Stocks Update 26/4/2024

ABDN – Q1 update, positive momentum

APH – Another delay 

BHP – Approach for Anglo American 

BOCH – Senior issuance

CLIG – A good start to CY 2024

GRP – €25m buyback; NAV and dividend updates

GSK – Pipeline progress 

LLOY – Solid Q1 update

MKS/PRX – Getir news

PRX – Swiggy swag 

RKT – Q1 update reassures

RWI – Solid pre-close update

ULVR – Good start to the year

 

BHP – Approach for Anglo American

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

 

RWI – Solid pre-close update

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

 

ULVR – Good start to the year 

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

 

RKT – Q1 update reassures

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

 

ABDN – Q1 update, positive momentum

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

 

GRP – €25m buyback; NAV and dividend updates

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

 

LLOY – Solid Q1 update  

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

 

CLIG – A good start to CY 2024

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

 

PRX – Swiggy swag 

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

 

MKS/PRX – Getir news

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

 

GSK – Pipeline progress

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

 

APH – Another delay

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

 

BOCH – Senior issuance

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

Prosus (PRX NA) – Buy one, get lots for free

With a market cap of €74bn, Prosus is the largest European listed consumer internet company. It is perhaps best known for its c.25% shareholding in Tencent, currently valued at €86bn. Unsurprisingly, and as shown below, PRX’s share price broadly tracks that of Tencent, with the market likely not affording due consideration to the Group’s other significant assets – it has €8bn of other listed investments and €21bn of unlisted investments. The Group has de minimis (c.€0.02bn) net debt. All in all, this leaves Prosus with a net asset value of €115bn (€46.3 per share) which investors can buy today for €29.4 per share, a 36% discount. Sure, conglomerates generally do trade at a discount, but a number of strategic steps being undertaken by the Group suggest to this shareholder that PRX can narrow this discount – (i) share buybacks; (ii) monetisation of assets; (iii) driving portfolio efficiencies; and (iv) simplification.

Before delving in to the strategic levers that I believe PRX can deliver value for investors from, it is worth spending some time on the Group’s portfolio of assets.

PRX has “more than 80 investments across more than 100 markets“. As mentioned, these span listed and unlisted companies; part and wholly owned and/or controlled. As of 12 April 2024, PRX had €94bn of listed investments, of which c.90% is represented by the shareholding in Tencent, a world-leading internet and technology company. Other meaningful listed holdings include a €3bn stake in Chinese shopping platform Meituan; a €2.5bn stake in the German headquartered food delivery player Delivery Hero; €1.4bn of shares in Singapore travel service conglomerate Trip.com; and smaller (sub-€1bn) shareholdings in online remittance service provider Remitly; Edtech specialist Udemy; US software firm Similarweb; (another Edtech) Skillsoft; (another food delivery firm) Doordash; and social platform VerticalScope.

PRX’s unlisted investments are mainly drawn from the same sectors as the publicly quoted names – Classifieds; Food Delivery; Payments & Fintech; and Edtech. Prosus Ventures is the Group’s VC arm and it has invested $1.4bn in more than 40 high potential firms.

By sector (combining both the private and public assets), 77% of PRX is in Social & Internet Platforms; 8% in Food Delivery; 3% in Classifieds; 4% in Payments & Fintech; 2% in Edtech; 2% in Etail; 2% in Ventures; and 2% in ‘Other Ecommerce’.

As mentioned in the introduction, PRX trades at a discount to the value of its holding in Tencent alone, so in buying Prosus you get exposure to Tencent at a discount and investments in c.80 other businesses for free. Sure, conglomerates generally tend to trade at a discount, but I believe that PRX has a number of levers that should at least narrow this discount. Let’s review these in turn.

(i) Share Buybacks. PRX announced an open-ended share repurchase programme in June 2022, funded by the sale of its shareholding in Tencent. By 30 September 2023, this programme had created over $25bn of value, as 17% of the PRX free float was repurchased at a discount to NAV, leading to 7% NAV accretion per share for continuing shareholders. PRX says that “while the discount remains elevated, we envision no changes to the parameters of the programme”. PRX further notes that its “open-ended buyback program increases our per share exposure to Tencent”. This is an important consideration, given the analyst consensus for Tencent is that it will deliver stronger dividends over the coming years, which will augment the cashflow that PRX is unlocking through its share sales from its investment in the company.

(ii) Monetisation of assets. In PRX’s latest (H1 2024) results, the Group said it would “adopt a more dispassionate approach to portfolio management”. During CY 2023 Prosus exited OLX Autos and sold PayU GPO (for $610m). On the analyst call following the release of the interim results, management was asked to elaborate on its plans to ‘crystallise’ value from its portfolio. The CEO said: “Crystallisation for me is really about highlighting value. And that could happen through a sale, but more likely, in the near to mid-term, through listing businesses. Now, I want to be very clear. Our intent is not to list every single business in our portfolio that’s privately held. Listing is appropriate for businesses when that event can actually help the business, or perhaps there a valuation disconnect between what an asset could be worth in the public markets versus what it’s worth under private ownership“.

(iii) Driving portfolio efficiencies. The end of the ‘zero interest rate environment’ from 2022 onwards has, to my mind, put more discipline on business models generally. We have seen a lot of early stage companies being compelled to accelerate the journey to profitability. Prosus is no exception to this trend. At its Capital Markets Day in December 2022, management set out its plan to achieve profitability from its consolidated Ecommerce portfolio by H1 of FY 2025. This was brought forward to H2 of FY 2024 in the most recent (H1 FY 2024) results, which showed that in the six months to end-September 2023 PRX’s Ecommerce portfolio had consolidated trading losses of $36m, a $220m improvement from the prior year period. The overall PRX portfolio delivered very impressive topline performances, with revenue growth across all divisions (Etail +4% y/y; Edtech +11% y/y; Food Delivery +17% y/y; Classifieds +32% y/y; Payments & Fintech +32% y/y) in H1 2024, and margin improvement in all divisions ranging from 2ppts to 15ppts y/y. The revenue performance is particularly pleasing as it shows the Group isn’t simply trying to ‘cut its way to glory’.

(iv) Simplification. Prosus made its stock market debut in Amsterdam in September 2019, spun out of the South African conglomerate Naspers, as the latter tried to address its valuation discount by listing in a more liquid market with superior capital allocation. Following shareholder approval in September 2023, the cross-holding of shares between Prosus and Naspers was removed, simplifying the corporate structure while maintaining the economic interest split. While this helped to make the PRX story ‘less complicated’, I think there is scope to simplify the narrative further by streamlining the number of verticals that the Group operates across through disposals – put simply, if Prosus becomes less of a conglomerate, then logically it should have less of a conglomerate discount.

Bringing it all together, as a shareholder in Prosus, I see the potential for attractive returns as: (i) loss-making consolidated Ecommerce businesses transition into profitability; (ii) the Group recycles capital from Tencent into buying back its own shares at a discount; and (iii) other (non-Tencent) assets – for which the market currently appears to be attributing a negative value – are divested. I appreciate that (i) and (iii) have a degree of overlap, but given PRX’s sprawling interests and the broad-based uplift in performance across all of its verticals demonstrated in the recent results, I don’t believe that disposals would derail the improving trend in underlying earnings.

Sell-side consensus, shown here, suggests that analysts (at least) are buying into the same narrative. At a high level, the market expects to see good top-line growth combined with margin expansion that leads to a step change in earnings. Based on this consensus, PRX is very cheap on conventional earnings metrics and the expected strengthening of the balance sheet (rising net cash over the coming years) will likely provide management with considerable optionality around further capital returns. All in all, I remain a very happy shareholder in PRX.

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 1/12/2023

AV/ – Bolt-on acquisition

BOCH – Tidying up

BT/A – musicMagpie fails to take off

GSK – Pipeline progress

HBR – Solid trading update

LLOY – Telegraph dividend?

MKS – Clarification 

PRX – Interims

RHM – CMD 

THW – Hotel reopens 

 

HBR – Solid trading update

Harbour Energy released a trading and operations update covering the nine months to end-September on Wednesday. Production in the period averaged 189kboepd, split 50-50 between liquids and gas, within the unchanged FY guidance of 185-195kboepd. Operating costs were $16/boe, again in-line with unchanged FY guidance of $16/boe. The Group continues to progress development projects in the UK (Tolmount East production start-up underway; Leverett discovery undergoing planned final appraisal side track; and Talbot on track to deliver first oil around the end of 2024); while also enhancing its International business (Layaran drilling campaign underway in Indonesia’s Andaman Sea; Zama FEED preparation underway in the Gulf of Mexico; while elsewhere in Mexico the Kan appraisal plan has been submitted to regulators following April’s oil discovery). There was no new news on the CCS projects. In terms of the financial highlights, revenue for 9M23 of $2.9bn reflected post-hedging oil and UK gas prices of $77/bbl and 53p/therm. The Group has reiterated FY guidance of c.$1bn of capex, along with free cash flow guidance of c.$1bn (post-tax but pre-distributions). HBR had net debt of just $0.3bn at end-September and reiterates the “potential” for it to have zero net debt in 2024 (in practice though, I expect the Group to continue to make distributions above its $200m annual cash dividend target and invest in M&A). On M&A, it is striking that management says “our own discussions with potential counterparties indicate that market conditions for M&A are improving”, which suggests activity on this front is likely, in my view. Harbour is remarkably cheap, trading on 4.9x consensus 2024 earnings and yielding 9.3%. While I can understand the strategic temptation for M&A, I suggest the bar for deals should appropriately reflect the attractiveness of continuing to repurchase its own stock. HBR’s share count has reduced from 847m to 770m at end-November.

 

PRX – Interims 

Prosus released its H1 (end-September) results on Wednesday. It has been a busy period for the Group, as it simplified its ownership structure; maintained its open-ended and accretive share repurchase programme; and quite clearly continued to execute on business improvements, given that the Group has brought forward its profitability ambition from 2025 to H2 2024. The Group says the crystallisation of value from its sprawling portfolio of assets, through IPOs, trade sales, and mergers is a “work in progress”. Despite the uncertain global macro backdrop, the Group delivered revenue growth across all of its verticals – Food Delivery +17% y/y; Classifieds +32% y/y; Payments & Fintech +32% y/y; Edtech +11%; and Etail +4% y/y. Importantly, all verticals also saw an expansion in trading margins of between 2bps and 15bps. Trading losses in H1 2024 were just $36m, versus a loss of $256m in H1 2023. Distributions will remain an important part of the PRX investment case for the foreseeable future – “while the discount remains elevated, we envisage no changes to the parameters of the programme”. The PRX balance sheet is in great shape, with an LTV of sub-12%, average cost of debt of just 3.1% and interest cover of 3.0x. Prosus has essentially zero net debt, and it is striking that the Group’s market cap (€80.3bn) is less than the value of its shareholding in Tencent (€92.7bn), meaning that PRX’s other assets are being valued at -€12.4bn. Given the upgraded trading profit guidance and the Group’s ability to monetise its non-Tencent assets (it has shareholdings in at least nine publicly quoted companies other than Tencent), this valuation seems ridiculously cheap, in my view.

 

AV/ – Bolt-on acquisition

Aviva announced on Monday that it is to acquire Canadian vehicle replacement insurance business Optiom for a consideration of c.£100m. Canada is one of three core markets (alongside the UK and Ireland) for Aviva. AV/ is an existing underwriting capacity provider for Optiom, so this is a forward integration move that strengthens its position in Canada. Given its scale (AV/’s market cap is £11bn), this acquisition won’t move the needle for the Group, but it is a reminder of management’s ambition to deploy surplus capital not just on dividends and buybacks, but also on bolt-on M&A to enhance its proposition in principal geographies. During Q3 Aviva agreed to buy AIG’s UK Protection business for £460m, while last year it agreed to buy Succession Wealth for £385m. Aviva is very cheap, trading on 9.1x consensus 2024 earnings and yielding an attractive 8.2%.

 

LLOY – Telegraph dividend?

Media (Sky) reports today say that, if approved, the sale of the Telegraph and Spectator titles to the Barclay family is expected to result in a £500m provision write-back by Lloyds Banking Group. Assuming the deal goes through, this presumably heightens the potential for a meaningful share buyback to be announced when the Group releases FY results in February. LLOY compiled analyst consensus points to likely buybacks of £2bn per annum from 2023-2026, lowering the share count by >8bn (all else being equal) over the period (LLOY had 63.6bn shares at end-November 2023, so this should reduce by around a tenth by the end of 2026, ceteris paribus). LLOY trades on just 6.2x 2024 earnings and offers a cash dividend of 6.8% (and a double-digit distribution yield taking buybacks into consideration). It’s very cheap, in my opinion.

 

THW – Hotel reopens 

I note media reports that pubs-to-hotels group Daniel Thwaites has reopened the Langdale Chase hotel in the UK Lake District following a multi-million pound refurbishment. THW acquired the Grade II listed hotel in 2017 and closed its doors in September 2022 to allow the renovation to take place. Langdale Chase, one of 10 hotels in the Group, has 30 bedrooms and a two AA Rosette-awarded restaurant. Thwaites’ financial year runs to end-March so this will provide a modest boost to performance in the current financial year and something more meaningful in FY 2025 (when it makes a full 12 month contribution). THW’s net debt was £70.6m at end-September 2023, 4.0x FY 2023’s EBITDA, and while I suspect that management would like that to be a ‘turn’ lower (i.e. 3.0x), it’s not a stretch to imagine Thwaites adding one hotel a year in the second half of this decade to grow to a portfolio of 15 hotels by the time we get to 2030. THW reported NAV per share of 420p at end-September, which is roughly 5x its current share price of 85p. Thwaites is very cheap in my opinion. 

 

GSK – Pipeline progress

GSK announced positive results from its DREAMM-7 phase III trial for Blenrep in relation to relapsed/refractory multiple myeloma on Monday. These results will be presented “at an upcoming scientific meeting” and shared with health authorities. There are c.176,000 new cases of multiple myeloma diagnosed annually each year around the world. At end-Q3 2023 GSK had 67 vaccines and specialty medicines in its pipeline, which I don’t see reflected in a very cheap rating of 9.2x consensus 2024 earnings and yield of 4.25%. 

 

BT/A – musicMagpie fails to take off

BT announced on Monday that it does not intend to make an offer for electronics reseller musicMagpie. Last week the second hand goods specialist said it was in early-stage discussions with both BT and Aurelius Group. A transaction might have made sense, viewed through the lens of BT’s push into electronics retailing (using its EE brand), but it wouldn’t have moved the dial for BT/A (whose market cap is c.600x that of musicMagpie). BT/A is very cheap, trading on 6.6x consensus 2024 earnings and yielding 6.3%.

 

RHM – CMD 

I belatedly picked up Rheinmetall’s Capital Markets Day from last week. The Group is strongly positioned for the global security environment, with the invasion of Ukraine set to result in a super cycle for firms that can meet Western requirements. This year is expected to see an 8.3% increase in NATO members’ defence budgets, for example, while there are clear needs to: (i) replenish stocks transferred to Ukraine; (ii) increase inventories to higher than pre-2022 levels (given the alarming pace of depletion); and (iii) bring in more modern systems to cope with 21^st century requirements. In terms of financial targets, RHM sees 2026 sales of €13-14bn; operating margins >15% and 50% cash conversion (for 2023, Bloomberg consensus is for revenue of €7.7bn and margins of 12.5%). Within that, the Power Systems division is expected to contribute €2.5-3bn of sales and margins of >9%. RHM hinted that it is open to selling this business (given that >9% is below the 10% minimum hurdle for the Group), and any sale would free up cash to enhance its core security franchise. RHM sees huge potential across a number of its key markets – Hungary, where it recently opened a new plant; Ukraine, where it recently established a JV; Spain, where it recently acquired Expal for €1bn+; Germany, where policymakers are investing in the security services; the UK, where large-scale land systems contracts are available; Australia, where the Group may be able to exploit recent international security partnerships; and of course the world’s largest market, the USA. Interestingly, management were keen to highlight the potential for share buybacks alongside more conventional dividend distributions. While RHM’s share price has performed well of late, I think its rating of 14.5x consensus 2024 earnings doesn’t reflect the potential here. 

 

BOCH – Tidying up

Bank of Cyprus announced on Wednesday that it is exercising its call on the remaining the remaining €8.25m outstanding of its 12.5% AT1 instrument (originally issued in 2018). Back in June BOCH repurchased €204m of the aggregate €220m principal amount at 103%, with a further €7m repurchased in July. At €1m/year the savings from this call are immaterial, but it is nonetheless a further reminder of the progress BOCH has made – the bulk of the 2018 AT1 was replaced in June with a new issue with a coupon of 11.875%, the lower coupon compared to the previous issue – notwithstanding the interest rate environment – reflecting the market’s improved sentiment towards BOCH as an issuer as a result of the heavy lifting of recent years. Bank of Cyprus is extremely cheap, trading on just 3.9x consensus earnings and yielding a remarkable 10.2%. 

 

MKS – Clarification 

In last week’s blog I noted that S&P had upgraded Marks & Spencer to investment grade (BBB-), adding “I suspect (but am not certain – I have a query in to MKS IR on it) that receipt of one IG rating might reverse the coupon step up” on a number of the Group’s bonds that was triggered by the Group’s previous downgrade to junk. MKS IR has clarified that the step down rating change is defined as the first public announcement by both S&P and Moody’s that the credit rating of MKS’ senior unsecured long-term debt is at least BBB- and Baa3 respectively. As Moody’s is one notch below the latter at Ba1, the coupon step-down has therefore not been triggered. I estimate that the year one (on an annualised basis) savings from a step down would be of the order of c.£10m for the Group, not transformative, but nonetheless all of this should serve as a reminder of how MKS’ rapid deleveraging provides it with a competitive advantage over its more heavily indebted peers. MKS trades on an undemanding 12.4x consensus FY 2024 earnings and yields 1.2%.

Stocks Update 22/9/2023

BOCH – SocGen comments on international footprint

CLIG – FY results reflect choppy markets

GRP – H1 results, cash is king

GSK – Pipeline progress

MKS – Ocado Retail JV update

PHO – FY results – Improved performance; debt free

PRX/SPDI – Dutch tax changes

ULVR – Potential disposals

CLIG – FY results reflect choppy markets

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

 

PHO – FY results – Improved performance; debt free

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

 

GRP – H1 results, cash is king

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

 

MKS – Ocado Retail JV update

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

 

ULVR – Potential disposals

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

 

GSK – Pipeline progress

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

 

BOCH – SocGen comments on international footprint

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

 

PRX/SPDI – Dutch tax changes

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

Stocks Update 15/9/2023

AV/ – Disposal

GSK – Pipeline progress 

HBR – Egdon stake

KMR – Successful tender

PPA – Cruise business booming

PRX – Capitalisation issue

RHM – Renk to IPO; Orders

SPDI – Arcona asset management

 

KMR – Successful tender

Kenmare Resources announced on Monday the results of its latest tender offer. Shareholders tendered 22.0m shares, resulting in the repurchase of 5.6m shares or 5.9% of the issued share capital, following the application of the scale-back mechanism. The shares were repurchased at the tender price of £4.22 per share, resulting in a cost for this exercise of £23.6m. The oversubscribed tender offer, and KMR’s strong financial position (it reported net cash of $42m at end-H1 2023), makes me suspect that another tender offer is likely to be launched next year – KMR has conducted share repurchases in 2021, 2022 and now 2023. Indeed, at the end of 2020 KMR had 109.7m shares in issue. This reduced to 94.9m in late 2021 following a tender to repurchase 13.5% of its issued share capital, and reduced marginally to 94.8m in 2022 following an ‘odd lot’ offer targeted at shareholders holding their interests in certificated format. On completion, this latest tender will reduce KMR’s issued share count to 89.2m, bringing the cumulative reduction in the share count to 20.5m (-19%) since 2020. For patient long-term investors, it is very welcome to see KMR, a stock with net cash, repurchasing its own shares at a mid-single digit earnings multiple while the Group’s asset base is underpinned by a resource with a century of reserves remaining. Bloomberg consensus has KMR trading on just 4.3x 2024 earnings and offering a prospective yield of 9.5%.

 

AV/ – Disposal

Aviva announced on Wednesday that it has agreed to sell its remaining 25.9% shareholding in its Singlife JV in Singapore to Sumitomo. The consideration payable is £0.8bn, which includes the sale of debt instruments. By way of background to this disposal, AV/ undertook a major rationalisation of its geographic footprint after the appointment of Amanda Blanc as CEO in July 2020, selling eight non-core businesses in eight months for total cash proceeds of £7.5bn, which reduced the Group’s perimeter to its core markets of the UK, Canada and Ireland, with other investments in China, India and Singapore retained on a ‘manage for value’ basis. The £0.8bn consideration for Singlife compares favourably to the end-June IFRS17 NAV for the unit of £729m (and even more so to the £17m it contributed to Aviva’s operating profit in 2022). On a pro-forma basis to the end-June position, the sale increases the Solvency II shareholder surplus by £0.4bn (and the SII shareholder ratio by c.8ppts). The focus will now inevitably turn to what AV/ does with these proceeds, with management says they will be considered under its existing capital management framework which allows for reinvestment in the business, bolt-on M&A, and/or distributions to shareholders. Completion is expected by end-2023. Certainly, a buyback at the current cheap multiple would be very accretive for patient long-term oriented shareholders, but there may also be bolt-on opportunities across its core geographies that Aviva will also look at. Another consideration is that Aviva may look to exit its Indian and Chinese interests in due course, bolstering its strategic optionality. Aviva is cheap, trading on just 8.6x 2024 earnings, and yields 8.6%.

 

PPA – Cruise business booming

Piraeus Port Authority yesterday announced that it has seen a surge in cruise traffic at the port so far this year. In the first eight months of 2023 it has seen an 85% increase in the total number of cruise passengers (928,357) compared to the same period in 2022 (500,905). The importance of the Hellenic Republic’s largest port as a major European hub is underscored by 78% of the ships and 55% of these passengers starting their cruises from Piraeus. Cruise ship arrivals of 478 in 2023 are +14% from 2022’s 419. All in all, this augurs well for another year of revenue and earnings progress at PPA, with future growth underpinned by the strategic initiatives planned by PPA. Piraeus Port Authority is very neglected by the market – there are no consensus earnings on Bloomberg, for example – but on my rough calculations it trades on c.4x forward EV/EBITDA, making it one of the cheapest infrastructure plays in the Western World.

 

RHM – Renk to IPO; Orders

Tuesday’s Financial Times reported that tank gear box specialist Renk is to IPO in Frankfurt before the end of the year. The business has a 30% share of the global market for vehicle transmissions in the defence sector and was previously a target of bid interest from Rheinmetall before being sold by Volkswagen to PE group Triton for €530m three years ago. Renk guides to revenues of €900m-€1bn this year and for 10% CAGR in revenue in the medium term, and it expects profit margins in the range of 16-17%. A valuation of €2.5bn is mooted. While Triton currently intends to hold a majority interest in Renk post-IPO, as a PE fund it is presumably highly unlikely to be a long-term holder. Renk would be a good strategic fit for RHM and, indeed, Rheinmetall could certainly make an acquisition of this size – earlier this year it bought Spain’s Expal for €1.2bn, while its net debt is expected to be €1.1bn at end-2023, or 0.9x consensus 2023 EBITDA (and 0.7x consensus 2024 EBITDA, a year in which RHM will benefit from a full 12 month contribution from Expal). In other RHM news this week, the Group announced on Monday that the German government had contracted it to supply a further 40 ex-Bundeswehr Marder IFVs to Ukraine, with delivery due to begin this year. The order “is worth a figure in the upper-two-digit million-euro range” and is another reminder of the surge in demand for Rheinmetall’s product set that Russia’s invasion of Ukraine has created, both in terms of refurbished ‘old’ kit and likely new orders from Western governments to replace donations to Ukraine. On Tuesday, RHM announced that it has transferred a mobile field hospital to Ukraine, completing a 12 month contract worth c.€9m. Presumably this demonstrated capability could lead to copycat orders from other Western governments. Rheinmetall has a €30bn+ order book, giving it huge visibility on revenues and profits for years to come. I don’t see this as being reflected in an undemanding valuation of 13.9x 2024 consensus earnings.

 

GSK – Pipeline progress 

GSK announced on Monday that the Japanese regulatory authorities have accepted its submission of momelotinib for the treatment of myelofibrosis (blood cancer). The new drug application was supported by data from two phase III trials. Momelotinib is currently not approved in any market. Myelofibrosis is a rare cancer, affecting approximately 1 in 500,000 people worldwide, so while any successful treatment launch is unlikely to move the needle in a financial manner, it is clearly transformative for those suffering from it. GSK’s Q2 results showed the Group has a 68-strong pipeline of potential new medicines and vaccines across Phase I-III inclusive. I don’t see this pipeline as being given proper consideration in GSK’s very undemanding valuation of just 9.9x consensus 2024 earnings. 

 

PRX – Capitalisation issue

Today is the last trading day before the Prosus Capitalisation Issue and listing of new Prosus ordinary ‘N’ shares becomes effective. The removal of the previous Cross-Holding Structure is a welcome development, which simplifies the Group’s capital structure, reducing Naspers’ effective interest in Prosus from 62% to 43%, to match its economic interest. Some 1.1796 new ‘N’ shares will be issued for each existing ‘N’ share held as at the transaction record date, resulting in the issuance of 808.5m new shares to free-float shareholders. The ticker (PRX) will remain as-is. Prosus’ share repurchase programme, which had been paused on 30 August, will resume from Monday. The complexity of the Naspers-Prosus relationship may have amplified the ‘conglomerate discount’ that Prosus struggles with (it trades at a discount to the value of its shareholding in Tencent alone, meaning shareholders get all of its other net assets at a negative valuation). So this simplification is to be welcomed. Monetisation of its other assets and improved trading at its core businesses should hopefully lead to a step-change in its valuation over time. PRX’s spot NAV per share is €46.90, whereas the shares were trading at €29.91 this lunchtime.

 

HBR – Egdon stake

Earlier today UK penny stock Egdon Resources announced that the Scheme of Arrangement under which Petrichor will acquire the company has become effective. Shares are expected to be cancelled at 7am on Monday. Shareholders will be paid 4.5p/share, implying that Harbour will receive just over £2m for its 8% stake in the company. This is small change for Harbour (market cap £2bn) but it represents a further simplification of the business around core assets following last month’s agreement to sell its Vietnamese assets for $84m. HBR is very cheap on conventional metrics, trading on just under 6x 2024 consensus earnings and yielding 7.9%.  

 

SPDI – Arcona asset management

Arcona, the Dutch listed Eastern European real estate fund that SPDI is a major shareholder in, said earlier today that it has agreed three new lettings at the Maris office building in Szczecin, Poland, that have resulted in a 300% increase in the rent roll and pushed out the average lease term from 0.9 years to 4.4 years. As a result, management says it “is now investigating options to realise value from the asset for the benefit of shareholders”. At end-June Arcona had 21 buildings across six countries, with Maris contributing €9m of gross carrying value (of a €74m total gross carrying value of the portfolio), but this is presumably higher now. The monetisation of this asset would be a further step towards the execution of Arcona’s strategy to maximise the value of its properties with a view to selling them down, clearing the remaining debt and funding share buybacks (Arcona’s share price is €5.30 or less than half its end-June NAV of €11.77, so buybacks are very accretive). Like SPDI, Arcona is sub-scale and inefficient, so converting its assets into cash held at the centre is the best way to address the yawning gap between its share price and intrinsic value. A welcome development.

Stocks Update 4/8/2023

AMZN – Strong Q2 results

AV/ – Topping up

GRP – The wind in Spain

GSK – Incremental pipeline progress

HBR – Track 2 status for CCS projects

HLN – Solid H1 results

KYGA – H1 results, Bolt-on Chinese acquisition

PCA – Another better-than-book-value disposal 

PRSR – Dividend in-line

PRX – Disposal at a very keen price

RHM – Closes Spanish acquisition

RYA – Bumper passenger figures (again)

SN/ – H1 results, upgraded guidance

 

AV/ – Topping up

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

 

AMZN – Strong Q2 results 

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

 

SN/ – H1 results, upgraded guidance

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

 

HLN – Solid H1 results

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

 

KYGA – H1 results, Bolt-on Chinese acquisition

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

 

GRP – The wind in Spain

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

 

PRX – Disposal at a very keen price

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

 

PCA – Another better-than-book-value disposal 

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

 

RYA – Bumper passenger figures (again)

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

 

HBR – Track 2 status for CCS projects

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

 

GSK – Incremental pipeline progress

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

 

RHM – Closes Spanish acquisition

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

PRSR – Dividend in-line

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

Stocks Update 30/6/2023

CRH – Share buyback

GSK – Further progress

IDS – Super-hub to supercharge efficiency

LLOY/PRSR – Citra PRS deal

PRX – FY results, pivot from ‘sow’ to ‘reap’

SPDI – FY results, waiting for Godot 

STM – FY results, stock trades in-line with net cash

 

PRX – FY results, pivot from ‘sow’ to ‘reap’

Prosus released its FY 2023 results on Tuesday. The market responded positively to the update, in particular the confirmation of an unwind in the Naspers/Prosus cross-holding structure that will result in a simplified corporate structure, where PRX is 43% owned by Naspers. The Group has traded at a persistent discount to the sum of its parts, which management has tried to address through the gradual disposal of Tencent shares to finance share buybacks. The Group has achieved a 14% share reduction in the past 12 months, spending $10.5bn on buybacks (boosting NAV per share by 6%). The underlying performance of its businesses is doing well, as evidenced by a 36% pro-forma increase in consolidated revenues. Management is reaffirmed its confidence in the delivery of profitability in H1 2025, noting that margins improved 6 points sequentially in H2 2023. Consolidated e-commerce trading losses peaked at $450m in H1 2022 but reduced to $369m in H2. That PRX invested $10.5bn on buybacks and $2.5bn on capital injections into companies shows the pivot from ‘sow’ to ‘reap’ in its investment strategy. Net debt was just $0.5bn at end-March, and the Group received a $750m Tencent dividend in June. Prosus shares were trading at just €66.50 this afternoon, about a third before its ‘spot NAV’ of €104/share at end-Thursday. 

 

STM – FY results, stock trades in-line with net cash

STM belatedly released its FY 2022 results on Tuesday. Headline results (revenue £24.1m; underlying profit £3.3m; net cash £13.9m) were all in-line with prior guidance. The FY dividend was trimmed from 1.5p to 1.2p, reflecting exceptional outlays relating to the strategy review, the results of which are still to be revealed. The Group called out: (i) its annuity style model, which accounted for 91% of reported revenue in 2022; (ii) the benefits from its IT transformation programme, with all personal pension businesses (aside from the recent Mercer acquisition) now all on the one administration system; and (iii) the previously announced ‘interest sharing’ policy, which will benefit the top-line. Management says that: “we are conscious that we have not yet realised our true potential, and are working towards a revised strategy to maximising the opportunities and to deliver shareholder value”, while the Chairman notes: “the Board believes that there is embedded shareholder value within the Group that is not reflected by the current market capitalisation”. While the ‘big reveal’ of the strategy review is yet to happen, it looks like a focus on higher potential areas – “it is important that we focus on those areas that have the potential to deliver a step-change in profitability”, which may mean the exit from a number of the markets that STM currently has a presence in. The guidance for the current financial year is vague, despite the Group being half-way through the year: “we will achieve a solid 2023 performance when compared to 2022”. STM’s market capitalisation of £15.1m compares to its end-2022 net cash of £13.9m, suggesting that the market is currently ascribing very little value to a profitable underlying business. Hopefully the strategic review will address this. 

 

SPDI – FY results, waiting for Godot 

Secure Property Development & Investment (SPDI) belatedly released its FY 2022 results earlier today. The Group’s strategy in recent years has been to swap most of its real estate assets for shares in the larger Dutch listed (but similarly Eastern European focused) Arcona Property Fund, while selling off the rest. The Group finished 2022 with a NAV of 9p/10c per share (end-2021: 18c/share), well above the current share price of 5.625p. SPDI has 1.1m shares (worth €6m at the current market price or €12.75m based on 1x Arcona’s NAV) in Arcona plus a further 260k warrants in the Group. SPDI’s operating results reflect a smaller asset base in the year due to asset sales/transfers. The Group has moved to minimise OpEx accordingly. In 2022 SPDI completed the transfer of two Romanian commercial assets to Arcona, but the transfer of the remaining Ukrainian landbank has been held up by the Russian invasion. On the non-Arcona disposals, I note that SPDI says that the Romanian assets it sold (a premises leased to an international school and a landbank) achieved higher prices than Arcona was willing to pay for them. Less helpfully, a €2.5m loan receivable is being transferred into a JV structure, which may complicate moves to monetise that asset. The remaining property assets in SPDI are a logistics park in Bucharest and land plots in Romania and Ukraine. Seven residential units in Bucharest were sold during 2023. There are a number of swing factors that could materially change SPDI’s NAV either to the upside or downside. In October the Cyprus courts will hear a case between SPDI and Bluehouse. SPDI strike a bullish tone on that “our legal advisers and our board are confident [the case] will end up to our benefit”. Bluehouse is seeking up to €7.5m from SPDI, which has a provision of €2.5m in relation to this matter. The downside risk if Bluehouse gets what it’s looking for is 3.9c/share of NAV (i.e. €7.5m-€2.5m divided by 129m shares outstanding). In Ukraine, the Group has marked its property assets at c.60% of the valuation provided by CBRE, which may prove conservative (although there is plainly a risk that these assets go to zero too). The gross value of SPDI’s Ukrainian assets is €1.9m / 1.5c per share. Moving them to CBRE’s valuation would add 1.0c/share to NAV, zeroing them takes 1.5c/share from NAV. Elsewhere, I note that the Arcona shares are valued at 1x NAV as opposed to market value, nonetheless I am reasonably comfortable with that approach as Arcona has been repurchasing its own stock at a discount to NAV and appears to have a strong strategy for maximising the value of its real estate portfolio. Management reiterate that they “expect 2023 will be the last year of SPDI operations as we know them with its net assets turned into [Arcona] shares and cash, and opex being reduced to a minimum”. I suspect that 2023 is too optimistic a timeframe, however. I am loath to commit any further capital to SPDI given the experience to date, but given: (i) my very low exposure (c.40bps of the portfolio); and (ii) the asymmetric potential from the Bluehouse and Ukraine factors discussed above, I’m happy to let this one run to see how it plays out.

 

LLOY/PRSR – Citra PRS deal 

Earlier today it was announced that Barratt Developments has agreed the forward sale of 604 units to Citra, a PRS subsidiary of Lloyds Banking Group. The consideration is £168.4m, immaterial in a Group context (LLOY’s market cap is £28bn) but a useful vote of confidence in the UK PRS sector generally. This transaction may also prompt increased interest in PRS REIT, which has a portfolio of more than 5,000 modern homes. Its latest disclosed IFRS NAV and EPRA NTA per share was 117.1p at end-2022 but the stock trades well below that (it was 80.2p this lunchtime). From LLOY’s perspective, while not material in a Group context, it is nonetheless a helpful addition to the business income line. LLOY trades on a very inexpensive 0.6x NAV for an expected 11% ROE and yields 7.1%, based on consensus 2024 numbers. 

 

IDS – Super-hub to supercharge efficiency

Last weekend’s Sunday Times carried an interesting piece on Royal Mail’s new super-hub for parcels at Daventry in Northamptonshire in the East Midlands. Under the sub-heading of “Embattled postal company ups the stakes in the fight to win the parcels market”, it sets out (with the aid of a snazzy promotional video, suggesting the article was placed by IDS’ PR people) how the vast automated centre will deliver tangible operational efficiencies and customer benefits that will bring Royal Mail closer to industry best-in-class metrics. It officially opened today (Friday) with the capacity to handle 235m parcels a year. It will have the ancillary benefit of easing pressure on Royal Mail’s 37 mail centres (and 1,200 delivery offices) elsewhere in the UK, which should help to address service metrics that have attracted criticism of Royal Mail’s performance in recent times. The super-hub is designed to take e-commerce parcels directly from retailers, representing a win-win (leveraging Royal Mail’s enhanced distribution reach and hopefully attract new e-commerce business to Royal Mail). At capacity, the facility will handle 1,600 trucks a day, scanning parcels and then sending them down the right ‘chute’ for onward despatch in under seven minutes. Royal Mail has also built a new train station to support distribution, while its goods yard has parking bays for 500 vehicles. In addition, tracking data will provide better real-time customer information on where their parcel is. Royal Mail opened a similar parcels hub in Warrington in June 2022, which helped to lift automation of parcels handling from 33% in 2021 to 50% during 2022 and this new super-hub should get the business to 90%. The anticipated step-change in efficiency was a pull factor for me to buy into Royal Mail’s parent company IDS, but the share price performance has suffered due to the well-documented (and hopefully now resolved) labour relations unrest in the company. Ocado’s experience shows that these massive automated fulfilment centres are tricky to get right, so hopefully execution will match ambition at IDS. In time, there will presumably be more of these centres rolled out to further enhance efficiency (with all that implies for margins). Bloomberg consensus has IDS trading on a 2024 EV/EBITDA multiple of 6.4x, falling to just 3.6x in 2026 as earnings recover from the huge disruption from labour relations issues seen over the past year or so.

 

CRH – Share buyback

CRH today announced the completion of the latest ($0.7bn) phase of its share buyback programme which ran throughout Q2 2023. This brings cash returns via buybacks to $5bn since May 2018. The Group has launched a new $1bn buyback which will run to no later than 22 September 2023. CRH trades on an undemanding 13.0x consensus 2024 earnings and yields 2.6%.

 

GSK – Further progress

GSK announced on Monday that it has received a positive CHMP (the European Medicines Agency’s Committee for Medicinal Products for Human Use) opinion recommending authorisation of daprodustat for symptomatic anaemia associated with chronic kidney disease in adults on chronic maintenance dialysis. This is based on data from three global Phase III trials. In terms of the addressable market, GSK notes that 700m patients worldwide have chronic kidney disease, of whom one in seven also develop anaemia. GSK has had similar approvals from regulatory authorities in the US (FDA) and Japan (Ministry of Health, Labour and Welfare) for its products recently. Elsewhere, Japan has approved the use of Shingrix for the prevention of shingles in at-risk adults aged 18 and over. Shingrix had previous approval for over-50s in Japan. GSK describes this as a “significant expansion” in a country where about 600,000 people develop shingles every year. While neither of these pipeline announcements in and of themselves are likely to prove transformative for GSK, they are nonetheless incremental positives for the Group. On a similar note, on Wednesday GSK announced that it has closed the US$2.0bn acquisition of BELLUS, a biopharmaceutical company whose flagship asset is a drug in Phase III for the first-line treatment of adults suffering from refractory chronic cough. GSK says the deal is expected to be EPS accretive from 2027 and has the potential to deliver significant sales “through 2031 and beyond”. GSK trades on a very undemanding 9.0x consensus 2024 earnings and yields 4.3%.

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 12/5/2023

GSK – Haleon placing; Meningitis vaccine progress; Zantac litigation win

HBR – In-line trading update

HLN – GSK placing; EMTN programme

IR5B – Solid trading update

PRX – PayU disposal report 

RHM – Further contract wins

RYA – MAX order underpins growth plans

 

IR5B – Solid trading update

Irish Continental Group released a solid trading update on Thursday. In the period to 6 May the Group carried 129,600 cars (+5.9% y/y); 229,200 trucks (+3.2% y/y); 100,100 containers (-13.9% y/y); and handled 104,700 units at its terminal operations (-8.3% y/y). In the first four months of the financial year (i.e. to end-April) Group revenue of €163.4m was +1.4% y/y while net debt has reduced to €124.9m on a pre-IFRS 16 basis compared to €128.7m at end-2022. Overall the narrative is one of resilient Ferries operations and Container & Terminal weakness which mirrors the slowdown in deep sea volumes observed in recent months. Bloomberg data have ICG trading on just 11.8x FY 2024 earnings and yielding 3.3%. This stock is very inexpensive, in my view. 

 

HBR – In-line trading update

Harbour Energy released its Q1 (end-March) 2023 trading update on Wednesday. The release showed a strong operating performance, with production running at 202kboepd, ahead of the Group’s unchanged FY guidance of 185-200k, although future periods are likely to see production disruption due to maintenance etc. The production split in Q1 was 50/50 liquids and gas. Estimated OpEx in Q1 was c.$15/boe, below unchanged FY guidance of c.$16. The period saw good progress on a number of UK infrastructure projects (both energy and CCS) and international momentum with the submission of the Zama development plan in Mexico; an oil discovery at Kan-1 (also Mexico) and prepartions for a “high impact” three well drilling campaign in H2 in Indonesia’s Andaman Sea. On the financials, HBR delivered revenues of $1.1bn in Q1, supported by realised oil and gas prices of $76/bbl and 71p/therm, below unhedged average prices of $81 and 133p. Capex spend was c.$0.2bn in the period, running below the unchanged FY guidance of $1.1bn due to timing. The Group will take a c.$15m one-off charge in respect of UK redundancies in 2023 which will deliver annual cost reductions of $50m from 2024 onwards. On the balance sheet, helped by strong free cash flow of $0.7bn (reflecting capex, dividend and tax payment timing, the Group continues to guide to FY free cash flow of $1.0bn), net debt has reduced to just $0.2bn at end-March from $0.8bn at end-2022. The Group continues to guide to being net debt free in 2024, unless further M&A / distributions are announced. A $100m (previously announced) dividend will be paid later this month. By 9 May the Group had executed a quarter of its current $200m share buyback programme, which has cut the share count by over 10% since the 2022 AGM. All-in-all, an in-line update from the Group. I recently doubled my position in HBR due to its very cheap valuation; attractive distribution qualities; relatively safe (by industry standards) resource profile; and strong balance sheet. Harbour Energy trades on just 4.8x consensus 2024 earnings and yields 8.6% according to Bloomberg data. In my view the risk/reward trade-off for this stock is very favourable.

HLN – GSK placing; EMTN programme 

As discussed below, GSK placed 240m shares in Haleon last night, reducing its stake in the Group to c.10.3%. Further disposals are likely over time as neither GSK nor Pfizer, which holds 32% of shares in the Group, see themselves as long-term shareholders. The GSK placing is a welcome development, reducing (but not removing) the technical overhang represented by more than two-fifths of the register being in the hands of declared future sellers. I have said before that I wish to add to my HLN position, and will look to take advantage of technical weakness caused by large stake-selling to buy more of the company. Elsewhere, I note that Haleon has today published a base prospectus regarding its £10bn EMTN programme. This may hint at near-term bond issuance, which would not be a surprise if the Group is likely to wish to pre-fund USD denominated debt maturing in 2024 with a GBP equivalent value of £0.8bn and a further £1.5bn maturing in 2025. Bloomberg data have HLN trading on 17.5x 2024 earnings, a discount to other personal care players. 

 

GSK – Haleon placing; Meningitis vaccine progress; Zantac litigation win

Last night GSK sold, through an accelerated bookbuild, 240m shares in Haleon at a price of 335p/share, raising gross proceeds of c.£804m. The price was a c.2% discount to the pre-placing price, but a touch ahead of the 330p/share IPO price. Following this sale, GSK will hold 955m shares in Haleon, equating to c.10.3% of the share capital. Both GSK and Pfizer have committed to no further share sales for a minimum of 60 days following settlement. Assuming settlement is on Monday, this means no further sales until 14 July, but I suspect that share sales won’t feature again this side of H1 results on 2 August. The monetisation of GSK’s stake in Haleon has been well flagged and sales of this type will further strengthen GSK’s liquidity position. Elsewhere, earlier today GSK announced that it has presented “pivotal data” at ESPID confirming the effectiveness of its 5-in-1 meningococcal ABCWY vaccine candidate, with “demonstrated coverage against a panel of 110 MenB strains”. Encouragingly, “preliminary results from phase III trial show all primary endpoints met, demonstrating statistical non-inferiority compared to Bexsero (meningococcal group B vaccine) and Menveo (meningococcal group A, C, W-135 and Y conjugate vaccine), in individuals 10-25 years old with an acceptable safety profile”. GSK adds that “if approved, this vaccine candidate could provide the broadest coverage against the most prevalent meningococcal serogroups and could lead to a simplified immunisation schedule”. This all sounds very encouraging. At the end of Q1 2023 GSK had a pipeline of 68 potential new vaccines and medicines across phase I, II, III/registration. Finally, this morning GSK noted its latest Zantac litigation win, this time in Canada, where the British Columbia Supreme Court dismissed a proposed class action on behalf of a class of ranitidine users. Similar to other cases, the Court stated: “Given the uncontroverted evidence that neither ranitidine nor NDMA are reliably associated with increased cancer risk, and the absence of evidence that ranitidine or NDMA cause cancer in humans, the plaintiff has failed to raise a bona fide triable issue regarding injury due to the ingestion and/or purchase of ranitidine”. Zantac litigation risk continues to reduce for GSK, although it will clearly remain an overhang until all of these cases have ended. Bloomberg data have GSK trading on just 9.6x 2024 earnings and yielding 4.1%. This stock is very good value, in my opinion.

 

RYA – Max order underpins growth plans

On Tuesday Ryanair announced that it has placed an order for 300 (150 firm and 150 options) Boeing 737-MAX-10 aircraft with a list price of $40bn (not that RYA is likely to pay anything approaching that amount). The order is nonetheless of such a scale that it will require shareholder approval (a formality, presumably) at the Group’s AGM to be held in September). As previously noted, the MAX has 228 seats, 21% more than the B737NG, and phased delivery of the new aircraft over 2027-33 will support the Group’s newly announced ambition to lift traffic by 80% from FY (March) 2023 (168m) to 300m p.a. by March 2034. Half of the new aircraft will replace older B737NGs. The MAX aircraft also have superior (20% better) fuel efficiency and (50% quieter) noise attributes relative to the B737NGs, important considerations on a number of different levels (ESG, OpEx, negotiations over landing rights etc.). Ryanair guides that the capex involved “will be substantially funded from internal cashflows”, whilst noting that it will remain opportunistic in respect of its fleet financing strategy. Annual passenger numbers of 300m represents c.30% of the European air travel market, which feels realistic for the structural low cost leader. Bloomberg consensus estimates have RYA trading on just 11.8x FY 2024 earnings, which seems very cheap to me given the growth trajectory.

RHM – Further contract wins

The steady stream of contract win news continues for Rheinmetall. This week Austria signed a framework agreement for up to 1,375 logistics vehicles with a potential order value of €525m running to 2029 with Rheinmetall MAN, a JV that is 51% owned by RHM and 49% by MAN Truck & Bus SE. Earlier today the Group announced that an unnamed European customer (presumably Ukraine) has awarded it a “mid-double-digit” million euro order to supply rounds for IFVs and MBTs. Delivery is to take place over 2023 and 2024, with RHM noting that this underscores its capacity to meet such demand at short notice. The Group also attended the DEFEA exhibition in Athens this week at which it presented its Lynx KF41 IFV, “a strong contender for the modernisation of the mechanised brigades” of Greece. Hungary is currently the only operator of the Lynx, taking its first deliveries (of an order of up to 209 vehicles) in 2022. Greece is seen as one of five key potential export markets for the Lynx, alongside Australia, Iraq, the US and Ukraine. Bloomberg consensus has RHM trading on just 14.4x FY 2024 earnings (and yielding 2.6%) which seems very cheap to me given the structural growth prospects for Western security investment.

PRX – PayU disposal report

Bloomberg reported on Wednesday that Prosus is considering potential divestments of PayU outside of India. While PayU operates across more than 50 countries, more than 60% of transactions processed come from its Indian market. Bloomberg suggests that PayU ex-India is worth up to $800m. Such an exit would represent quite the U-turn for Prosus, considering that it sought to merge PayU with Billdesk in a $4.7bn takeover last year in what would have created one of the world’s largest payments businesses. I previously noted that Prosus could look to exit assets other than Tencent, where a managed share sale process is underway, but I am surprised that the Group would consider selling off one of its largest assets in the current climate as opposed to (say) opportunistic sales of some of the smaller shareholdings. Prosus’ shares were trading at just €65 earlier today versus a spot NAV of €101/share.