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 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 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 26/1/2024

ABDN – Transformation/Trading/Ratings 

BHP – Brazil bill

BOCH – Checks out of Russia 

CLIG – Trading update

DCC – Bolt-on acquisition

HLN – Divestment 

IDS – Positive Ofcom noises

RHM – German contract

RYA – Boeing risks

WDS – Trading update

ABDN – Transformation/Trading/Ratings 

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

 

CLIG – Trading update

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

 

WDS – Trading update

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

 

HLN – Divestment 

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

 

DCC – Bolt-on acquisition

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

 

BHP – Brazil bill

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

 

RHM – German contract

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

 

IDS – Positive Ofcom noises

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

 

RYA – Boeing risks

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

 

BOCH – Checks out of Russia

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

Stocks Update 19/1/2024

AMZN – iRobot disconnected?

BHP – Operational review 

BT/A – Pricing changes; Bond thoughts 

GSK/HLN – GSK places more Haleon shares

HBR – Trading update

IDS – Trading update

KMR – Trading update

LLOY – Sainsbury to exit 

MKS – Ocado Retail update

PRSR – Trading update

RHM – German order 

 

BHP – Operational review

BHP released a comprehensive operational review for the half-year ended 31 December on Thursday. As expected, this showed a strong performance across copper, iron ore and energy coal, and a more challenging half in metallurgical coal. The key highlights were 5% q/q production growth at WAIO, and 7% H1 copper production growth. In coal, NSW Energy had its best H1 in five years, but there was weakness in BMA “following significant planned maintenance and low starting inventories”. Nickel performance has been adversely affected by a sharp fall in prices, with management dropping a hint that there may be a non-cash writedown of the carrying value of its exposures here. For the FY, the Group has retained all of its production guidance for all assets, save for BMA, now seen at 23-25Mt (was 28-31Mt), while unit costs are expected to be within previous guidance, save again for BMA due to lower production. BHP says it finished H1 with net debt of between $12.5bn and $13.0bn, the top half of its target range, but this is influenced by the timing of the recent A$10bn OZ acquisition. On the development side, the $5.7bn Stage 1 of the giant Jansen potash mine in Canada is now 38% complete, with first production still targeted for end-CY 2026, while the Group sanctioned the $4.9bn Stage 2 in October. All in all, a mixed performance, which can be an occupational hazard for any individual results period given the Group’s diverse portfolio of commodities, but taking a long-term view, BHP’s skew to future-facing commodities leaves it well positioned through the cycle. The stock is inexpensive too, trading on 11.5x consensus 2025 earnings and yielding 5.0%.

 

HBR – Trading update

Harbour Energy released a trading and operations update on Thursday for 2023 ahead of the release of FY results on 7 March. Headline metrics for 2023 – production (186kboepd, split 50/50 gas/liquids); OpEx ($16/boe); capex ($1.0bn) and free cash ($1.0bn) were all in-line with guidance. The Group made solid progress on its development pipeline, starting production at Tolmount East in Q4; successfully appraising the Leverett discovery where production is slated to start in late 2024; making a significant gas discovery at its 20% owned Layaran-1 well in the Andaman Sea (where a multi-well exploration campaign continues); securing regulatory approval of the Zama FDP and striking the Kan oil discovery in Mexico; and progressing the two CCS projects in the UK. On the corporate development side, the Group has agreed the transformational Wintershall Dea acquisition, which is expected to complete in Q4 2024. Distributions remain a key part of the HBR ‘pull’ and in 2023 it returned $441m through a $200m dividend and share buybacks. The Group finished last year with a super strong balance sheet, with net debt of just $0.2bn (end-2022: $0.8bn) and it expects to briefly be in net cash during the first half of this year (as 2024 UK tax payments are back-ended). In terms of other 2024 guidance (which excludes Wintershall), production is slated at just 150-165kboepd due to “an unusually high level of planned shutdowns”, well down on the 2023 level; OpEx is guided at $18/boe (economies of scale apply here); capex is guided at $1.2bn; and the dividend will be $200m again (but higher on a per-share basis). For 2025, and again excluding Wintershall, the Group expects similar production and OpEx but higher free cash flow (presumably driven by commodity price assumptions). HBR shares came under pressure on the back of this week’s update, but trading on 7.8x consensus 2025 earnings and yielding 7.7% this isn’t a stock that’s remotely priced for perfection (not least given the super-strong balance sheet).

 

IDS – Trading update 

International Distributions Services, the parent company of Royal Mail and GLS, released a Q3 (end-December) trading update on Thursday. The main takeaway is that the Group is on track to meet full year guidance. Performance at the Group had been significantly negatively impacted by labour relations issues (since resolved) at Royal Mail, and the resolution of this resulted in Royal Mail seeing its best Christmas operational performance for four years. A key aspect of the deal with the unions was changes to work practices, and the results reflect the benefits of this, with sick leave -25% y/y in December (only 0.2% of the 54,000 ‘daily walks’ weren’t resourced on any given day by end-December) and increased recruitment of permanent employees on new flexible contracts leading to reduced use of agency staff. Group revenues were +9.8% y/y in Q3, helped by customer win-backs at Royal Mail (parcel volumes were +21% y/y in Q3 at 387m), and +3.8% y/y in the first nine months of the year, although the top-line growth has been offset by increased costs (pay and inflation). IDS expects a H2 adjusted operating profit that will broadly offset H1’s £169m loss. A key swing factor to look for in 2024 is Ofcom’s imminent review of the future of the Universal Service, which could unlock massive cost savings – Royal Mail has a delivery network designed for 20bn letters but it only delivers 7bn annually. However, with a UK general election on the horizon, any changes (which will require political approval) will presumably be back-ended to late 2024 or early 2025. IDS trades on a very cheap 9.8x consensus 2025 earnings, with analysts pencilling in a 4.0% dividend for the next financial year.

 

KMR – Trading update

Kenmare Resources released its Q4 2023 production report and initial FY 2024 guidance on Wednesday. The Group delivered just under 1m tonnes of ilmenite production in 2023, within its revised guidance range, with production of other products meeting or exceeding the original guidance. Softer external macro meant lower pricing, however, but the Group remains significantly cash generative – during 2023 it repaid $31m of debt, paid $58m in dividends, repurchased $30m of shares (a 5.9% share count reduction), started another material capex project (the transition to the Nataka orezone) and still finished the year with $21m of net cash (end-2022: $28m). The Group still guides to 2023 dividends of c.$50m (H1: $16.6m, implying a final dividend of >35USc). While the ilmenite production was -9% y/y, in part due to the effects of a severe lightning strike, shipments were only -3% y/y as KMR was able to use stocks to meet demand. For 2024, KMR guides to ilmenite production of 950k-1.05m tonnes, so flat y/y, but prices in early 2024 have been weaker than what was seen in the final quarter of last year. For the other products, primary zircon and concentrates volumes are guided to be a tad lower than in 2023, while rutile production is expected to be steady y/y. Cash opex is expected to be higher ($219-243m) in 2024 than in 2023 (c.$228m), in part due to higher power costs. Capex is guided at $224m, of which $189m is related to development projects such as Nataka. Kenmare will issue its FY 2023 results on 20 March. The absence of positive surprises saw the shares marked down this week, but the stock’s depressed rating (6.4x consensus 2025 earnings, 9.8% yield) is hardly demanding. For patient investors, a stock with net cash and a single resource with a 100 year mine life that accounts for 7% of global supply trading on a mid-single digit earnings multiple is clearly compelling.

 

PRSR – Trading update

The PRS REIT released its Q2 2024 (end-December) trading update on Wednesday. At the end of December it had 5,264 completed homes with an ERV of £60.3m, up from 4,913 homes with an ERV of £50.7m 12 months earlier. The number of contracted (under construction) homes has reduced from 613 at end-CY 2022 to 312 at end-CY 2023. Adding together completed and contracted sites means that the ERV of PRSR’s portfolio is now £63.4m, up from £57.3m at the end of December 2022. Asset management metrics are strong, with rent collection of 99% and occupancy of 98%. LFL rental growth for the 12 months to end-2023 was 11%, up from 6% in the prior year. Total arrears have reduced to £0.6m from £0.7m at end-December 2022. The portfolio income is very sustainable, with an affordability ratio of just c.22% of gross household income, well within Homes England’s upper guidance limit of 35%. The Q2 dividend will be announced later this month but I imagine it will be 1p/share, with the FY DPS looking (to me) like it will come in at an unchanged 4p/share, but importantly it will be covered in 2024 for the first time. The removal of the dividend risk this year (as dividends were previously uncovered); the removal of development risk as the pipeline completes; and expected interest rate reductions should be helpful catalysts for a share price rerating this year. In the meantime, the dividend offers a healthy income for patient investors. I also suspect the stock could be the subject of takeover interest given the reduced development risk profile and wide discount to NAV that it trades at. Bloomberg consensus has PRSR trading on just 7.7x 2025 earnings and yielding 5.1%.

 

MKS – Ocado Retail update

Ocado Retail released a trading update on Tuesday that showed improving momentum into the New Year. For Q4 2023 (13 weeks to 26 November), revenue was +10.9% y/y, a significant acceleration on Q3’s +7.2% y/y. This was driven by a combination of 4.8% y/y volume growth and higher average prices (+5.4% y/y). Active customers were 998k at end-Q4, +5.9% y/y, with average orders per week of 407k +6.3% y/y. For FY 2023, Ocado Retail’s revenue of £2.4bn was +7.0% y/y, despite a 0.9% y/y decline in volumes (this was clearly H1 skewed) that was driven by more selective buying by cash strapped households (average orders per week of 393k was +4.0% y/y but the average basket size was -4.5% y/y in volume terms). Ocado Retail delivered a “positive EBITDA for the full year”, although the absence of a disclosed number suggests to me that this was only modestly positive. Ocado Retail has improved MKS stock availability to c.90% of the addressable range, which is helpful for MKS’ Food business. In terms of trading since the start of FY 2024, Ocado Retail says it had “another record Christmas and hit its highest ever level of sales over the peak Christmas trading period”, noting that over 90% of peak [December 22-24] slots were sold by mid-October. On guidance, Ocado Retail says it expects to grow sales volumes “ahead of the market”, with volume growth driven by positive trends in customer acquisition, although revenue growth will be adversely impacted by mix (value) and moderating food price inflation. Nonetheless, mid-high single digit revenue growth is guided. EBITDA guidance is for continued progress on the journey to a “high mid-single digit” margin. All in all, a very solid update from Ocado Retail, with earnings from the JV set to be a tailwind for MKS for the current FY (year ending March) 2024 and beyond. Another consideration is that while the rate environment has weighed on Ocado Retail’s short term performance, in the longer term I see it as being very supportive, as more of the loss-making grocery delivery start-ups that only “made sense” in the era of loose money cut back on their operations, pushing more customers towards an Ocado Retail that has significant operating leverage. OCDO’s structural cost advantage (robotics) and scale / incumbency qualities means it has the staying power to win this contest. MKS is very cheap, trading on 10.2x consensus 2025 earnings and yielding 2.6%, per Bloomberg consensus.

 

GSK/HLN – GSK places more Haleon shares

In my 2023 portfolio review, noting that GSK had sold stock in Haleon at 328p in October, close to its 330p IPO price, I said: “I suspect it will look to sell more of its remaining 7% holding at or around this level in 2024”. I didn’t have to wait long for that prediction to come true, with GSK announcing on Tuesday evening its intention to sell down more of its stake in Haleon via an accelerated bookbuild. In the event, GSK confirmed on Wednesday morning that it sold 300m shares at 326p apiece, a modest discount to Tuesday’s close of 332.14p. This latest sale leaves GSK with 385m shares or a 4.2% stake in HLN worth c.£1.3bn – a useful future source of capital to support GSK’s growth strategy (as supportive, indeed, as the nearly £1bn of net proceeds from this week’s sale, coming just a week after GSK announced a $1.4bn acquisition). Haleon is also a winner from these sell downs, with the GSK shareholding reduction from 12.94% immediately post IPO to the new level of 4.2% mechanically increasing the free-float market cap of the company and triggering automatic buying by index trackers (HLN is a constituent of the FTSE 100). Pfizer has another 32% shareholding in HLN which it is expected to divest over time, although it should be noted that both Pfizer and GSK are subject to 60 day lock-ups post the settlement of this latest disposal. During 2023 I doubled my shareholding in HLN, with my reasoning being that the technical overhang from Pfizer and GSK was weighing on the share price, allowing patient investors to pick up HLN at a discount. As an aside, the GSK shareholding reduction also raises the prospect that HLN may consider buying back some of the residual GSK stake when it next comes to the market to sell stock. A potential source of funds to cover that outlay is a media report (Sky News) that says Indian firm Dr. Reddy’s Laboratories, is in talks to buy smoking cessation brand Nicotinell from Haleon for up to $800m. This follows the recent sale of antifungal brand Lamisil for £235m. GSK and HLN are both quite inexpensive relative to peers – GSK trades on 9.0x consensus 2025 earnings and yields 4.2%, making it one of the cheapest large cap (£64bn market cap) pharma stocks, while HLN trades on 15.8x 2025 earnings and yields 2.3%.

 

BT/A – Pricing changes; Bond thoughts

In an interesting development on Tuesday, BT announced significant changes to its consumer pricing model for both new and re-contracting customers in the UK. This follows a recent Ofcom consultation and will see the previous model of adjusting prices annually by CPI +3.9% replaced by a new system of easy to follow nominal ‘pounds and pence’ price increases – this summer, BT expects to increase mobile customers’ charges by £1.50 and broadband customers by £3, following a March price increase of 7.9% (i.e. the December annual CPI of 4.0% + 3.9%) – and these increases follow the 14% rise put through during 2023. Vulnerable customers are to be shielded from the planned increases (which is likely to be a tactical move by BT given Ofcom has yet to fully sign off on the new regime). With more than 30m retail customers in the UK alone, modest increases can lead to significant bottom line benefits, particularly as BT is materially reducing its cost base through network upgrades, a much reduced property footprint and increased digitalisation. Elsewhere, I also spent a bit of time this week digging into BT’s bond securities. Based off spot FX and disregarding early calls, the Group has £18bn of bonds outstanding with a weighted average coupon of 4.0% and maturity of 12.9 years. Clearly, market moves over the past two years means that the Group faces higher costs of new issuance than might otherwise have been, but the starting position as set out here and stock/flow effects (disregarding calls, BT has an average of £1.3bn of bonds maturing annually over the next 10 years) means that the incremental costs of new (versus retiring) issuance will not be material – a new GBP 10 year would probably come somewhere in the 5.5% area (and possibly lower if rates fall as the market expects them too). Another consideration is that BT/A is set to see a material step up in free cash flow generation once its FTTP roll-out to 25m premises in the UK concludes in December 2026. This should see net debt start to meaningfully come down thereafter – and an undrawn £2.1bn RCF and BT’s curve are both likely to be helpful in aiding this transition (on the latter, with no current scheduled maturities between 2034 and 2036, it’s not unreasonable to assume new 10 year issuances to help meet bond maturities between now and the end of FTTP in 2026) and the current absence of any maturities in 2038 and 2040 is also helpful given that 2028 and 2030 are the peak funding cliffs for BT, with maturities of £1.7bn and £2.1bn in those years respectively. Annual BT EBITDA of >£8bn; a cash dividend cost of £0.8bn; cash interest costs of (say) £0.8bn; pension contributions of £0.8bn; and post-FTTP annual capex of (say) £3bn could leave around £3bn per annum (c.25% of BT’s market cap) to divide between deleveraging, distributions and corporate development from the start of calendar year 2027 onwards. Indeed, Bloomberg consensus has BT/A net debt falling from £18.6bn in March 2026 to £18.0bn in March 2027. If my assumptions are right, we should see a meaningful rebalancing of value from bondholders to shareholders at BT/A in the medium term. BT trades on a very cheap 6.1x 2025 earnings multiple and yields 6.5%.

 

LLOY – Sainsbury to exit 

Sainsbury’s announced on Thursday that it is to commence “a phased withdrawal from our core Banking business”, with future financial services products to be provided to customers through a distributed model. During H1 of its current financial year Sainsbury’s Bank completed the sale of its mortgage book to The Co-operative Bank. Its remaining product set at that point were personal loans; credit cards; savings; insurance; and travel money. Press reports say that Sainsbury’s Bank has 1.9m customers and while I suspect that most of these are secondary banking relationships (i.e. customers of other banks who took out a Sainsbury’s financial services product as they shopped in the supermarket, while further circumstantial evidence for this hunch is that Sainsbury’s never launched a current account offering), there will be some opportunities for other banks to pick up some of these customers. As the largest High Street bank (it has a c.20% UK personal current account market share), Lloyds Banking Group will be a natural destination for some of the Sainsbury customers who will be looking for a new home. LLOY is very cheap, trading on 5.4x expected 2025 earnings and yielding 8.0%.

 

AMZN – iRobot disconnected?

Media reports this morning (Bloomberg) state that the EU is expected to block Amazon’s $1.4bn purchase of iRobot Corp on concerns that Amazon might be tempted to use its dominant position as an online retailer to favour iRobot products over those of its competitors. The reports also say that the US FTC is looking to block the deal. A $1.4bn acquisition is small beer for Amazon (market cap $1.6trn) although it would have been the Group’s fourth largest acquisition in history after Whole Foods, MGM and One Medical – which is more of a sign about how good AMZN is at internally generated value creation investments than anything else. Bloomberg consensus has iRobot delivering $929m of revenue and losing $117m at the EBITDA level in 2024, which compares to Amazon’s $636bn of 2024 income and $120bn of EBITDA on the same measure. So, not a game changer for AMZN, which has plenty of other growth levers (indeed, Bloomberg consensus has AMZN EBITDA growing to $167bn in 2026). AMZN trades on a 2025 EV/EBITDA of just 11.3x, a very cheap multiple for such a quality business.

 

RHM – German order

One of my New Year’s resolutions was only to cover material (nine digit) contract wins when updating on Rheinmetall newsflow. On Wednesday, RHM announced that the German Bundeswehr has contracted it to supply over €350m worth of 30mm rounds for the Puma IFV over 2024-27. Follow-up orders are expected. This order is synonymous with a lot of what sits in RHM’s >€30bn order book – multi-year contracts that offer multi-year visibility on revenue and earnings, while RHM is clearly a play on the structural growth in Western security investment. RHM trades on an undemanding 13.6x consensus 2025 earnings and yields 2.6%.

End of Year Review 2023

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

 

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

 

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

 

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

 

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

 

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

 

Financial Services (6.7% weighting)

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

 

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

 

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

 

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

 

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

 

Industrial Goods & Services (11.0% weighting)

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

 

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

 

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

 

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

 

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

 

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

 

Personal / Household (9.1% weighting)

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

 

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

 

Healthcare (5.6% weighting)

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

 

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

 

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

 

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

 

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

 

Basic Resources (12.5% weighting)

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

 

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

 

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

 

Oil & Gas (2.6% weighting)

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

 

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

 

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

 

Banks (9.9% weighting)

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

 

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

 

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

 

Retail (3.6% weighting)

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

 

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

 

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

 

Insurance (2.9% weighting)

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

 

Food & Beverage (8.6% weighting)

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

 

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

 

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

 

Travel & Leisure (5.9% weighting)

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

 

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

 

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

 

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

 

Media (1.3% weighting)

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

 

Utilities (9.9% weighting)

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

 

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

 

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

 

Real Estate (4.4% weighting)

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

 

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

 

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

 

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

 

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

 

Telecoms (1.2% weighting)

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

 

Construction/Materials (2.2% weighting)

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

 

Technology (2.6% weighting)

My exposures here are two megacaps, Amazon and Prosus.

 

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

 

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

Stocks Update 3/11/2023

BHP – Jansen expansion

BT/A – H1 results

GRP – Q3 NAV and dividend update

GSK – Q3 results; Beat and raise

HLN – Q3 results; FX headwinds

IR5B – Short-term charter

PMI – Bolt-on acquisition

RYA – Strong passenger numbers

SN/ – Q3 results; “encouraging progress”

STVG – Contract win

BT/A – H1 results

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

GSK – Q3 results; Beat and raise

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

HLN – Q3 results; FX headwinds

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

SN/ – Q3 results; “encouraging progress”

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

PMI – Bolt-on acquisition

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

BHP – Jansen expansion

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

GRP – Q3 NAV and dividend update

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

RYA – Strong passenger numbers

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

STVG – Contract win

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

IR5B – Short-term charter

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

Stocks Update 6/10/2023

AMZN – Shrewd moves 

AV/ – Takeover speculation

BHP – Development plans

BOCH – Another upgrade

GRP – Additional investment in Butendiek

HLN – GSK places more stock

RHM – More order wins

RWI – CMD

RYA – Traffic data

 

RWI – CMD 

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

GRP – Additional investment in Butendiek

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

 

HLN – GSK places more stock

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

 

AV/ – Takeover speculation

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

 

BHP – Development plans

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

 

RHM – More order wins

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

 

AMZN – Shrewd moves 

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

 

BOCH – Another upgrade

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

 

RYA – Traffic data

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

Stocks Update 18/8/2023

AV/ – Solid H1 results

HLN – Position doubled 

KMR – Record H1 results; tender

MKS – Trading update; guidance upgraded

PMI – Potential acquisition

RHM – More contract wins

 

HLN – Position doubled

I doubled my shareholding in Haleon (HLN LN) for £3.36 (inclusive of all charges) on Tuesday. I have been minded to increase my exposure to the Group for some time as it has upgraded its guidance yet still trades broadly in-line with the 330p IPO price, reflecting the technical overhang from the GSK/Pfizer rump shareholding. My bet is that fundamentals will trump technical in the long run, and HLN’s portfolio of strongly cash generative brands in attractive growth markets should perform well, in my view. Haleon is not the cheapest stock on the market – Koyfin has it on 17.7x forward earnings – but it is cheap relative to consumer healthcare peers, which reflects the technical overhang mentioned above.

 

KMR – Record H1 results; tender

Kenmare Resources released a strong set of H1 results on Tuesday. Notwithstanding the damage caused by a severe lightning strike in Q1 that weighed on production, the Group delivered record revenues ($243m, +23% y/y), aided by the drawdown of finished product stockpiles; 6% growth in EBITDA; and net income increased to $67.8m (+8% y/y). An interim dividend of USc17.5 was declared, +59% y/y, while a $30m tender to buy back up to 5.9% of the Group’s shares has been announced. The Group finished the half with net cash of $42.3m (up from $25.7m at end-2022). Looking ahead, the Group says that titanium pigment market “is slower in H2” although I suspect the restoration of normal production volumes will prove a useful offset to this. Koyfin data have KMR trading on a bargain basement multiple of just 3.8x P/E. 

 

AV/ – Solid H1 results 

Aviva released its H1 results on Wednesday. These showed a strong start to the year across the Group, with operating profit +8% to £715m and Solvency II own funds generation +26% to £648m. The Solvency II shareholder cover ratio was 202%. The Group says it has a “confident outlook” for the FY and “expect to exceed Group medium-term targets”. In a reflection of this confidence, the interim dividend was hiked 8%, with the Group guiding to a c.33.4p FY dividend for 2023 “with low-to-mid single digit growth in the cash cost of the dividend thereafter”. Underwriting in the period was strong, with GI COR of 94.8% (H1 2022: 93.8%), with UK and Ireland GI premiums rising 13% y/y (likely helped by the inflationary environment, but at the same time this is worth remembering given that AV/ bears think the stock is ex-growth). On a similar note, net flows in Workplace in Aviva Wealth grew 25% and private health insurance sales rose 58%, helped by expanded corporate sales. In Canada, GI revenues were +12% y/y. Efficiency was super-strong with baseline ‘controllable costs’ flat despite a c.7% inflationary headwind. AV/ sees FY operating profit growth of 5-7%. While the 8% growth in the dividend exceeds this growth rate, the reduced share count as a consequence of buybacks (totalling £300m in H1) provides significant reassurance on the sustainability of distributions over and above the strong cash remittances (+3% y/y to £825m) and (not unrelated) capital generation. Aviva is very cheap, trading on just 8.9x forward earnings, and yields a very attractive 8.8%.

 

MKS – Trading update; guidance upgraded

Marks & Spencer provided an update to the market on its trading performance on Tuesday. The first 19 weeks of its financial year “has seen continued market share growth in both the Clothing & Home and Food businesses, and good progress on the programme to reshape M&S”. Like-for-like revenues were +11% in Food and +6% in C&H. Overall Group margin “has continued to be robust”. MKS now guides for “the outcome for the year to show profit growth on 2022-23” which compares to market expectations of a c.7% y/y decline before this update – so an implied upgrade of the order of c.10%. Interim results are due on 8 November, which are expected to herald a return to dividend payments from the Group. Another milestone worth noting is the December 8 maturity of the 3.00% 12/23 bond (£128m outstanding), which will leave MKS with just three remaining GBP bonds (c.£655m outstanding, maturing over 2025-27) and one USD bond ($300m outstanding, maturing in 2037). An underappreciated, to my mind, aspect of the MKS story is that it is on course to be net cash (pre-IFRS 16 basis) shortly, which is worth remembering against the context of some of its UK peers (in particular) being loaded up with debt. MKS trades on 12.6x forward earnings, a multiple that to my mind does not provide due regard to the company’s improving prospects (a function of strong strategic execution) and its balance sheet strength.

 

RHM – More contract wins

Rheinmetall announced on Monday that its LUNA NG air-supported reconnaissance system will be supplied to Ukraine as part of the latest German support package. RHM says the order is “worth a figure in the low-two-digit-million-euro range”, with delivery expected before the end of this calendar year. LUNA NG comprises a ground control station and “several” UAVs that provides a reconnaissance capability of several hundred kilometres and operates at an altitude of up to 5,000 metres for over 12 hours. The system also includes a launch catapult, net equipment for catching drones when they land and spare parts. While this contract is small in a Group context (RHM’s order book runs to €30bn), once deployed it will put another one of the Group’s products very much in the shop window for other countries seeking these capabilities. Later this week, Rheinmetall said its KS HUAYU AluTech JV (co-owned 50-50 by Rheinmetall and China’s SAIC Group) had won a contract “in the low three-digit-million-euro range” from a “premium automaker” to supply components for fully electric vehicles, with deliveries under this contract set to commence in 2026, and “additional follow-up orders” expected in the future. This customary long-term contract provides helpful visibility for revenues and earnings into the longer-term. Finally, earlier today RHM’s newest factory opened in Zalaegerszeg in Hungary. The Group is manufacturing the Lynx IFV at this facility, with 209 units to be supplied to the host country and clear potential for export orders to other countries. RHM trades on a forward PE of just 15.8x despite being a relatively pure-play on the structural growth story in Western security.

 

PMI – Potential acquisition

Press reports (Sky News) this week state that Premier Miton has been in discussions with AssetCo about buying parts of the old River and Mercantile business from the latter. PMI had previously expressed interest in buying this business before AssetCo took it over, so it is not a hugely surprising development (albeit it is surprising that AssetCo would consider selling part of a business it only acquired around 18 months ago). Amidst a flurry of deal-making in the UK asset management space, it is no surprise that PMI (itself a product of the merger of Premier Asset Management and Miton) is open to playing a role in the consolidation of the industry. Koyfin data have PMI trading on an undemanding forward multiple of 11.4x.

Stocks Update 4/8/2023

AMZN – Strong Q2 results

AV/ – Topping up

GRP – The wind in Spain

GSK – Incremental pipeline progress

HBR – Track 2 status for CCS projects

HLN – Solid H1 results

KYGA – H1 results, Bolt-on Chinese acquisition

PCA – Another better-than-book-value disposal 

PRSR – Dividend in-line

PRX – Disposal at a very keen price

RHM – Closes Spanish acquisition

RYA – Bumper passenger figures (again)

SN/ – H1 results, upgraded guidance

 

AV/ – Topping up

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

 

AMZN – Strong Q2 results 

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

 

SN/ – H1 results, upgraded guidance

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

 

HLN – Solid H1 results

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

 

KYGA – H1 results, Bolt-on Chinese acquisition

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

 

GRP – The wind in Spain

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

 

PRX – Disposal at a very keen price

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

 

PCA – Another better-than-book-value disposal 

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

 

RYA – Bumper passenger figures (again)

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

 

HBR – Track 2 status for CCS projects

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

 

GSK – Incremental pipeline progress

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

 

RHM – Closes Spanish acquisition

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

PRSR – Dividend in-line

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