AMZN – Q4 results
APH – FY trading update
BT/A – Q3 trading update
GRP – NAV update
GSK – FY results; Zantac update; Pipeline progress
MKS – JLP challenges
PHO – New borrowings
PMI – Acquisition
RHM – Acquisition; Investment; Contract
RKT – Share buyback
RWI – Q3 trading update
RYA – Q3 results; Traffic stats
STVG – Additional investment; Channel 4 cutbacks
AMZN – Q4 results
Amazon released its Q4 results last night, which show net sales +14% y/y to $170bn (+13% at CER), with strong momentum in both North America (+13% y/y to $106bn) and ‘International’ (+17% y/y to $40bn, +13% at CER). AWS sales were +13% y/y to $24bn. There was a big uplift in operating income (Q4 2022: $2.7bn, Q4 2023: $13.2bn), with a step change in North America (from a loss of $0.2bn to profit of $6.5bn; International losses narrowing from $2.2bn to $0.4bn; and AWS earnings climbing from $5.2bn to $7.2bn. For the FY, net sales were +12% to $575bn and operating profit trebled from $12bn in 2022 to $37bn last year. There was a huge improvement in free cash flow, from an outflow of $20bn in 2022 to an inflow of $32bn last year. Operating leverage; targeted cost reductions; supply chain and distribution optimisation; and pricing changes all contributed to the dramatic uplift in financial performance. AMZN struck a confident tone on the outlook: “As we enter 2024, our teams are delivering at a rapid clip, and we have a lot in front of us to be excited about”. AMZN guides to Q1 2024 net sales growth of 8-13% y/y; and operating income of $8-12bn (was $4.8bn in the prior year period). For such a quality business, AMZN is cheap, trading on just 11.1x consensus 2025 EV/EBITDA.
RYA – Q3 results; Traffic stats
Ryanair released its Q3 (end-December) results on Monday, unveiling YTD profits of €2.19bn, +39% y/y, albeit Q3 itself saw net income fall to €15m from €211m in the prior year period as higher fuel costs offset revenue (traffic and fares) gains. Ryanair’s balance sheet is incredibly strong, with net cash of €150m at end-December despite very heavy capex investment of €1.9bn in the period to end-December 2023 (vs €1.3bn in the prior year period). As I mentioned in recent weeks, the risks to RYA’s outlook have become less favourable in recent weeks due to the combination of rising geopolitical issues in the Middle East, Boeing’s challenges and Ryanair’s delisting from “OTA Pirate” websites. On Boeing, RYA says that it expects to be short 7 B737 ‘Gamechanger’ aircraft for the peak summer season and “there remains a risk that some of these deliveries could slip further”, although RYA doesn’t expect the MAX-9 grounding “to affect the MAX-8 fleet or the MAX-10 certification”. On the outlook, RYA continues to expect 183.5m FY 2024 traffic (despite the headwinds mentioned above) which is presumably locked in given the visibility on forward bookings that RYA has (and I note that traffic stats released this morning show the carrier had 182.1m PAX in the 12 months to end-January, +10% y/y), but citing seasonality (Easter timing) and weaker than expected loads and yields it is narrowing FY 2024 PAT guidance to €1.85-1.95bn (was €1.85-2.05bn). Whatever about the short term, the long-term outlook remains very positive for Europe’s low cost leader, with market dynamics set to remain favourable (RYA sees continued industry consolidation in Europe, with ITA, Air Europe, TAP and SAS expected to be taken over by larger Groups over the short-to-medium term). RYA trades on a very inexpensive 9.2x consensus FY 2025 earnings and yields 2.2%.
GSK – FY results; Zantac update; Pipeline progress
GSK released its FY 2023 results on Wednesday. The Group delivered a strong performance, with revenues +5% (+14% ex-COVID), led by a 25% jump in vaccines sales (helped by the latest blockbuster, Arexvy). Headline specialty medicines sales were -8% but +15% ex-COVID, while general medicines sales were +5%. Adjusted operating profit (+12%) and adjusted EPS (+16%) reflected operating leverage benefits. The Group’s pipeline is in terrific shape, with 71 vaccines and specialty medicines now in clinical development, including 18 in Phase III/registration. Highlights for 2023 include approvals for Arexvy, Apretude, Ojjaara and Jemperli. GSK has augmented its R&D pipeline by targeted M&A (Aiolos Bio, Bellus Health) and licence agreements (Janssen – infectious diseases; Hansoh Pharma – oncology). For 2024 GSK guides to turnover +5-7%; adjusted EPS +6-9%; and a 60p dividend. Beyond that, the Group has upgraded its longer-term outlook and now sees CAGR of 7% and 11% (was >5% and >10%) in sales and adjusted operating profit over the 2021-2026 period, with revenues in 2031 now expected to be >£38bn (was £33bn) and broadly stable adjusted operating margins. The balance sheet is in great shape, with net debt reducing from £17.2bn to £15.0bn over the course of 2023. Elsewhere, on Thursday GSK announced the settlement of another Zantac case (in California) which is reflective of the Group’s desire to avoid protracted litigation. No liability is admitted in the settlement. Lastly, GSK released two announcements on Monday. Firstly the European Commission has authorised GSK’s Omjjara (momelotinib) as the first approved medicine in the EU for treating splenomegaly (enlarged spleen) or symptoms in adult myelofibrosis patients with moderate to severe anaemia. GSK says the “authorisation may address high unmet need, with nearly all myelofibrosis patients estimated to develop anaemia over the course of the disease”. The FDA provided a similar approval for momelotinib in the US in September. To the extent that this news broadens the addressable market for Omjjara, this is an incremental positive for GSK. Elsewhere, GSK’s RSV vaccine, Arexvy, has been accepted for regulatory review by the European Medicines Agency (EMA) for the prevention of RSV disease in adults aged 50-59 at increased risk (over 60s have already been approved in Europe by the EMA). A European regulatory decision is anticipated in Q3 2024. Similar to Omjjara, a satisfactory outcome will increase the target market size (RSV causes c.270k hospitalisations of over-60s in Europe annually) and is therefore positive for GSK. All in all, a busy week for GSK but the fundamental investment case remains very much intact – the core franchise is performing very well and there is an exciting R&D pipeline to sustain this momentum, with the upgrades to longer-term guidance being testament to that. GSK is among the cheapest large cap pharma plays, trading on 9.2x consensus 2025 earnings and yielding 4.1%.
BT/A – Q3 trading update
BT released its Q3 (end-December) trading update on Thursday. In the first outing for new CEO Allison Kirkby the Group delivered another quarter of revenue and EBITDA growth, while announcing a further quickening in the pace of delivery of its FTTP programme to bring fibre broadband to 25m UK premises by end-2026 (I am guessing from the series of upgrades to delivery that the risks are skewed towards FTTP finishing ahead of that timeframe). The Group has held its FY guidance steady. On FTTP, build rate is now 73k per week, with 950k premises passed in the quarter, bringing the footprint to 13m premises. Openreach saw 432k net adds in Q3, bringing premises connected to 4.4m, a 34% take-up. Reflecting retail price increases, Openreach broadband ARPU is +10% y/y while the line losses are 369k year to date (-2% y/y). Consumer broadband ARPU is +5% y/y and prepaid mobile ARPU is +8% y/y. So far so good, but another weak Business performance (higher input costs, legacy declines etc.) took some of the gloss off the Group performance, producing reported revenue growth of 1% y/y and EBITDA +3% y/y. All in all, a solid update. The completion of FTTP, allied to cost take-out initiatives, will deliver a material step-change in cash generation from end-CY 2026 onwards, in my view. This is also reflected in sell side consensus, which sees BT’s end-year net debt peaking at £18.6bn in FY (March) 2026 and falling to £18.2bn by March 2027. Consensus also has BT/A trading on just under 6x FY 2025 earnings and yielding 6.6%.
RWI – Q3 trading update
Renewi released its Q3 (end-December) trading update on Tuesday. The Group noted ongoing macro headwinds, which it has been able to partly offset through margin recovery initiatives. Volumes in commercial waste, particularly construction, “continue to be subdued”. Pricing is stable, save for plastics which show continued weakness. The ‘Simplify’ cost saving project was mostly complete by end-December, and will deliver an “in year cost reduction of c.€5m”. The Group expects the aforementioned trends to continue into year end, producing a H2 skew to FY results, which are now expected to be “below market expectations”. It is clearly unhelpful to see short-term earnings headwinds, but the long-term structural drivers of a circular economy player like Renewi are very much intact (indeed, management describe them as “compelling”) and the Group further expresses confidence in its “ability to deliver on the medium term targets” set out in the October 2023 CMD. The timing of this earnings downgrade is potentially significant given the recent bid interest in the Group – assuming falls in policy rates come through later in 2024 as the market expects, infrastructure plays like RWI are likely to be in favour from public and private market participants alike. Assuming consensus reflects this update, RWI trades on a very inexpensive 8.2x consensus FY 2025 earnings and is expected to pay a 1.9% dividend in respect of that year.
APH – FY trading update
Alliance Pharma released its FY 2023 trading update on Monday ahead of the release of audited results in March, “which are anticipated to be in line with market expectations”. The Group delivered 6% y/y growth in ‘see-through’ (essentially, consolidating franchise sales) revenues in 2023 (+7% at CER), with LFL revenues +6% y/y at CER. As had been guided, topline growth was skewed to H2, reflecting a rebound in China, with strong performances from the Kelo-Cote franchise (revenues +29% at CER in FY 2023), while prescription medicines finished the year flat following H2 recovery as inventory issues were resolved. Underlying profits are guided to meet market expectations, helping a good improvement in free cash flow (FY 2022: £15.8m, +34% to £21.1m in FY 2023) that helped to pare net debt to £92.4m at end-2023 versus £102.0m at end-2022, with leverage in-line with guidance. On the outlook, APH sees good top-line momentum, with consumer healthcare revenues expected to outpace the market while prescription medicine revenues are seen as stable, but increased investment in sales and marketing to support medium-term growth plans should see this year’s earnings in-line with 2023’s outturn. There were no updates on the dividend or the legacy CMA report. All in all, a solid update. I see APH as a value play in the consumer healthcare space, with consensus having it on just 7.2x 2025 earnings and yielding 2.3%.
GRP – NAV update
Greencoat Renewables provided an end-December NAV update on Thursday. The Group finished 2023 with a NAV of 112.1c, -0.9c q/q (impacted by weak power prices) and -0.3c y/y. GRP said the FY 2023 dividend (guided at 6.42c) was covered 2.7x by last year’s net cash generation of €197m despite the headwinds of wind generation being 9% below budget last year. The balance sheet is solid, with net debt of €1.5bn equivalent to 51% of GAV (GRP has a 60% ceiling), while the Group also has cash of €143m and €20m of further headroom in its RCF, helpful when considering future acquisition opportunities. For 2024 GRP guides to a target dividend of 6.74c, +5% y/y. The Group’s expansion strategy hasn’t been helped by the wide discount to NAV that GRP trades at – a model of better-than-NAV placings to support M&A worked a charm during the zero interest rate environment – but the strong headroom that cash generation has over dividend outlays means that GRP can use internally generated cash flow to continue growing. GRP was trading at 91.4c this lunchtime, an 18% discount to end-2023 NAV, and yields 7.4% based on the 2024 target dividend.
RHM – Acquisition; Investment; Contract
Rheinmetall had a busy week. On Thursday the Group announced that it has taken a 72.5% stake in Romanian vehicle maker Automecanica Medias SRL, whose “truck build-ons and trailers will augment Rheinmetall’s product portfolio”. The business, whose origins date back to the 1940s, is expected to produce revenues of c.€300m a year in the medium term and further strengthens RHM’s competitive position as a key supplier to countries along Europe’s (and NATO’s) eastern flank. This follows Romania’s awarding of a €328m order to Rheinmetall recently and also RHM’s establishment of a military vehicle repair facility in Satu Mare in Romania to support Ukraine, with this latest step deepening relations in that market. RHM has vehicle plants in the US, Canada, Australia, UK, Austria, Netherlands, Germany and now Romania. On Tuesday RHM announced an expansion of its under-construction Várpalota munitions plant in Hungary, which is due to start production this year and scale up to full capacity in 2026. It will produce 30mm, 120mm and 155mm artillery rounds and ancillary products for RHM’s international customers, particularly in Europe where this plant is expected to reduce the continent’s dependence on imports. RHM already operates such plants in Germany, Spain, Switzerland, Austria, Italy, South Africa, Australia and the US. Finally, on Monday an “international partner” (presumably Algeria) has placed a three-digit million euro order for Fuchs 2 APCs, to be delivered over 2024-28. RHM trades on a very inexpensive 13.5x consensus 2025 earnings and yields 2.7%.
PMI – Acquisition
Premier Miton Group announced the closing of the previously announced Tellworth Investments acquisition on Tuesday. The Group has issued 4.2m shares comprising the initial consideration for the acquired business. Given the operating leveraging inherent within the PMI model, the extra assets that Tellworth bring to a larger scale platform are very helpful indeed. PMI trades on a very inexpensive 8.0x consensus FY 2025 earnings and yields 9.8%.
MKS – JLP challenges
Media reports (The Guardian) last weekend said that John Lewis is considering 11,000 redundancies over the next five years from its current headcount of 76,000. The Group is looking to achieve this through a combination of natural attrition and targeted redundancies. While not explicitly called out, it seems unlikely that this level of reduction won’t be accompanied by a contraction in the number of Waitrose supermarkets and John Lewis department stores. Given the overlapping customer profile, I expect that a smaller JLP footprint will result in Marks & Spencer further eating into its market share – as it stands, both John Lewis and M&S UK turn over c.£10bn, so the operating leverage benefits from higher UK sales throughput at MKS could be very helpful indeed. MKS trades on an inexpensive 9.8x consensus FY 2025 earnings and yields 2.7%.
STVG – Additional investment; Channel 4 cutbacks
STV announced on Wednesday that it has lifted its shareholding in “high-end scripted production company”, Two Cities, from 25% to 51%. STV says the acquisition “accelerates STV Studios’ growth plan and is materially earnings enhancing”, noting that Two Cities has a £55m pipeline of secured revenues over the next three years. The background to STV’s involvement in Two Cities is an initial 25% stake taken in January 2020 with an option to increase this to a majority stake on the achievement of profitability by Two Cities. In this regard it mirrors STV’s model in taking stakes in Studios businesses where it provides ‘back office’ (legal, finance, HR etc.) services, freeing up the creative talent to make great content, and over time buy out the other shareholders in these Studios companies. STV has interests in 24 different Studios companies. This approach caps the downside risk where investments don’t work out, but also captures the upside where they do, and in this regard the STV strategy is a compelling one, in my view. STV expects its Studios division to become “a 10% operating margin business” in time (a not unrealistic target compared to ITV’s Studios unit). Elsewhere, on Monday Channel 4 announced “an ambitious five-year strategy to reshape the organisation and accelerate its transformation into an agile, genuinely digital-first public service streamer by 2030”. Of specific interest to STVG is the shrinkages around Channel 4’s perimeter (“close small linear channels that no longer deliver revenues or public value at scale”), which will likely strengthen STV’s dominant commercial position in Scotland (a reminder that the BBC doesn’t carry advertising and STV’s linear broadcast division has the lion’s share of Caledonian TV advertising revenue), while Channel 4 also wishes to have focused “investment in distinctive, streaming-friendly British content and social media”, which will likely create opportunities for STV’s portfolio of Studios (TV production) companies to sell shows to Channel 4 (the release says it is “proposing changes to how Channel 4’s Commissioning team is organised to make it simpler for suppliers and more focused on content that drives streaming”). STVG has been ahead of the curve in terms of the structural changes affecting the TV industry, with >60% of 2023 earnings guided to have come from outside of broadcasting, a proportion that will be even higher in 2024 (and beyond) given the transformative acquisition of Greenbird Media only closed at the start of H2 2023. STVG’s legacy STV TV business should therefore be viewed as a cash cow that supports growth in the Group’s Studios and Digital divisions. The next scheduled newsflow from STVG is FY results on 5 March. STVG trades on a very undemanding 6.0x consensus 2025 earnings and yields 6.2%.
PHO – New borrowings
In an intriguing development, UK Companies House filings uploaded on Monday show that Peel Hotels has drawn down finance from Lloyds Banking Group secured against its hotel portfolio. The Group transitioned into a net cash position last year following the disposal of the Norfolk Royale and Midland hotels. Peel, which is profitable, has four remaining hotels – The Caledonian (Newcastle); Crown & Mitre (Carlisle); George (Wallingford); and Bull (Peterborough). While it is possible that this facility is intended for working capital or refurbishment expenditures, another potential use of this debt financing is to launch a share buyback. I’ve long noted the disconnect between the grey market value of its shares (30p on the AssetMatch platform) and the £1/share net book value. A buyback pitched somewhere between the two would offer a balance between providing an ‘exit’ for those shareholders who wish to sell out now and NAV accretion for more patient long-term oriented shareholders.
RKT – Share buyback
Reckitt announced on Wednesday that it has completed the first £250m tranche of the £1bn share buyback programme that was announced in October. A second £250m tranche commenced yesterday and will run until 10 May at the latest. Given the undemanding valuation the Group trades on, this is a good use of surplus capital. Reckitt trades on an undemanding 15.2x consensus 2025 earnings and yields 3.7%.
Theodosian Capital 