Stocks Update 28/6/2024

GSK – Pipeline progress

HLN – Disposal

PRX – FY results; Clearer value

SPDI – FY results; Pleasingly strong

STM – FY results; Waiting on approvals

 

PRX – FY results; Clearer value

Prosus released its FY 2024 results on Monday. As expected, these showed strong momentum in the business, particularly in terms of the bottom line and associated cash flow generation – a welcome consequence of the end of the era of ‘free money’ being that start/scale ups’ business models need to prove their worth. In the event, PRX’s consolidated revenues climbed from $5.0bn to $5.5bn, gross margins widened 750bps (to 40.6%), and EBIT improved to -$546m (a five year high) from -$1.0bn. Helped by income from associates and disposal gains, statutory net earnings were $6.6bn. PRX had pledged a big improvement in the performance of its E-commerce businesses and this was delivered on, with a trading profit of $38m, a $451m y/y improvement. The argument could previously be made that PRX deserved to trade at a discount to the value of its listed investments as its E-commerce businesses were loss-making. This argument no longer holds water. Cash flow was a major highlight, with operating cash flow of $1.0bn in FY 2024, up from -$120m in the prior year and ending five consecutive years of outflows (totalling $920m). Prosus spent $7bn on share buybacks last year, with the $17bn spend in the past two years helping to boost per-share NAV by 8%. The coming year should see more of the same – portfolio optimisation, accretive buybacks, and targeted improvements in the E-commerce businesses. This should make the value in this stock clearer to see, to my mind. As a footnote, this week it was reported that Deliveroo had rebuffed an M&A approach from DoorDash, which PRX has a $0.1bn stake in. To the extent that Food Delivery / Tech generally sees a pick-up in M&A, that should be helpful for PRX’s portfolio of assets. In addition to DoorDash, PRX also has stakes in other food/grocery delivery platforms including DeliveryHero, Meituan, Swiggy and iFood. Prosus’ market cap (€86bn) sits well below the value of its stake in Tencent (€102bn) alone, which makes the stock look ridiculously cheap to my mind given the profitability of its owned businesses, accretion from ongoing buybacks and the portfolio of listed assets outside of Tencent. 

 

STM – FY results; Waiting on approvals

STM Group released its FY 2023 results on Thursday. The results themselves are (I hope) of academic interest only given the expected imminent takeover of the company at an attractive price. For what it’s worth, they show a steady performance, with adjusted revenue climbing from £24.6m in FY 2022 to £28.1m, helped by £3m of additional interest income, and underlying PBT increasing from £4.7m to £5.8m. Net cash was in-line at £13.6m from £13.9m at end-2022. Given the proposed acquisition of the Group, no dividend has been declared in respect of FY 2023 performance. On current trading, STM says that year to date “the Group has continued to trade in line with the Board’s expectations”. On the takeover, the acquisition remains subject to change of control approvals by both Gibraltar and Malta. The long-stop date was previously extended to COB today (28 June) and earlier today the Group announced a further extension to 30 August, although the upbeat tone of the closing part of the Chairman’s letter in the FY results release possibly hints at a near-term resolution: “I look forward to updating the market in due course in relation to the change of control approvals”. An exit at the maximum agreed takeover price of 60p up-front and up to a further 7p/share deferred would represent a satisfactory 2x return on my investment. That the share price is at 56p suggests the market has a high degree of confidence that the transaction will complete.

 

SPDI – FY results; Pleasingly strong

Secure Property Development & Investment (SPDI) released its FY 2023 results earlier today. I had expected the results to show a decent result, given the settlement of the Bluehouse litigation for €0.5m (well inside the €2.5m provision). The results reflect this €2m gain, but the FY outturn was a profit of €6.5m (FY 2022: A loss of €10m), helped by gains versus book value totalling €7.5m on non-core assets. This helped NAV jump 40% from 10c to 14c per share (from €13m to €19m). The finalisation of the Arcona transaction is guided for Q3 2024, with the last steps being the transfer of the Ukrainian land assets from SPDI to Arcona and the distribution of Arcona shares to SPDI shareholders. Once that concludes, SPDI’s remaining property assets are Romanian logistics facilities. SPDI says that, along with JV partner Myrian Nes, it is looking at developing two different properties for the same tenant in two regional Romanian cities. At a high level, SPDI’s €19m of NAV (versus today’s market cap of £5m) is represented by Arcona shares (€12m); the owned Innovations Logistics Park in Bucharest (€3.8m) and the Ukrainian land bank (€1.5m). The latter is due to be swapped for more Arcona shares and the Arcona shares are due to be divvied out to SPDI shareholders in the coming months. This will leave the rump SPDI as a pure-play Romanian logistics business thereafter. Given the variance between the NAV (14c) and the share price (4p), I am happy to be long SPDI, but I will re-evaluate my position after the distribution of the Arcona shares to see if I want to remain long the rest of the Group. 

 

HLN – Disposal 

Haleon announced on Wednesday that it has agreed to sell its NRT business outside of the US to Dr. Reddy’s for a total consideration of £500m (and customary working capital adjustments). HLN will receive an up-front payment of £458m and £42m of performance-based contingent consideration over the period to end-H1 2026. The transaction is expected to close in early Q4. The NRT business consists of brands including Nicotinell, Nicabate, Habitrol and Thrive and has a presence across over 30 countries. This disposal had been well flagged in media reports and is consistent with HLN’s ambition to sharpen its portfolio. On the use of proceeds, HLN says it “will be determined in line with capital allocation priorities, including reducing leverage”. Given the timing of the disposal, the impact on guided FY 2024 net revenue and adjusted operating operating profit is minimal (0.5-1.0%). At 16.6x consensus 2025 earnings HLN isn’t the cheapest, but it is inexpensive relative to peers (reflecting the Pfizer overhang).

 

GSK – Pipeline progress

Two updates on Monday from GSK highlighted the ongoing promise from its R&D pipeline. The European Medicines Agency has accepted an application for Jemperli (dostarlimab) plus chemotherapy for use to all patients with primary advanced or recurrent endometrial cancer. GSK says it is “the only immune-oncology-based therapy to show a statistically significant and clinically meaningful overall survival benefit in the broader patient population”. Approval is expected in H1 2025. There are c.417k new cases of endometrial cancer reported each year worldwide, c.121k of which are in Europe. In other news, GSK’s Omjjara (momelotinib) has received regulatory approval in Japan for treatment of myelofibrosis. This follows similar approvals from the US FDA, European Commission and the UK authorities. Myelofibrosis affects around 1 in every 500k people worldwide. These approvals help to broaden the addressable market for GSK’s product suite, which is an incremental positive for the stock. As an aside, I note this evening’s release that shows a confidential settlement has been released in another single name Zantac case in the US, although that’s minor relative to the contingent liability GSK is addressing – supported by what seems to me like compelling scientific evidence in its favour. GSK is very cheap, trading on just 8.6x consensus 2025 earnings and yielding 4.1%.

Stocks Update 21/6/2024

APH – FY results; A sigh of relief 

BOCH – Potential block trade; S&P upgrade

RHM – Jumbo order

SPDI – Distribution of Arcona shares

THW – FY results; Huge asset backing

 

THW – FY results; Huge asset backing

Daniel Thwaites released its FY (year-end March) 2024 results on Wednesday. The results show a solid underlying performance, with revenue increasing from £108.8m to £115.5m and underlying EBIT increasing from £10.9m to £11.3m. The Group strikes a confident tone on the outlook, saying that: “factors that have been against us for the last few years, including inflation, a difficult employment market and the cost of living crisis are now abating and we are hopeful that the coming year will present a more stable trading environment…This last year has been one of confident investment across every area of the Company and that places us in a very strong position to move our performance forward in this current financial year. We have high expectations that, all things being equal, this coming year will be a good one”. Performance will be supported in the current year by Euro 2024 and the FY benefit from the recently (November 2023) reopened (post a huge refurbishment) Langdale Chase hotel, which was shut during the key trading period in FY 2024. As ever with THW, the attraction is the balance sheet, where TNAV has climbed to 426p at end-March 2024, 5x today’s 85p share price, from 412p at end-March 2023. Net assets of £251m include a pension surplus of £35m and I note that THW has merged its two DB schemes into one – I wonder if this is a precursor to a pension transaction with an insurer, which would transform the risk profile of the Group and unlock capital to finance further growth. All in all, trading at less than a fifth of its NAV and at 7x trailing earnings (and I would expect earnings to be higher this year given the tailwinds cited above), THW looks extremely cheap to me.

 

APH – FY results; A sigh of relief 

Alliance Pharma belatedly released its FY 2023 results on Wednesday. As expected, they contained a lot of red ink, with significant impairments in FY 2023 (and FY 2022, resulting in a restatement to prior-year numbers), but the underlying performance is solid, with 6% underlying sales growth last year, and gross profits rising 3% y/y. Free cash flow of £21m was +35% y/y, helping net debt to reduce from £102m at end-2022 to £91m at end-2023. No dividend has been declared, which won’t come as a surprise to anyone following the story. The non-cash impairments were £79m in FY 2023 due to lowered future cash flow expectations and higher cost of capital, with a further £28m impairment in 2022. On the outlook, APH guides to stable profits in FY 2024 (“Group performance in the five months to end-May is in-line with the Board’s expectation”) and “we remain confident in our medium to long-term performance”. All in all, I think the market will breathe a sigh of relief at these numbers, given the uncertainty that had surrounded the Group due to the delays with the release of audited FY results. The impairments were well anticipated and the underlying performance looks solid. The renewal of the senior leadership team of APH is, I think, also helpful in terms of a ‘fresh start’ for the investment case. To me, APH offers exposure to a portfolio of attractive products with good market positions and consistently solid cash generation. Its undemanding rating of 7.7x consensus 2025 earnings and rapid deleveraging (Bloomberg consensus has net debt falling to £71m at end-2024, then down to £47m at end-2025) are further pull factors.

 

BOCH – Potential block trade; S&P upgrade

Bloomberg reported on Thursday that BOCH’s second (Carval, 9.1%) and fourth (Caius Capital, 5.7%) largest shareholders are “exploring a sale of their stakes”. The combined 15% shareholding is said to have been offered to “potential buyers”.  Elsewhere, S&P raised Bank of Cyprus’ LT credit rating from BB to BB+, with a Positive outlook. This is not a surprise given recent Sovereign upgrades, but it is noteworthy that the S&P BOCH rating is now just one notch below investment grade – bang in line with Fitch (BB/Positive) but one notch below Moody’s (Baa3/Positive). BOCH is very cheap, trading on just 5.5x 2025 PE, yielding 9.0% and at 0.67x P/B for an expected 13% ROE.

 

RHM – Jumbo order

Rheinmetall announced the biggest order in its history yesterday, with the Bundeswehr and associated partners ordering €8.5bn worth of 155mm rounds. Delivery will start in 2025 to Germany, Ukraine, Netherlands, Estonia and Denmark. The statement says that “the main purpose of the order is to replenish the stocks held by the Bundeswehr and its allies, as well as to provide support to the Ukraine”, adding that “further increased call-offs are also expected in the coming years”. RHM’s €40bn+ order book provides very helpful visibility into the longer-term on its revenues and earnings. Rheinmetall is inexpensive given its strong growth profile, trading on 17.3x expected 2025 earnings and yielding 2.2%.

 

SPDI – Distribution of Arcona shares

Secure Property Development & Investment (SPDI) announced on Monday that it is calling an EGM on 10 July to secure the necessary approvals for the distribution of shares in Arcona Property Fund “or by a bank transfer of readily available funds, or both as the board of directors may in their absolute discretion may (sic) decide”. The conversion of an indirect shareholding in Arcona to a direct one would be a very welcome development. SPDI is due to release FY 2023 results in the coming week (I expect at COB on Friday 28 June) that should hopefully provide clarity on the value of SPDI’s residual assets – at end-June 2023 the Group had €13.3m of net assets, with €12.0m (41%) of its gross assets represented by the Arcona shareholding – Romanian logistics properties account for the bulk of the other gross assets. As a side point, it is noteworthy that the notice of EGM: (i) Confirms that the Bluehouse Accession case in Cyprus was settled (I understand on terms that are favourable to the existing provision stock relating to that matter), removing one tail risk on the stock; and (ii) The reduction in the share premium account relating to the transfer of Arcona shares will be higher, depending on the completion (or otherwise) of the transfer of SPDI’s remaining Ukrainian land assets in exchange for 135,000 shares in Arcona – this is worth c.€0.8m at the current ARCPF share price. The latter is particularly interesting as I didn’t think SPDI would be able to exchange on that given the difficulties in that country, but the very specific number of shares cited in relation to that matter presumably indicates that a deal is very close to completion.

Stocks Update 14/6/2024

BT/A – Bond tender; Slim pickings 

GSK – RSV progress; Zantac progress

OGN – Q3 trading update

PCA – Share tender 

PRX – Trading update

RHM – Further progress

SPDI – Arcona disposals

WDS – First oil at Sangomar

 

OGN – Q3 trading update

Origin Enterprises released its Q3 (end-April) trading update on Thursday. Performance has been impacted by adverse weather and challenging in-field conditions, with lower global feed and fertiliser pricing also impacting on headline revenue. For the first nine months of FY 2024, revenue was -21% y/y at €1.5bn as weaker prices offset 5.7% volume growth. On the development front, the Group has completed and commissioned its new fertiliser plant in Poland. The €20m share buyback programme continues, with around a quarter of the surplus capital earmarked for that still to be deployed (I wouldn’t be surprised to see another buyback announced at the FY results). For the full year, OGN guides to adjusted diluted EPS of 45-48c, narrower than the previous guidance of 44-49c. Further out, management says OGN “remains well on track to deliver the cumulative profit and cash generation and other operational targets, for the period FY 2022 to FY 2026, as outlined at the 2022 Capital Markets Day”. Preliminary FY results are due for release on 24 September. All in all, the sharpening of guidance (but still to the same midpoint of 46.5c) is a solid outturn, and one that further illustrates how cheap the stock is – at the 46.5c midpoint EPS guided, OGN trades on just 6.5x earnings and the stock yields 5.6%

 

PRX – Trading update

Prosus released a pre-close trading statement on Tuesday ahead of the release later this month of annual results to end-March 2024. This reflects South African listing rules that stipulate that entities whose results are expected to differ by at least 20% from the previous corresponding period must release such an update. PRX notes that improved consolidated ecommerce profitability and cash flow generation, supported by the ongoing share buyback, supports “meaningful growth in core headline earnings per share”, although headline earnings per share will be significantly impacted by non-underlying items. Reflecting also the exit from the OLX Autos business and the removal of the cross-holding with Naspers, prior period numbers are also being restated. For good order, headline EPS are guided at 103-107c, up from 27c, while core headline earnings are guided at 90-97c (from 99c in the prior year; and in-line with expectations). There is always a lot of noise around PRX, but the underlying attraction is simple – the stock (market cap €87bn, negligible net debt) trades at a discount to the value (€104bn) of its shareholding in Tencent alone, so you get the rest of its assets (more than 80 investments in businesses operating across more than 100 markets) thrown in at a negative valuation. As the Group continues to monetise its assets, this should help to further simplify the story and showcase the inherent value.

 

PCA – Share tender 

Palace Capital released the details of its long-awaited tender on Thursday. As a reminder, the Group has been monetising its real estate assets to extinguish debt (it’s now in a net cash position) and repurchase shares at a discount to NTA. Subject to customary shareholder approval, the Group is offering to repurchase 8.7m shares (c.23% of the outstanding count) at a price of 250p, representing a maximum aggregate consideration of £21.7m. This seems like a fair balance, pitched at an 11% premium to Tuesday’s closing price but also 5% below the end-March EPRA NTA per share of 262p. Repurchasing stock at a discount will, ceteris paribus, be accretive for NTA. Importantly, PCA says that “with further property sales due to complete later in the year, we anticipate making further capital returns through an additional tender offer as we continue to deliver on our strategy for shareholders”. I will sit this tender offer out, as I suspect there is further upside to the 262p/share end-March 2024 NTA (pro-forma for uncovered dividends) due to PCA’s remaining property assets (£88m gross value, which compares to total net assets of £98m) being on the balance sheet at a reversionary yield of 13.0%. PCA was trading at 232p this afternoon.

 

GSK – RSV progress; Zantac progress

GSK announced on Monday that the US FDA has expanded the age indication for its RSV vaccine, Arexvy, to adults aged 50-59. GSK notes that “over 13m US adults aged 50-59 years have a medical condition that increases their risk of severe RSV outcomes”. GSK continues to progress efforts to further broaden the target constituency for Arexvy to over-18s “with data read-outs expected H2 2024”. In addition, GSK has also filed regulatory submissions to extend the use of its RSV vaccine to 50-59 year olds in Europe, Japan “and other geographies”. Clearly, anything that broadens the market will have favourable commercial outcomes, so an incremental positive for GSK. Elsewhere, GSK announced progress this week on the myriad Zantac litigation that it is battling. The Kasza (single plaintiff) case which was scheduled to start on 10 June in Illinois was voluntarily dismissed, with GSK saying it “did not settle Ms. Kasza’s claim and has not paid anything in exchange for the voluntary dismissal”. That’s small compared to the c.70,000 plaintiffs in the class action suit in Delaware, where GSK was recently unsuccessful in having the case dismissed ahead of trial. GSK said it has started the process to appear the Delaware ‘Daubert’ decision, where the Group appears to have a strong case, namely that the scientific consensus (16 epidemiological studies) remains that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer. A decision on whether to grant interlocutory review and hear the appeal is expected “sometime later this year”, so Zantac will remain an overhang for some time to come. Reflecting this uncertainty, Bloomberg consensus has GSK trading on just 9.0x 2025 earnings and yielding 4.0%.

 

BT/A – Bond tender; Slim pickings 

BT announced this week that it is tendering to repurchase €750m (so in-line with the amount raised from this week’s bond sale) of its outstanding €650m 0.5% notes due September 2025 and €1.3bn 1.75% notes due March 2026. These repurchases coincide with this week’s issue of a new 10 year bond (3.875% coupon, a keen result for that tenor – last week I noted that the weighted average coupon on BT’s then outstanding stock of debt was 4.1%) that raised €750m. BT says the rationale for the offers is to optimise the liquidity and debt maturity profile of the Group. This is a prudent move to term out debt ahead of its scheduled maturity, although as I’ve noted before, the prevailing rate environment means the replacement debt is more expensive. However, as FTTP completes in 2026, this will pave the way for a step change in cash generation and – I assume – the commencement of a period of deleveraging by BT/A. The Group has only one scheduled maturity falling due later this calendar year, a €825m (outstanding) euro bond. At end-March BT had £2.8bn in cash and near-cash (money market fund) assets on its balance sheet and £18.5bn of financial debt (excluding leases). Elsewhere, Mexican billionaire Carlos Slim popped up on the BT register this week, taking a 3% stake in the telco whose largest shareholders are Patrick Drahi (24.5%) and Deutsche Telekom (12.1%). A spokesman for Slim said the stake is “just a financial investment, as we often make in many companies”, but given his status as one of the world’s leading telco entrepreneurs, it seems unlikely that the investment doesn’t come with his personal imprimatur. As a result, I see this as a welcome vote of confidence in BT and its strategy. As recent FY results demonstrate, BT is executing well on this strategy, which makes its low rating (7.4x FY (year end March) 2025 earnings and yielding 5.9%) look all the more anomalous.  

 

WDS – First oil at Sangomar

Woodside Energy announced on Tuesday that it had achieved first oil at the Sangomar field offshore Senegal. Phase I of Sangomar will have a nameplate capacity of 100,000 bopd, enabled by a FPSO facility. This is a positive step for WDS as it marks the on-time and on-budget – the latter estimated at US$5bn – completion of one of its three flagship development projects (the other being Scarborough in Australia and Trion in the Gulf of Mexico), which by extension de-risks the investment case for WDS. Woodside is inexpensive, trading on 13.9x 2025 consensus earnings and yielding 5.8%.

 

SPDI – Arcona disposals

Arcona, the Dutch listed associate that SPDI owns more than a fifth of, announced a series of disposals yesterday. It has signed agreements with a regional investment fund for the sale of its Zahradnicka office building in Bratislava and Prague’s Karlin office building for a combined €10.3m, slightly above their end-2023 book values. Separately, it has sold its remaining Bulgarian residential and ancillary land assets in Boyana, Sofia to a local investor for €1.59m, slightly below its end-2023 book value. Part of these proceeds will be used for a share buyback, with the remainder presumably earmarked for debt paydown. Arcona says that “in addition, the management will continue in the coming months with the sale of real estate in Poland and elsewhere”. Arcona started 2024 with real estate assets in six Eastern European countries. On the completion of these sales, it will have exited Bulgaria, and its Slovakia holdings will have reduced to just one office building in Kosice. A rapid monetisation of its whole portfolio is unlikely to happen given that some of it is located in Ukraine, but accretive buybacks and paying down expensive debt should reward the patient. ARCPF’s latest (end-Q1 2024) NAV is €10.91 a share, close to double the €6.00 at which the stock was being offered this afternoon.

 

RHM – Further progress

Rheinmetall announced a further jumbo contract win this week, with Germany’s Bundeswehr ordering another 1,515 trucks with an order value of over €920m, to be delivered later this year. RHM’s total order book runs to more than €40bn, giving strong revenue visibility well into the medium term. Elsewhere, RHM and Ukraine signed an agreement on Wednesday to expand their strategic cooperation, which covers a variety of work streams, including the establishment of manufacturing plants in Ukraine to help leverage off the evident skilled labour force there. This follows the opening on Tuesday of a maintenance and repair centre for RHM’s systems in Western Ukraine. RHM has a number of similar facilities operating in neighbouring countries. On Friday it emerged that auto supplier Continental has agreed a deal with Rheinmetall where suitably qualified employees leaving the former under its global redundancy programme (7,000 departures) will be transferred to Rheinmetall. The first 100 employees, from Continental’s Gifhorn plant in Germany, will transfer to Rheinmetall’s expanding facilities at nearby Unterluess. An elegant solution given tight German labour market conditions (5.9% unemployment rate). Fast-growing Rheinmetall trades on an undemanding 16.9x consensus 2025 earnings and yields 2.2%.

Stocks Update 7/6/2024

BT/A – Annual Report musings

EEP – FY results, Penultimate distribution

GSK – A busy week

PCA – FY results; Kitchen sink?

PRSR – PE investment in UK PRS 

RHM – Investment and order book news

RWI – FTSE 250 promotion

RYA – Good traffic growth

STVG – Solid trading update

 

PCA – FY results; Kitchen sink? 

Palace Capital released its FY (year-end March) 2024 results on Thursday. The strapline of the release was “Delivering on our strategy for shareholders” and this is fair, with management continuing to monetise its real estate assets to facilitate capital returns to shareholders. Since 1 April 2023 PCA has exchanged and completed on the sale of 24 investment properties for £113m and a further £4m of residential units at Hudson Quarter in York. This leaves PCA with a remaining portfolio of six investment properties valued at £54.4m and 13 apartments at Hudson Quarter valued at £6.6m and PCA says that “sales of these will continue subject to market conditions which have materially improved since the start of 2024”. During FY 2024, gross debt reduced by £56.0m to £8.3m, producing a net cash position of £11.5m at end-March, rising to £30.1m on a pro-forma basis for post-year end completions and exchanges. The Group bought back £15m of its shares last year, up from £7m in FY 2023, and will launch a £22m tender shortly which will complete during July. “An additional tender offer is likely to take place later in the year as further property sales are completed”. PCA’s NTA per share slid 12% last year to 262p from 296p at end-FY 2024, with LFL portfolio values falling 15.5% (buybacks at a discount to NTA reduced the damage). The 15.5% LFL portfolio valuation reductions are hard to square with last year’s sales of 21 properties coming in on average 4.4% above the end-March 2023 book value. I further note that the end-March book value of the properties has them on a blended reversionary yield of 13.0% (+440bps y/y) which is hard to square with expectations for falling UK policy rates. A final (Q4) dividend of 3.75p is being proposed, implying an annualised dividend of 15.0p, consistent with the FY 2023 distributions. While disposals are cutting PCA’s revenue streams, management is doing a good job of bringing down costs (admin and financial) and share buybacks are also reducing the cash cost of the dividend. PCA’s remaining portfolio, assuming sales currently in the process of completion go through, comprise leisure assets at Halifax (35% income yield and 9.6 year WAULT to break) and Northampton (WAULT of 13.1 years to break); office assets in Newcastle, York, Leamington Spa and Exeter; and the remaining apartments at Hudson Quarter. My sense is that all of these could be sold before the end of 2025 and, assuming my gut feeling that management has ‘kitchen sinked’ the book value of its remaining assets is correct, the way to play this is to remain patient and wait for a later tender / distribution as opposed to accepting the July 2024 tender. In saying that, details of this tender have yet to be published, so I’ll keep an open mind until I see those, but at this juncture I wouldn’t be a seller below the end-March 2024 NTA of 262p (pro-forma for future distributions going forward). PCA shares were trading at just 228p earlier today.

 

EEP – FY results, Penultimate distribution

Eastern European Property Fund Limited released its 2023 accounts on Thursday. The Group is a cash shell following the disposal of its remaining property asset (the Markiz building in Istanbul) last year. The Group finished 2023 with NAV of 9.19p (end-2022: 59.27p) with the bulk of the delta relating to a 45p/share initial distribution from the proceeds of Markiz. A second 5p/share distribution will be made on or around 18 June. Deferred consideration of £0.3m relating to the sale of Markiz is receivable in November of this year, following which, “in conjunction with the winding up of the Company, the Board expects that a small final distribution of any residual cash from the deferred sales proceeds will be made to Shareholders”. So, presumably another 2 or so pence per share to come in late 2024 / early 2025. All told, my nominal profit on this investment is of the order of 15%, and while on the face of it that is a poor return for a position I started building in 2017, that this has resulted in a positive net return is nonetheless pleasing to see given the myriad external challenges faced by the Group (Turkish politics, the pandemic, an earthquake, Syria and Ukraine, and the step-change in the rate environment) over that time.

 

STVG – Solid trading update

STV released a trading update on Wednesday ahead of a scheduled site visit by institutional investors. The Group has seen a strong start to the year in terms of total advertising revenue, +5% y/y in Q1 (as previously guided) and expected to be up 15-20% y/y in Q2, driven by Euro 2024, which Scotland is playing in. The Studios business continues to perform well, with the end-May orderbook at £86m (was £87m in early March, with the walk being new commissioning wins of £11m and programme deliveries of £12m) and guidance to grow the business to deliver £140m of revenues in FY 2026 reaffirmed. Management has reaffirmed that the cost savings plan will deliver £1.5m of benefits this year, increasing to a run rate of £5m p.a. as previously guided. All in all, this is a solid trading update that showcases good business momentum and ongoing strategic delivery. Despite a recent good run (shares are +46% year to date), STVG is still cheap, trading on just 8.6x consensus 2025 earnings and yielding 4.2%.

 

RYA – Good traffic growth

Ryanair released May traffic stats on Wednesday that show 11% y/y growth to 18.9m PAX on average loads of 95%. On a rolling 12 month basis, RYA has carried 186.9m PAX, +9% y/y. For the current fiscal year (to end-March 2025) RYA guides to 8% traffic growth to 198-200m passengers and on the strength of these data there would appear to be upside risk (while noting that May is only month 2 of the current fiscal year) to this guidance. RYA is very cheap, trading on just 7.8x consensus FY (year-end March) 2026 earnings and yielding 2.9%.

 

GSK – A busy week

It was a busy week for GSK. On Monday the Group issued three RNS releases, the first of which related to its unsuccessful efforts to get c.70,000 Zantac cases thrown out by the Delaware State Court. GSK continues to reaffirm that the scientific consensus (from 16 studies) is that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer and, consequently, “GSK will continue to vigorously defend itself against all claims”, and “will immediately seek an appeal” of the Delaware Court ruling. Clearly, until all of these Zantac legal processes are exhausted, this will remain an overhang on the stock, notwithstanding management’s soothing remarks that “GSK’s capital allocation priorities remain unchanged, and the ruling has no impact on the Company’s investment plans for growth”. Elsewhere, there were a couple of encouraging updates on GSK’s R&D pipeline this week. The latest study on Blenrep provides further indications of its effectiveness in relapsed/refractory multiple myeloma; and a Jemperli trial shows “an unprecedented 100% clinical complete response rate”. Finally, I note that GSK agreed to buy US-based Elsie Biotechnologies for $50m on Thursday, so a tiny bolt-on deal for the Group. Assuming a benign Zantac litigation outcome and continued successful commercialisation of its pipeline, I think GSK will dramatically re-rate higher from here – the stock is valued at only 9.1x consensus 2025 earnings, which is astonishingly cheap for a large-cap pharma company, to my mind.

 

PRSR – PE investment in UK PRS 

Tuesday’s FT reported that Blacktone has agreed to buy 1,750 new homes for rent from Vistry “as big money managers increasingly see opportunities in the UK’s underserved rental market”. The £580m transaction is the second such transaction between the two parties in the eight months, totalling £1.4bn and funding more than 4,500 homes. This investment is a welcome vote of confidence in the sector, and may help to draw attention to the significant discount to book value (share price of 79.7p vs an end-December NAV of 123.6p) that PRSR trades at. 

 

RHM – Investment and order book news

Rheinmetall announced on Monday that it has struck an agreement with the Lithuanian government to develop a new ammunition factory in the Baltic country. The new manufacturing facility has been granted the status of State importance, which has positive implications for planning risk. The release says the investment will total €180m, but it is not clear if any of the cost will be borne by the Lithuanian government. Regardless, the special status of the plant means that it will benefit from a 0% corporate tax rate for 20 years. Elsewhere, Spiegel reported on Tuesday that the Bundeswehr will order an additional 200k artillery rounds from Rheinmetall in a deal worth €880m. The report says that the order is designed to replenish stocks that were run down in support of Ukraine, although as noted before it seems highly probable that the West will be carrying higher inventories going forward than it did before 2022. RHM isn’t the cheapest, trading on 18.4x 2025 earnings and yielding 2.0%, but I don’t think its multiple is unreasonable given the structural growth underpinning the sector. 

 

BT/A – Annual Report musings

BT released its FY 2024 Annual Report on Thursday. This follows the release of preliminary results for the year on 16 May. In terms of ‘new news’, the key areas for me relate to the pension scheme and headcount. On the pension scheme, IAS19 liabilities reduced to £40.0bn at end-March 2024 from £41.6bn at end-FY23 (and £58.9bn at end-FY19). The number of members of the BTPS scheme continues to reduce, standing at 265k (55k deferred and 210k pensioners) at end-FY24, down from 270k (62k and 208k respectively) at end-FY23 and 288k (83k and 205k) at end-FY19. The BTPS scheme was closed to new members in 2001. Over time the financial risks from the BTPS should continue to trend lower – and at an accelerating pace – deferred members made up 21% of scheme members at end-FY24, down from 29% at end-FY19 and 38% at end-FY14. Turning to headcount, the average number of employees also continues to trend lower. It was 94.9k in FY24, down from 98.8k in FY23 and 106.5k in FY19. Automation and the completion of the FTTP programme should see further reductions from here. Lastly, I refreshed my table of BT’s outstanding bonds for spot FX rates and this shows a weighted average maturity (disregarding calls) of 13.7 years and a weighted average coupon of 4.1%. While the short end of the BT curve has a lot of low coupon maturities, which implies the weighted average coupon will tick higher from here, my expectation is that BT will be able to start to delever once the FTTP programme concludes in late 2026 – which will augment the falling liabilities from the BTPS. BT/A is cheap, trading on just under 7x consensus FY (year-end March) 2026 earnings and yielding 6.1%.

 

RWI – FTSE 250 promotion

Following the latest scheduled FTSE index review, Renewi is to be promoted to the FTSE 250. This will take effect from the start of trading on Monday 24 June. This will trigger mandatory index buying from passive tracker funds so is a positive technical boost for the Group. Renewi is inexpensive, trading on just 8.4x consensus FY (year-end March) 2026 earnings and yielding 1.9%.

Stocks Update 31/5/2024

BHP – AAL out 

HLN – Nicotinell reports

IDS – EP bid; FY results

MKS – Bond tender results 

PMI – Solid interims

PPA – Q1 results

RHM – Contracts keep coming

RWI – FY results; Streamlined 

STM – Small delay

 

RWI – FY results; Streamlined

Thursday saw the release of FY results from Renewi. The main takeaway from the release was the news that the Group has agreed to sell its loss-making UK Municipal business to Biffa. While this comes at a cash cost to RWI of €154m, the payback period is guided at c.8 years (in practice less, as RWI can invest the recurring annual cash savings elsewhere) and it removes PPP risks that would otherwise have run to 2040. RWI’s remaining (core) business will also have a more favourable profile, with >50bps of EBIT margin expansion. For the continuing businesses, FY24 was a year of normalisation, with recyclate prices retracing from their previous highs, contributing to underlying EBITDA coming in at €230m from the prior year’s €252m outturn. I am encouraged though by the statement that “in the last quarter of the year, volumes stabilised or returned to modest sequential growth”. Free cash flow was just €21m (€25m in the prior year), so it is unsurprising that improving cash conversion to >40% of EBITDA is a key priority for management, not least given the flattish end-FY24 core net debt of €368m (€371m at end-FY23). To be fair to RWI, the aforementioned FCF is net of €20m of deferred COVID tax payments in each of the past two years and UK Municipal outflows of €16m (last year) and €12m (FY23). The restoration of a modest (5p) dividend was well flagged, but should hopefully broaden the constituency of potential RWI owners. For the current year, RWI guides to a return to revenue growth and significant margin improvement, in line with current consensus. Renewi is very cheap to my mind, trading on just under 10x FY 2025 earnings and yielding 1.5%.

 

IDS – EP bid; FY results

International Distribution (interestingly, it has dropped the previous ‘s’ at the end of its middle name) Services (IDS) finally delivered its FY (year-end March) results late last Friday. As expected, the results show an improvement versus soft prior year comparatives which reflected the imprint of ruinous industrial relations’ hiccups, and within the results themselves there are ample hints of the strategic improvements that I think will have a transformative impact on future performance. Revenue of £12.7bn was +£635m y/y and the prior year’s reported operating loss of £742m was turned into a profit of £26m. A token dividend of 2.0p has been declared. On the strategic improvements, IDS notes quality of service metrics are trending higher across both commercial and USO products; it plans to increase parcel drop-off locations by more than 50% to 21,000; automation continues to increase, +5pc y/y to 81% in March 2024; productivity was +4.3% y/y in Q4, allowing for a smaller headcount; and the Group awaits the implementation of USO reforms that will significantly pare OpEx. On an IFRS basis, IDS finished March 2024 with a NAV of 368p. This was followed on Wednesday by confirmation of a recommended cash offer for IDS from Daniel Kretinsky’s EP UK BidCo at the previously mooted 370p level (comprising 360p up front, the 2p ordinary dividend which shareholders will be getting either way, and an 8p special dividend). Given the starting point of a NAV that is indistinguishable from what Kretinsky is offering and the strategic improvements to come set out above – which I believe will lead to rapid NAV accretion from here – I think this bid level is way too low and will vote against it. I note that the share price (335p this afternoon) continues to trade meaningfully below the 370p level and while much of the commentary suggests that this is due to a sense that EP’s undertakings on service, corporate governance and brand will not be enough to persuade the UK Government to approve the deal, I suspect I’m far from alone in thinking that 370p is simply too skinny a price to secure control of this company. It will be interesting to see if, as with Wincanton recently, a second bidder emerges. Bloomberg consensus has IDS trading on just 9.5x FY (year-end March) 2026 earnings and yielding an estimated 4.1%. 

 

PPA – Q1 results

Piraeus Port Authority released its Q1 results on Thursday. The Group, which operates the largest seaport in South-East Europe, heralded an “improved performance with consistently strong profitability margins”. Despite the disruption caused by geopolitical issues in the Red Sea and Eastern Mediterranean, PPA delivered 2.5% y/y revenue growth in Q1 (to €45m) and net income of €14m, +6.9% y/y. The balance sheet remains in good shape, with end-March net assets of €369m +3.9% year to date while net cash stands at €102m (-4% ytd, presumably reflecting growth capex phasing). The Red Sea impact is reflected in the 27.0% y/y decrease in transhipment cargoes reflecting ships’ avoidance of the Suez Canal, but this was fully offset by a 66% y/y uplift in domestic cargo, reflecting the strength of the Greek economy. PPA is extremely cheap for a globally significant infrastructure asset, trading on just 4.7x consensus 2025 EV/EBITDA.

 

PMI – Solid interims 

Premier Miton Group released its H1 (end-March) results on Thursday. The Group finished the period with £10.7bn of AUM, up from £9.8bn at the start of the year, helped by the addition of £0.6bn of acquired assets from Tellworth Investments and performance, which helped to more than offset £486m of net outflows and a £120m impact from disposals. PMI note an “improving fund flow environment during the current quarter”, which will be helped by 68% of funds having outperformed their benchmark since inception / fund manager tenure as appropriate. Adjusted PBT in the half fell to £5.7m from £7.9m in the prior year, driven by lower average AUM. The Group’s confidence in the outlook is underlined by a flat 3p declared DPS despite the lower H1 profits. Net cash is solid at £31m (a quarter of net assets). PMI is ultimately a play on the markets, so is always vulnerable to external factors, but an undemanding rating (9.8x consensus FY 2025 earnings) and an attractive 8.4% yield (underpinned by the strong cash position) makes this appear good value to me.

 

BHP – AAL out 

Last week I wrote that “I wonder if BHP would be better off not pursuing this opportunity too strongly and coming back at a later date to pounce on a smaller, more streamlined (and therefore less execution risk) AAL”. In the event, on Thursday BHP announced that it does not intend to make a firm offer for Anglo American, saying it was “unable to reach agreement with Anglo American on our specific views in respect of South African regulatory risk and cost”. I’m pleased that this transaction is not proceeding – I don’t think the risk-reward mix was favourable for BHP shareholders, particularly given the evolution of the financial consideration detailed in BHP’s series of proposals and (more recently) proposed socio-economic assurances to South Africa, which would have diminished strategic flexibility. BHP is very inexpensive, trading on 12.1x consensus FY (year-end June) 2026 earnings and yielding 4.7%.

 

RHM – Contracts keep coming

It was a busy week for Rheinmetall, which announced: (i) on Monday, that “a European customer country” (presumably Ukraine) has awarded it a “low three-digit million euro” contract for gun barrel systems for the PzH 2000 self-propelled howitzer; (ii) on Tuesday, that another “European customer country” has awarded it another “low three-digit million euro” contract for 35mm rounds for RHM’s Skynex air defence system; and (iii) on Wednesday, that it will now sponsor Champions League finalists Borussia Dortmund, which should further raise RHM’s brand profile. RHM’s order book stretches to more than €40bn, mostly from blue chip Sovereign customers, providing strong revenue and earnings visibility. RHM is not the cheapest, trading on 18.4x consensus 2025 earnings and yielding 2.0%, but the momentum behind the business is very strong.

 

STM – Small delay

STM Group said on Tuesday that its recommended acquisition by Jambo SRC Limited will take longer to conclude as change of control approvals from the Gibraltar and Malta regulators had not completed by 28 May, the original ‘long stop date’ for the Scheme to become unconditional and effective. Encouragingly, Bidco (Jambo) “confirms that it is not aware of any reason why the Regualtory Approvals should not be granted in due course”. The Scheme was previously approved by STM shareholders (by a 99.9% margin) on 6 December. The Takeover Panel has agreed to extend the long stop date to 28 June. Given the complexity of a takeover of a Group with regulated entities across multiple jurisdictions, this delay comes as no surprise. I remain hopeful of a conclusion by the end of Q2. 

 

MKS – Bond tender results 

On Thursday MKS released the results for the tender offers for its 2025 and 2026 bonds that were announced last week. Bondholders tendered £98m of the £204m outstanding of the 2025 bond and £92m of the £202m outstanding of the 2026 bond, leaving maturities of just over £100m remaining in each of the next two years. These tenders will pare £9m off MKS’ annual interest costs, albeit the Group will be missing out on interest income from deploying its surplus cash in this manner. Apart from the c.£100m maturities in each of 2025 and 2026, MKS also has a £250m bond maturing in 2027 and a $300m bond maturing in 2037. MKS is in a modest net cash position, which positively differentiates it from a number of its UK peers. The stock is cheap, trading on just 10.9x FY (year-end March) 2026 earnings and yielding an estimated 3%. 

 

HLN – Nicotinell reports

Media reports (Sky) this week suggest that India’s Dr. Reddy’s Laboratories is near a deal to buy the Nicotinell brand from Haleon. The brand may fetch “hundreds of millions of pounds”. This news is not a surprise – a potential sale of the brand was mooted last year – and it would provide increased optionality for capital deployment at HLN (deleveraging, bolt on M&A, further buybacks). Reflecting the Pfizer overhang, HLN is cheap relative to peers, trading on 16.5x consensus 2025 earnings and yielding 2.1%.

Stocks Update 24/5/2024

APH – CMA win

AV/ – Solid Q1 trading update

BHP – Increased and final offer for Anglo American

GSK – Pipeline progress; Zantac progress

MKS – FY results show excellent progress

RHM – Orders continue to flow 

RYA – Record FY results 

SPDI – Associate’s solid Q1 results 

 

MKS – FY results show excellent progress

Marks & Spencer released an excellent set of FY results on Wednesday. PBT jumped from £453m to £716m, with the core Food (sales +13%, adjusted operating profit increased by around three-fifths) and Clothing & Home (sales +5%, adjusted operating profit up by about a quarter) divisions turning in strong performances. As expected, the International division was weaker (sales -1%, adjusted operating profits down c.30%) and adjusted losses’ share at Ocado Retail widened slightly to £37m from £30m in the prior year. So, good market share gains (+40bps in Clothing and +15bps in Food, so good progress against the ambition for 100bps uplifts in both divisions’ share) and operational improvement (to give just two examples, full price sales mix and stock cover in Clothing is now 81% and 12 weeks respectively, versus 63% in 2020 and 18 weeks in 2019 respectively) driving impressive operating leverage. Strategic initiatives (store rotation, Gist logistics vertical integration) are also reflected in this performance. MKS aims to pare a further £100m off its cost base. The Group’s cash performance was stellar, with free cash flow of £414m up from £170m in the prior year, helping to push M&S into a modest net cash position on a pre-IFRS16 basis (£46m, versus net debt of £356m in the prior year). With £1.0bn of cash, an undrawn RCF and strong underlying profitability, it is no surprise to see that MKS is tendering to repurchase all of its 2025 and 2026 MTNs (£405m outstanding across both bonds, with a weighted average coupon of c.4.9%). If all of those bonds are repurchased, it will leave MKS with only two bonds remaining that mature in 2027 and 2037. MKS’ financial strength is in stark contrast to certain of its peers who have high levels of financial debt. The Group has announced a FY dividend of 3p a share, having already returned to the dividend list at H1 when it paid a 1p dividend – the one-third/two-thirds interim/final split is not a surprise. One surprise was the more constructive tone of commentary on the Ocado Retail JV – “we believe [it] could be the most competitive model for online grocery sales in the UK…There is enormous opportunity to improve trust in value, website experience, logistics, and supply chain, which will be the focus for the next two to three years”. Within the release, management also note the demise of a number of fast grocery delivery peers of Ocado Retail, a theme I’ve explored previously. Elsewhere, the Group aims to ‘reset’ the International business, with capital light partnerships to drive improved global reach. On the outlook, MKS gave a qualitative steer, saying it expects to make further progress, which seems very fair given the clear momentum that the Group entered 2024 with. All in all, strong strategic delivery and excellent business momentum. There’s a lot to like about Marks & Spencer, in my view. The shares trade on a very undemanding 10.6x consensus FY (year-end March) 2026 earnings multiple.

 

RYA – Record FY results 

Ryanair released its FY 2024 results on Monday. These showed a record performance from the Group, with revenues of €13.4bn +25% y/y and net income of €1.9bn +34% y/y. As had previously been flagged, the Group carried 184m (+9% y/y) PAX last year on loads of 94% (+1pc). The strong outturn is all the more impressive given the sharp rise in oil prices from $65/bbl in FY23 to $89/bbl last year. The Group is over 70% hedged for the current year at just under $80/bbl. Another headwind in the past year has been Boeing’s well publicised issues – RYA will have 158 B737 Gamechanger aircraft at end-July, 23 below the contracted level. RYA is unlikely to cede market share from this though, given the P&W engine repair issue for a number of its peers which is “likely to run into 2026”. Distributions are another key part of the RYA story – a maiden 17.5c dividend was paid in February and a final dividend of 17.8c is payable in September. The Group will augment this with a new €700m buyback, which should help pare the share count to c.1.1bn (it was 1.5bn in the mid-noughties – I don’t think the falling share count gets enough attention in the RYA narrative). I expect that the coming years will see further buybacks given the starting position (pre-€700m buyback) of net cash of €1.4bn (admittedly this is somewhat flattered by the Boeing delivery delays). RYA refrained from providing full guidance from the current year, albeit it does see passenger growth of 8% (to 198-200m PAX), subject to Boeing deliveries; and unit costs are set “to rise modestly” albeit this pressure will be “substantially offset by our fuel hedge savings and our rising interest income”. All in all, RYA is in a super spot, with a first rate balance sheet, structural cost advantage over peers and clear growth plans underpinned by an expanding fleet. I don’t see this mirrored in an extremely cheap rating of 7.9x consensus FY (year-end March) 2026 earnings and 2.8% yield – to put this in context, the ‘Ryanair of America’, Southwest Airlines, trades on 14.6x/10.9x FY (year-end December) 2025/2026 earnings. 

 

AV/ – Solid Q1 trading update

Aviva released a solid trading update on Thursday for Q1. The Group heralded “another quarter of consistent delivery”, with GI premiums of £2.7bn +16% y/y; Protection & Health sales of £106m +5% y/y; Wealth net flows of £2.7bn +15% y/y; Retirement sales of £1.7bn +13% y/y; and a SII cover ratio of 206%, -1pc year to date (reflecting distributions). The COR was 95.8%, -40bps y/y. The Group has made further strategic progress since the start of the year, exiting the JV in Singapore for £937m and reinvesting the proceeds into acquisitions in two of its three core markets – Canada (Optiom, £100m) and the UK (Probitas, £242m and AIG UK, £453m). Management says it remains “confident in meeting the Group targets outlined at our FY 2023 results presentation”, although I suspect there are upside risks given the evident momentum in the year to date. Aviva is cheap, trading on just 9.5x consensus 2025 earnings, and yielding 7.9%.

 

BHP – Increased and final offer for Anglo American

BHP said on Wednesday that it had made an increased and final offer ratio for AAL in its pursuit of its smaller peer. BHP has retained the same proposed deal structure (AAL to spin out its platinum and iron ore units, and sell the rest of the Group to BHP) but with a higher offer ratio (0.886 BHP share for each AAL ordinary share, up from 0.8132 in the previous proposal and 0.7097 in the original proposal). BHP says that it has “been engaging with Anglo American and its advisors to help mitigate the concerns associated with the implementation of this [deal] structure that led to the rejection of the revised proposal. We have made progress on these topics over the course of the engagement so far, and we are hopeful that resolution will be reached in the next seven days”. The PUSU deadline is 5pm on 29 May. Given that AAL’s strategic plan is to shed assets that would be considered non-core by BHP, I wonder if BHP would be better off not pursuing this opportunity too strongly and coming back at a later date to pounce on a smaller, more streamlined (and therefore less execution risk) AAL. Stepping back, the latest BHP proposal values AAL at £31.11 per share, well above the £26.47 at which the shares were trading earlier today, suggesting market scepticism on the likelihood of a successful transaction. Regardless, BHP is cheap, trading at 11.9x FY (year-end June) 2026 earnings and yielding 4.8%.

 

GSK – Pipeline progress; Zantac progress

GSK announced positive phase III results on Tuesday for depemokimab, a treatment for severe asthma. The trial found statistically significant and clinically meaningful reductions in exacerbations over 52 weeks versus the placebo. GSK says depemokimab “has the potential to be the first approved ultra long acting biologic with a six month dosing schedule for severe asthma”, with the commercial opportunity underscored by an addressable population of millions of patients with severe asthma, albeit GSK has yet to file regulatory submissions to health authorities worldwide. GSK had 72 vaccines and medicines in pipeline at end-Q1 2024. Elsewhere, a jury in the Valadez case in the Illinois State court has found that GSK is not liable in the first Zantac cancer case to go to trial. GSK notes that this verdict “is consistent with scientific consensus that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer”, adding that it “will continue to vigorously defend itself against all other claims”. The next Zantac trial (Williams) that was due to start in Illinois has also been dismissed. GSK is very cheap, trading on just 10.0x consensus 2025 earnings and yielding 3.6%.

 

SPDI – Associate’s solid Q1 results 

Arcona, the Dutch listed Eastern European property group that SPDI owns c.22% of, released solid Q1 results on Thursday. In Q1, Arcona posted PBT of €555k, 3x the outturn for the same period of last year (175k), helped by a 2.6% y/y uplift in NRI to €1.2m, lower fund costs, the release of the FX reserve and a positive sales result on asset sales at Boyana Residence (Bulgarian apartments), but with a modest drag from financing costs of €692k that were +2% y/y. The LTV at end-Q1 was 39.2%, which while not especially high does make me wonder why Arcona is contemplating a buyback instead of paying off all of its debt first. NNNAV was €10.91 at end-March, essentially flat versus end-2023 (€10.93). Arcona is very cheap, trading at a huge discount (share price of €5.79) to this triple NAV, but closing the gap will require the simplification (via disposals) of a very inefficient sprawling portfolio of 21 properties spread across six European countries.

 

RHM – Orders continue to flow 

Rheinmetall had a busy week in terms of securing new orders. Earlier today it was announced that a ‘NATO customer’ had placed a €300m order for 155mm rounds, with delivery to take place between 2024 and 2028. This type of order flow is commonplace as Western countries seek to replace stocks transferred to Ukraine and increase stocks to significantly above pre-Ukraine levels given the extent to which stocks have been depleted on Europe’s Eastern flank. Yesterday Sweden ordered 48 HX trucks from Rheinmetall to support its Archer system, with this €71m order to be completed in Q3. On Wednesday, RHM’s automotive unit secured a “three digit million” euro order for high pressure exhaust gas recirculation and exhaust back pressure valves from a “long-standing customer”. Rheinmetall reported a €40bn order backlog at end-March 2024, which provides helpful medium-term revenue and earnings visibility (consensus is for revenues of €10bn in the current year) from a portfolio of blue chip (mainly Sovereign and large auto makers) customers. I don’t see this quality reflected in a valuation of 18.5x consensus 2025 earnings.

 

APH – CMA win 

In a welcome announcement yesterday, Alliance Pharma said it had successfully appealed the previous CMA decision regarding anti-competitive conduct in relation to four companies. This removes an unwelcome distraction that had acted as an overhang over the stock since May 2019. The CMA previously fined APH £7.9m in relation to this matter, which was fully provided for in the 2021 accounts and which will presumably be reversed either in the yet to be filed FY 2023 accounts or in the H1 2024 report. APH’s market cap is £208m, so this is not a game-changing amount, but it is helpful from a reputation / brand / sentiment standpoint. APH is optically very cheap, trading on 7.3x consensus 2025 earnings and while I am minded to buy more of the stock, I am staying on the sidelines pending the eventual release of the 2023 accounts and my review of same.

Stocks Update 17/5/2024

AMZN – Going global 

BHP – Anglo take 2

BOCH – Q1 results

BT/A – FY results; cash is king

DCC: FY results; solid

HBR – Indonesia gas find

HLN/GSK – GSK out, free float up

IDS – Will a bigger Czech suffice?

IR5B – A bigger boat

RHM – Q1 results; strong momentum

 

IDS – Will a bigger Czech suffice?

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

 

BT/A – FY results; cash is king

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

 

DCC – FY results; solid

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

 

RHM – Q1 results; strong momentum

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

 

BOCH – Q1 results

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

 

HLN/GSK – GSK out, free float up

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

 

BHP – Anglo take 2

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

 

IR5B – A bigger boat 

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

 

HBR – Indonesia gas find

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

 

AMZN – Going global 

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

Stocks Update 10/5/2024

APH – Very unsatisfactory 

CRH – Q1 results, solid start to the year

HBR – Solid trading update

IR5B – A good start to 2024

STV – Recommissions

 

CRH – Q1 results; solid start to the year

CRH released its Q1 results earlier today that show a “solid start to the year in the seasonally least significant quarter”. Revenues of $6.5bn were +2% y/y and an 80bps EBITDA margin expansion (to 6.8%) helped adjusted EBITDA rise 15% Y/y to $445m. CRH attributes the improvement to “positive pricing, early-season activity and benign weather in key markets”. The Group completed its $2.1bn materials acquisition in Texas and seven other bolt-ons for a combined $0.1bn in the quarter, and it agreed a $0.7bn purchase of a majority stake in Australia’s Adbri in the period. CRH also received $0.7bn from divestments, mainly the initial phases of its Lime sale. The Group has also bought back $0.6bn of its own shares in the year to date. A maiden quarterly dividend of 35c (+5% annualised) is payable on June 2026. CRH reaffirms FY 2024 guidance of $3.55-3.80bn and adjusted EBITDA of $6.55-6.85bn, although on the strength of the Q1 performance I suspect the risks to this guidance lie to the upside. CRH trades on an undemanding 13.9x consensus 2025 earnings and yields 2.0%.

 

IR5B – A good start to 2024

Irish Continental Group released a trading update covering carryings for the period from 1 January to 4 May and financial performance for the first four months of 2024. In what is a seasonally quieter time of year (the summer months, inflated by tourism, are key), the Group showed strong momentum, with cars carried (153k) +21% y/y; RoRo freight (trucks) carried (263k) +17% y/y; Container Freight handled (104k) +6% y/y; and Terminal Lifts (113k) +10% y/y. In financial terms, revenue to end-April of €177m was +8.3% y/y and while profit figures were not disclosed, net debt fell to €108.8m (pre-IFRS 16 leases) from €111.1m at end-2023 (this is not particularly meaningful though given capex phasing and the Group did repurchase c.€8m worth of shares in the period. ICG trades on an undemanding 12.8x consensus 2025 earnings and yields 3.0%.

 

HBR – Solid trading update

Harbour Energy released a solid trading update covering Q1 2024 on Thursday. Production was 172kboepd, split broadly evenly between liquids and natural gas, but management is holding FY guidance of 150-165kboepd constant. OpEx was c.$18/boe, constant with the unchanged c.$18/boe guidance. On the development pipeline, the Talbot development in the J-Area remains on track to start production around the year-end; Zama FEED is due to commence shortly, with appraisal of the 2023 Kan oil discovery scheduled for H2 2024; and a small oil discovery at a 15% owned field in Norway has been announced. Revenue was $0.9bn in Q1, capex was c.$250m (and FY guidance remains c.$1.2bn), and net debt reduced from $0.2bn at end-2023 to $0.1bn at end-Q1 (guidance remains for a net cash position ex-2025 for the Harbour business). The Winstershall DEA acquisition remains on track for Q4 2024. On distributions, a 13c/share DPS will be paid on 22 May, up from 12c/share last year reflecting the benefits from share buybacks. Harbour has had a good run of late but remains extremely cheap, trading on just 4.4x consensus 2025 earnings and yielding 7.2%.

 

APH – Very unsatisfactory 

Alliance Pharma had been due to release its (previously rescheduled) FY results on Wednesday, but in a surprise announcement that morning said that the numbers would be further delayed as “the audit process remains ongoing”. Frustratingly, the Group has not set a new date as yet (“we will provide an update on revised timing in due course”, but some comfort can be drawn from the important line that: “Alliance reiterates that the details provided in the full year trading update on 29 January 2024 remain accurate”. In a separate announcement on Wednesday, APH said that CEO Peter Butterfield “has decided to leave the business in order to pursue other business interests”. Nick Sedgwick has been appointed as the new CEO with effect from Monday. Sedgwick’s background is in senior roles at Reckitt, Coty and Nestle. The newish Chairman Camillo Pane is a Reckitt alum so I’m guessing they know Sedgwick from there. All in all, a second delay for the release of audited results is very unsatisfactory and it therefore wasn’t surprising to see the shares sink on Wednesday, although they have staged a recovery since then. Two weeks ago I wrote that I was minded to buy more shares in APH, but would wait until after I see the audited results before doing so. That view hasn’t changed – APH is a proper business with some excellent brands that produce strong cashflows. Bloomberg consensus has APH trading on a very cheap 6.4x 2025 earnings and expected to yield 2.4%.

 

STV – Recommissions

Scottish media group STV announced on Wednesday that BBC has recommissioned Antiques Road Trip, Celebrity Antiques Road Trip and The Travelling Auctioneers from STV Studios in an order totalling 56 episodes. These are welcome moves and serve as a reminder of how STV Studios is able to sweat its more established formats – post this win, Antiques Roadshow will have been on BBC One for 29 series, while BBC Two will have screened 13 series of Celebrity Antiques Roadtrip. This latest win for The Travelling Auctioneers gives that show its third series. STVG shares have had a good run year to date, rising nearly 30%, but are still very cheap on conventional metrics, trading on 7.8x consensus 2025 earnings and yielding 4.7%.

Stocks Update 3/5/2024

AMZN – Q1 results, only getting started

GSK – Upgrades FY guidance 

HLN – Q1 update, on track for FY

IDS – Constructive union comments

KYGA – Q1 update

PCA – Nearing the finish line 

RYA – Passenger data, good start to FY25

SN/ – Q1 update, solid start to 2024

SPDI – Dutch associate’s FY results 

 

GSK – Upgrades FY guidance

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

 

KYGA – Q1 update

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

 

HLN – Q1 update, on track for FY

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

 

SN/ – Q1 update, solid start to 2024

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

 

AMZN – Q1 results, only getting started

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

 

IDS – Constructive union comments

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

 

PCA – Nearing the finish line 

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

 

RYA – Passenger data, good start to FY25

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

 

SPDI – Dutch associate’s FY results

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

Stocks Update 26/4/2024

ABDN – Q1 update, positive momentum

APH – Another delay 

BHP – Approach for Anglo American 

BOCH – Senior issuance

CLIG – A good start to CY 2024

GRP – €25m buyback; NAV and dividend updates

GSK – Pipeline progress 

LLOY – Solid Q1 update

MKS/PRX – Getir news

PRX – Swiggy swag 

RKT – Q1 update reassures

RWI – Solid pre-close update

ULVR – Good start to the year

 

BHP – Approach for Anglo American

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

 

RWI – Solid pre-close update

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

 

ULVR – Good start to the year 

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

 

RKT – Q1 update reassures

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

 

ABDN – Q1 update, positive momentum

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

 

GRP – €25m buyback; NAV and dividend updates

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

 

LLOY – Solid Q1 update  

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

 

CLIG – A good start to CY 2024

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

 

PRX – Swiggy swag 

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

 

MKS/PRX – Getir news

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

 

GSK – Pipeline progress

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

 

APH – Another delay

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

 

BOCH – Senior issuance

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