Stocks Update 3/5/2024

AMZN – Q1 results, only getting started

GSK – Upgrades FY guidance 

HLN – Q1 update, on track for FY

IDS – Constructive union comments

KYGA – Q1 update

PCA – Nearing the finish line 

RYA – Passenger data, good start to FY25

SN/ – Q1 update, solid start to 2024

SPDI – Dutch associate’s FY results 

 

GSK – Upgrades FY guidance

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

 

KYGA – Q1 update

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

 

HLN – Q1 update, on track for FY

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

 

SN/ – Q1 update, solid start to 2024

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

 

AMZN – Q1 results, only getting started

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

 

IDS – Constructive union comments

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

 

PCA – Nearing the finish line 

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

 

RYA – Passenger data, good start to FY25

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

 

SPDI – Dutch associate’s FY results

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

Stocks Update 26/4/2024

ABDN – Q1 update, positive momentum

APH – Another delay 

BHP – Approach for Anglo American 

BOCH – Senior issuance

CLIG – A good start to CY 2024

GRP – €25m buyback; NAV and dividend updates

GSK – Pipeline progress 

LLOY – Solid Q1 update

MKS/PRX – Getir news

PRX – Swiggy swag 

RKT – Q1 update reassures

RWI – Solid pre-close update

ULVR – Good start to the year

 

BHP – Approach for Anglo American

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

 

RWI – Solid pre-close update

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

 

ULVR – Good start to the year 

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

 

RKT – Q1 update reassures

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

 

ABDN – Q1 update, positive momentum

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

 

GRP – €25m buyback; NAV and dividend updates

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

 

LLOY – Solid Q1 update  

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

 

CLIG – A good start to CY 2024

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

 

PRX – Swiggy swag 

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

 

MKS/PRX – Getir news

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

 

GSK – Pipeline progress

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

 

APH – Another delay

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

 

BOCH – Senior issuance

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

Stocks Update 19/4/2024

BHP – Production update 

BOCH – Launch of share buyback

BT/A – Disposal rumours 

GRP – 10 year corporate PPA

GSK – Pipeline progress

IDS – Kretinsky approach

PCA – Disposals and tender updates

WDS – Q1 report 

 

WDS – Q1 report 

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

 

IDS – Kretinsky approach

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

 

PCA – Disposals and tender updates

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

 

BHP – Production update

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

 

GSK – Pipeline progress

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

 

BT/A – Disposal rumours 

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

 

GRP – 10 year corporate PPA 

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

 

BOCH – Launch of share buyback

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

Stocks Update 22/3/2024

AV/ – Singlife exit completes

BOCH – Step-change in distributions

GSK – Pipeline progress; Dementia report

HLN – Overhang reduces

KMR – FY results; Well positioned

MKS – Financial services report

PRSR – Interims; Dividend now covered

RHM – Bolt-on acquisition; German contract

RKT – Enfamil thoughts 

STVG – Further Studios wins

ULVR – I scream, you scream…

 

KMR – FY results; Well positioned

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

 

PRSR – Interims; Dividend now covered 

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

 

BOCH – Step-change in distributions

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

 

HLN – Overhang reduces

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

 

ULVR – I scream, you scream… 

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

 

RHM – Bolt-on acquisition; German contract

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

 

RKT – Enfamil thoughts 

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

 

STVG – Further Studios wins 

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

 

MKS – Financial services report 

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

 

GSK – Pipeline progress; Dementia report

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

 

AV/ – Singlife exit completes

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

Stocks Update 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 1/3/2024

ABDN – FY results

CRH – FY results 

GSK – Pipeline progress; Zantac update

HLN – FY results

MKS – Ocado Retail comments 

RHM – Order wins 

RKT – FY results 

RYA – Capacity constraints

SN/ – FY results

WDS – FY results

 

HLN – FY results 

Haleon released its FY 2023 results on Thursday. These showed strong growth, with price +7.0% and volume/mix contributing +1.0%. Statutory revenue was +4.1% to £11.3bn with the walk being a 3.8% FX headwind and a 0.1% M&A impact. Encouragingly, HLN’s Power Brands outperformed, with organic growth of 9.1% and six of the nine Power Brands seeing double-digit growth. Helped by operating leverage, adjusted operating profit was +10.4% at CER (+9.4% reported). Adjusted diluted EPS of 17.3p was, however, -6.0% due to the annualisation of interest costs and FX headwinds. Net debt finished 2023 at £8.5bn, 3.0x adjusted EBITDA. The Group increased the dividend payout from 30% to 35%, with a final DPS of 4.2p and a commitment for the “dividend to grow at least in line with adjusted earnings” in future. The Group has augmented this with an announced “capital allocation” of £500m for share buybacks in 2024. I’ve previously noted (most recently on 26 January) that HLN might consider a targeted buyback of part of the residual GSK stake (valued at £1.3bn at yesterday’s close) to remove that technical overhang from the share register, so I’m not surprised to see that. On the outlook, management guide to “another year of strong growth in 2024”, with 4-6% revenue growth and operating profits growing at a faster clip. Net debt is expected to decline to c.2.5x EBITDA in the medium term. HLN is inexpensively rated at 16.4x consensus 2025 earnings and yields 2.3%.

 

CRH – FY results 

CRH released its maiden set of results under US GAAP on Thursday. These revealed another record performance, with revenue growing from $32.7bn to $34.9bn and adjusted EBITDA increasing from $5.4bn to $6.2bn. The adjusted EBITDA margin widened 120bps y/y to 17.7%. RONA was a very strong 15.3%, +200bps y/y, while cash generation also impressed, with operating cash flow of $5.0bn, +$1.2bn y/y. The Group returned $0.9bn to shareholders through dividends and $3.0bn through dividends during 2023, with the FY 2023 dividend of $1.33 +5% y/y. On the corporate front, CRH spent $0.7bn on 22 acquisitions during 2023. The Group finished 2023 with a strong balance sheet, with net debt of $5.4bn equivalent to just 1.0x adjusted EBITDA. On the outlook, CRH expects a favourable market backdrop and continued positive pricing momentum in 2024, driven by significant infrastructure investment and reindustrialisation activity across North America and Europe. CRH has had a great run, +21% ytd, but is not expensive at a multiple of 15.2x 2025 earnings and yielding 1.9%.

 

RKT – FY results 

Reckitt released its FY 2023 results on Wednesday. The headline read: “A year of progress with mid-single-digit growth in Health & Hygiene”, and while that’s all fair, the results came in a touch behind market expectations, following a soft Q4 (LFL net revenues -1.2% y/y). The market was also unimpressed with the discovery of “an understatement of trade spend” in two markets which pared net revenues and operating profits by £55m and £35m respectively. Adjusted LFL net revenues were +3.5% y/y, with growth in Hygiene (+5.1% y/y) and Health (+5.0% y/y) diluted by a 4.0% y/y pullback in Nutrition as revenues normalised from the temporary spike resulting from competitor issues in the prior year. There was a welcome 220bps expansion in the gross profit margin to 60.0%, but the operating profit margin contracted 70bps to 23.1%, reflecting “increased brand equity investments (ad spend, to you and me) and inflation-led cost base increases”. The Group delivered a stronger free cash flow performance (£2.3bn, +11% y/y), helping to reduce net debt (from £8.0bn to £7.3bn) even despite a 24% y/y increase in cash returns to shareholders (to £1.5bn) fuelled by a £0.2bn outlay on share repurchases during 2023 as part of a wider £1bn share buyback programme. The FY dividend of 192.5p was +5% y/y. On the outlook, RKT expects another year of MSD growth in Health and Hygiene, with Nutrition returning to growth “late in the year”. Importantly, profits are expected to grow at a faster pace than the top-line (so, mid to high single digit growth presumably), although at least some of this will be offset by guidance for net finance charges to come in at £300-320m vs 2023’s £247m. RKT also signalled higher cash returns to shareholders this year, although this was always likely given that the £1bn share buyback programme was only announced in October of last year. Looking past the noise of rebasing Nutrition sales and the audit issue, I see Reckitt as delivering good growth through the cycle, translating into higher cash flows which are facilitating both continued deleveraging and enhanced shareholder distributions. Net debt of less than 2x EBITDA also raises the potential for the Group to consider meaningful M&A to bolster its portfolio. RKT is cheap, trading on just 14.1x consensus 2025 earnings and yielding 4.1%. 

 

SN/ – FY results 

Smith & Nephew released a solid set of results on Tuesday. Underlying revenue growth came in at 7.2% (+6.4% reported), while Trading Profit widened to $970m (a 17.5% margin) from the prior year’s $901m (17.3% margin), helped by higher productivity and operating leverage the benefits from which were partly offset by input cost inflation and FX headwinds. Revenue growth was broad-based, with Orthopaedics +5.7%, Sports Medicine & ENT +10.0% and Advanced Wound Management +6.4%. The Group delivered a much improved cash performance, led by better working capital management. Operating cashflow was $829m (2022: $581m). A flat dividend of 37.5c/share was declared, unsurprising given the Group is still executing on its strategic refresh. For 2024, management guide to USG of 5-6% (4.6-5.6% reported) and trading profit margin of at least 18% (and at least 20% in 2025). All in all, a good set of results and the promise of more to come as margins expand from 17.5% to >20% over the coming 2 years. SN/ is cheap, trading on 12.7x consensus 2025 earnings and yielding 3.3%.

 

ABDN – FY results

Abrdn released its FY results on Tuesday. The Group saw a mixed performance, with strong ii and Adviser performance, but weaker profitability in Investments. ABDN recently unveiled another (£150m, payback <2 years) round of cost-cutting in an effort to improve efficiency, but the flat Cost / Income ratio of 82% despite the delivery of £102m in cost take-out in 2023 (ahead of the £75m target) serves as a reminder that growing the topline is essential to delivering sustainable returns. The DPS was maintained at 14.6p, above adjusted diluted EPS of 13.9p. AUMA finished the year -1% at £495bn as net outflows continued to feature (£13.9bn in 2023, up from £10.3bn in 2022). Alarmingly, investment performance has deteriorated, with just 42% of funds beating benchmark over the past 3 years, a 23 point deterioration versus 2022. This is a headwind for delivering the AUM growth necessary to transform revenue performance. While the P&L needs work, the balance sheet is in great shape, with CET1 capital of £1.47bn providing 139% coverage, implying >£400m of surplus capital above regulatory requirements, and the stake in Phoenix and staff pension scheme surplus offer further buffers above that (ABDN’s highlighting of the latter may hint that the Group is considering a buyout to unlock value). The Group returned £0.6bn to shareholders through dividends and buybacks in 2023; the cash cost of the dividend reduced from £295m in 2022 to £267m in 2023 as a result of the share purchases – this is very important when considering the sustainability of the uncovered dividend. On the outlook, ABDN assumes a slow moderation in inflation (and associated interest rates) which may or may prove ambitious where the top-line is concerned. The Group didn’t unveil another buyback with these results – unsurprising, given that £150m will be invested in the latest cost cutting drive – while management says it “will continue to scan the market for bolt-on acquisitions”. The absence of a buyback removes a technical support on the stock, for sure, but investment of surplus capital in cost take-out and potentially M&A too is preferable to ABDN hoarding capital. Bloomberg consensus has ABDN trading on 11.5x 2025 earnings and yielding 9.5%. Clearly the stock is not without its risks, and there are concerns around the dividend, but the extent to which ABDN is overcapitalised offers reassurance in terms of the current delta between EPS and DPS as management work to address earnings through cost take-out and rejuvenating business momentum.

 

WDS – FY results

Woodside released its FY 2023 results on Tuesday. The Group delivered record production of 187.2 MMboe and full year net income of $1.7bn ($3.3bn underlying, -37% y/y reflecting the 30% fall in average realised prices, with the walk to statutory profits chiefly represented by non-cash impairments) and operating cash flow of $6.1bn. A final dividend of 60c has been declared, bringing the full year dividend to 140c (an 80% payout ratio, but still -45% y/y). Efficiency was a hallmark of the results too, with LNG operations achieving 98% reliability over the year and unit production costs broadly steady at $8.3/boe (+2% y/y). In terms of corporate developments, the Group farmed down 10% of equity in the Scarborough JV to LNG Japan (a further 15.1% was farmed down to JERA since the start of this year). On the growth projects, the FPSO arrived at the Sangomar oil field offshore Senegal in February, with first production on track for mid-2024. Scarborough is 55% complete, with the first LNG cargo expected in 2026. A FID was taken on Trion (oil, Gulf of Mexico) last year. Impressively, 158% of production was replaced with proved plus probable reserves in 2023, a top quartile performance. On the outlook, WDS guides to 185-195 MMboe of production in 2024, steady relative to 2023. All in all, no great surprises here, and while annual performance can be volatile due to commodity price developments, structural demand drivers for leading energy producers with a quality portfolio of assets like Woodside means it should perform very well over the course of the cycle. Indeed, WDS’ CEO said that she expects LNG demand will surge by 50% over the next decade. Woodside trades on 16.8x 2025 earnings and yields 4.9%.

 

GSK – Pipeline progress; Zantac update

GSK announced positive headline results from its EAGLE-1 phase III trial on Monday for gepotidacin. The trial met its primary efficacy endpoint of non-inferiority compared to the existing leading combination treatment regimen for GC. The GSK antibiotic is also being investigated for potential use in uncomplicated UTIs, where it could potentially disrupt a market that hasn’t seen new oral antibiotics in over 20 years. Neisseria gonorrhoeae bacteria are estimated to cause 82m new cases globally each year, with 648k cases being reported to the US CDC in 2022. To the extent that gepotidacin, if approved, widens the addressable market for GSK, this will have obvious commercial benefits. GSK had 71 vaccines and medicines in its pipeline across Phase I-III/registration as at end-2023. Elsewhere, GSK said on Thursday that it had settled a Zantac case that had been filed in California state court as part of its approach to avoid protracted litigation. No liability has been admitted and while GSK says it “will continue to vigorously defend itself based on the facts and the science” this is hard to reconcile with settling cases. Nonetheless, the economics of settling cases may well be superior to years of lawsuits. GSK is very cheap, trading on just 9.6x consensus 2025 earnings and yielding 3.9%, despite the high quality of its development pipeline.

 

MKS – Ocado Retail comments 

Ocado reported its FY 2023 results on Thursday and, within those, my interest was centred on its 50-50 JV with Marks & Spencer, Ocado Retail. The JV had a stronger 2023 performance, with sales +7% and a return to a positive adjusted EBITDA of £10.4m from a £4.0m loss in the prior year. Following the closure of the Hatfield CFC, Ocado Retail’s capacity utilisation has climbed from 60% to 75%, which is very welcome to see. On the outlook, Ocado Retail is expected to deliver MSD revenue growth this year, and improved profitability (underlying adjusted EBITDA margin of c.2.5%) on the road to its medium term aspiration of a “high mid-single” digit adjusted EBITDA margin. The direction of travel here is helpful to see, and I expect that it will continue to improve as Ocado Retail grows into its excess capacity. Elsewhere, the Ocado results provided a lot of colour on the contingent consideration due from M&S. Subject to the achievement of contractually defined Ocado Retail performance measures, MKS was to pay £190.7m (£156.3m plus interest) to Ocado, or zero if the targets weren’t met. In the event, these targets have not been met, and while “there is no formal arrangement for a payment between zero and £190.7m”, OCDO argues that “the contractual arrangement with M&S expressly provides for the target to be adjusted for certain decisions or actions taken by Ocado Retail management that differ from the assumptions used in the discounted cash flow model which underpinned the sale transaction”. As a result “it may be that a legal process is required for this outcome to be assessed. The precise outcome of a legal process is inherently uncertain but would be binary – payment of either the £190.7m in full, or no payment”. It remains to be seen how this plays out, but the mood music suggests to me that MKS is unlikely to be on the hook for anything close to £190.7m. MKS is very cheap, trading on just 9.5x FY 2025 earnings and yielding 2.8%. In terms of the ability to absorb any Ocado Retail payment, net debt (including leases) to EBITDA is forecast at just 1.5x for FY 2025, so the balance sheet is in great shape.

 

RYA – Capacity constraints

Ryanair announced this morning that, arising from Boeing’s well documented production issues, it will now only take delivery of 40 of the 57 B737 deliveries that had been slated for Summer 2024. Ryanair had planned its schedule on the assumption that a minimum of 50 aircraft deliveries, so this will cause reduced frequencies on a number of routes leading to revised guidance that RYA will carry 198-200m passengers in FY 2025 compared to an original target of 205m. Clearly unhelpful, but the impact is modest at c.3% of volumes and presumably there will be a margin uplift on the remaining capacity so the hit to earnings is likely to be lower. Ryanair is very cheap in my view, trading on just 9.1x consensus FY 2025 earnings and yielding 2.2%. 

 

RHM – Order wins

Rheinmetall announced two size orders this week for its SHORAD platforms. On Tuesday the German Bundeswehr placed an order worth €595m for the delivery of highly mobile Skyranger 30 systems, which will commence in late 2024. Earlier today the Group announced that an unnamed “European customer” has placed an order “in the lower three-digit million euro range” for modular Skynex systems. After Austria recently placed an order for 36 systems I had said I expected further European SHORAD wins, so this news, while very welcome, is not a surprise. Given the disruptive effect of drones, I expect to see more contract wins for Skyranger – RHM has previously indicated that Lithuania and Denmark are potential customers. RHM has re-rated significantly this year, with the shares +51% year to date, reflecting its business momentum in the context of structural growth in Western security investment. A rating of 17.2x consensus 2025 earnings and a 2.1% yield doesn’t strike me as particularly expensive given the backdrop.

Stocks Update 23/2/2024

BHP – Solid H1 results

BOCH – Very strong FY results

BT/A – Sells BT Tower 

CLIG – Solid H1 results

GSK – Pipeline progress 

LLOY – Solid FY results

RHM – Deepens Ukraine partnership; Austria contract

SPDI – Arcona NAV update

STM – Trading and takeover update

STVG – Contract wins

WDS – Scarborough farm-out

 

BOCH – Very strong FY results

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

 

LLOY – Solid FY results

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

 

BHP – Solid H1 results 

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

 

CLIG – Solid H1 results

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

 

STM – Trading and takeover update

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

 

BT/A – Sells BT Tower 

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

 

WDS – Scarborough farm-out

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

 

GSK – Pipeline progress 

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

 

RHM – Deepens Ukraine partnership; Austria contract

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

 

STVG – Contract wins

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

 

SPDI – Arcona NAV update

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

Stocks Update 16/2/2024

ABDN – Exits JV 

BHP – Exceptional items update

BT/A – Industry consolidation report 

GSK – Pipeline progress

IDS/AMZN – UK parcel market shake-up

KYGA – FY 2023 results

KMR – Shareholder calls for strategic review

RHM – Investment

WDS – Reserves and financial update

 

KYGA – FY 2023 results

Kerry Group released its 2023 results on Thursday. The strapline on these was “solid business performance in a challenging environment”, which seems fair.  The Group delivered revenue of €8.0bn (-8.6%), with volumes -0.9%, pricing -0.7%, net disposals contributing -4.1% and FX -2.9%, while EBITDA of €1,165m (-4.2% y/y) was negatively impacted by the impact of disposals and FX. The EBITDA margin climbed 60bps to 14.5%. Kerry had free cash flow of €701m, an impressive 92% conversion and above the prior year’s €640m notwithstanding lower EBITDA. Net debt reduced from €2.2bn to €1.6bn (1.5x EBITDA), reflecting cash flow and net disposal proceeds. A final dividend of 80.8c has been declared, giving a total 2023 dividend of 115.4c, +10.1%. The Group said it will announce a further buyback once the current €300m programme completes (a third of it was executed in FY 2023 after the programme commenced on 1 November, so an update is likely during H1 2024). Kerry guides to constant FX EPS growth of 5-8% for the current year, a touch lower than what the model is usually capable of, but the strong balance sheet is likely to see that revised higher through M&A/buybacks, in my view. Bloomberg has KYGA trading on 14.9x consensus 2025 earnings, cheap for a business of this quality. 

 

KMR – Shareholder calls for strategic review

Thursday’s Irish Times reported that Kenmare Resources’ shareholder JO Hambro has called for a strategic review, saying it favours a sale of the company. JOH owns just over 6% of the company and has set out its views in a letter to the Board. Kenmare produces c.7% of global titanium feedstocks from a single asset in Mozambique with a 100 year mine life, making it an attractive target for any large resources company seeking exposure to that commodity. While I welcome any review that may lead to the unlocking of shareholder value, my hunch is that the Group would likely attract a better price following the completion of the $0.3bn WCP A relocation in 2025/26, the completion of which would significantly reduce the risk profile of the company. I last valued the company at 874p/share after the 2022 results, although commodity pricing developments since then likely means that’s too ambitious. Nonetheless, based on the current very cheap multiple I think the shares are worth at least 2x where they are currently trading at (319p this lunchtime), which puts Kenmare on just 6.7x consensus 2025 earnings (and a dividend yield of 7.8%).

 

WDS – Reserves and financial update

Woodside Energy released a reserves statement and financial update on Thursday. In a welcome development, the Group replaced 158% of 2023 production by 2P reserves last year, reflecting sanctioned projects in the Gulf of Mexico and improved North West Shelf and Pluto performance, partly offset by reserves reductions in Shenzi. The latter is going to contribute $1.2bn of WDS’ guided $1.5bn non-cash post-tax impairment charge for 2023, which Woodside says will not impact the dividend calculation. Woodside’s proved reserves life is 12.2 years given 2023 production levels, putting the Group in the top quartile of global peers. WDS has 1P reserves of 2.5kMMboe; 2P reserves of 3.8kMMboe; and 2C resources of 5.9kMMboe. The impairment charge, while unwelcome, is non-cash, with the reserves upgrade being more significant, in my view. WDS had $35.9bn of shareholder equity at end-June 2023, so the impairment isn’t overly material given that context. I am positive on Woodside which has an attractive asset base and is leveraged to favourable structural changes in the energy sector – this week Shell said that it estimates that global demand for LNG will grow by more than 50% by 2040 as the world shifts to cleaner forms of energy, and Woodside provides around 5% of global LNG supply. Woodside trades on 17.1x 2025 consensus earnings, not unreasonable given the structural growth drivers for the business.

 

BHP – Exceptional items update

BHP provided an update on its FY 2024 exceptional items outlook on Thursday. The Group is to impair its Western Australia Nickel business and increase its provision in relation to the Samarco dam failure. On the nickel impairment, which has been driven by dumping in the market, BHP will take a $2.5bn post-tax impairment charge against the carrying value of Western Australia Nickel, taking its net operating asset value down to -$0.3bn (including closure and rehabilitation provisions of $0.9bn). BHP is considering potentially placing Nickel West into a period of care and maintenance, while the 21% complete West Musgrave project, which came to BHP as part of last calendar year’s OZ Minerals acquisition, is having its phasing and capex profile reviewed. BHP is doubling its Samarco provision from $3.3bn to $6.5bn. Taken together, these developments (notwithstanding the non-cash nature of the Nickel impairment, it is plainly driven by market pricing dynamics) point to significant downside risk for BHP’s near-term dividend profile. BHP had shareholders’ funds of $44bn at end-June 2023, so it has ample capacity to absorb these setbacks. BHP trades on 11.5x 2025 earnings and yields 5.0%, which is cheap to my mind given its exposure to attractive ‘future facing’ commodities.

 

RHM – Investment 

Rheinmetall announced on Monday that it is building a new plant at its sprawling Unterluess facility in Northern Germany, where the Group has had a presence for 125 years. On completion and full commissioning, the new facility will have annual production capacity for 200k artillery rounds (and ancillary products), material in the context of European ambitions to grow EU production capacity from 1.4m this year to 2.0m in 2025. The €300m investment will result in the creation of 500 new jobs. RHM management said that the facility will mean the Bundeswehr’s own needs can be met through domestic capacity and “especially in a crisis – to assure unrestricted transfers to partner nations” (presumably the latter is a bit of shade being thrown at the Swiss). Production is stated to start in 12 months, with scale-up to 100% capacity by year three. This investment is a no-brainer, given the need to replenish the drawdown of Western inventories to support Ukraine (RHM starkly says: “The Bundeswehr’s depots are empty; replenishing its stocks will cost an estimated €40bn”) and the demonstrated shortfalls in Western production capacity to go toe-to-toe with Russia in this domain. By 2025 RHM will have the capacity to produce 700k rounds annually at plants in Germany, Spain, South Africa, Australia and Hungary. For context, Russia is said to be scaling up to output of 2m rounds per annum, so RHM is clearly a globally significant player in this critical product line. RHM has had a good run this year, +35% ytd, but trading on 15.8x consensus 2025 earnings it doesn’t seem to be fully up with events, in my view.

 

GSK – Pipeline progress 

GSK announced on Monday that the US FDA has awarded bepirovirsen Fast Track designation for the treatment of patients with chronic hepatitis B (CHB). This designation was requested based on its potential for addressing an unmet medical need, supported by Phase IIb trial data. A confirmatory Phase III trial is ongoing. CHB affects nearly 300m people worldwide (although only c.10% of these people have a diagnosis and only 5% receive treatment), with current treatment options offering a “less than 2-8%” functional cure rate (i.e. the virus is undetectable and can be controlled by the immune system without medication). GSK’s Bepirovirsen is “the only single agent in Phase III development that has shown the potential to achieve clinically meaningful functional cure response when combined [with other treatments]”. Clearly, there’s still a road to travel, but this looks promising for GSK. GSK trades on only 9.6x consensus 2025 earnings and yields 3.9%, a multiple that doesn’t give credit for its attractive pipeline, in my view.

 

ABDN – Exits JV

Thursday’s Times reported that VMUK has bought ABDN’s 50% stake in their joint investment business. The duo had only launched the digital platform, including a mobile app, to allow VMUK customers choose a range of investments in April of last year. The consideration for ABDN’s stake is only £20m, tiny in a Group context (Abrdn’s market cap is £3bn). The platform is said to have had £3.7bn of customer assets from 150k customers at end-2023, implying an average pot of £25k. I view this move as a further step in the simplification strategy at ABDN, which has been selling peripheral assets and bulking up in core customer-facing propositions. ABDN trades on an inexpensive 12.2x 2025 earnings multiple and yields 8.9%, albeit consensus has the dividend uncovered until 2026 at the earliest. 

 

IDS/AMZN – UK parcel market shake-up

The Sunday Times reported that the PE owner (Advent International) of UK delivery group Evri are readying the business for a £2bn sale. The business is said to have net debt of £1.3bn and produces underlying profits of £0.2bn per annum off sales of £1.5bn. Wednesday’s FT reported that the Barclay family has agreed to sell parcel delivery group Yodel to a consortium led by the owners of Tuffnells, a specialist in “moving loads of larger and irregular sizes” which emerged from administration last year. How a small parcel specialist will marry up with Tuffnells remains to be seen. For context, the latest Pitney Bowes Parcel Shipping Index gives the size of the UK market at 5.1bn parcels, of which IDS’ Royal Mail delivered 25% in 2022 (this share is likely to have grown since then due to the resolution of labour relations issues at Royal Mail) with the rest of the market being comprised of Amazon 17%, Evri 14%, DHL (including UK Mail) 12%, DPD/Yodel/UPS 6% apiece, FedEx 3% and Others 11%. I suspect that the uncertainties around Evri and Yodel might create openings for Royal Mail and Amazon to pick up some extra contracts. IDS trades on only 10.1x 2025 earnings, while AMZN is on a similarly undemanding 11.8x 2025 EV/EBITDA.

 

BT/A – Industry consolidation report 

Press reports (The Daily Telegraph) this week suggest that VMO2 and TalkTalk are in merger talks. If a tie-up were to proceed, this would likely result in lost wholesale revenues for BT/A, as TalkTalk’s c.2.5m residential customers would presumably migrate to VMO2’s wholesale network from BT’s Openreach. That said, the practicalities of this are tricky – regulatory/competition clearance; VMO2’s current lack of a national wholesale network means that Openreach would likely still be needed for some customers; and technology may not be homogenous across the two. So the impact for BT/A would likely be phased in over a period of time. The hypothetical impact is also modest in a Group context – say, £15/month*2.5m = £450m which compares to annual revenues of >£20bn – and perhaps lower if some TalkTalk customers elect to switch to BT/A (not least due to the latter’s FTTP roll-out). BT is very cheap to my mind, trading on only 5.7x consensus 2025 earnings and yielding 6.9%.

Stocks Update 9/2/2024

DCC – Q3 trading update

GSK – Pipeline progress

IDS – Yodel developments

PCA – Disposals and debt update

RHM – Contracts; Peer lists in Frankfurt

ULVR – FY results

WDS – Santos talks end

 

ULVR – FY results

Unilever released its FY 2023 results on Thursday. The key highlight within the results was the return to volume growth, +0.2% for the year but importantly an exit rate of +1.8% y/y in Q4. Underlying sales growth was 7.0% (price 6.8%, volume 0.2%), with all divisions seeing growth of 2.3-8.9%. The underlying operating margin expanded by 60bps y/y to 16.7% (gross margin was +200bps y/y), while free cash flow of €7.1bn was +€1.9bn y/y. An unchanged quarterly dividend of 42.68c was declared, payable next month. While underlying EPS was only +1.4%, this was a creditable performance given a 9.6% FX tailwind, so +11% on a CER basis. The Group has announced a new €1.5bn share buyback, to commence in Q2, which follows the completion of the €3bn buyback programme. On distributions, ULVR returned €5.9bn in 2023 comprising €4.4bn dividends and €1.5bn of buybacks. I note that Visible Alpha consensus was for €2.0bn of buybacks to be announced in these results, rather than the €1.5bn declared, but a possible reason for this undershoot is that ULVR sees net finance costs climbing from 2.1% of average net debt in 2023 to between 2.5% and 3% this year. ULVR’s net debt of €23.7bn was in-line with the prior year, reflecting the distributions detailed above. Drilling down into performance, the focus on the 30 ‘Power Brands’ is paying off, as the brands, which account for 75% of ULVR turnover, saw USG of 8.6%, ahead of the Group average, supported by increased brand and marketing investment (+130bps to 14.3%), focused on the Power Brands. ULVR has been optimising its portfolio, buying K18 and Yasso for a combined €675m and agreeing the disposals of Elida (which will close in 2024), Dollar Shave Club and Suave North America, receiving €578m for the latter two. In terms of the outlook, ULVR sees USG in 2024 within its multi-year range of 3-5%, with more balance between volume and price than 2023, and a “modest improvement” in operating margins. I suspect this guidance is conservative, given that household real disposable incomes in most of its markets should be growing this year as inflation has cooled. Overall, a solid set of results and I would be optimistic of upgrades as we move through 2024. ULVR trades on an undemanding 15.8x forward earnings and yields 4.1%.

 

DCC – Q3 trading update

DCC released its Q3 (end-December) IMS on Wednesday. In a customarily qualitative update, the Group reiterated its operating profit guidance for the year. Operating profit in Q3 was “modestly ahead of the prior year”, led by a stronger Energy performance that offset falling profits in Healthcare and Technology. Management continues to expect that FY 2024 “will be another year of operating profit growth in line with expectations, and continued development activity”. On the latter, DCC has invested £355m on acquisitions year to date, of which c.£45m was invested in Q3 on bolt-on acquisitions by the Energy business in the UK (previously covered on this blog), Austria and Ireland. The acquisition of Germany’s Progas (LPG distributor) is expected to complete by end-FY 2024. All in all, a solid update from a solid company. Bloomberg has DCC trading on just 11.6x 2025 earnings and yielding 3.6%. The stock is cheap, in my view.

 

PCA – Disposals and debt update 

Palace Capital released an update on progress towards the monetisation of its real assets on Wednesday. The Group has sold three investment properties for £15.2m, 2.3% below the March 2023 valuation. “Several properties are currently under offer”, which assuming they complete “will provide the company with various options for returning capital to shareholders, including a tender offer”. PCA has been repurchasing its stock on and off at a discount to NAV, augmenting NAV per share for patient investors. At Hudson Quarter, another two apartments totalling £1.4m are under offer, leaving 16 remaining. It is a pity that the previous management team didn’t sell all of the apartment element of that scheme to an institutional buyer to effect a faster recycling of capital. On the liability side of the balance sheet, disposal proceeds facilitated the full repayment of the £5.6m floating rate loan from Barclays, which was carrying a 7.1% interest rate. The only remaining debt facility is a £8.3m loan from Scottish Widows, which has a 2.9% fixed rate until July 2026. The proforma LTV as at 6 February was just 2.5%. While we await the valuers to come in with the end-March 2024 portfolio valuation, it seems to me that Palace Capital likely trades on a c.20% discount to NTA, which offers an attractive risk-reward trade off in my view ahead of a likely full portfolio realisation over the next 1-2 years.

 

GSK – Pipeline progress

An illustration of the breadth of GSK’s pipeline (71 vaccines and medicines at end-2023 across Phase I – Phase III/registration) is the publication of three stock exchange releases on Tuesday morning relating to the pipeline. The Group’s blockbuster RSV vaccine Arexvy has been accepted under Priority Review in the US for adults aged 50-59 at increased risk. Arexvy is currently approved for use by over-60s in the US, so a broader constituency of potential patients would clearly be positive for GSK. Elsewhere, the DREAMM-7 phase III trial shows Blenrep combination nearly tripled median progression-free survival versus standard of care combination in patients with relapsed/refractory multiple myeloma. The clinically meaningful trend in overall survival should help drive future demand for Blenrep – there are c.176k new cases of multiple myeloma diagnosed globally each year. In other development news, China’s National Medical Products Administration has accepted GSK’s regulatory application for shingles vaccine Shingrix for use by over-18s. It is currently approved by the Chinese authorities for use by the over-50s, so as with Arexvy in the US, any step to broaden the addressable market would have obvious commercial benefits for GSK. There are c.6m annual cases of shingles in China each year, with shingles estimated to affect 1 in 3 people globally in their lifetime. Bloomberg consensus has GSK trading on only 9.6x 2025 earnings and yielding 3.9%, a valuation that doesn’t properly reflect the strength of the Group’s pipeline, to my mind.

 

WDS – Santos talks end

Woodside Energy said on Wednesday that merger talks with local peer Santos have concluded without agreement. Woodside said it “will only pursue a transaction that is value accretive for its shareholders” hinting that it will consider other deals in the global LNG sector that it believes “provides significant potential for value creation” (a view I share, although I wouldn’t downplay WDS’ very attractive development pipeline). Woodside shares closed up 0.5% in Australia post the news, while Santos fell 6%, giving a clue about the market’s assessment on who the winner and loser from the fizzling out of merger talks are. Woodside trades on 17.8x 2025 earnings, not the cheapest, but the long-term drivers of demand are very much intact, in my view. A 4.4% forward dividend is another pull factor.

 

RHM – Contracts; Peer lists in Frankfurt 

Rheinmetall announced on Tuesday that it had secured a contract worth £282m from the UK for the supply of 500 palletised load system trucks to the MoD. Delivery is to be completed in March of this year, just seven months from initial discussions. On Wednesday, the American Rheinmetall Vehicles and GM JV announced that they had supplied three prototype trucks to the US Common Tactical Truck programme. The US aims to ultimately replace its existing fleet, involving the production of 40,000 trucks valued at $14bn, with RHM clearly looking for a slice of that business. Elsewhere, Renk, a maker of gear boxes, slide bearings and transmissions for tanks, announced on Monday that it would list its shares in Frankfurt. The Group previously shelved an IPO back in October, but its owner, PE fund Triton Partners, said it would list 30% of its shares this week. The Group’s shares listed at a price of €15 on Wednesday and have since climbed to €20, giving a market cap of €2.0bn. KNDS, a JV between KMW and Nexter, and Wellington are corner investors, taking stakes of €100m and €50m respectively in the IPO, with Triton remaining the largest shareholder. In 9M 2023 Renk had revenues of €653m and EBITDA of €104m. The listing of this company may offer Rheinmetall, which was reported to have bid for Renk in 2019, a route to acquiring the business – RHM closed the purchase of Spain’s Expal in 2023 and has just announced the purchase of a 72.5% stake in Romania’s Automecanica Mediaș – as Rheinmetall plays its part in effecting the consolidation of a fragmented European market to better position itself for the step change in demand arising from Russia’s invasion of Ukraine. RHM trades on 13.7x 2025 earnings and yields 2.6%, a rating that I don’t believe adequately reflects its high potential in a changed Western security environment. 

 

IDS – Yodel developments

Press reports (The Times) on Thursday say that UK courier Yodel, which handled 191m parcels in 2023, “is getting ready to call in administrators after so far failing to find a buyer”. Teneo is said to be on standby if it goes into administration. Yodel competes with the likes of IDS’ Royal Mail, Evri and Amazon Logistics. The latest annual published accounts show revenues of £676m and PTP of £18m in 2021. Clearly an evolving situation, but one that may allow Royal Mail (which handled 841m domestic UK parcels in the 9 months to end-December 2023, +2% y/y) to pick up some extra market share, particularly given the competitive advantage provided by the increasing use of automation in the business. IDS trades on an undemanding 10.3x consensus 2025 earnings and yields 3.7%, per Bloomberg data.

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%.