GRP’s total borrowings are now at an undemanding 47% of GAV, well inside its self-imposed 60% limit. While debt is an option to pay for Andella (estimated to cost €90-95m), it is worth noting that the Group has a very cash generative model – in FY 2022 it had operating cash flow of €102m while the cash cost of the dividend is €73m/year. I’ve said before that GRP is likely a preferred partner for developers of European renewable assets to arrange forward sale agreements with, given its strong balance sheet, familiarity with a range of technologies (wind, solar, battery power) and suppliers and proven ability to execute transactions across different markets. GRP trades on an undemanding 12.3x 2024 consensus earnings and yields an attractive 6.2%.

 

PRX – Disposal at a very keen price

Prosus announced on Tuesday that its 100% owned PayU business has agreed to sell its Global Payment Organisation (GPO) to Rapyd for US$610m in cash. Following the sale, PayU will focus on its rapidly growing Indian payments and credit business, which serves more than 450,000 merchants and has more than 2m credit customers. GPO handled US$34bn of payment volumes in FY 2023, >300% above FY 2018 volumes. Recent media reports had said that PayU was considering a sale of its ex-India business, so this is not a particular surprise. What is a pleasant surprise though is the reported multiples for the transaction, which is subject to customary regulary approvals and closing conditions, 13.0x CY 2024E EBITDA on a standalone basis, which is a c.17% premium to peers. On completion, the deal will further strengthen PRX’s balance sheet (it last reported net cash of US$0.3bn) and is another helpful step to simplifying the business, which suffers from a conglomerate discount (its NAV per share is €107, of which €80 of NAV per share relates to Prosus’s shareholding in Tencent alone, so the Prosus share price of €68.65 earlier today implies you get all of Prosus’ other assets outside of Tencent, including its net cash, at a negative valuation). In related PRX news, I note that Indian media reports this week said that PayU is considering an IPO of its Indian operations, which offers an opportunity for PRX to monetise this asset.

 

PCA – Another better-than-book-value disposal 

Palace Capital announced on Wednesday that it has sold 22 Market Street, an office property in Maidenhead, for £9.6m before rent incentives. The net price of £9.0m is 9.7% ahead of the end-March 2023 book value. PCA will use £3.5m of the proceeds to repay bank debt, with the balance sheet strengthening to a net debt position of £0.1m. Gross debt is £20.2m and cash is £20.1m, so presumably the Group is balancing break fees on loan facilities and the keener rates available on deposits at this time. Further portfolio disposals will fund distributions to shareholders as PCA continues to divest its real estate assets. It is hard to square today’s 248p share price and ongoing better-than-book-value disposals with the end-March 2023 EPRA NTA of 296p/share.

 

RYA – Bumper passenger figures (again)

Ryanair announced on Wednesday that it carried 18.7m passengers in July, the first time in the Group’s history that it carried >18m guest in one month. The July passenger figure is 11% above the outturn for the same month last year.  The load factor of 96% was in line with the same month last year. On a rolling 12 months basis, RYA carried 175.3m PAX in the period to end-July, +23% y/y on average loads of 94%, +7pc y/y. RYA guides to 183.5m passengers in FY (year-end March) 2024, +9% y/y. On the strength of these data, the Group should easily meet this new target. Ryanair trades on just 10.3x consensus 2024 earnings, which seems extremely cheap for a high quality sector leader, in my view.

 

HBR – Track 2 status for CCS projects

Harbour Energy said on Monday that its 60% owned Viking CO2 transportation and storage network and Acorn CCS project have both been awarded Track 2 status as part of the British government’s CCS cluster sequencing process. This means that both projects now move into FEED and discussions with the government over licence terms, ahead of FID. Viking has the potential to transport and store up to 10m tonnes of CO2 annually by 2030 and 15m tonnes by 2035, with independently verified storage capacity of 300m tonnes of CO2 across the depleted Viking gas fields. This is a welcome step for HBR, particularly viewed through the lens of ESG ratings (and associated future borrowing costs and marketability of the Group to investors). Harbour Energy is one of the cheapest stocks in my portfolio, trading on 6.2x consensus 2024 earnings and yielding 7.7%. Its net cash position is a further attraction.

 

GSK – Incremental pipeline progress

GSK said on Monday that the US FDA has approved the use of Jemperli (dostarlimab) plus chemo for primary advanced or recurrent endometrial cancer. This is the first immuno-oncology treatment approved in the frontline setting for this patient population in combination with chemotherapy. This widens the addressable market for Jemperli by up to 18,000 per annum in the US, good news for patients and GSK alike. GSK’s Q2 results last week showed that the Group has 68 vaccines and medicines across Phase I-III as at the end of June, a pipeline that I don’t see as being fairly reflected in an undemanding valuation of just 8.8x expected 2024 earnings. The stock also yields 4.5%.

 

RHM – Closes Spanish acquisition

Rheinmetall closed its €1.2bn acquisition of Spain’s Expal Systems on Tuesday. The acquisition materially expands the Group’s ammunition production capacity and product range at a time where there are huge cyclical (Ukraine) and structural (a demonstrated need to rebuild Western inventories) demand drivers for medium and large calibre munitions. Expal covers the full gambit from propellant to fuse. Reflecting the aforementioned demand drivers, it is no surprise that RHM will keep all of Expal’s existing locations in Spain and the US operational, “with further expansions planned”. I’m very positive on RHM, which is well positioned for the changed security backdrop. The stock trades on an undemanding 14.3x 2024 earnings and yields 2.6%.

PRSR – Dividend in-line

PRS REIT announced on Wednesday that it is declaring an unchanged 1.0p/share quarterly dividend for Q4 (to end-June 2023). This is in-line with expectations. Recent updates from the Group show that the dividend is on course to be covered in FY 2024 and that the Group has completed >90% of its development pipeline, both of which significantly reduce the risk profile around the Group. PRSR yields 4.9%, not as elevated a yield as other income plays, but it is safe with more than 5,000 properties contributing to its rent roll.