Stocks Update 8/3/2024

AV/ – FY results; Bolt-on acquisition

GRP – FY results; Compelling opportunity

GSK – Pipeline progress

HBR – FY results; Solid

IR5B – FY results; Solid

OGN – H1 results; already in the price

RHM – Contract win

STVG – Solid FY results; Strong strategic progress

 

HBR – FY results; Solid

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

 

AV/ – FY results; Bolt-on acquisition 

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

 

IR5B – FY results; Solid

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

 

GRP – FY results; Compelling outlook

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

 

STVG – Solid FY results; Strong strategic progress

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

 

OGN – H1 results; already in the price

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

 

RHM – Contract win

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

 

GSK – Pipeline progress

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

End of Year Review 2023

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

 

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

 

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

 

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

 

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

 

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

 

Financial Services (6.7% weighting)

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

 

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

 

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

 

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

 

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

 

Industrial Goods & Services (11.0% weighting)

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

 

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

 

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

 

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

 

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

 

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

 

Personal / Household (9.1% weighting)

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

 

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

 

Healthcare (5.6% weighting)

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

 

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

 

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

 

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

 

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

 

Basic Resources (12.5% weighting)

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

 

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

 

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

 

Oil & Gas (2.6% weighting)

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

 

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

 

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

 

Banks (9.9% weighting)

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

 

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

 

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

 

Retail (3.6% weighting)

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

 

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

 

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

 

Insurance (2.9% weighting)

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

 

Food & Beverage (8.6% weighting)

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

 

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

 

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

 

Travel & Leisure (5.9% weighting)

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

 

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

 

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

 

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

 

Media (1.3% weighting)

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

 

Utilities (9.9% weighting)

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

 

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

 

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

 

Real Estate (4.4% weighting)

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

 

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

 

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

 

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

 

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

 

Telecoms (1.2% weighting)

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

 

Construction/Materials (2.2% weighting)

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

 

Technology (2.6% weighting)

My exposures here are two megacaps, Amazon and Prosus.

 

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

 

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

Stocks Update 17/11/2023

AV/ – Q3 trading update

BOCH – Strong results

BT/A – Triennial pension valuation

DCC – Strong results

GSK – Pipeline progress

IDS – In-line results

OGN – Q1 trading update; buyback

PCA – Solid results

 

BOCH – Strong results

Bank of Cyprus released its Q3 (end-September) results on Monday. These showed ongoing strong momentum, supported by the rate environment and supportive macro trends in Cyprus, where it has a 42% loan market share and 38% deposit market share. In Q3, the Group: (i) saw a 9% q/q uplift in NII to €214m (Q3 2022: €89m), with low deposit beta and an LDR of just 51% both helping; (ii) essentially held its C/I ratio at 30% (Q3 2022: 47%); (iii) delivered a strong ROTE of 25.6%; and (iv) finished the quarter with TNAV of €4.63 a share, +22% y/y. In terms of FY guidance, the Group has upgraded its expectations for NII (was “>€650m”, now ~€786m); C/I (was “sub-40%”, now “considerably <40%); ROTE (was “>17%”, but “to well exceed” this target given 9M23 ROTE of 24.6%); while asset quality guidance of <4% NPE (was 3.5% at end-September) and 50-80bps CoR (was 58bps in 9M23) has been retained (I note that 99% of new exposures in Cyprus since 2016 are classified as performing). Bank of Cyprus is strongly liquid (€13.5bn of liquid assets, of which 74% are cash) and capitalised (pro-forma and net of 50% dividend accrual end-September Regulatory CET1 of 15.8%, which compares to a January 2024 minimum requirement of 10.92%+P2G). I note some focus on Cyprus’ relationship with Russia this week and, to this end, it is worth noting that just 4% of BOCH’s deposit base relates to Russian / Belarus counterparties. BOCH’s progress is being somewhat recognised externally – Moody’s upgraded its long-term deposit rating to Investment Grade (Baa3) in October, a far cry from 2016’s Caa3 rating – but the market continues to significantly undervalue BOCH’s equity, in my view. BOCH shares closed at 293c in Nicosia yesterday, a 37% discount to the end-September NAV, despite its elevated ROTE. The stock trades on a forward PE of just 3.5x per Koyfin data.

 

DCC – Strong results

DCC released a strong set of interims on Tuesday. Adjusted operating profit was +12.2% to £248m, split 4.4% organic and 7.8% from M&A. The interim dividend was hiked 5.0% to 63.04p. The Group has continued its buy-and-build strategy, agreeing six energy related acquisitions for £310m, the largest being the just-agreed Progas, a nationwide distributor of LPG in Germany. Reflecting M&A investment, net debt was £1.0bn at end-September, +c.£250m from a year-earlier. Across the business, Energy (CER profits +29% y/y, with strong growth across both Solutions and Mobility) was the main driver of operating profit growth, with declines seen in Healthcare (-12% y/y, due to destocking) and Technology (-13% y/y, due to weak consumer demand). On the outlook, DCC sees FY 2024 to be “another year of operating profit growth in line with expectations”. Trading on just 10.9x forward earnings, DCC is very cheap, in my view.

 

PCA – Solid results

Palace Capital released its H1 (end-September) results on Wednesday. These showed continued progress with disposals (since the start of the financial year on 1 April, PCA has sold £73.3m of property at 6% ahead of the end-March 2023 book value) and asset management (an extra £1.1m of annualised NRI delivered in H1 through leasing and review activity at a blended 3% above ERV; rent collection is flat at 99%). EPRA NTA was 294p at end-September, down just 2p year to date which is equivalent to the extent to which the dividend (7.5p) was uncovered by EPRA earnings (5.5p). A 4.4% LFL valuation decrease was offset by disposal gains and buybacks at a discount to NTA (which added 8.0p to NTA). Net debt is now just £7.7m (leverage of 6.5%) and the Group has cancelled its undrawn £20m RCF. The Group has returned £21.9m to shareholders through buybacks since July 2022 and an EGM has been called for 4 December to authorise the Group to repurchase a further 15% of its own shares (a potential tender offer in early 2024 is envisaged). Apartment sales at Hudson Quarter in York have been more muted, with only 6 sold during H1 and a further 2 under offer, leaving 16 remaining. Assuming risk free rates have peaked (which has positive read-through to the value of real assets), and with financial risk having been essentially eliminated as net debt is now so low and EPRA NTA further underpinned by share repurchases, I don’t understand why PCA (share price 224p) trades at such a wide discount to its end-September 2023 NTA.

 

IDS – In-line results

International Distributions Services released its H1 (period to 24 September) results on Thursday. The Group’s performance was in line with expectations, despite a challenging macro backdrop. There was a noticeable divergence in the performance of its two units, with Royal Mail continuing to be outshone by GLS. At a Group level, revenue was essentially flat (+0.4% y/y) at £5.9bn, but the operating loss widened to £243m from £157m in the prior year period. Trading cash outflows narrowed, reflecting working capital moves, but the net debt (pre-IFRS16) has improved by £8m in the past 12 months to £142m as a result of a RMPP pension escrow release. Royal Mail saw its revenue contract 3% y/y to £3.5bn and operating losses widen £100m y/y to -£319m (reflecting negative operating leverage and labour related costs), while GLS posted 6% higher revenue of £2.3bn but profits slipped 7% to £150m (reflecting cost pressures). The new CEO set out his agenda to improve performance at both units. Automation (the new Midlands hub, which processes up to 90,000 parcels per hour, opened in the period) and modern working practices are key elements of this, while the Group continues to lobby for changes to the USO, which is not fit for purpose (“it’s simply not sustainable to maintain a network built for 20bn letters when we’re only delivering 7bn”). IDS says that it expects to be able to pay a “modest dividend” from GLS at the full year – I’d prefer it not to do this as the step change in returns I see coming from successful (and faster) transformation execution are far more attractive than a small short-term dividend. Furthermore, I note that IDS now guides to slower than previously expected receipt of proceeds from real estate disposals and it also flags downside risks from macro conditions (“represent a significant headwind”). On performance, it expects to be “around breakeven” at a Group level for the FY. An EV/Sales multiple of only 0.3x suggests scope for a meaningful re-rating from here, assuming successful execution of management’s plans for the Group.

 

AV/ – Q3 trading update

Aviva released its Q3 trading update on Thursday. The release shows continued momentum across the Group, which: (i) reaffirmed its guidance for 5-7% operating profit growth in 2023; (ii) stated it is “on track to exceed Group medium-term targets”; and (iii) said the “outlook for capital returns [is] unchanged”, supported by a robust Solvency II shareholder cover ratio of 200% (well ahead of the Group’s target, which raises the possibility of further buybacks in due course). Across the business, GI saw GWP +13%, Protection & Health sales were +23%, Wealth saw net flows equivalent to 6% of opening AUM, and Retirement sales were +2%. Controllable costs were -1% y/y in 9M23, a laudable performance given the inflationary backdrop. The reaffirmed operating profit guidance is welcome to see given the recent severe weather. AV/ also reiterated its guidance for a total dividend of c.33.4p for 2023 “and further regular and sustainable returns of surplus capital”. Aviva yields 8.1% and is cheap, trading on 10.6x forward earnings.

 

OGN – Q1 trading update; buyback

Origin Enterprises released its Q1 (end-October) trading update on Thursday. The Group reported a “solid” performance, with underlying volumes +1.3% y/y but the continued correction in agri-commodity prices saw reported Group revenue fall 26% y/y to €532.5m. The Group noted adverse weather effects in the UK and Romania, but said that “on-farm sentiment is reasonable”, adding that “generally, inventory levels on-farm remain low and are likely to require replenishment for the spring application period”. The Group reported a good start to the year for its Amenity, Environmental and Ecology division, which has recently been bulked up with acquisitions, and also in its LatAm business. A highlight of the release was the announcement, reflecting “the continued strong cash performance of the business”, of a new €20m share buyback programme, making FY24 the third successive financial year in which the Group has bought back its own stock (FY23: €20m; FY22: €40m). On the outlook, given the early stage of the financial year and the extent to which weather can influence outcomes, the Group struck to customary qualitative guidance (“We are confident that the Group is well positioned to deliver on our 2022 CMD financial and strategic ambitions”). To my mind, buying back its own shares at the current cheap (6x PE) multiple is a very sensible move by OGN.

 

BT/A – Triennial pension valuation

BT announced on Tuesday that it and its principal DB pension scheme (BTPS) have agreed the June 2023 triennial funding valuation and associated recovery plan. The funding deficit at end-June was £3.7bn, down from £8.0bn in 2020, due primarily to deficit contributions in the intervening period. Somewhat disappointingly (given the step-change in the rate environment), annual Group contributions will remain at £780m in the period to 2030, before stepping down to £670m in 2031 and £180m p.a. between 2032 and 2034. BT has also agreed the flexibility to grow dividends by up to 10% p.a. for the next three years, subject to these not exceeding free cashflow by a factor of at least 1.2x; while it will have to consult the BTPS if specials and/or buybacks (other than those relating to share options) are under consideration. The pension payments are manageable in the context of BT’s annual EBITDA of c.£8bn, and I note sell-side comments to the effect that no change in annual contributions was priced in by the market. BT’s pension overhang has reduced sharply since 2020 and is expected to continue to do given the aforementioned contributions and other factors. BT is cheap, trading on just 6.4x forward earnings.  

 

GSK – Pipeline progress

GSK announced on Monday that the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) has adopted a positive opinion regarding the recommendation of its momelotinib for myelofibrosis (a rare blood cancer) patients with anaemia. Assuming formal approval follows, this will make momelotinib (marketed under the trade name Omjjara) the first and only treatment in the EU for those patients. Decision on EU marketing authorisation is expected early next year. In September the US FDA approved Omjjara for this patient population. At end-Q3 2023 GSK had 67 vaccines and specialty medicines in its pipeline. I don’t see this pipeline reflected in the Group’s very low valuation of just 8.9x forward earnings, per Koyfin.

Stocks Update 29/9/2023

AV/ – Bolt-on M&A 

CRH – Buyback continues 

GSK – RSV approved in Japan 

OGN – FY results

PPA – H1 results; Look at the operating leverage 

RHM – Contract wins

RWI – Takeover approach

SPDI – H1 results; NAV at 10p

STM – Waiting for Godot; H1 results 

 

RWI – Takeover approach 

Thursday brought the news that infrastructure specialist Macquarie had made a takeover approach for Renewi, which is the largest position in my portfolio. Macquarie says it is “considering a possible cash offer”, having had a 775p/share proposal rebuffed by the Board of Renewi. Macquarie’s argument is that it sees RWI as being capital constrained in terms of the delivery on its stated ambition, an argument I can see some merit in, although as I’ve hinted at here previously, RWI could expand across Europe through partnerships with local investors to reduce up-front capital commitments. The 775p “proposal” values RWI at only 8.4x EBITDA for the year ended 31 March 2023, which seems far too low to me given the structural growth opportunity that the circular economy push represents for RWI. Indeed, my own modelling suggests a fair value of £11.07/share, although it should be noted that Bloomberg consensus shows an average target price of 771p (range £5.98-£8.55). Macquarie “invites the Board to engage constructively to agree the terms of a recommended transaction”. For its part, RWI says the proposal “fundamentally undervalues the value of Renewi and its prospects”, an assessment I share – I tweeted yesterday that I’d be surprised if shareholders would entertain a bid below £10. Time will tell how this plays out. 

 

OGN – FY results 

Origin Enterprises released its FY (year-end July) 2023 results on Tuesday. At a headline level, adjusted EPS of 53.2c came in at the top end of guidance, supported by a 4.9% rise in Group revenue to €2.5bn, but was -26% y/y reflecting volatile pricing dynamics in the agri space. ROCE was 12.6%. The Group delivered a stellar cash performance, with a FCF conversion of 178%, finishing the year with net cash of €53.2m, +€9.7m y/y notwithstanding the completion of a €20m buyback and executing on four acquisitions for €30m to help bulk up its Amenity, Environmental & Ecology business. I was disappointed to see management take the decision to shut down its Ukrainian business – yes, it was loss-making but given the Group’s wider profitability and the current challenges facing that country I think the timing is very poor. Visibility is a constant issue for the Group, which is at the mercy of external factors such as weather and commodity pricing, albeit this problem should lessen as it builds up the Amenity side of the business. Management had little to say on the outlook at this early stage, with the next performance release scheduled for the Q1 trading update on 16 November. OGN has proposed a total dividend of 16.80c in respect of FY 2023 performance, a 5% uplift on the previous financial year (albeit the share count has declined from 115.6m in July 2022, before the €20m buyback was announced, to 111.9m as of September 2023, a 3.2% reduction). OGN’s business model may be volatile but it is a profitable one that gives exposure to the twin themes of sustainability and food security and is backed by a strong (net cash) balance sheet. Trading on just 6.2x consensus FY 2024 earnings and yielding 5.2%, this stock is cheap.

 

STM – Waiting for Godot; H1 results 

On Wednesday STM provided an update on the takeover approach for the Group by PSF Capital. This follows the statement on 5 September where revised terms incorporating a price of 67p per share and an additional condition requiring the disposal of non-core (to PSF) parts of the Group was disclosed. On Wednesday STM said it had received a revised proposal whereby the offer price remains 67p but this is now expected to comprise a 60p/share up-front payment upon completion of the possible offer and a further 7p/share by way of an unsecured loan note, repayable 12 months after the date on which a firm intention to make an offer has been announced. STM further noted that “the Board has not reached agreement at this stage…but intends to continue discussions…with the aim of reaching agreement”. The PUSU deadline has been moved to 5pm on 11 October. The waiting game continues. Elsewhere, on Thursday STM released its interims (to end-June). These showed underlying revenues rising from £11.3m to £13.2m, with underlying profits inching up to £1.8m from £1.7m. Net cash, however, fell to £13.8m from £16.9m a year earlier, reflecting acquisition outlays of £3.5m in H2 2022. The interim dividend (0.60p in H1 2022) has been waived, reflecting the takeover discussions. In terms of the FY outlook, management says that “the Group expects to be in line with…internal expectations for the year ending 31 December 2023”. On the assumption a firm bid materialises, I am minded to cash in my STM shares ahead of time (I would be a seller at 60p) but the latest indicative deal structure means that a 60p bid is likely to be some way away. The stock closed at just 52.5p yesterday, suggesting the market is cautious on the prospects for a near-term deal.

PPA – H1 results; Look at the operating leverage 

Piraeus Port Authority released its H1 (end-June) results on Wednesday. These show a continuation of the strong momentum recorded in 2022, with revenue climbing 10% y/y to €102.4m. Reflecting the high fixed cost element of the operating model, net income jumped 50% y/y to €38.7m (H1 2022: €25.9m). PPA say all operating divisions posted higher revenue, led by the cruise sector which handled “approximately double” the number of passengers it did in the same period last year. Despite global macro weakness, the container handling unit also recorded higher activity. In FY 2022 PPA recorded growth in revenue of 26% (to €195m) and 44% in net income (to €53m). These results show continued positive momentum and while the economic outlook is somewhat uncertain, PPA’s large-scale capex projects should continue to drive revenue and earnings growth in the years ahead. On these capex projects, I note that the interim report says the Hellenic Republic’s Minister of Environment and Energy approved the master plan projects of PPA on 15 September. PPA is very much overlooked by the market – there are no broker forecasts available on Bloomberg – but I suggest a globally significant infrastructure asset on 10x trailing PE (with net cash) is significantly undervalued.

 

SPDI – H1 results; NAV at 10p

Secure Property Development & Investment released its H1 results earlier today. The Group’s strategy has been to transfer most of its property assets to the larger Dutch-listed Arcona in exchange for shares while selling off other, non-core, assets. At the end of June the Group’s remaining real estate assets were a logistics park in Bucharest and three land plots in Ukraine (where the market is clearly not functioning at this time). The Group sold its seven remaining residential units in Bucharest during H1, it retains some ancillary property (parking spaces, storage areas) which await disposal. SPDI says it hopes to transfer the Ukrainian assets to Arcona by year end but this seems a very tall order. Given the disposal of most of its assets, operating performance is not especially instructive, but SPDI’s NAV was 10p/share at end-June, which compares to the 6p/share SPDI was trading at earlier today. There are two obvious risks to this NAV – the Ukrainian assets, which have a book value of €1.9m, and the Bluehouse Accession court case (the next hearing of which has been set for 16 October), where SPDI has provided €2.5m (a figure it views as adequate) but Bluehouse is seeking up to €7.5m. If you view the upper band of that Bluehouse range and a ‘zero’ value for the Ukrainian assets as the bear case, that would pare the NAV back to c.5p/share, about 17% down from where the shares are at currently. While this has been a deeply frustrating investment to date, I think the risk/reward skew (-17% downside / +66% upside) to stay involved. Moreover, this is only a tiny part of my portfolio (c.35bps).

 

AV/ – Bolt-on M&A

Aviva announced on Monday that it has agreed to acquire AIG’s UK protection business for £460m. This is a strategically sensible move, adding more capital-light business and additional scale (1.3m individual protection customers and 1.4m group protection members) to the Aviva UK franchise – indeed, management says the deal “delivers significant capital and expense synergies”. The consideration is 0.9x AIG Life UK’s Solvency II Own Funds, pro-forma for the capital synergies. Aviva expects a “low-teens IRR (including integration and restructuring costs)” which is an excellent use of surplus capital. Aviva is very cheap, trading on just 8.6x consensus 2024 earnings and yielding a keen 8.8%.

 

CRH – Buyback continues 

CRH said on Monday that it is launching a new $1bn tranche of its ongoing share buyback programme. In the latest phase between 30 June and 23 September the Group repurchased 17.7m ordinary shares, bringing cumulative cash returns under the buyback to $6bn since May 2018. The new $1bn buyback will end no later than 20 December. Based on public (TVR) disclosures, CRH has reduced its share count by 15% since May 2018, providing compounding benefits for patient long-term oriented investors. CRH is inexpensively rated on 12.1x consensus 2024 earnings and yielding 2.6%. 

 

GSK – RSV approved in Japan 

GSK said on Monday that Japan’s Ministry of Health, Labour and Welfare has approved its RSV vaccine for use on older (60+) adults. RSV causes c.63k hospitalisations and c.4.5k in-hospital deaths in that age cohort in Japan (and c.470k hospitalisations and c.33k deaths in industrialised countries generally) annually. This is the first Asian regulatory approval for the vaccine, which has previously been given the green light in the US, EU, UK and Canada. This is an incremental positive for GSK. In terms of the valuation, GSK is one of the cheapest large cap pharma stocks, trading on just 9.7x consensus 2024 earnings and yielding 4.0%.

 

RHM – Contract wins

Rheinmetall announced a series of contract wins this week. On Tuesday it announced that it had secured a “triple-digit million-euro” order from a Chinese car maker for lightweight automotive parts (battery trays and cylinder heads for electric vehicles and hybrid models). Production will start in 2023 and run until 2032. On Thursday RHM announced that it will supply the Bundeswehr with 13 LUNA NG (air-supported reconnaissance drone) systems in an order worth €200m, with the first delivery due in 2025. Also on Thursday, the German authorities cleared the establishment of a JV between Rheinmetall and the State-owned Ukrainian Defence Industry (UDI). The long-term potential of this JV is obvious. Lastly, I note that Germany’s Handelsblatt reported on Wednesday that Rheinmetall will supply Hungary with its new Panther KF51 MBTs. Rheinmetall has a hugely successful relationship with Hungary – it has a plant in the country and is producing the Lynx IFV there for domestic use. A first contract order for Panther would be a very welcome development, with Ukraine also rumoured to be considering adding it to its mechanised forces. Rheinmetall has a €30bn+ order book that provides huge visibility on revenues and earnings into the long-term, a point that I don’t see reflected in its valuation of just 13.2x consensus 2024 earnings. The stock yields 2.8%.

Stocks Update 1/9/2023

ABDN – Relegation

BOCH – Sector M&A

IR5B – H1 results 

LLOY – Share buyback completes

MKS – Back where it belongs

OGN – Bolt-on M&A

RHM – Contract wins / Development

SPDI – Arcona interims

WDS – Trion progress

 

IR5B – H1 results

Irish Continental Group released its H1 (end-June) results on Thursday. The Group delivered a steady performance in the half with revenue of €264m (+0.3% y/y); EBITDA of €49.0m (+3.6%) and basic EPS of 7.5c (-6.3%). While fuel costs were -€9.0m / -15.5% y/y, there was no associated earnings benefit as the Group dynamically adjusts pricing to pass through fuel cost fluctuations (similar to peers, it does not hedge). An interim dividend of 4.87c has been declared, +5.0% y/y. Headline net debt was €164.5m at end-June, +€10.0m / +6.5% y/y, but -€6.6m from end-2022 as the Group posted robust net operating cash of €70m, flat on the prior year period despite the lower headline earnings. In terms of activity, cars carried (229.1k) were +7.0% and Ro-Ro (trucks) were 348.2k (+5.5%) but Container & Terminal activity was weaker (containers shipped -15.9% y/y; port lifts -7.5% y/y), the latter reflecting a weaker global macroeconomic backdrop and destocking as supply chain pressures have eased. On development, as previously announced the Group chartered the OSCAR WILDE cruise ferry (replacing BLUE STAR 1) in May to serve Rosslare – Pembroke; and commissioned new heavy plant machinery at Dublin Port including a new ship-to-shore crane and five new remote controlled semi-automated rubber-tyred gantries. On the outlook, the Group expressed caution on the timing of the recovery in container shipping volumes and the impact of potential cost increases from environmental levies. The Group also updated on performance from 1 July to 26 August (i.e. since the start of H2), saying that car volumes (214.1k) are +18% y/y; RoRo freight units (112.5k) are unchanged y/y but this is partly down to tough comparatives given P&O’s issues on Dover-Calais last year; Containers shipped (41.8k teu) are -18% y/y; and Port lifts of 47.1k are -4% y/y. Separately, I note reports that Stena Line is potentially interested in launching a Dublin – Liverpool service following last week’s news that P&O was dropping that route. This is surprising given the high operating leverage of its business model, which would surely make absorbing P&O’s foregone volumes on Stena / ICG / Seatruck’s other (existing) services on the Central Corridor of the Irish Sea an economically appealing outcome. For example, Dublin – Liverpool handled only 28k passengers (13k outward; 15k inward) in 2019 (pre-COVID, latest data available) versus 1.7m (both directions) on Dublin – Holyhead in the same year. Similarly, the Irish government said that P&O carried 3,000 trucks weekly on Dublin – Liverpool, whereas Irish Ferries appears likely to carry 5m trucks across its routes (Ireland – GB/France and GB – France). All in all, I view ICG as a class act, with a strongly (and H2 weighted) cash generative model; attractive market positions; and a management team with aligned interests (>17% ownership of the company) that takes an appropriately disciplined and long-term perspective to capital allocation. Bloomberg data had ICG trading on just 11.6x forward earnings at yesterday’s close, with the shares yielding 3.5%.

 

OGN – Bolt-on M&A

The Agriland website reported yesterday that Origin Enterprise has snapped up another UK based landscape supplier. Essex-based Suregreen specialises in landscaping products; ground reinforcement solutions; wire products; fencing and timber posts; timber sleepers; and garden supplies. At first blush, it is a good fit for Origin’s existing footprint in that space. Origin confirmed to Agriland that it acquired the business from administrators who were appointed on 24 August. The latest (end-2021) accounts for Suregreen show it had net assets of £0.7m at that date, of which £130k were intangibles. Thus, it seems reasonable to assume that this is a small bolt-on deal, albeit one that serves to remind of management’s strategic actions to reduce earnings volatility through diversification of revenue streams. Bloomberg data show OGN trading at 6.4x FY 2024 consensus earnings at yesterday’s close, and yielding an attractive (and well-covered) 5.1%.

 

BOCH – Sector M&A

I belatedly caught up this week on significant share register developments at Hellenic Bank, which is the second largest bank in Cyprus after Bank of Cyprus. In April the Greek lender Eurobank announced that it had lifted its shareholding in Hellenic Bank to 29.2%. On 23 August it announced that it has entered into a share purchase agreement with Poppy (PIMCO) pursuant to which it will, subject to customary approvals, buy a further 17.3% of Hellenic for €2.35/share (€168m) which will bring its stake to 46.5% on completion. Eurobank further noted that, on completion, it will, under Cypriot law, proceed to a mandatory tender offer for all outstanding Hellenic shares not already held by it. On 25 August Eurobank announced that it has agreed to buy a further 1.6% of Hellenic (again subject to approvals) from Senvest, while on Wednesday it announced the agreement (again subject to approvals) to buy a further 7.2% from Wargaming and related parties. Assuming all agreed transactions complete, Eurobank will own 55.3% (before it proceeds to squeeze out other shareholders). Eurobank has a separate (standalone) subsidiary in Cyprus which will presumably be merged with Hellenic in another welcome step towards the consolidation of the sector (the Cyprus Register of Credit Institutions has a staggering 29 names on it, although eight of these are in the process of handing back their licences. This consolidation may also help BOCH’s cheap valuation (it closed on just 3.8x expected 2024 earnings yesterday). Hellenic’s TNAV was €3.02 a share at end-June, so Eurobank’s purchases at €2.35/share represent a 0.78x P/TNAV multiple. BOCH’s TNAV was €4.34 at end-June and the share price in Nicosia this afternoon was €2.97, a P/TNAV multiple of just 0.69x – were BOCH shares to rise to the implied Hellenic multiple this would give 14% upside (and more upside if they rise to 1x NAV, which seems very fair to me given BOCH’s strong returns profile).

 

WDS – Trion progress

Woodside Energy announced on Wednesday that the field development plan (FDP) for Trion has been approved by the Mexican authorities. This was the final step (alongside JV partner approval – Trion is 60% WDS, 40% Pemex) required to develop the resource, following the FID announcement in June. Following the approval of the FDP Woodisde has booked 2P undeveloped reserves of 478.7 MMboe gross (287.2 MMboe Woodside share). Woodside has executed key contracts relating to the development including contracts for: (i) the floating production unit with Hyundai; (ii) the rig contract with Transocean; (iii) the FPU and FSO installation contract with SBM Offshore; and (iv) the subsea trees contract with OneSubsea UK. First oil is targeted for 2028. This is a huge project for WDS and Pemex – Trion is at a depth of 2,500m and lies 30km south of the Mexico/US maritime border. The resource will have a production capacity of 100,000 barrels of oil per day and an associated FSO vessel with a capacity of 950k barrels of oil. The initial phase will involve 18 wells, rising to 24 over the life of the project. The total capex commitment is $7.2bn, of which Woodside’s share is $4.8bn. Given the scale of it, I would not be surprised if Woodside seeks to de-risk the project by selling down a stake to a third party. This is one of a long list of material development projects that Woodside has across its portfolio, which should create material value over time (Woodside has a >15% IRR hurdle and payback within five years) in a world that simply is not producing enough oil and gas to meet expected demand. At yesterday’s close Woodside was trading on an undemanding 13.3x expected FY 2024 earnings.

 

RHM – Contract wins / Development

Rheinmetall announced another series of contract wins this week which provide further reassurance on its €30bn+ orderbook, which provides strong revenue and earnings visibility for years to come. On Monday the Group announced it had won a “lower two-digit million euro” order for fuel cell components “from one of Europe’s largest and most influential specialists”, increasing 2023 booked business in this product area to c.€50m, with further progress expected. This latest contract will run from 2026 until 2030. On Tuesday it was announced that the Group had secured a “low three-digit million euro order” to supply the Australian navy with smart sea mines, deepening its security relationship with that country. Deliveries are expected to commence later this year. On Wednesday RHM announced that it and General Dynamics were to present a new 8×8 based wheeled tactical bridge-laying system at the Rue.Net conference. Given the importance of specialist engineering vehicles to ensure mobility (as we see in real time in Ukraine), this platform is timely, particularly in the context of so much ex-Soviet kit of this type still being deployed in Eastern Europe. On Thursday, RHM confirmed last week’s media reports that it, alongside Norwegian and German platforms, would tender to remove legacy materiel from the bottom of the Baltic Sea, expertise that (again) could be leveraged in many other waters, given the push for offshore telecommunications and wind (and other energy) infrastructure that needs a safe seabed. Earlier today it was announced that RHM has supplied Norway with a Mission Master XT, an autonomous unmanned ground vehicle with amphibious capabilities that will bolster border security in “extreme terrain” and is “capable of thriving in sub-zero temperatures”. The vehicle can carry a payload of up to 1,000kg and has a 750km range. Taken together, this week’s developments illustrate the breadth of RHM’s product offering and strong demand backdrop for same, points that I don’t see as being adequately reflected in yesterday’s closing valuation of 13.7x 2024 earnings (RHM further yields 2.7%). 

 

SPDI – Arcona interims

Arcona Property Fund, the Dutch listed Group that SPDI transferred the majority of its real estate assets to in exchange for shares, released its H1 results yesterday. In a nutshell, the results show a solid performance in the half, with pre-tax earnings up 4.4% to €359k, helped by a 10.4% y/y increase in NRI to €2.2m. The fund’s LTV improved by 320bps in the period to 40.4%. The Group expects to execute further property disposals in H2, which should help to finance a buyback and pare leverage further. The end-June NAV was €11.77 a share, essentially flat on the end-2022 level of €11.81, but more than 2x this afternoon’s Arcona quoted share price of €5.35. SPDI owns 1.1m shares (and currently out-of-the-money) options in Arcona which are worth €5.7m at today’s Arcona share price but €12.6m at 1x NAV. This compares to SPDI’s current market cap of just under £7m. SPDI is expected to release its H1 (end-June) results later this month which will give a reasonably current picture on the rest of its balance sheet, although one ‘known unknown’ is a scheduled court case between SPDI and Bluehouse Accession, due to start next month in Cyprus.

 

LLOY – Share buyback completes

Lloyds Banking Group announced on Tuesday that it has completed its latest share buyback. It launched the £2bn programme on 23 Februaryand, over the six months to 25 August, repurchased 4.4bn shares for £2.0bn – an average price of 45.6p per share which compares to the 45.7p end-June 2023 TNAV. Of course, with LLOY trading on a double-digit earnings yield, the attraction of repurchasing its own stock is clear. LLOY had 72.1bn shares in issue at end-January 2018, just before the Group announced the first of a series of on-market buybacks. On 24 August 2023 LLOY had 63.7bn shares in issue, representing a reduction of 11.6% in the share count since the initial 2018 buyback. As a shareholder I am delighted to see the Group using its surplus capital to reduce the share count at a very cheap earnings multiple, increasing my percentage ownership of LLOY in the process. Bloomberg data show that LLOY was trading on just 5.7x expected 2024 earnings and yielding 7.3% at yesterday’s close.

 

MKS – Back where it belongs / ABDN – Relegation

FTSE Russell announced the latest changes to the FTSE 100 and FTSE 250 indices late on Wednesday. Marks & Spencer is among four companies (the others being Dechra Pharmaceuticals, Diploma and Hikma) joining the FTSE 100, which is a terrific endorsement of the successful strategic turnaround that the Group has been executing on. Less helpfully for my portfolio, Abrdn is one of the companies dropping down to the FTSE 250 (the others being Hiscox, Johnson Matthey and Persimmon) which reflects tough market conditions. All changes will be implemented at close of business on Friday 15 September. At yesterday’s close ABDN was trading on 13.1x expected 2024 earnings and yielding an attractive 8.7%, while M&S trades on 12.3x expected FY 2024 earnings and is expected to pay a dividend equivalent to a 2.5% yield for this current (to end-March 2024) financial year.

Stocks Update 16/6/2023

BOCH – AT1 refinancing

BT/A – UK sector consolidation

OGN – Trading update 

PCA – FY results – limited downside?

PRX – Trading update

RHM – Leopard deal

 

PCA – FY results – limited downside?

Palace Capital released its FY (year-end March) 2023 results on Thursday. Under the heading of ‘Focused on Maximising Cash Returns to Shareholders’, management set out how it is looking to extract value from its property portfolio while not losing operational focus. Reflecting a difficult year for UK commercial real estate, the EPRA NTA fell from 390p to 296p, driven by a statutory loss of £36m which in turn was driven by a -£43m revaluation hit due to UK property market dislocation. During FY 2023 the Group sold eight investment properties for £15.6m, 8% ahead of the March 2022 book value. The Group is also making progress at Hudson Quarter, where it sold £10m worth of unencumbered apartments (a further £2m worth of apartments have sold since the start of the new financial year, with 18 units remaining to be sold). Since the start of FY 2024, the Group has agreed to sell £43.4m worth of property assets at an average of 6% ahead of their March 2023 book value (suggesting that the worst of the market pressures may have abated), adding 6p/share to EPRA NAV. On the liability side of the balance sheet, gross debt reduced by £37.5m during FY 2023 to £64.3m, and is expected to have fallen to just £34m (a proforma LTV of only 13%) by the end of July of this year. PCA’s strategy remains focused on maximising cash returns, “whilst continuing to remain mindful of consolidation in the Real Estate sector”. Outside of selective property disposals, the Group has been opportunistically picking up its own shares at steep discounts to NAV (adding 8.0p to NAV during FY 2023 from this alone), and has launched a further buyback programme through its broker alongside yesterday’s results. PCA is clearly focused on asset management, with NRI rising 3% y/y to £15.6m despite the impact of disposals. The EPRA occupancy rate was broadly stable at 87.7%, -80bps y/y. Rent collection was 99% in FY 2023 (+1pt y/y) and the Group agreed 14 new lettings, 15 lease renewals and 16 rent reviews across the estate during FY 2023, generating £1.1m of additional annualised contracted rent, 11% above the end-March 2022 ERV. The WAULT of 4.8 years to break is stable year on year. EPC is a key concern for UK real estate watchers and in this regard, that 96.2% of PCA’s portfolio is rated A-D (72% A-C) is reassuring. At the end of March 2023 the PCA portfolio stood at 31 buildings (68% office and industrial, 15% leisure, retail/retail warehousing 11% and residential 6%) with 141 occupiers. Since the end of March sales of nine of those buildings have been agreed. The resolution of the PCA portfolio is moving at some pace, albeit also with discipline (as evidenced by the strong disposal proceeds relative to book value). My sense is that 296p is likely to be the trough NTA, although last night’s closing price of 244p suggests that others disagree. In any event, the 17.5% discount to end-March net assets that PCA trades at, alongside supports from accretive share buybacks and agreed property disposals > book value, suggests limited downside risk from current levels, to my mind, barring of course any market turmoil such as that caused by the mini-Budget debacle in the UK last September.

 

OGN – Trading update

Origin Enterprises released its Q3 trading update on Thursday. The Group guides to FY adjusted diluted EPS of 50-53c, in-line with market expectations, in spite of “significant price and volume volatility” across its markets. Group revenue is +9% to €1.9bn in the first nine months of the financial year, notwithstanding a 16% y/y fall in revenue during the third quarter. A highlight of the period has been the continued build-out (via M&A) of its UK Amenity, Environment and Ecology vertical. A €20m share buyback completed in March. OGN will release its FY 2023 results on 26 September. OGN closed at 365c in Dublin last night, so the stock trades on a very undemanding 7.1x guided FY 2023 earnings and it offers an attractive prospective yield of 4.6%.

 

PRX – Trading update

Prosus released a trading update on Wednesday ahead of the release of its FY results on 27 June. Noting an operating environment “characterised by significant geopolitical and macroeconomic uncertainty”, the Group said that it has been responding to strengthen its financial footing and delivering value for shareholders. Encouragingly, the Group remains “committed to achieving consolidated ecommerce profitability during the first half of FY25”. The Group has also continued to execute on its buyback programme to close the huge discount to NAV, reducing its shareholding in Tencent from 29% to 26% over the course of the last financial year to finance share buybacks that have led to “a 5% accretion in NAV per share”. Furthermore, consolidated earnings in H2 “were stronger than the first half” and “cashflow from operations in FY23 is expected to improve meaningfully year on year”. PRX’s statutory results are going to be distorted by discontinued operations (OLX Autos and Avito). Adding in the impact of portfolio revaluations means that headline earnings per share are expected to be down up to 80% versus the prior year, with a smaller (20-28%) decline on an underlying basis (reflecting in part a lower contribution from Tencent due to stake sales). PRX’s shares were little changed despite headlines highlighting a “profit warning” as the main focus is on the SOTP valuation, which is underpinned by Tencent. As of last night’s close, PRX’s NAV was €111/share versus a share price of only €68.87.

BOCH – AT1 refinancing 

It was reported on Monday that Bank of Cyprus had mandated banks to arrange a series of fixed income investor meetings in London ahead of the launch of a €220m (no-grow) PNC5.5 AT1 (low trigger) instrument with an expected rating of B3. Alongside this, the Group launched an any-and-all cash tender offer on the existing AT1 (XS1865594870, callable on 19 December), the results from which will be announced on Tuesday of next week. The legacy AT1 carries a 12.5% coupon but was issued in 2018, so the improvement in the BOCH credit helped to offset the impact of the step-change in the rate environment. In the event, the new AT1 attracted a remarkable €2.75bn+ of demand and priced at 11.875% (well inside IPT of 12.5%). The credit spread on this new issuance of c.910bps compares very favourably to the c.1,260bps for the previous AT1 issuance in 2018. This is an incremental positive in the BOCH story. The stock is very cheap, closing at just 0.6x NAV last night for an expected 2023 ROTE of >17% (and >14% for 2024). 

 

BT/A – UK sector consolidation

The worst kept secret in UK telecoms was finally confirmed on Wednesday with the announcement that Vodafone UK and Three UK are to merge, creating the biggest UK mobile network. Vodafone says the deal is “great for customers, great for the country and great for competition”. The transaction is expected to close before the end of 2024, subject to customary approvals. Assuming this is approved, at first blush it looks like a welcome development for BT/A, creating a more concentrated UK mobile market. I suspect that the complexity of the deal is also likely to lead to a lessening of focus, at least in the short term, at Vodafone/Three UK. Further out, Three UK’s statement that the deal will allow its mobile investments in the UK to finally “earn their cost of capital” suggests the new entity is likely to be a rational competitor for BT/A. The combined Vodafone/Three has a 37% share of the UK mobile market (by revenue) with BT on 32% and VMO2 on 31%.

 

RHM – Leopard deal

Media reports on Thursday said that Denmark and the Netherlands have agreed to purchase 14 more Leopard 2 MBTs, to be “supplied and refurbished” by Rheinmetall, for transfer to Ukraine in January 2024. The “three-digit million euro” contract is an incremental positive for RHM, which closed last night at an undemanding multiple of just 13.5x expected 2024 earnings and yielding 2.9%.

Stocks Update 2/6/2023

ABDN – Indian sale helps simplify the story

AV/ – Completion of latest share buyback

BHP – Insignificant legacy issue

KYGA – Bolt-on acquisition 

OGN – Bolt-on acquisition

PMI – Interims

STM – Trading update

 

PMI – Interims

Premier Miton Group released its H1 results (to end-March) on Wednesday. Unsurprisingly, these reflect challenging market conditions which have affected virtually all asset managers. Closing AUM of £11.0bn was down from £12.8bn in the prior year period, although net outflows were modest at just £32m and 76% of funds are performing ahead of their respective median. PBT dropped to £2.4m from £9.9m in the prior year. The interim dividend was pared to 3.0p from 3.7p in H1 2022. The Chairman’s Statement has a number of intriguing lines – “I met several of our shareholders following the announcement of our results for 2022 to discuss their thoughts and views on our business, and to listen to the issues that they raise”; “We have also been active in reviewing several strategic ideas which have the potential to materially advance our business, contributing to shareholder value”; and “We closely examine and make decisions on the mix, focus and financial management of all our activities”. For his part the CEO said (inter alia) “we are open minded about the prospects to grow our business through further M&A activity should the opportunity present itself”. In terms of post-period trading, Premier Miton disclosed that AUM was flat at £11.0bn at end-April. All in all, as with other asset managers, a strengthening in financial markets will lead to a re-rating for PMI. The M&A hints from the Group are intriguing against the backdrop of its current depressed rating which I would think makes PMI more likely to be prey than predator absent the realisation of the aforementioned re-rating.

 

ABDN – Indian sale helps simplify the story

Abrdn announced on Wednesday that it has sold the last of its shares in India’s HDFC Life Insurance Company, placing a 1.66% stake for £198m net of taxes and expenses. The Group says that these funds will be used to fund share buybacks, with a further announcement on this to be made in due course. In the detailed piece I did in October 2022 on ABDN (see ‘Investment Write-Ups’ for more) I noted that its shareholdings in HDFC Life; HDFC Asset Management; and Phoenix Group accounted for c.40% of ABDN’s then market cap, muddying the investment case for ABDN. As such, shedding these minority stakes and using them to finance buybacks at an inexpensive rating would be a helpful value realisation strategy. Indeed, ABDN pays a 14.6p dividend so, simplistically, buying back £198m shares at the current level for cancellation will shave £14m+ off the cash cost of dividends, a 7%+ recurring annual cash return but also important against the backdrop of ABDN having an uncovered dividend (i.e. a smaller denominator will help lift EPS closer to the DPS). 

 

OGN – Bolt-on acquisition

Origin Enterprises announced on Friday that it has acquired British Hardwood Tree Nursery Limited, the “leading specialist wholesale supplier of bare root trees and planting accessories in the UK”. BHTN supplies the forestry, farming, estate management, corporate and landscaping sectors. This is a logical fit for Origin’s amenity, environmental and ecological portfolio in the UK, while also helping to offset some of the inherent earnings volatility driven by its core profit centres. No details of financial consideration were disclosed, but given that UK Companies House filings show net assets of £1.4m as at end-May 2022 and retained earnings had grown by ~£0.5m in the preceding 12 months, a single digit million pound consideration seems a reasonable assumption. A small but useful bolt-on deal. Origin trades on just 6.9x forward earnings, per Koyfin data, making it very cheap in my view.

 

KYGA – Bolt-on acquisition

Kerry Group announced on Wednesday that it has acquired Proexcar for an initial US$44m subject to routing closing adjustments, with a further $18m payable in 2025 should earn-out conditions be achieved. The acquired business is located in Colombia with c.120 employees and delivers clean label solutions into protein applications. As such, Kerry sees this deal as strengthening its offering and leadership position within the overall LATAM meat market. All in all, this is a sensible bolt-on deal albeit not one that is significant when set against Kerry’s market cap of €16bn. Koyfin data have Kerry trading on 21x forward earnings – not cheap, but this is a quality business.

 

STM – Trading update

STM Group provided a short trading update on Tuesday. The Group is changing its policy on interest income to bring it in-line with peers, with the new “sharing” arrangement set to bring in £1m in annualised PBT from 1 July. STM adds that “in addition to the above, income generated from client assets is expected to be higher in the current year than in the prior year as a result of the increasing interest rates”. However, these benefits will only “compensate for lower than expected new business and some significant non-recurring costs incurred such as the third party costs in relation to the strategic review”, while recurring administration revenue from existing clients remains in line. Net net neutral on a financial basis but the lower than expected new business is disappointing to see. FY 2022 results from STM are due later this month but the Group’s market cap of c.£15m is only marginally above its expected net cash, putting this stock firmly in deep value territory, although it will need a catalyst to drive the shares higher from here. 

 

BHP – Insignificant legacy issue

BHP said on Thursday that a review of its payroll systems has identified that c. 28,500 Australian employees have had leave incorrectly deducted on public holidays since 2010. An initial investigation suggests that the recently acquired OZ Minerals has a similar issue, while 400 current and former employees at Port Hedland are entitled to additional allowances. BHP’s initial estimate of the cost of remediating this issue and fixing systems will be US$280m. This is obviously a disappointing situation but one that is not significant in the context of BHP’s US$138bn market cap.

 

AV/ – Completion of latest share buyback

Aviva said on Friday that it has completed its £300m share buyback programme which was first announced on 9 March. Under the programme the Group repurchased 73m shares or 2.6% of its pre-buyback share count. With the stock trading on just 7.0x forward earnings (per Koyfin data) this is an eminently sensible use of surplus capital. At end-March 2023 AV/ had a pro-forma Solvency II ratio of 193%, comfortably above its 180% target, which should open the door to further buybacks in due course.

Stocks Update 19/5/2023

BOCH – Strong Q1, upgrades to come?

BT/A – FY results; Group at an inflection point 

DCC – Solid FY results 

IDS – FY results – light at the end of the tunnel? 

OGN – UK government comments on farming 

RHM – German contract win; Ukraine partnership

SPDI – Dutch partner reports Q1 results

 

BT/A – FY results; Group at an inflection point

BT released its FY (year-end March) 2023 results on Thursday. To my mind the results, with key line items all in line with guidance, show the Group at an inflection point, with BT delivering pro-forma revenue and EBITDA growth for the first time in six years. The massive FTTP build out is more than 40% complete, having passed 10m of the 25m premises targeted, with the project guided to complete at end-2026 (as before), although I note that the current build rate of 54k a week (2.8m per annum) will need to accelerate to meet that end-2026 target. Reassurance in this regard comes from guidance of accelerated capex to exploit the UK government’s 100% tax deduction incentive on investment in plant and machinery that is available between 1 April 2023 and end-March 2026. Elsewhere, I note the Group is guiding to a massive reduction in headcount (from 130,000 to 75-90,000) by FY 2028 – FY 2030. That, plus the completion of the FTTP project should, in my view, lead to a massive expansion in cash flow. This is good to see, given that BT’s net debt ticket up to £18.9bn at end-FY 2023, +£850m primarily as a result of a £1bn pension scheme contribution. The pension deficit trebled on an IAS 19 basis to £3.1bn (£2.5bn net of tax) although I will reserve judgment on that until I see the Group’s Annual Report and associated detailed disclosures. The dividend was flat at 7.7p for the year, as expected. On the guidance, BT is providing a qualitative steer of pro-forma revenue and EBITDA growth; capex (ex-spectrum) of £5.0-5.1bn; and normalised free cash flow of £1.0-1.2bn. The shares were hammered on the open yesterday due to perceived lower cash flow generation, but I think this misses the point that capex is being brought forward to capitalise on tax incentives – I consider that to be “good capex”. The cost take-outs guided are also in excess of anything I had been expecting. All in all, I continue to see BT as a Group at an inflection point, with clear drivers to revenue growth (FTTP providing a better network and associated customer loyalty / acquisition plus higher pricing); cost reduction (lower headcount and shuttering of legacy networks and systems) and enhanced cash generation (completion of FTTP plus the aforementioned income and cost benefits). A market rating of 7.6x expected FY 2024 earnings (and a yield of 5.5%) makes BT very cheap, in my view.

IDS – FY results – light at the end of the tunnel? 

International Distributions Services also released its FY 2023 results on Thursday. These had been well guided to show a lot of red ink due to the industrial relations difficulties at Royal Mail during the financial year. On a statutory basis the Group turned in a £748m operating loss (FY 2022: a profit of £577m), driven by Royal Mail where a £1.0bn loss was booked (FY 2022: a profit of £250m). GLS’ operating profit slipped 9.5% from £327m to £296m last year. Trading cash was an outflow of £34m (FY 2022: an inflow of £519m), contributing to net debt on a pre-IFRS 16 basis of £181m, a deterioration on the £307m of net cash at end-FY 2022. More unhelpfully, I note that all of IDS’ bonds and facilities will require refinancing over 2024-26. IDS has written down the carrying value of Royal Mail by £539m to £900m. The strike cost the Group £200m. Within the statement I note that the Group delivered some good progress on reforms notwithstanding last year’s strike action. At Royal Mail, FTEs reduced by 10k (2x the target), delivering a £150m annualised cost saving (although this will be offset . The Midlands Super Hub for parcels will open next month. Automation in parcels has increased from 50% in FY 2022 to 76% by end-FY 2023 (and guided to reach 90% when the Midlands Super Hub opens). The settlement of the strike action at Royal Mail offers an element of cost certainty for the next 2-3 years. There was no progress on the expensive Universal Service Obligation, and I wonder if we will see any movement this side of the next election. Reform of the USO is essential given the collapse in letter volumes (from 9.7bn in FY 2020 to 7.3bn in FY 2023). No dividend is being declared, which is no surprise. On the outlook, IDS guides to “Group adjusted operating profit”, with Royal Mail set to be loss-making and GLS expected to make adjusted operating profits of €350-370m (and targeted to grow to €500m by FY 2027). Clearly, FY 2023 was an annus horribilis for IDS, but the resolution of industrial relations problems (for now at least) and roll-out of significantly enhanced automation are important steps as the Group looks to rebuild profitability. The relatively low financial net debt also leaves IDS with plenty of optionality in the medium-to-longer term. Bloomberg consensus has IDS trading on 8.2x FY 2025 earnings, a depressed multiple, but presumably the market will want to see firm evidence of a return to stronger trading before the shares re-rate from here.

 

DCC – Solid FY results 

DCC released its FY (year-end March) 2023 results on Tuesday. For the unfamiliar, DCC is a top quality company, which has delivered unbroken growth in dividends in its 29 years as a public company; CAGR of 14% in adjusted operating profit over that period; and average ROCE of 19% since its IPO. In respect of FY 2023, DCC delivered 11.3% (7.8% constant currency) growth in adjusted operating profit (to £656m, 2% above consensus), driven by its Energy business (operating profits of £458m, +12.4%) and contributions from acquisitions. Free cash conversion was a strong 87% (£570m) and ROCE was an impressive 15.1%. The FY dividend is being hiked by 6.5% to 187.21p. DCC has a proven (given the strong ROCE pedigree) track record when it comes to capital allocation. The £360m invested on 19 acquisitions during FY 2023 should support future earnings. This was also the main driver of the increase in net debt (pre-leases) from £420m to £767m in the year. On the outlook, DCC has provided a qualitative statement in respect of FY 2024, saying it expects “another year of operating profit growth and continued development activity”. Consensus points to mid-single digit growth in operating profit, against which higher net debt (on higher rates) must be considered, so FY 2024 may not see a lot of EPS momentum absent further M&A. Nonetheless, that may well be a solid outcome given the distortions in the energy market seen during FY 2023 and what that means for FY 2024 comparatives. DCC trades on 10.6x expected FY 2024 earnings with a dividend yield of 4.0%. To me this seems like the market is essentially valuing a business that guides to doubling profits by 2030 as being ex-growth, thus making DCC seem mispriced in my view.

 

BOCH – Strong Q1, upgrades to come?

Bank of Cyprus released its Q1 (end-March) results on Tuesday. These showed another seasonally strong quarter of new lending (€624m, +41% q/q but flat y/y) helping the gross performing loan book to rise marginally to €9.9bn. A supportive macro backdrop (Cyprus’ GDP is forecast to grow 2.8% this year) helps, as does the rate environment (NII of €162m was +127% y/y) and self-help measures (OpEx were -3% y/y, pushing the Cost/Income ratio to a super-efficient 34%. Net income for the quarter was €95m, up from €17m in Q1 of last year. BOCH says that “performance in the quarter [was] ahead of our FY 2023 targets” and dropped a hint of earnings upgrades to come, saying that “rates [are] higher than expected and anticipated increases in deposit costs not yet developing”. Asset quality is in good shape for BOCH – the NPE ratio of 3.8% is -7.6ppt y/y and coverage is a very strong 73%. BOCH has very strong capital (15.2% CET1, total capital ratio of 20.3%) and funding (the loan to deposit ratio is just 53%). Earlier this year Bank of Cyprus announced its first dividend for 12 years – a milestone that reflects the heroic effort by management to turn the ship around – with the initial 5c/share dividend representing a 14% payout, and distributions expected to build to 30-50% payouts over time. While that sounds like a skinny payout for such a strongly capitalised bank, I note that the CEO said on the investor call post results that: “We don’t rule out anything including buybacks, everything’s on the table and [is] under constant review”. There’s a lot of focus on banks’ fixed income portfolios at this time, given the well documented unforced errors in US regional lenders. BOCH has increased its fixed income portfolio by 10% (to €2.75bn) since the start of the year, all of which is held to maturity, so no fair value/gains are recognised in the income statement or equity. For good order, BOCH’s bond portfolio has an unrealised fair value loss of €87m, equivalent to c.85bps of CET1, but given the low average duration of c.2 years and high average rating (A1) of the bonds, this will unwind as the bonds mature. Two other things to watch for BOCH this year are the investor day next month, which should hopefully increase interest in this positive story, and the AT1 call in December – where BOCH will have to decide on whether or not to refinance / replace its €220m AT1 instrument, which carries a chunky 12.5% coupon. Finally, I note that BOCH has €19bn of deposits as at the end of March. Of these, €734m are from Russian counterparties and a further €95m from Belarusian counterparties. Presumably there are risks to these deposits’ continued tenure with BOCH, but given the Group’s very strong funding position this is not a concern. As an aside, it’s also worth noting that Moody’s this week upgraded BOCH’s long-term deposit rating to Ba1 from Ba2. Bank of Cyprus’ net assets stood at €1.9bn at end-March, or €4.26 a share. Given management’s target of delivering >13% ROTE, the stock should (in my view) be trading at a premium to this book value. A share price of €2.50, or a c.40% discount to NAV, is therefore too cheap, in my opinion.

 

RHM – German contract win; Ukraine partnership

Rheinmetall announced on Monday that it and its partner KMW have been awarded a €1.1bn contract to supply 50 new Puma IFVs to the Bundeswehr. RHM’s share of this order is €501m. Delivery of the 50 units is slated from December 2025 to early 2027. The order may grow as “a framework agreement was signed enabling the subsequent call-off of further Puma IFVs”. Elsewhere, late last week RHM announced the establishment of a JV, expected to be operational this summer, with Ukraine’s Ukroboronprom. The initial focus is on repairs to Ukrainian armoured vehicles, but this is expected to grow to encompass “technology capabilities that will be domiciled in Ukraine” that will be leveraged to “jointly produce selected Rheinmetall products in Ukraine…including for subsequent export from Ukraine”. In recent months there have been reports that Rheinmetall is in discussions to build a factory to produce main battle tanks in Ukraine, so this is no surprise. Ukroboronprom is a credible partner, employing 65,000 skilled people. In the longer-term, there is clear scope for Rheinmetall to leverage this partnership to support meeting a busy orderbook from Western customers. Bloomberg consensus has RHM trading on an undemanding 14.2x 2024 earnings and yielding 2.6%.

 

OGN – UK government comments on farming 

My attention was drawn to an opinion piece in Tuesday’s [London] Times from Thérèse Coffey, the UK Secretary of State for Environment, Food and Rural Affairs. Coffey said that “we should all proudly champion our farmers and role they play in putting food on our plates and their careful stewardship of the countryside”. She wrote that the UK government “will go further in protecting our farmers’ interests”, including relaxing planning rules around farm buildings (such as glasshouses) and providing 45,000 seasonal visas to the horticulture sector. Significantly, she also called out “the symbiotic relationship between science and industry [which] can help us improve productivity, nutrition and resilience for the long term”. All music to the ears for shareholders in Origin Enterprises, the largest agronomy firm in the UK, whose advisers are an important contribution to post-Brexit (and post-the Russian invasion of Ukraine) Britain’s need to enhance food security and sustainable farming practices. I suggest that this contribution is not reflected in OGN’s very low market valuation of just 7.3x 2024 earnings (with an expected dividend yield of 4.5%). Indeed, I note that Canaccord Genuity initiated coverage on OGN with a Buy rating and €5.65 price target (c.50% upside from today’s €3.705 price) this week. 

 

SPDI – Dutch partner reports Q1 results

Arcona, the Dutch listed Eastern European property fund that SPDI swapped most of its real estates assets into in exchange for shares, released its Q1 results yesterday. These showed an improved performance, with a PBT in the period of €175k, helped by 11.3% y/y growth in net rental income to €1.1m. The NAV rose by 60bps in the quarter to €11.88 per share, helped by the repurchase for cancellation of 61k shares at an average price of €6.43 a share. The Arcona portfolio is in good shape, with an LTV of just 41% (versus 44% at end-2022), although rising interest costs are a near-term headwind. The Group aims to sell more properties to pare borrowings and finance more share buybacks. There is no update on the acquisition of the remaining properties from SPDI, although we may get some news on this at the AGM on 27 June. All in all, a solid update. SPDI (market cap £7.3m) owns 1.1m shares with a value (based on NAV) of €12.75m in Arcona, along with a further 259,627 warrants in the Group. SPDI results, expected in late June, should hopefully provide further clarity on management’s strategy to realise value from its remaining assets, including from the distribution of Arcona shares.

Stocks Update 31/3/2023

BHP – JV partner to extend Antamina mine life 

BT/A / HMSO – Added more BT, exited Hammerson

BT/A – UK broadband market set for consolidation? 

CRH – Next phase of the buyback 

GSK – Pipeline developments

KYGA – Sweet Ingredients disposal completes

MKS – Positive signs from Ocado Retail trading update

OGN – Bolt-on acquisition

STVG – TV licence renewed

Trading – Added more BT/A; exited HMSO

Earlier this week I increased by my shareholding in BT by a quarter. For some time I have been of the view that BT is an income stock transitioning to a growth stock. The main reason for this is its huge FTTP investment, which is connecting 25m premises to fibre broadband. My expectation is that this investment will grow broadband customers (superior proposition) while the end of the era of ‘free money’ is a headwind for smaller scale operators. BT is also executing a major cost cutting drive, examples of which include consolidating the office footprint from 300 to just 30 premises. Shutting down legacy networks will also pare BT’s run costs. Management has further simplified the business through moving BT Sport into a JV with Warner Brothers Discovery, the precursor (in my view) to a full exit. While input price pressures are to the fore for many sectors, BT is relatively insulated by having CPI-linked pricing arrangements with most of its customers. And the dividend is attractive – 5.5% at the current share price. Once the FTTP spend rolls off from 2026 I think we’re going to see rapid deleveraging by the Group to boot. All in all, BT is a stock I like, hence my decision to top up this week. I also took the decision to sell my small residual shareholding in Hammerson. It has not been a happy investment for me, with its capital values having collapsed as a result of the economic dislocation of recent years. I suspect there is more pain to come for the sector – this extract from Supermarket Income REIT’s results on Thursday is a sign of how challenging the current environment is: “The robust performance of the grocery sector is in stark contrast to the decline in values seen in the property investment market caused by the challenging macroeconomic and geopolitical backdrop. The significant increase in interest rates since September has caused a rapid decline in property values, with the MSCI Capital Values Index declining by over 19%. Supermarket property has been less volatile, but not immune, with a 13% like-for-like decline in our portfolio value resulting in a net initial yield of 5.5% as at 31 December 2022 (30 June 2022: 4.6%)”.

 

MKS – Positive signs from Ocado Retail trading update

On Tuesday Ocado Retail released its Q1 trading statement. While the 50-50 JV between Marks & Spencer and Ocado has held its FY guidance, the Q1 statement gives me optimism that the risks to this guidance lie to the upside. Specifically, the JV’s performance has been negatively impacted by excess capacity at its network of CFCs, and in this regard I am encouraged to see average orders per week +4% y/y to 381k, while active customers of 951k at end-Q1 are +14% y/y, suggestive of more growth to come. While inflation and its impact on households are well understood, a flat average basket value for the JV is a good outcome (volumes -7.5% y/y but ASP +8.3% y/y). While not explicitly stated, there are hints in the trading update that MKS is capturing more share of basket – “increasing our range of M&S products”; and “creating more of the M&S magic for customers by offering more of the products they love”. I think the Ocado Retail JV is well placed irrespective of how the macro plays out – either (a) cost of living pressures ease and retail sales rebound; or (b) weaker grocery delivery start-ups with inferior economics (automation / scale) fold and Ocado Retail eats up their market share. A pause on future capacity additions and ongoing new customer acquisition will lead to a step-change in performance due to operating leverage effects. I’m positive on this JV and what it brings to MKS, which I’m a happy holder of. Based on Thursday’s close, Marks & Spencer trades on 11.3x 2024 earnings, with analysts pencilling in a dividend of 3.4% for next year.

 

GSK – Pipeline developments

There was good news from GSK on Monday, with results from the Phase III RUBY clinical trial demonstrating the potential of Jemperli / dostarlimab plus chemotherapy “to redefine the treatment of primary advanced or recurrent endometrial cancer versus chemotherapy alone”. The trial showed a 72% and 36% reduction in the risk of disease progression or death. Regulatory submissions are planned for H1 2023. Approximately 417,000 new endometrial cancer cases are reported in developed countries each year. At end-2022 GSK had 69 potential new vaccines and medicines across Phase I, Phase II and Phase III/registration. Elsewhere, I note that J&J announced this week that it has discontinued its RSV adult vaccine programme following a strategic review of its portfolio. This is an incremental positive for GSK, which is one of three companies (the others being Pfizer and Moderna) which has a RSV adult vaccine in Phase III development. Based on Thursday’s closing price GSK trades on just 9.2x 2024 earnings (the FTSE 350 Pharma and Biotech sector trades on 13.7x) and yields 4.25% (well above the F3PHRM’s 2.8%).

 

OGN – Bolt-on acquisition

Earlier today Origin Enterprises announced the acquisition of Neo Environmental, a “market-leading planning environmental and technical consultancy business in the UK and Ireland”. Neo sells its advice to a range of clients, “primarily in the energy and infrastructure sectors”. Origin says that Neo will be a good fit for its existing ecological specialist business Keystone Environmental, which it bought for an initial €11m cash outlay (plus up to a further €3m of contingent consideration) during H1 of its financial year (to end-July 2023). No details on the consideration paid were provided, but I note from UK Companies House filings that Neo had net assets of €1.0m as at end-April 2022 (Keystone had €3.3m of NAV at the time of its acquisition). Interestingly, Origin’s CEO says in the RNS that “Following the completion of our €20m share buyback programme this week, which has seen a cumulative €60m returned to shareholders via share buybacks in the last two years, we expect our near-term capital deployment will be focused on further bolt-on acquisitions; strategic capex to drive organic growth; and our progressive dividend policy”. I view Origin as an excellent way to play the themes of food security and sustainability, and see its forward earnings multiple of just over 8x as representing good value. 

 

CRH – Next phase of the buyback 

Earlier today CRH said that the latest phase of its share buyback has completed, with $0.3bn returned to shareholders through the repurchase of 5.9m shares between 19 December and 30 March. This brings cumulative cash returns through buybacks to $4.3bn since its commencement in May 2018. A new $750m buyback tranche will now commence and this will end no later than 29 June. This new tranche is the initial stage of the wider $3bn programme announced with the results on 2 March. Koyfin data have CRH trading on a forward PE of 12.6x, which is very undemanding for a business of this quality.

 

BHP – JV partner to extend Antamina mine life 

BHP is a 33.75% non-operating JV partner in Antamina, a large, low-cost copper and zinc mine in Peru. It is operated independently by Compañía Minera Antamina S.A.  Antamina produces copper and zinc, and by-product credits of molybdenum and silver. Copper and zinc concentrates are transported 300 kilometres by pipeline to the port of Huarney. Molybdenum and lead/bismuth concentrates are transported by truck. It is one of the ten largest mines in the world in terms of production volume. Press reports this week quote Anatamina’s CEO as saying that they will spend US$2 billion to extend the useful life of Antamina copper mine to 2036 (from the 2028 previously guided), with approval expected in mid-2023. Given the favourable demand profile for copper, this is a welcome development (albeit not a gamechanger, given BHP’s scale (£128bn market cap) for the Group. On Thursday BHP shares were trading on 10.9x 2024 earnings and yielding 6.2%.

 

KYGA – Sweet Ingredients disposal completes

On Monday Kerry Group announced the completion of the €500m disposal of its Sweet Ingredients portfolio to IRCA. The sale was first announced in January. Kerry has a proven track record of successfully repositioning its portfolio (A potent example of the benefits of this strategy being this line from its FY 2022 results: “Over 35 years as a listed company, the Group has grown its dividend at a compound rate of 16.1%”) and I would expect the proceeds to be recycled into earnings-accretive M&A in due course. As of the close on Thursday, KYGA traded on 18.2x 2024 earnings and yields 1.4%, an undemanding valuation for a business of this quality.

STVG – TV licence renewed  

STV Group announced on Wednesday that the UK Secretary of State has renewed its ‘Channel 3’ licence can be renewed for a further ten year period from January 2025. This provides the Group with helpful revenue visibility from its Broadcast division, although this part of the business will contribute a smaller share of revenues and profits going forward given the rapid growth in STVG’s Studios business. STV further notes that the draft UK Media Bill proposes to extend the prominence that Public Service Media (PSM) providers are entitled to on broadcast platforms to new digital platforms, making STV Player “more easily discoverable on connected TVs, streaming sticks and set top boxes”. All in all, these steps should help to ‘future proof’ the business. The market is not giving credit to any of the progress the Group has been making with the shares trading on just 6.8x consensus 2024 earnings and yielding 4.7%. This stock is very cheap, in my opinion.

 

BT/A – UK broadband market set for consolidation? 

Last weekend’s FT reported that a number of infrastructure funds are in talks to acquire the UK ‘altnet’, Trooli. The firm is said to have 200,000 customers, mainly in the south east of England, and Trooli has targeted reaching 2.1m homes by 2026 with its fibre broadband offering, small beer compared to BT’s FTTP push to reach 25m premises in the same timeframe. The article said that Trooli is likely to fetch in excess of £100m, a valuation that seems light to me relative to the targeted customer base and associated capex to get to there. The FT said that Virgin Media O2 backed out of a bid for the altnet, while the sale is also being framed as “a sign of pressure within the altnet industry…which is grappling with rising costs and soaring interest rates”, with a wave of consolidation expected to take place. In December the UK government ordered the sale of the Russian PE backed Upp network, which operates in the East of England, while in January Shell said it was conducting a strategic review on its Shell Energy unit, which has c.500,000 broadband customers. Per an analysis by Uswitch conducted this month, BT has roughly a third of the UK broadband market, as measured by subscribers. I expect BT to at least hold this share, with upside risk coming from FTTP (customers switching to BT from inferior networks) and consolidation (fewer competitors).

Stocks Update 10/3/2023

AV/ – FY results – Compounding returns

HBR – FY results – the cash machine

HMSO – FY results, more done, a lot more to do

IR5B – Strong FY results

OGN – H1 results 

PRX – Silvergate announcement doesn’t move the needle

RWI – Positive conclusion to EC investigation 

STVG – FY results; Planet V details

 

AV/ – FY results – Compounding returns

Aviva released a solid set of 2022 results on Thursday. Under the decisive leadership of CEO Amanda Blanc the Group has been repositioned as a focused business, concentrating on its core markets (UK, Canada, Ireland) and driving efficiencies. It has also solid credentials in terms of capital returns. In 2022 the Group delivered operating profit of £2.2bn (+35% y/y), supported by growth in new business (Life +15%, General +8%); a COR of 94.6%; and controllable costs of £2.8bn which were -3% y/y. Despite having returned over £5bn of capital since 2021, it retains a large surplus, with a Solvency II cover ratio of 212% (196% allowing for payment of the 2022 final dividend and the new buyback, which is well above the target of >180%). A new £300m buyback has been announced, while the 2022 dividend was 31p (as guided). Interestingly, AV/ guides to “low to mid-single digit growth in the cash cost of the dividend”, which presumably means mid-to-high-single digit growth in the DPS as the share count continues to reduce due to buybacks. On the outlook, management expect higher BPA volumes in 2023, alongside growth in Wealth, GI and ongoing good demand for Protection and Health products. Conditions are seen as more challenging in Adviser. The Group is targeting a sub-94% COR ‘over time’. Aviva closed at a very undemanding 2024 multiple of 7.5x last night and offering a 7.5% yield. Given the capital generative nature of the model and management’s commitment to return surplus capital through buybacks, I view this stock as an attractively priced compounder.

 

IR5B – Strong FY results 

Irish Continental Group released a strong set of 2022 results on Thursday. Helped by the ongoing recovery in international travel post-COVID and growth on the Dover-Calais route (the ISLE OF INISHEER ferry was added to the route in April 2022, bringing daily sailings to 30), revenue surged 75% to €585m (In terms of volumes, Trucks were +140%, Cars +182%, Containers -7% and Port Lifts -5%) while EBITDA rose 143% to €127m. The Group swung from an operating loss of €200k in 2021 to a profit of €67m. Net debt increased from €142m to €171m (from €85m to €129m on a pre-IFRS 16 basis), which is explained by strategic capex on new vessels and cranes of €57m; share buybacks of €49m and dividends paid of €24m (versus nil in 2021). In terms of strategic developments, apart from the ISLE OF INISHEER, the Group also acquired a container vessel, CT PACHUCA, which brings the total owned fleet to six ferries and eight container ships. The Group commenced operations at the new Dublin Inland Port container terminal in January 2022 and more than doubled its fleet of electric rubber-tyred gantry cranes at Dublin Port to nine. In terms of trading since the start of the year, the Group has seen 42% y/y growth in Cars; 21% y/y growth in Trucks; 4% y/y fewer Containers and 5% y/y fewer lifts. Management struck a confident tone on the outlook, saying it looks forward to “continued growth during 2023 through the leveraging of our recent investments”. The FY dividend has been raised by 57% to 14.09c/share, which combined with the repurchase of €49m of shares in 2022 is surely a sign of management’s confidence in the business. One surprise for me was the absence of any ‘new news’ on fleet replacement – given that all but one of its owned ferries is >20 years old this is a nettle that needs to be grasped before long. All in all though, ICG is in a great place, with strong market positions. Based on Thursday’s closing price ICG trades on an undemanding 11.9x 2024 earnings and offers a cash dividend yield of 3.1%.

 

HBR – FY results – the cash machine

Harbour Energy released its FY 2022 results on Thursday. The UK government’s peculiar decision to hammer North Sea oil and gas producers at a time when energy security should be top of agenda for all Western governments diluted the Group’s performance in the year. 2022 saw production of 208kboepd, +19% y/y; unit operating costs of $13.9/boe (2021: $15.2); and uplifted PBT to $2.5bn from $0.3bn. The aforementioned tax hit though meant that net income was just $8m (2021: $101m), impacted by a $1.5bn deferred tax charge. Cash flow was a happier story, with free cash tripling to $2.1bn after flat capex of $0.9bn and $0.6bn of cash tax payments (double 2021’s level). The Group approved $600m of shareholder distributions in 2022 and alongside the FY 2022 results unveiled a further $200m buyback and an unchanged (in quantum, but +9% on a per-share basis, reflecting the benefits of buybacks) $100m ordinary dividend. The balance sheet is in super shape, with net debt reducing over the course of 2022 from $2.3bn to $0.8bn. On the development front, the Group has taken investment decisions on the Talbot development (first oil guided for end-2024) and Leverett gas appraisal (well scheduled to spud in Q2) in the UK; made a material discovery at Timpan-1 in Indonesia, where HBR says it has “a multi-TCF gas play” and substantially agreed a development plan for the giant Zama field in the Gulf of Mexico ahead of submission to the regulator. In terms of 2023 guidance, management sees production at 185-200kboepd; OpEx of c.$16/boe and capex of $1.1bn (of which $0.2bn is decommissioning). Based on commodity price assumptions, free cash flow could be c.$1.0bn this year, with the Group moving into net cash in 2024 if realised. Looking further out, management says that HBR is “well-placed to deliver on our strategy of building a global diverse oil and gas company. We will continue to return any excess capital to shareholders while investing in our existing portfolio and maintaining capacity for meaningful but disciplined M&A”. Harbour is a cash machine, which is rapidly deleveraging and cutting its share count – thus becoming a compounder for patient investors. A more constructive UK tax policy is a potential catalyst, while the Group’s international development assets also provide helpful optionality. A valuation of 5.3x consensus 2025 earnings (per Thursday’s close) looks far too cheap to me, noting the balance sheet strength.

 

STVG – FY results; Planet V details

Scottish media firm STV Group released its 2022 results on Tuesday. The Group recorded its highest ever operating profit while executing strongly against its strategic objectives. The Group now makes 38% of its earnings from Digital and Studios as it continues to reduce its reliance on its traditional broadcasting franchise (it has the ‘Channel 3’ ITV licences for Scotland). Its free to air broadcasting unit still has real value though, particularly in the context of cash strapped households cutting back on subscription streaming services. The Group cites research that 20% of Scots have cancelled at least one paid-for streaming service, with a further 38% saying they intend to. STV is completely dominant in the commercial broadcasting arena in Scotland (mindful that BBC does not carry advertising), having a higher audience than any other commercial channel on 361 days of last year while November saw it record its highest viewing share for 19 years, helped by the World Cup. The Group has invested in its STV Player offering, which passed the 5m registered users target a year ahead of schedule – a really impressive milestone considering that Scotland’s population is 5.5m. Advertising impressions on the player were +27% last year while monthly active users were +10% y/y. The Group has deepened its digital partnership with ITV, locking in a long-term content deal. 1,600 hours of digital content were added to the Player in 2022, which now offers 6,000+ hours of content to users. An example of how effective this approach can be is the acquisition of the long-running soap Brookside – that became the fastest programme on the Player to reach 1m streams and lifted ex-Scotland streams to 25% of the total in Q1 2023! STV also disclosed more information on the launch of its Player on ITV’s programmatic video advertising platform, Planet V. This uplifts the share of STV’s digital advertising that is targeted to specific groups of users to 90% from 40% in 2022 and STV says that in its first weeks of operation it has seen “higher advertising yields and new digital-only advertisers coming onto the platform for the first time”. The Studios business had a phenomenal year, doubling new programme commissions. It will deliver £50m+ of revenues this year, more than double 2022’s level. In terms of the financial performance, revenue was -5% but a 120bps increase in the operating margin delivered operating profits of £25.8m, +2% y/y. A final dividend of 7.4p has been declared, bringing the FY total to 11.3p, +3%. On the balance sheet, the Group swung from net cash of £0.3m at end-2021 to net debt (pre-leases) of £15.1m at end-2022. This was a function of short-term working capital needs (cash outflows linked to inventories were £29.3m, up from £2.3m in 2021) and will unwind as programmes are delivered. The IAS19 pension deficit improved to £63.1m from £79.4m at end-2021 – a meaningful improvement in the context of a c.£130m market cap. Looking ahead, management says STVG is “on track to hit or surpass our 3-year growth targets to the end of 2023” to (i) Double digital viewing, users and revenue (to £20m); Quadruple Studios revenue (to £40m); and (iii) Achieve at least 50% of operating profit from outside traditional broadcasting. Advertising revenues have had a soft start to the year, -15% which is hardly surprising given the economic backdrop. All in all, this is a very satisfactory update from STVG, which is delivering on its strategic plans and is well placed to benefit when advertising rebounds. A yield of 4.2% (based on 2024 consensus) is helpful compensation for the patient until this happens, while the forward (2024) earnings multiple of only 7.5x is very inexpensive for a quality media franchise, in my view.

 

OGN – H1 results

Origin Enterprises released its interim results (to end-January) on Tuesday. These show a strong performance, although H1 is the seasonally quieter time of the year for the Group (H2 will probably contribute about 80% of the FY earnings). The Group delivered revenues of €1.2bn (+€0.3bn/+35% y/y, driven by commodity price inflation and strong volume growth in Latin America) and doubled operating profits to €20.3m from the prior year’s €11.1m. Net debt ballooned to €131m from €54m at end-H122, “reflecting a commodity inflation led increase in working capital, cumulative share buyback spend of €53m and acquisition investment of €13m”. An unchanged interim dividend of 3.15c has been declared, while a €20m FY2023 share buyback programme is 80% complete. On the corporate development side, the integration of Keystone Environmental is “progressing to plan”, while the Group has announced the acquisition of Agrigem, “the largest independent specialist supplier and advisor of ground care products throughout the UK and Ireland”, which further strengthens its Amenity offering. On current trading, OGN notes “reasonable on-farm sentiment, with a favourable planting profile, solid early season winter crop establishment and global grain prices well above the longer-term average”, which should set the business up for a good H2. Guidance for the FY will be provided with the Q3 trading update in mid-June. All in all, OGN to me offers attractive exposure to the themes of sustainable farming and food security. A multiple of just 9.2x FY 2024 earnings seems too light for this business, with the yield of 4.1% a further attraction.

 

HMSO – FY results, more done, a lot more to do

Hammerson released its FY 2022 results on Thursday. The strap line is “another year of good progress”, and while there are some signs of improvement, a lot of the big issues overhanging the Group remain. Operationally, the portfolio delivered a big improvement, with adjusted earnings +60% to £105m, helped by a 29% uplift in LFL NRI. Admin costs were reduced by a sixth in 2022, “with more to come in 2023 and 2024”. Management call out “lower finance costs following deleveraging”, but the prevailing interest rate environment is plainly unhelpful. So far so good, but the NAV has been hammered by the use of scrip dividends to comply with REIT obligations to distribute most of its earnings. The EPRA NTA per share fell to 53p from 64p at end-2021, with 7.5p of this 11p decline a function of the scrip dividend. Management says that it anticipates a return to cash dividends in 2023 but I would argue that this cash would be far better served being used to retire debt – not that this option is open to management, due to the REIT status. The Group has sold £628m of assets in the past two years (£195m in 2022) and while management can say it has “strengthened the balance sheet”, this has come at a cost of foregone income. The portfolio value fell 5% due to revaluation deficit and disposals. Net debt disappointingly reduced only £67m in the year to £1,732m. The pace of reduction would have been stronger were it not for an FX headwind of £131m. That net debt equates to 10.4x EBITDA (2021: 13.4x), an uncomfortably high multiple, with the fully proportionately consolidated LTV rising 1pt to 47% last year. The Group continues to expect £300m of disposals during 2023 but, again, this will reduce Group income. Liquidity is reasonable with gross cash on balance sheet of £227m and just £112m of maturities falling due between now and the end of next year. On the outlook, management note that the positive footfall and sales trends seen in 2022 (when footfall rose 11%, ending the year at 90% of 2019 pre-COVID levels, while sales are above pre-COVID levels) have continued into the New Year. Portfolio metrics are also encouraging, with net effective rent in 2022 coming in 2% ahead of ERV; the average WAULT to break at 8.0 years (giving strong visibility on revenues); flagship occupancy climbing one point to 96% during H2; and rent collections have normalised (as of February, 95% of 2022 rents had been collected). There were positive signs from Value Retail, notwithstanding Chinese restrictions. Brand sales rose 34% in 2022 and are now back to within 5% of pre-COVID levels (footfall is 9% below 2019). In terms of development, HMSO continues to make slow progress on this front. It has repurposed former Debenhams stores in the UK and Ireland; in France it completed a 34,000m2 extension at Les 3 Fontaines and at Dundrum it is building a 122 unit apartment development. All good to see but minor in the context of the development potential – I fear that HMSO’s balance sheet means that it will not be able to capture full value from its development assets, however – my sense is that it will look to sell on permissioned developments in many cases. All in all, while management is to be commended on the various areas of progress, the Group is stymied by an elevated debt load and the macro backdrop isn’t supportive. That all, I suspect, feeds into a share price of 25.9p (last night’s close) that is well below the NTA per share of 53p.

 

RWI – Positive conclusion to EC investigation

In FY 2020 Renewi took a provision of €15m following the opening of a European Commission State aid investigation relating to the tax rate applied to waste materials added to the Cetem landfill to contour the site for closure and rehabilitation. The Commission has now determined that the Walloon Region did not provide State Aid to Renewi Valorisation and Quarry NV. As a result, Renewi is releasing the €15m (equivalent to nearly 20c/share on NAV) provision. This is an incremental positive for Renewi, where the main story relates to the Group’s perfect positioning to benefit from the structural growth story that is the circular economy.

 

PRX – Silvergate announcement doesn’t move the needle

On Wednesday night Silvergate Capital Corporation, the holding company for Silvergate Bank, announced its intent to wind down operations and voluntarily liquidate the bank. This follows recent industry and regulatory developments. Prosus held 100,000 shares in Silvergate, worth c.€300k based on last night’s closing price – a rounding error compared to Prosus’ NAV of c.€140bn.