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.

Stocks Update 31/3/2024

BOCH – Annual Report confirms strong progress

MKS – Ocado Retail update

PPA – Record results

RHM – EU grant aid

RKT – Buyback

 

PPA – Record results 

Piraeus Port Authority released record results for FY 2023 on Friday. Revenue and EBIT climbed to €220m and €97m respectively from the prior year’s €195m and €77m as strong performances from the Cruise Liner (passengers up from 880k in 2022 to 1.5m in 2023, also well ahead of the 2019 pre-COVID total of 1.1m) and Coastal (16.2m passengers in 2023, up from 15.0m in 2022) businesses offset softer Terminal (reflecting deep sea and geopolitical developments) and Ship Repair (reflecting disruption caused by infrastructure investment) trends. Management has lifted the dividend to 133.6c (FY 2022: 104.0c). On investments, by end-2023 PPA had completed accumulated investment of €155m or 53% of the ‘Mandatory Investments’ linked to its concession agreement (which runs to 2052), up from €133m/45% at end-2022. With net cash of €94m at end-2023, PPA is very well positioned to meet all of its obligations – I won’t pretend to be an expert on Greek politics, but prompt delivery on its remaining investments would presumably help, assuming management is minded to negotiate another extension to the concession agreement in the near future – particularly given that Greece has a one party centre-right government at present. PPA closed at €28.80 in Athens on Friday, putting it on just 10.6x 2023 earnings and yielding 4.6%, a valuation that seems extremely cheap for a top performing (ROE of 19%, ROCE of 18% in 2023) infrastructure operator, in my view, notwithstanding the current headwinds to trade arising from tensions in the Red Sea (the flip side of which being that cruise ships are more likely to stick to safe havens like the Mediterranean, which is positive for PPA).

 

BOCH – Annual Report confirms strong progress

Bank of Cyprus released its 2023 Annual Report on Thursday, which provided some useful colour following the release of preliminary FY results on 19 February and confirmation of approved distributions in respect of 2023 performance on 20 March. Last year saw a step-change in performance, supported by the rate environment, with ROE soaring to 21.7% from 3.1% in FY 2022. TNAV per share closed the year at €4.92, up from €3.93 at end-2022. Asset quality continued to improve, with NPEs reducing to 3.6% (end-2022: 4.0%) or €365m, of which €185m have no arrears, and 84% of loans are in the highest quality Stage 1 (+460bps y/y). REMU, which manages legacy real estate exposures, saw its stock of assets fall to €878m (end-2022: €1.1bn), continuing the trend of recent years. There has been a lot of focus on Cyprus’ exposures to Russia and Belarus, so in this regard it it worth noting that 90.6% of BOCH’s deposits are euro denominated, with the USD accounting for 7.5% and sterling 1.6%. Rouble deposits totalled only €1m equivalent out of a €19.3bn deposit book. There were no major changes in the composition of its loan book. BOCH’s upward trend in market shares has continued, with its shares of loans and deposits climbing 130bps and 50bps respectively y/y to 42.2% and 37.7% at end-2023. A decade ago (in 2014) BOCH had 38.8% of Cyprus system loans and 24.8% of deposits. Another illustration of BOCH’s progress is that it is now rated investment grade by Moody’s – a far cry from the end-2015 rating of Caa3, nine notches below IG. Both S&P and Fitch rate BOCH at BB, two notches below IG. While BOCH is more rating sensitive than most Eurozone banks, it has taken prudent steps to address this, including enhanced structural hedge activity. The end-2023 Regulatory CET1 ratio of 17.4% (versus a minimum requirement for 2024 of 10.9%+P2G) illustrates BOCH’s huge surplus capital, pointing the way to strong distributions in the coming years. BOCH finished the week trading on just 3.3x 2023 earnings, with the dividend in respect of 2023 performance of 25c equating to a 7% dividend. I think this stock would be cheap at 2x the price. 

 

MKS – Ocado Retail update

Ocado Retail, the 50-50 JV owned by Ocado and Marks & Spencer, provided a Q1 (13 weeks to 3 March) trading update on Tuesday. The update revealed a good start to the calendar year, with volumes +8.1% y/y and average basket value +2.1% y/y, helping to produce revenue growth of 10.6% y/y (to £645.3m). Average weekly orders of 414k were +8.4% y/y, with average customers +6.4% to 1.02m at end-Q1. The average basket size was stable at end-Q1 at 45.0 (end-Q1 2023: 45.1). Given the early stage of the Ocado Retail JV’s financial year, it is unsurprising that management has held FY guidance steady (revenue +mid-high single digit %; EBITDA c.2.5% ex Hatfield fees of £33m per annum), although on the strength of this performance I suspect the risks to guidance are to the upside. More fundamentally, the performance of the JV has been held back by excess capacity, and it is good to see this problem reducing through a combination of ongoing volume growth and the closure of Hatfield, which was the oldest CFC in its distribution network. This should provide a helpful tailwind to earnings at MKS. Koyfin data show that Marks & Spencer is trading on just 11.1x forward earnings, a multiple I view as too cheap given the balance sheet strength and step change in earnings arising from its strategic initiatives and market share gains. 

 

RHM – EU grant aid

Rheinmetall announced on Tuesday that it has secured €130m or just over a quarter (which really highlights RHM’s superb positioning for the structural growth story in Western security investment) of the EU’s “ASAP” funding programme to enhance ammunition production. The funds will be channelled into six investment projects by Rheinmetall across four European countries (Germany, Hungary, Romania and Spain). These grants will help to defray some of RHM’s heavy investment programme, although an order book of €38.3bn at end-2023 illustrates that the EU cash is a nice to have, not a need to have. Koyfin data show RHM trades on a forward PE multiple of 24.5x, undemanding for a growth stock in a growth sector.

 

RKT – Buyback

Reckitt announced on Wednesday its intention to commence a third (£250m) tranche of the £1bn buyback programme announced to the market on 30 October. This tranche is expected to commence during April 2024. Given the recent concerns (which I believe to be overdone) about litigation risk at RKT, it is reassuring to see management press on with this programme. Koyfin data show RKT trades on 14.1x consensus earnings, cheap relative to peers but likely to stay that way absent further clarity on litigation risk, unfortunately.

Stocks Update 22/3/2024

AV/ – Singlife exit completes

BOCH – Step-change in distributions

GSK – Pipeline progress; Dementia report

HLN – Overhang reduces

KMR – FY results; Well positioned

MKS – Financial services report

PRSR – Interims; Dividend now covered

RHM – Bolt-on acquisition; German contract

RKT – Enfamil thoughts 

STVG – Further Studios wins

ULVR – I scream, you scream…

 

KMR – FY results; Well positioned

Kenmare Resources released its FY 2023 results on Wednesday. The results were expected to show a moderation in performance from 2022, given developments in pricing and disruption from the lightning strike early last year. In the event, EBITDA came in at $220m, down from FY 2022’s record $298m. The balance sheet remains in great shape, with net cash of $21m at end-2023 (a year in which $30m was spent on share buybacks, cutting the share count by nearly 6%). This is important, given that the Group is set to embark on a $341m capex programme to upgrade WCP A and transition it to the Nataka ore zone over 2025-2027 – the costs of which will be easily met by operating cashflows and the $200m RCF. In a sign of confidence, a full year dividend of USc56.04 has been declared, +3% y/y. A further sign of confidence is the statement that “Kenmare is on track to achieve its annual production guidance [for 2024], although production is still expected to be second half weighted. The markets for our products have been stronger than anticipated in 2024 to date”. Kenmare is very cheap, trading on just 5.0x consensus earnings and yielding 8.2%.

 

PRSR – Interims; Dividend now covered 

PRS REIT released its H1 (end-December) results on Wednesday. The key highlight was confirmation that the “dividend [is] fully covered on an annualised run-rate basis from March 2024” which fully removes one of the question marks that had been over the Group since its IPO (albeit this question mark had steadily diminished in importance as the Group completed more of its development pipeline). Reflecting the growing portfolio of let-up rental properties, PRSR reported NRI of £23m, +17% y/y; EPRA EPS of 1.8p (+13% y/y); and operating profit of £39.2m (+73% y/y). The latter reflects fair value gains of £20.5m in the period. PRSR finished H1 with a NAV per share of 123.6p, +3.5p since the start of the financial year, as ERV growth offset a softening in the NIY. PRSR’s portfolio stood at 5,264 completed units at end-December, with a further 312 at various stages of construction. Portfolio metrics are very strong – underlying occupancy of 98%, rent collection at 99%, LFL rental growth of 11.1% and total arrears, net of bad debt provision, were £0.6m at end-January 2024. The average rent was just c.23% of tenants’ gross household income – well within the guided affordability limit of 35%. The total portfolio ERV is £63.4m (of which £3.1m relates to homes under construction), up from £57.3m at end-December 2022. Assuming a gross-to-net ‘walk’ of 20% (the H1 2024 actual was 18.5%), this produces an NRI of £50.7m. Take away annualised operating and financing costs of (say) £20m and this leaves £30.7m versus a dividend cost of 4p*550m shares out = £22m. As the pipeline completes, a 5p annualised dividend seems a reasonable possibility for some time in CY 2025. Another consideration is that the wide gap between the share price (79p this lunchtime) and NAV might leave the Group vulnerable to a takeover approach (not least given that planning and construction risk has effectively reduced to zero). While NAV has its critics where REITs in general are concerned (I’ve seen people calling it “Not Actual Value”!), PRSR’s dividend (supported by more than 5,000 revenue generating units) of 4p is rock solid. A yield of >5% seems attractive to me.

 

BOCH – Step-change in distributions

Following receipt of the necessary regulatory approvals, Bank of Cyprus revealed its long-awaited distribution in respect of FY 2023 performance on Wednesday. The Group is to pay a 25c dividend in respect of FY 2023, a 5x increase on the 5c paid in respect of FY 2022 performance, and also commence a €25m share buyback. The ECB’s approval of this distribution is a reflection of the Group’s strong financial performance and strategic progress. The total distribution corresponds to a 30% payout ratio for 2023 – BOCH had accrued for up to a 50% payout so its end-2023 transitional CET1 ratio has been revised up to 17.4% from the previously reported 16.5%. BOCH’s minimum CET1 requirement was 10.98%+P2G at the start of 2024, meaning that the Group has a very large buffer over this requirement which paves the way for further strong distributions over the coming years. While the dividend is extremely welcome, I am delighted to see a buyback, given how cheap this stock is (Bloomberg consensus has it on just 5.0x 2025 earnings, a 40% discount to NAV and yielding 9.4%).

 

HLN – Overhang reduces

In a very welcome development on Monday, it was announced that Pfizer: (a) intends to sell c.630m Haleon ordinary shares in a secondary global offering; and (b) sell £315m worth of Haleon shares to the company for cancellation. Completion of (a) and (b) would pare Pfizer’s interest in Haleon from 32% at the time of the IPO to c.24%. In the event, Pfizer upsized its public offering to 790.6m ordinary shares, priced at £3.08, with Pfizer selling a further 102.3m shares to Haleon for cancellation (reducing its share count by 1.1% to 9.1bn shares) at the same price. Post-completion on Thursday, Pfizer is now subject to a 90 day lock-up over its remaining shareholding. When Haleon first came to the market in 2022 it only had a 55% free-float due to Pfizer holding 32% and GSK c.13%. Since then, GSK has cut its stake to 4.2% and Pfizer is now down to c.22.6%, meaning a free-float of c.73%. This is all good news as it means index trackers are obliged to buy more HLN (passive investing can work to active investors’ advantage at times!). Another consideration is that Haleon said in its recent FY results that it was open to  buying back up to £500m worth of its shares this year – does ‘only’ spending £315m on buying from HLN mean it is lining up a repurchase of £185m worth of shares from GSK when the latter (currently not subject to any lock-up restrictions) next comes to market? Haleon trades on an undemanding 16.4x consensus 2025 earnings and yields 2.2%.

 

ULVR – I scream, you scream… 

On Tuesday Unilever set out plans to “accelerate Growth Action Plan through separation of Ice Cream and launch of productivity programme”. The Group will remain committed to a portfolio of power brands “in highly attractive categories [Beauty & Wellbeing; Personal Care; Home Care; and Nutrition) that have complementary operating models”. Due to Ice Cream’s “very different operating model” (frozen goods supply chain; different channel landscape; more seasonality; and greater capital intensity), “the Board has decided that the separation of Ice Cream best serves the future growth of both Ice Cream and Unilever”. The Ice Cream division, which had sales of €7.9bn in 2023, owns five of the top 10 selling global ice cream brands. ULVR says a demerger “is the most likely separation route”, but other options will be considered to maximise shareholder returns. Will full separation not expected until end-2025, this will be a management distraction for some time to come though. Separately, a comprehensive productivity programme is being launched with the aim of delivering total cost savings of c.€800m over the next three years, “more than offsetting estimated operational dis-synergies from the separation of Ice Cream”. Around 7,500 administrative jobs will be affected, while the Group will invest c.1.2% of turnover (was c.1.0%) equivalent over the next three years as part of the programme. ULVR also said that post-separation of Ice Cream, the continuing Group will have a structurally higher margin and aim to deliver “MSD USG and modest margin improvement” over time. Given recent high profile shareholder unhappiness around ULVR’s strategy, the radical steps set out in this announcement are not surprising. On Ice Cream, I expect that plenty of PE and trade buyers alike will be running the slide rule over that division, so an IPO may not be the exit route. Unilever trades on an undemanding 15.8x 2025 earnings and yields 4.0%.

 

RHM – Bolt-on acquisition; German contract

Rheinmetall announced the bolt-on acquisition of Dutch firm REEQ (Range Extended Electrical Quad) on Monday. The acquired firm specialises in “innovative light hybrid vehicles” which seems an attractive vertical given the increased use of air/sea/land drones in the security context. “Both parties have agreed not to disclose the purchase price”, rather unhelpfully, but as mentioned, it seems to be a field with strong structural growth drivers so this could prove a very helpful deal in time. This follows RHM’s agreement to purchase a 72.5% shareholding in Romanian vehicle maker Automecanica Medias SRL in February, a business it sees with an “annual sales potential of up to €300m”. The extent to which RHM can spur the consolidation of Europe’s deeply consolidated sector will further enhance its competitive position and (presumably) standing with European policymakers. RHM’s global vehicle production footprint extents to plants in the US, Canada, Australia, the UK, Austria, Netherlands, Romania and Germany. Elsewhere, RHM announced on Thursday that Germany’s Bundeswehr has commissioned it to supply 123 Boxer IFVs from 2025 in a contract worth c.€2.7bn. Rheinmetall has had a super run of late – the shares are +75% year to date – although a valuation of 17.9x consensus 2025 earnings (and 2.0% yield) doesn’t seem toppy for a high growth company.

 

RKT – Enfamil thoughts 

Late on Friday, Reckitt released a statement following the awarding of $60m to a plaintiff in relation to a case concerning necrotising enterocolitis (NEC). Reckitt and its US formula subsidiary Mead Johnson emphatically rejected the court’s findings, citing that the plaintiff’s lawyers’ allegations “were not supported by the science or experts in the medical community. This was underscored during the trial by a dozen neonatologists”. While RKT goes on to say: “it is important to note that this is a single verdict in a single case and should not be extrapolated”, the market did just that last Friday, knocking 15% or £5bn off the Group’s market cap. Reckitt says it will “pursue all options” to have the verdict overturned. I understand that there are c.500 similar NEC cases pending against RKT, and while appropriate consideration has to be given to the scientific evidence supporting the RKT case, as a GSK shareholder I’ve seen Zantac cases settled despite the lack of any scientific evidence that it is harmful. It could also be a couple of years before a line can be drawn under NEC, while the huge award in the Illinois NEC case may also prompt more suits against RKT. Let’s assume 1,000 cases where the average settlements are between $100k (similar to J&J talc settlements) and $160k (similar to Bayer Roundup settlements), with legal fees adding as much again. That suggests a hit of $200-320m, immaterial in a RKT context (the Group made IFRS operating profits of £2.5bn last year), although the $60m Illinois award (which may be overturned) and last Friday’s share price reaction suggests things could end up being materially worse. And the lead-time (presumably years) before we know what the real number is going to be, warrants a higher cost of equity for RKT until that is clarified. RKT shares trade on just 12.3x consensus 2025 earnings and yield 4.7%. This discount to ULVR (qv) seems warranted pending clarification on this matter.

 

STVG – Further Studios wins 

STV announced on Wednesday that it has been commissioned by Warner Brothers Discovery UK and Ireland to produce a brand new series of The Yorkshire Auction House; Celebrity Yorkshire Auction House; and The Derbyshire Auction House for the Really channel. The 40 episode commission is the latest of a series of wins for STV’s Studios business – it recently secured its first contract win from Netflix, while it also counts Apple TV+, BBC, Channel 4, Channel 5, ITV, Sky and Warner Brothers Discovery among its customer base. STVG is cheap, trading on 7.2x consensus 2025 earnings and yielding 5.1%.

 

MKS – Financial services report 

Monday’s CityAM reported that Marks & Spencer is “close to a seven-year agreement with HSBC to transform its banking division into a financial services and loyalty “superapp”. November’s Capital Markets Day presentation from MKS said that Sparks had 17.7m subscribers, and “Combining the power of Sparks and the App” was cited as one of the strategic actions to drive growth “ahead of the market”. Per the CityAM report, M&S Bank, which offers personal finance products (loans, insurance, BNPL) and which HSBC took control of in 2004 (but which MKS is entitled to a 50% share of the profits “after appropriate contractual deductions”), is said to have “more than 3m customers”, so broadening its potential reach to c.6x as many customers could be mutually attractive for M&S and HSBC alike. CityAM, citing a source, says “a public announcement with more details of the revised partnership was expected in April”, although “it is unclear whether M&S is set to take an ownership position”. On the latter, I’d prefer not – a ‘capital lite’ approach where M&S receives commission on business generated through a superapp would be a low-risk model. Obviously, execution risk will be high for this, but the risk/reward profile seems attractive. M&S is cheap, trading on only 10.0x consensus FY 2025 earnings and is expected to pay a 2.6% dividend in respect of that year’s performance.

 

GSK – Pipeline progress; Dementia report

GSK announced on Monday that phase III data show potential for Jemperli (dostarlimab) combinations in more patients with primary advanced or recurrent endometrial cancer. “Dostarlimab plus chemotherapy is the only immuno-oncology combination to show statistically significant and clinically meaningful overall survival in the overall population”. GSK says it expects US FDA regulatory submission acceptance for an expanded indication in the overall population in the first half of this year. There are c.417k worldwide endometrial cancers every year, of whom c.15-20% will be diagnosed with advanced disease at the time of diagnosis. This is a further encouraging headline from GSK’s attractive development pipeline, which had 71 vaccines and specialty medicines across Phase I-III/registration at end-2023. Elsewhere, I note a report from Marketwatch about an internal GSK study that shows a correlation between the use of GSK’s shingles vaccine Shingrix and a lower risk of getting dementia. The report cites an analysis of 5m UK senior citizens (the UK NHS has provided shingles vaccines for the over-80s since 2013), where those who took Shingrix were 20% less likely to develop dementia over the following 7 years. GSK says that further research is needed, and while it’s too early to get excited about this, the potential here is clear. I don’t think the potential of this, or indeed the rest of the GSK pipeline, is reflected in the Group’s very cheap valuation of 9.7x consensus 2025 earnings and 3.9% yield.

 

AV/ – Singlife exit completes

On Monday Aviva announced that it has received total proceeds of £937m from the disposal of its shareholding and associated instruments in Singlife. This is fractionally ahead of the c.£930m guided in an RNS in December, with the difference immaterial in an Aviva Group context. The timing is also in-line with the “Q1 2024” guidance previously provided. Aviva has already recycled these proceeds in attractive M&A in both the UK and Canada. Aviva is very cheap, trading on 9.5x consensus 2025 earnings and yielding 7.7%.

Stocks Update 1/3/2024

ABDN – FY results

CRH – FY results 

GSK – Pipeline progress; Zantac update

HLN – FY results

MKS – Ocado Retail comments 

RHM – Order wins 

RKT – FY results 

RYA – Capacity constraints

SN/ – FY results

WDS – FY results

 

HLN – FY results 

Haleon released its FY 2023 results on Thursday. These showed strong growth, with price +7.0% and volume/mix contributing +1.0%. Statutory revenue was +4.1% to £11.3bn with the walk being a 3.8% FX headwind and a 0.1% M&A impact. Encouragingly, HLN’s Power Brands outperformed, with organic growth of 9.1% and six of the nine Power Brands seeing double-digit growth. Helped by operating leverage, adjusted operating profit was +10.4% at CER (+9.4% reported). Adjusted diluted EPS of 17.3p was, however, -6.0% due to the annualisation of interest costs and FX headwinds. Net debt finished 2023 at £8.5bn, 3.0x adjusted EBITDA. The Group increased the dividend payout from 30% to 35%, with a final DPS of 4.2p and a commitment for the “dividend to grow at least in line with adjusted earnings” in future. The Group has augmented this with an announced “capital allocation” of £500m for share buybacks in 2024. I’ve previously noted (most recently on 26 January) that HLN might consider a targeted buyback of part of the residual GSK stake (valued at £1.3bn at yesterday’s close) to remove that technical overhang from the share register, so I’m not surprised to see that. On the outlook, management guide to “another year of strong growth in 2024”, with 4-6% revenue growth and operating profits growing at a faster clip. Net debt is expected to decline to c.2.5x EBITDA in the medium term. HLN is inexpensively rated at 16.4x consensus 2025 earnings and yields 2.3%.

 

CRH – FY results 

CRH released its maiden set of results under US GAAP on Thursday. These revealed another record performance, with revenue growing from $32.7bn to $34.9bn and adjusted EBITDA increasing from $5.4bn to $6.2bn. The adjusted EBITDA margin widened 120bps y/y to 17.7%. RONA was a very strong 15.3%, +200bps y/y, while cash generation also impressed, with operating cash flow of $5.0bn, +$1.2bn y/y. The Group returned $0.9bn to shareholders through dividends and $3.0bn through dividends during 2023, with the FY 2023 dividend of $1.33 +5% y/y. On the corporate front, CRH spent $0.7bn on 22 acquisitions during 2023. The Group finished 2023 with a strong balance sheet, with net debt of $5.4bn equivalent to just 1.0x adjusted EBITDA. On the outlook, CRH expects a favourable market backdrop and continued positive pricing momentum in 2024, driven by significant infrastructure investment and reindustrialisation activity across North America and Europe. CRH has had a great run, +21% ytd, but is not expensive at a multiple of 15.2x 2025 earnings and yielding 1.9%.

 

RKT – FY results 

Reckitt released its FY 2023 results on Wednesday. The headline read: “A year of progress with mid-single-digit growth in Health & Hygiene”, and while that’s all fair, the results came in a touch behind market expectations, following a soft Q4 (LFL net revenues -1.2% y/y). The market was also unimpressed with the discovery of “an understatement of trade spend” in two markets which pared net revenues and operating profits by £55m and £35m respectively. Adjusted LFL net revenues were +3.5% y/y, with growth in Hygiene (+5.1% y/y) and Health (+5.0% y/y) diluted by a 4.0% y/y pullback in Nutrition as revenues normalised from the temporary spike resulting from competitor issues in the prior year. There was a welcome 220bps expansion in the gross profit margin to 60.0%, but the operating profit margin contracted 70bps to 23.1%, reflecting “increased brand equity investments (ad spend, to you and me) and inflation-led cost base increases”. The Group delivered a stronger free cash flow performance (£2.3bn, +11% y/y), helping to reduce net debt (from £8.0bn to £7.3bn) even despite a 24% y/y increase in cash returns to shareholders (to £1.5bn) fuelled by a £0.2bn outlay on share repurchases during 2023 as part of a wider £1bn share buyback programme. The FY dividend of 192.5p was +5% y/y. On the outlook, RKT expects another year of MSD growth in Health and Hygiene, with Nutrition returning to growth “late in the year”. Importantly, profits are expected to grow at a faster pace than the top-line (so, mid to high single digit growth presumably), although at least some of this will be offset by guidance for net finance charges to come in at £300-320m vs 2023’s £247m. RKT also signalled higher cash returns to shareholders this year, although this was always likely given that the £1bn share buyback programme was only announced in October of last year. Looking past the noise of rebasing Nutrition sales and the audit issue, I see Reckitt as delivering good growth through the cycle, translating into higher cash flows which are facilitating both continued deleveraging and enhanced shareholder distributions. Net debt of less than 2x EBITDA also raises the potential for the Group to consider meaningful M&A to bolster its portfolio. RKT is cheap, trading on just 14.1x consensus 2025 earnings and yielding 4.1%. 

 

SN/ – FY results 

Smith & Nephew released a solid set of results on Tuesday. Underlying revenue growth came in at 7.2% (+6.4% reported), while Trading Profit widened to $970m (a 17.5% margin) from the prior year’s $901m (17.3% margin), helped by higher productivity and operating leverage the benefits from which were partly offset by input cost inflation and FX headwinds. Revenue growth was broad-based, with Orthopaedics +5.7%, Sports Medicine & ENT +10.0% and Advanced Wound Management +6.4%. The Group delivered a much improved cash performance, led by better working capital management. Operating cashflow was $829m (2022: $581m). A flat dividend of 37.5c/share was declared, unsurprising given the Group is still executing on its strategic refresh. For 2024, management guide to USG of 5-6% (4.6-5.6% reported) and trading profit margin of at least 18% (and at least 20% in 2025). All in all, a good set of results and the promise of more to come as margins expand from 17.5% to >20% over the coming 2 years. SN/ is cheap, trading on 12.7x consensus 2025 earnings and yielding 3.3%.

 

ABDN – FY results

Abrdn released its FY results on Tuesday. The Group saw a mixed performance, with strong ii and Adviser performance, but weaker profitability in Investments. ABDN recently unveiled another (£150m, payback <2 years) round of cost-cutting in an effort to improve efficiency, but the flat Cost / Income ratio of 82% despite the delivery of £102m in cost take-out in 2023 (ahead of the £75m target) serves as a reminder that growing the topline is essential to delivering sustainable returns. The DPS was maintained at 14.6p, above adjusted diluted EPS of 13.9p. AUMA finished the year -1% at £495bn as net outflows continued to feature (£13.9bn in 2023, up from £10.3bn in 2022). Alarmingly, investment performance has deteriorated, with just 42% of funds beating benchmark over the past 3 years, a 23 point deterioration versus 2022. This is a headwind for delivering the AUM growth necessary to transform revenue performance. While the P&L needs work, the balance sheet is in great shape, with CET1 capital of £1.47bn providing 139% coverage, implying >£400m of surplus capital above regulatory requirements, and the stake in Phoenix and staff pension scheme surplus offer further buffers above that (ABDN’s highlighting of the latter may hint that the Group is considering a buyout to unlock value). The Group returned £0.6bn to shareholders through dividends and buybacks in 2023; the cash cost of the dividend reduced from £295m in 2022 to £267m in 2023 as a result of the share purchases – this is very important when considering the sustainability of the uncovered dividend. On the outlook, ABDN assumes a slow moderation in inflation (and associated interest rates) which may or may prove ambitious where the top-line is concerned. The Group didn’t unveil another buyback with these results – unsurprising, given that £150m will be invested in the latest cost cutting drive – while management says it “will continue to scan the market for bolt-on acquisitions”. The absence of a buyback removes a technical support on the stock, for sure, but investment of surplus capital in cost take-out and potentially M&A too is preferable to ABDN hoarding capital. Bloomberg consensus has ABDN trading on 11.5x 2025 earnings and yielding 9.5%. Clearly the stock is not without its risks, and there are concerns around the dividend, but the extent to which ABDN is overcapitalised offers reassurance in terms of the current delta between EPS and DPS as management work to address earnings through cost take-out and rejuvenating business momentum.

 

WDS – FY results

Woodside released its FY 2023 results on Tuesday. The Group delivered record production of 187.2 MMboe and full year net income of $1.7bn ($3.3bn underlying, -37% y/y reflecting the 30% fall in average realised prices, with the walk to statutory profits chiefly represented by non-cash impairments) and operating cash flow of $6.1bn. A final dividend of 60c has been declared, bringing the full year dividend to 140c (an 80% payout ratio, but still -45% y/y). Efficiency was a hallmark of the results too, with LNG operations achieving 98% reliability over the year and unit production costs broadly steady at $8.3/boe (+2% y/y). In terms of corporate developments, the Group farmed down 10% of equity in the Scarborough JV to LNG Japan (a further 15.1% was farmed down to JERA since the start of this year). On the growth projects, the FPSO arrived at the Sangomar oil field offshore Senegal in February, with first production on track for mid-2024. Scarborough is 55% complete, with the first LNG cargo expected in 2026. A FID was taken on Trion (oil, Gulf of Mexico) last year. Impressively, 158% of production was replaced with proved plus probable reserves in 2023, a top quartile performance. On the outlook, WDS guides to 185-195 MMboe of production in 2024, steady relative to 2023. All in all, no great surprises here, and while annual performance can be volatile due to commodity price developments, structural demand drivers for leading energy producers with a quality portfolio of assets like Woodside means it should perform very well over the course of the cycle. Indeed, WDS’ CEO said that she expects LNG demand will surge by 50% over the next decade. Woodside trades on 16.8x 2025 earnings and yields 4.9%.

 

GSK – Pipeline progress; Zantac update

GSK announced positive headline results from its EAGLE-1 phase III trial on Monday for gepotidacin. The trial met its primary efficacy endpoint of non-inferiority compared to the existing leading combination treatment regimen for GC. The GSK antibiotic is also being investigated for potential use in uncomplicated UTIs, where it could potentially disrupt a market that hasn’t seen new oral antibiotics in over 20 years. Neisseria gonorrhoeae bacteria are estimated to cause 82m new cases globally each year, with 648k cases being reported to the US CDC in 2022. To the extent that gepotidacin, if approved, widens the addressable market for GSK, this will have obvious commercial benefits. GSK had 71 vaccines and medicines in its pipeline across Phase I-III/registration as at end-2023. Elsewhere, GSK said on Thursday that it had settled a Zantac case that had been filed in California state court as part of its approach to avoid protracted litigation. No liability has been admitted and while GSK says it “will continue to vigorously defend itself based on the facts and the science” this is hard to reconcile with settling cases. Nonetheless, the economics of settling cases may well be superior to years of lawsuits. GSK is very cheap, trading on just 9.6x consensus 2025 earnings and yielding 3.9%, despite the high quality of its development pipeline.

 

MKS – Ocado Retail comments 

Ocado reported its FY 2023 results on Thursday and, within those, my interest was centred on its 50-50 JV with Marks & Spencer, Ocado Retail. The JV had a stronger 2023 performance, with sales +7% and a return to a positive adjusted EBITDA of £10.4m from a £4.0m loss in the prior year. Following the closure of the Hatfield CFC, Ocado Retail’s capacity utilisation has climbed from 60% to 75%, which is very welcome to see. On the outlook, Ocado Retail is expected to deliver MSD revenue growth this year, and improved profitability (underlying adjusted EBITDA margin of c.2.5%) on the road to its medium term aspiration of a “high mid-single” digit adjusted EBITDA margin. The direction of travel here is helpful to see, and I expect that it will continue to improve as Ocado Retail grows into its excess capacity. Elsewhere, the Ocado results provided a lot of colour on the contingent consideration due from M&S. Subject to the achievement of contractually defined Ocado Retail performance measures, MKS was to pay £190.7m (£156.3m plus interest) to Ocado, or zero if the targets weren’t met. In the event, these targets have not been met, and while “there is no formal arrangement for a payment between zero and £190.7m”, OCDO argues that “the contractual arrangement with M&S expressly provides for the target to be adjusted for certain decisions or actions taken by Ocado Retail management that differ from the assumptions used in the discounted cash flow model which underpinned the sale transaction”. As a result “it may be that a legal process is required for this outcome to be assessed. The precise outcome of a legal process is inherently uncertain but would be binary – payment of either the £190.7m in full, or no payment”. It remains to be seen how this plays out, but the mood music suggests to me that MKS is unlikely to be on the hook for anything close to £190.7m. MKS is very cheap, trading on just 9.5x FY 2025 earnings and yielding 2.8%. In terms of the ability to absorb any Ocado Retail payment, net debt (including leases) to EBITDA is forecast at just 1.5x for FY 2025, so the balance sheet is in great shape.

 

RYA – Capacity constraints

Ryanair announced this morning that, arising from Boeing’s well documented production issues, it will now only take delivery of 40 of the 57 B737 deliveries that had been slated for Summer 2024. Ryanair had planned its schedule on the assumption that a minimum of 50 aircraft deliveries, so this will cause reduced frequencies on a number of routes leading to revised guidance that RYA will carry 198-200m passengers in FY 2025 compared to an original target of 205m. Clearly unhelpful, but the impact is modest at c.3% of volumes and presumably there will be a margin uplift on the remaining capacity so the hit to earnings is likely to be lower. Ryanair is very cheap in my view, trading on just 9.1x consensus FY 2025 earnings and yielding 2.2%. 

 

RHM – Order wins

Rheinmetall announced two size orders this week for its SHORAD platforms. On Tuesday the German Bundeswehr placed an order worth €595m for the delivery of highly mobile Skyranger 30 systems, which will commence in late 2024. Earlier today the Group announced that an unnamed “European customer” has placed an order “in the lower three-digit million euro range” for modular Skynex systems. After Austria recently placed an order for 36 systems I had said I expected further European SHORAD wins, so this news, while very welcome, is not a surprise. Given the disruptive effect of drones, I expect to see more contract wins for Skyranger – RHM has previously indicated that Lithuania and Denmark are potential customers. RHM has re-rated significantly this year, with the shares +51% year to date, reflecting its business momentum in the context of structural growth in Western security investment. A rating of 17.2x consensus 2025 earnings and a 2.1% yield doesn’t strike me as particularly expensive given the backdrop.

Stocks Update 2/2/2024

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%.

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 22/12/2023

CRH – Acquisition; Buyback

HBR – Transformative acquisition; Significant gas find

IR5B – Competition intensifies

PPA – Red Sea, Red Ink 

RHM – Further contract wins; Disposal

RKT – Buyback 

SPDI – Arcona shareholders back divestments

WDS – Panama Canal issues

 

HBR – Transformative acquisition; Significant gas find

Harbour Energy announced the transformative acquisition of the Wintershall Dea asset portfolio on Thursday for $11.2bn. The deal transforms HBR’s scale; provides welcome geographic diversification; increases production, reserve life and margins; lifts HBR’s exposure to gas; delivers significant financial synergies and cashflows; and unlocks enhanced shareholder returns. HBR will acquire all of Wintershall Dea’s upstream assets in Norway, Germany, Denmark, Argentina, Mexico, Egypt, Libya and Algeria, along with CCS licences in Europe. This brings 1.1bnboe (pro-forma HBR is now 1.5bnboe) of 2P reserves at c.$10/boe and more than 300kboepd (pro-forma HBR is now >500kboepd) of production. Wintershall’s main production hub is Norway, followed by Argentina, Egypt and Germany. The deal financing is very attractive, with HBR porting existing EUR denominated Wintershall bonds with a nominal value of $4.9bn and weighted average coupon of just 1.8%. The other $6.3bn of the consideration is coming from the issuance of 921.2m new HBR shares to Wintershall Dea’s shareholders at a value of 360p (60% higher than HBR’s 30 day VWAP) or $4.15bn, with the other $2.15bn to be essentially met from cash flow from the assets between the effective date (June 2023) and completion (likely Q4 2024). HBR says it will increase its annual dividend from $200m to c.$455m, of which c.$380m will be paid to ordinary shareholders in Harbour through a 5% increase in the DPS to 26.25c. Management also note the “potential for additional returns in line with Harbour’s existing policy” – hinting at buybacks. I note that Russia’s LetterOne will have 251.5m non-voting, non-listed convertible shares – if these do convert, then the future share register will be 45.5% current HBR shareholders; 39.6% BASF and 14.9% LetterOne. That will likely mean a technical overhang on the share price as presumably neither BASF nor LetterOne are long-term holders and Mr. Market will therefore assume those two will be sellers at 360p (so as not to sell below the deal price), but I don’t mind that – there’s a similar situation at Haleon which I have viewed as an opportunity to pick up more shares at an undemanding multiple. This is a genuinely transformative deal for HBR – depending on the oil price, revenues and EBITDA in 2025 (the first full year of ownership) could be 3x current consensus (pre-Wintershall) of $4bn and $3bn respectively. HBR is likely to be in net cash (pre-Wintershall) in 2024, so net debt (inclusive of Wintershall) will be <1x EBITDA. While these are only illustrative numbers, from that starting position it’s not hard to imagine a bulked up HBR that has the cash flow to simultaneously pursue organic and inorganic investments; deleverage; and provide increased distributions to shareholders. Elsewhere, Harbour Energy announced on Tuesday that a “significant gas discovery” has been made at the Layaran-1 well on the South Andaman licence offshore Indonesia that HBR has a 20% stake in. “Layaran-1 is the first of a four well exploration campaign targeting the same Oligocene play as the successful Timpan-1 well drilled on Andaman II (Harbour operator, 40%) in 2022”. While we await the results of the full campaign before evaluating the significance of this, it does sound encouraging. HBR’s exploration strategy is focused on high impact, high return prospects that are located close to existing HBR operations, allowing for existing infrastructure to be leveraged.

 

CRH – Acquisition; Buyback

CRH announced on Monday that, together with the Barro Group, it has entered into an agreement to acquire leading Australian building materials business Adbri. Under the recommended transaction, CRH and Barro will acquire Adbri for 9x expected 2023 EBITDA (expected in a range of A$310-315m). CRH is expected to own 57% of Adbri, with Barro retaining its current 43% shareholding in the business, implying an outlay of c.US$0.75bn for CRH’s share. CRH has been operating in Australia for 15 years, with this deal (assuming it completes) enhancing its position in that important market. Elsewhere, I note that CRH announced on Thursday that it completed the latest phase of its ongoing share buyback programme, returning $1.0bn to shareholders between 25 September and 20 December through the repurchase of 17.1m ordinary shares. CRH has repurchased $7bn of its shares since May 2018. The Group will repurchase a further $300m worth of shares between now and 28 February. CRH trades on an undemanding 14.1x consensus 2024 earnings and yields 2.2%.

 

RHM – Further contract wins; Disposal

Rheinmetall announced on Monday that it has received a further call-off under the framework agreement with the German Bundeswehr under which it will support Ukraine with “several tens of thousands” of 155mm rounds to a value “in the low three-digit million euro range”. Delivery is scheduled for 2025 and is a further demonstration of RHM’s strategic position as a major supplier to Western countries at a time where there are clear structural demand drivers. On Tuesday, RHM’s 51% owned JV, RMMV secured a contract from Austria for the delivery of 300 trucks over 48 months, with a potential order value of €300m. On Thursday, the first Lynx IFV rolled off the production line at RHM’s 51% owned Hungarian JV’s new factory at Zalaegerszeg. That milestone was accompanied by news of a €30m contract to provide RHM’s Skyranger 30 air defence system onto the Lynx. Skyranger 30 is also likely to be supplied to Germany and Denmark, doubtless on foot of the heavy usage of drones in Ukraine and Artsakh. I also note that late last Friday RHM announced that Hungary has signed a development order for its Panther KF51 MBT. This contract is worth c.€288m. Importantly, this is the first contract win for the Panther, and RHM will doubtless be looking to add further international customers for its newest MBT. Finally, on Wednesday RHM announced the sale of its small-bore pistons business to Comitans Capital. Completion is targeted for end-Q1 2024. This follows the sale of its large-bore pistons business earlier this year to Sweden’s Koncentra Verkstads AB and is a further step in RHM’s strategic reorientation away from products relating to the internal combustion engine. No details of the consideration paid were provided – Bloomberg suggests proceeds of c.€100m, small change for RHM (market cap €12bn). RHM trades on an undemanding 14.9x 2024 consensus earnings and yields 2.5%.

 

IR5B – Competition intensifies

P&O recently pulled off the Dublin – Liverpool route, which I said at the time was likely to provide a useful tailwind for both Stena and Irish Continental Group as former P&O traffic migrated to Stena and ICG’s Dublin – Holyhead propositions. That prediction was scotched last Friday when it was confirmed that Stena is instead to launch a new freight-only service from Dublin – Birkenhead (located across the River Mersey from Liverpool), with a daily return service to start from February. Elsewhere, CLdN is to add an extra vessel on the Dublin – Liverpool route. These services, like the old P&O Dublin – Liverpool route, are unlikely to draw much business from the far more convenient Dublin – Holyhead, but nonetheless had Central Corridor freight business consolidated on Dublin – Holyhead then operating leverage effects would have seen a very high pass through of incremental revenue to the bottom line for both Stena and ICG. In all, unhelpful for ICG, but not materially so. ICG is cheap, trading on just 11.4x consensus 2024 earnings and yielding 3.5%.

 

PPA – Red Sea, Red Ink 

Geopolitical risks pose a downside threat when you’re an internationally significant port. News that major maritime transport groups are suspending operations in the Red Sea following Houthi rebel attacks on cargo ships are unhelpful for Piraeus Port Authority, which operates terminals at the largest port in south-east Europe. With c.10% of global trade traversing the Bab El Mandeb Strait, a 20 mile wide channel separating Eritrea and Djibouti on the African side from Yemen on the Arabian Peninsula, it is unsurprising to see that major Western powers will act to reduce the threat to shipping, which should hopefully lead shipping firms to resume operations. At the margin though, lower volumes going through the Suez Canal are negative for PPA. PPA is among the cheapest listed infrastructure assets, trading on just 4x consensus 2024 EV/EBITDA.

 

WDS – Panama Canal issues

Low water levels at the Panama Canal has seen a reduction in daily transits through the key global freight hub. On Monday, the Panama Canal Authority said that, as a result of solid rainfall in recent weeks, it will increase daily transits to 24 starting in January, up from previous guidance of 20 slots in January and 18 in February. Currently, 22 vessels are allowed to transit daily. This compares to a daily average of 35.5 in 2022. In addition to driving business to longer routes via the capes (the Suez Canal has its own issues, as discussed in the PPA commentary elsewhere in this blog), media reports attribute a slide in European gas prices and associated upwards pressure on Asian gas prices to US LNG producers in the Gulf of Mexico diverting cargoes that had been earmarked for Asia to Europe instead. At the margin, this may be helpful for WDS’ Australian LNG operations (although hedging agreements will limit the scope for opportunistic gains). Woodside Energy trades on an undemanding 13.6x consensus 2024 earnings and yields 6.0%.

RKT – Buyback

Reckitt announced on Wednesday that the second (£250m) tranche of its £1bn share buyback programme will commence “two days after the completion of the first tranche (anticipated to be during January 2024)”. This buyback programme will provide a technical support for the shares and is a sensible use of surplus funds given the Group’s relatively inexpensive rating (15.4x consensus 2024 earnings and yielding 3.7%)

 

SPDI – Arcona shareholders back divestments

SPDI’s Dutch listed associate, Arcona Property Fund, held an EGM on Wednesday at which shareholders agreed to implement a monetisation process intended to sell at least 50% of its assets within the next 18 months. Management will be incentivised through performance-related fees for selling assets at a premium to book value. The proceeds will be used to finance distributions, with buybacks set to feature – Arcona is very cheap, closing at €5.20 in Amsterdam yesterday which compares to a pro-forma (for a recent dividend) NAV of €11.55 a share.

Stocks Update 27/10/2023

ABRN – Bolt-on acquisition

AMZN – Q3 results show good momentum

GSK – Pipeline progress

KYGA – Trading update, not milking it

LLOY – Reassuring IMS

PPA – Strong trading performance

RHM – Upgrades guidance 

RKT – £1bn buyback, trading statement 

RWI – No deal, or no deal for now?

ULVR – Trading update

 

RWI – No deal, or no deal for now? 

Renewi’s shares were hammered on Thursday, finishing -18% after Macquarie said that it does not intend to make an offer for the company. On 28 September it emerged that Macquarie had made a proposal to acquire RWI for 775p a share, a price that looked skinny to me – I think it’s worth at least £10/share. On Wednesday RWI received a further non-binding proposal with an indicative offer value of 810p/share which Renewi’s board rejected “on the basis that it continued to fundamentally undervalue Renewi”. Interestingly, the statement from RWI goes on to say that “the Board is open to all means of maximising shareholder value, the Board conveyed to Macquarie that formal engagement was possible, subject to price”. I’m ambivalent about these developments – RWI is my largest portfolio holding, so while a sale would deliver a meaningful positive return to me, I wouldn’t like to see it going for anything less than a full price. The Group has an attractive business model, operating in a structural growth market that lends itself to local barriers to entry – to give one example, Renewi’s facilities in the Netherlands recycle 1.5m mattresses per annum, and I don’t see anyone coming in to develop a rival business of that scale in that market. I also think there’s scope for RWI to expand across Europe in a capital light manner, establishing JVs with local partners that pair its intellectual property with external sources of finance. Koyfin data have RWI on 7.8x forward earnings and 4.7x EV/EBITDA, multiples that look ridiculously low for a business with its prospects, to my mind.

 

PPA – Strong trading performance

Piraeus Port Authority released its Q3 results on Wednesday. YTD (to end-September), revenue of €165m was +13% y/y, EBITDA +33% y/y to €100m and net income +40% y/y to €66m, reflecting the strong operating leverage within the model. For Q3 specifically, revenue was +18% y/y (to €62m) and net income of €27m was +28% y/y. The Group has seen positive revenue momentum y/y across all business lines (Container; RoRo; Cruise; Ferry; Ship Repair; and Other. The balance sheet is in great shape, with shareholders’ equity +13% YTD (to €354m) and net cash +9% y/y to €75m. This net cash position, allied to strong profitability, leaves PPA well positioned to meet its major capex programme, which should, in turn, deliver solid future growth in revenue and earnings. Koyfin data have PPA trading on c.7x forward earnings, which is astonishingly cheap for an internationally significant infrastructure asset with such a strong (net cash) balance sheet.

 

RKT – £1bn buyback, trading statement

Reckitt released its Q3 trading update on Wednesday. Trading in the quarter was stunted by adverse FX, as 3.4% LFL sales growth translated into a 3.6% decline in reported revenues after taking FX (-6.8pc) and M&A (-0.2pc) into account. YTD, revenues are +5.1% (LFL) and +4.0% reported. Nutrition was optically weak in Q3, with LFLs -11.9% y/y, but that reflects a tough comparative with last year’s competitor supply issue. Importantly, the Group says it is “firmly on track to deliver our full year targets” (3-5% LFL net revenue growth and a slight increase in underlying operating margins). The Group released a strategy refresh alongside the Q3 update, where it is targeting “sustained mid-single digit LFL net revenue growth” and adjusted operating profit growth > net revenue growth in the medium term. The Group has dropped its previous target of mid-20s margins by the mid-2020s, unsurprising given the inflationary backdrop, but not a huge issue given that consensus is for 24% margins in 2024 so it is ballpark there/thereabouts at any rate. A £1bn share buyback will commence imminently (this should pare the share count by >2%) – which while welcome is also not a surprise – in a detailed review of Reckitt that I wrote back in May I said that “the steady reduction in leverage opens the door to a resumption of share buybacks”. Koyfin has RKT trading on 16.1x forward earnings, not the cheapest, but inexpensive relative to global peers. 

 

KYGA – Trading update, not milking it

Kerry Group released a Q3 IMS on Thursday. While the strapline was: “Continued volume growth with good margin improvement”, the Group has lowered FY earnings guidance to the low end of the previously stated 1-5% constant currency range. The silver lining though is the announcement of a €300m share buyback, to commence in November, which is welcome to see given the relatively inexpensive rating that KYGA trades on. Across the businesses, T&N saw Q3 volume growth of 1.6%, but Group Q3 volumes were up just 0.1% as Dairy Ireland volumes struggled (-12.1% in Q3; YTD -6.2%). Pricing was weaker in Q3, reflecting the deflationary environment, with overall YTD pricing +1.3%. In terms of the balance sheet, net debt was €1.8bn at end-September or about 1.5x EBITDA, so the €300m buyback won’t meaningfully impact KYGA’s flexibility with respect to bolt-on acquisitions. Kerry trades on 15.9x forward earnings, inexpensive for a global ingredients powerhouse.

 

LLOY – Reassuring IMS

Lloyds Banking Group released its Q3 IMS on Wednesday. Reassuringly, management said that “the Group continues to perform well”, with financial performance characterised by “net income growth, cost discipline and resilient asset quality”. LLOY has reaffirmed nearly all of its 2023 guidance, with the one change being that the AQ charge is now expected at sub-30bps versus the previous c.30bps. The £1.4bn Q3 statutory net income is broadly in-line with the YTD run rate (9M 2023 net income of £4.3bn), albeit a 6bps q/q moderation in the NIM (given “expected mortgage and deposit pricing headwinds”) didn’t help. The YTD asset quality ratio is an impressive 25bps. On lending, balances increased £1.4bn q/q in Q3, bringing the YTD fall to £2.8bn (of which £2.5bn is from a legacy portfolio exit). Customer deposits rose marginally (+£0.5bn q/q) in Q3, but are still down £5.0bn (-1.0%) YTD. Capital generation is customarily strong at 165bps YTD, 129bps after CRD IV model changes (which inflated RWAs) and IFRS 9 phasing. For the FY, LLOY guides to c.175bps of capital generation. The CET1 ratio is a strong 14.6%, 110bps over the target of 12.5% plus a 1% buffer and c.260bps above minimum regulatory requirements (c.12% following the doubling of the UK CCyB in July to 2%). A tailwind for the NAV is that the pensions triennial review will result in a £250m contribution to be paid by end-March, and no further contributions in this triennial period. The TNAV/share rose 1.5p q/q to 47.2p, helped by the 2% q/q reduction in the share count and profitability. LLOY’s expectation of a full year ROTE of >14% (it was 16.6% in 9M 2023, so presumably this guidance will be beaten) means if should be trading at a healthy premium to this TNAV, instead of a discount (the shares closed at 40p this evening). The capital surplus should, in my view, mean that another buyback will be announced alongside FY results early next year. A £2bn buyback will reduce the share count (63.5bn at end-September) by >4bn/6%+, while enhancing EPS, TNAV and future DPS. Like other UK banks, LLOY is extremely cheap, trading on just 5.3x forward earnings per Koyfin data.

 

ULVR – Trading update

Unilever released its Q3 trading update on Thursday. USG in Q3 was 5.2%, lagging the 9M 2023 run-rate of 7.7%, while an FX headwind saw reported turnover -3.8% y/y (9M 2023: +0.4% y/y). FX was a striking 8.0% headwind on revenue. Nonetheless, the Group has reaffirmed its 2023 outlook of USG >5% and “a modest improvement in underlying operating margin”. The results provided the new CEO (Hein Schumacher) to set out his strategic vision for the Group. Noting an extended period of under-delivery, he is focusing on innovation and investment in Power Brands; alongside simplicity and productivity improvements, to sharpen performance. The targeted financial outputs of this strategy are medium-term USG of 3-5%; modest margin expansion; 100% cash conversion; mid-teens ROIC; EPS growth and an attractive dividend; and TSR in the top third of the peer group. So far so good, but execution remains to be seen (and this presumably is reflected in ULVR’s discount relative to global peers). The Group has maintained its quarterly dividend of 42.68c. On the Corporate side, the Group has agreed to sell 65% of its misfiring Dollar Shave Club with completion expected before end-2023. Unilever trades on 16.4x forward earnings, per Koyfin data, a slight premium to Reckitt.

 

RHM – Upgrades guidance

In an ad-hoc announcement on Wednesday, Rheinmetall said that its Q3 operating profits would be higher than market expectations. While the Group confirmed FY sales and earnings guidance, the risks to those are surely now to the upside. For Q3 specifically, operating profit is expected at €191m (consensus €165.4m) with a margin outperformance (10.9%, 150bps above consensus) delivering this beat. RHM credits the outperformance to favourable product mix and also operating leverage effects from higher volumes. For the FY RHM sees sales in the range of €7.4-7.6bn with a margin of c.12%, which excludes the contribution from the recently acquired Expal (statutory sales of €150-190m and a margin of >25% expected). Formal Q3 results will be published on 9 November and I wouldn’t be surprised to see this FY guidance revised upwards. This development is not a surprise given, as I’ve frequently documented, scarcely a week seems to go by without Rheinmetall heralding another new contract win, reflecting the Group’s key role in meeting the West’s changed security needs post-Ukraine. A forward earnings multiple of 16.0x earnings, per Koyfin, seems undemanding given the structural growth kickers for the stock.

 

AMZN – Q3 results show good momentum

Amazon released its Q3 (end-September) results after the market close on Thursday. The Group posted net sales of $143.1bn, +13% y/y (+11% y/y in constant FX terms). This growth was broad-based, with North American sales +11% y/y to $88bn, International +16% y/y to $32bn and AWS +12% y/y to $23bn. The relative size of the North American and International businesses is worth noting in terms of how much room this company still has to expand. Operating income surged from $2.5bn in Q322 to $11.2bn in Q323, with all segments showing improvement. Operating cashflow was +81% to $72bn on a TTM basis, compared to $40bn in the 12 months to end-September 2022. AMZN credited this momentum to improved efficiency (particularly in terms of fulfilment); AWS growth; Advertising revenue momentum and cash management. AWS is benefiting from generative AI dynamics. For Q4, AMZN guides to net sales of $160-167bn, +7-12% y/y and operating income of $7-11bn (Q422: $2.7bn). The step-change in profitability is welcome to see, but unsurprising given various cost reduction programmes, operating leverage as the Group grows into its capacity, and strategic growth initiatives. A forward EV/EBITDA of 11.0x seems very undemanding for a business of this quality.

 

ABRN – Bolt-on acquisition

Following the sale of its European PE business for a consideration of up to £60m, I wrote in last week’s blog that “I would back management to sensibly recycle the capital from this disposal”. It didn’t take long for Abrdn to recycle this capital, announcing on Tuesday that it has entered into an agreement with First Trust Advisors to acquire the assets of four closed-end funds, adding c.£0.6bn of AUM. Subject to approval by the shareholders of the respective funds, the acquired closed-end funds will be reorganised into existing Abrdn funds. ABDN’s closed-end fund business has £23.8bn of AUM in US and UK listed funds, making the Group the world’s third-largest manager of such funds. Assuming the deal completes as envisaged, there are obvious scale benefits to putting the extra AUM into ABDN’s existing funds (in this case, the Abrdn Global Infrastructure Income Fund; Abrdn Income Credit Strategies Fund; and Abrdn Total Dynamic Dividend Fund are the acquiring funds of the assets from the four First Trust funds. Under CEO Stephen Bird’s leadership, ABDN has become a far more focused business, shedding non-core units and bulking up in asset classes where it is strong, a strategy that makes sense to me, whilst management has also sensibly deployed surplus capital into sharply reducing the share count, an important consideration given the delta between EPS and DPS. Abrdn trades on an optically pricey (for an asset manager) 12.8x forward earnings, but that multiple is distorted by the Group’s investment in Phoenix. The stock yields 9.5%, which I view as sustainable given the falling share count, surplus capital and strategic initiatives.

 

GSK – Pipeline progress

GSK announced on Wednesday that preliminary results from a phase III trial show that Arexvy, its RSV vaccine, helps to protect people in their 50s at increased risk for RSV disease. Decisions on potential label expansion (Arexvy has approval for use in over-60s in the US, Europe, Japan, the UK and Canada) are expected in 2024. Clearly, any widening of the addressable market for Arexvy would have commercial benefits for GSK. There was more good news on Thursday, with China’s National Medical Products Administration approving GSK’s majority owned ViiV Healthcare’s Vocabria (cabotegravir) used in combination with Rekambys (rilpivirine) as the “first and only complete long-acting HIV-1 injectable treatment”. The addressable market in China is more than 1m people, so this is another incremental positive for GSK. Koyfin data have GSK trading on just 9.4x forward earnings, which seems extremely cheap to me.

Stocks Update 28/7/2023

BT/A: Strong revenue and EBITDA performance

CLIG: Pre-close trading update

GRP: NAV and dividend update

GSK: Strong Q2 results; More pipeline progress 

LLOY: H1 results, guides to higher ROTE 

PCA: Trading update, strong disposal activity

PRSR: Pre-close trading update

RKT: H1 results, upgrade

RYA: Q1 results, upgrades seem likely

ULVR: H1 results ahead of expectations, guidance raised

 

BT/A: Strong revenue and EBITDA performance

BT released its Q1 (end-June) trading update on Thursday. This showed a strong start to the year, with revenues +4% and EBITDA +5% compared to the prior year. While this was helped by the application of higher retail prices, the Group’s strategic initiatives are also reflected in this outturn, with Openreach now 44% (11m/25m premises, with 55k being added each week) of the way through the massive FTTP capex programme, with a total network take-up rate of 32% (total FTTP connections are 3.5m). All guidance for FY 2024 has been retained, but with consensus (pre-Q1) for FY revenue and EBITDA growth of 1.7% and 1.6% respectively, I suspect the Q1 actuals point to upgrades. Outgoing CEO Jansen said: “our strategy is working and BT Group is set up for success”. This is an assessment I share, with the Group set to benefit from the twin tailwinds of FTTP (due to end in 2026, resulting in a material step-down in capex and BT being left with a best in class network) and a large-scale cost take-out programme. I don’t see the current multiple (Bloomberg has the telco trading on just 6.9x 2024 earnings, with a dividend yield of 6.2%) as providing any real consideration of these tailwinds.

 

LLOY: H1 results, guides to higher ROTE 

Lloyds Banking Group released its H1 results on Wednesday. The results showed a robust performance, “with strong net income and capital generation alongside resilient asset quality”. Taking those in turn, net income of £9.2bn was +11% y/y (stable vs H2 2022), helping to deliver a statutory net income of £2.9bn. NIM in Q2 was 314bps, -8bps q/q “given expected headwinds from mortgage and deposit pricing”. Business income of £2.5bn was +7% y/y. OpEx of £4.4bn was +6% y/y, but still growing at a slower pace than the top-line. The Group delivered a strong ROTE of 16.6% in H1, again Q2 was a tad softer (13.6%) although this is still well above COE. Capital generation was a solid 111bps, which includes a £800m FY pension contribution and the phased unwind of IFRS 9 relief. The CET1 ratio of 14.2% remains comfortably above the target of c.12.5% plus a c.1% management buffer. The impairment charge of £0.7bn equates to just 29bps “reflecting broadly stable credit trends”. TNAV was 45.7p, -3.9p from Q1 reflecting derivatives moves. LLOY has declared an interim dividend of 0.92p, +15% y/y. On distributions, the Group announced a £2bn buyback in February, which it is 75% of the way through. In terms of the outlook, LLOY now guides to: (i) Banking NIM of >310bps (was >305bps); (ii) OpEx of c.£9.1bn; (iii) CoR of c.30bps; (iv) ROTE of >14% (was c.13%); and capital generation of c.175bps. To my mind, a >14% ROTE should have the stock trading above 60p given a starting TNAV of 45.7p (indeed, the consensus share price target on Bloomberg is 60.3p). LLOY trades on just 5.9x consensus 2024 earnings and yields 6.9% (cash dividend alone, adding in buybacks gives a double digit distribution yield), very cheap to my mind.

 

RKT: H1 results, upgrade

Reckitt released a solid set of H1 results on Wednesday, revealing growth across all business units. Net revenue in the half was +6.0% y/y in LFL CER terms, but operating profit was -2.4% y/y on the same basis due to a 2.6% currency headwind. The adjusted diluted EPS of 173.0p was -3.1% y/y (reported), nonetheless management has increased the dividend by 5% to 76.6p. On the outlook, management reiterates guidance for LFL net revenue growth of 3-5% but has upped guidance for margins to be slightly above 2022 levels (was “in line or slightly above” previously). The Group also reiterated medium-term guidance for mid-20s margins by the mid-2020s. Net debt was £7.9bn at end-June, an improvement / reduction of £0.7bn y/y. Management see net debt / EBITDA falling below 2.0x by year end and remains “committed to returning excess cash to shareholders”. Alongside the upgrade to guidance, the strengthening of the balance sheet is very welcome to see. Reckitt trades on an undemanding (relative to peers) 16.3x consensus 2024 earnings and yields 3.4%. 

 

ULVR: H1 results ahead of expectations, guidance raised

Unilever released a good set of H1 results on Tuesday, with underlying sales growth ahead of expectations both in terms of pricing and volumes. USG was +9.1% y/y in H1, with all divisions posting growth of between 5.7% and 10.8%. On a GAAP basis, reported turnover was +2.7% y/y to €30.4bn, with operating profit jumping 23% y/y to €5.5bn, supported by a 290bps expansion in margins (to 18.1%). An unchanged quarterly dividend of 42.68c/share has been declared, while the Group has been progressing (~75% complete) a €3bn share buyback programme. The newish CEO signalled that he will be setting out plans “to step up our performance and unlock our full potential” at October’s Q3 results. On the outlook, ULVR sees FY USG of >5%, ahead of its multi-year growth target, with inflation set to moderate as we move through the year. Net debt ticked up to €24.3bn from €23.7bn at end-December, reflecting a €750m buyback and dividends paid. The rate environment helped the pension surplus widen to €2.8bn from €2.6bn at end-December. Unilever trades on a not unreasonable 17.6x consensus 2024 earnings and yields 3.8%.

 

GSK: Strong Q2 results; More pipeline progress 

GSK released a strong set of Q2 results on Wednesday. Sales were +4% (+11% ex-COVID), with Vaccines +18%, Specialty -7% (but +12% ex-COVID) and General Medicines +8%. Adjusted operating profit was +11% with adjusted EPS +16%. The Group has had a very successful period in terms of R&D, including securing a key approval for Arexvy (the world’s first RSV vaccine) in the US and EU; Shingrix approved for over-18s in Japan; and positive phase III data for the MenABCWY vaccine candidate. On the corporate development side, the Group completed the acquisition of RCC specialist Bellus Health. In terms of the outlook, GSK has upgraded 2023 guidance for growth across revenue (from 6-8% to 8-10%); adjusted operating profit (from 10-12% to 11-13%) and adjusted EPS (from 12-15% to 14-17%). Net debt was £18.2bn at end-June, +£1.0bn since the start of the year reflecting the £1.4bn cost of Bellus Health. At end-June GSK had a pipeline of 68 medicines and vaccines across Phase I-III. With regard to that, I note that GSK said on Monday that its majority owned (Pfizer and Shionogi are the other shareholders) ViiV Healthcare’s cabotegravir PreP has received a positive Committee for Medicinal Products for Human Use opinion from the European Medicines Agency. This follows phase IIb/III studies comparing the (injectable) medicine, given as few as six times per year, to daily tablet alternatives. Cabotegravir is currently approved for use in seven countries, including the US, Australia, South Africa and Brazil. GSK trades on only 9.2x consensus 2024 earnings and offers a 4.3% dividend yield. This feels like an ‘ex growth’ multiple to me that doesn’t give due regard to the Group’s R&D pipeline.

 

RYA: Q1 results, upgrades seem likely

Ryanair released Q1 (end-June) results on Monday that showed a strong performance, helped by Easter, the extra (Coronation) holiday in the UK and soft prior-year comparatives. The carrier had 50.4m PAX in the quarter, +11% y/y; loans of 95% (+3pc); revenue of €3.7bn (+40% y/y, with average fares +42% y/y); and strong operating leverage (OpEx rose ‘only’ 23% y/y to €2.9bn) helped produce net income of €663m, +290% y/y. RYA finished the quarter with net cash of €980m, up from €560m at end-March. While the Group has a huge fleet capex programme planned for the coming years, dividends and/or a buyback are also surely likely to feature in the current capex cycle, possibly as early as the FY 2024 results next May. RYA struck a cautious tone in its outlook statement, paring FY PAX guidance marginally to 183.5m (was 185m) due to Boeing delivery delays (this was previously flagged, to be fair); and citing both a moderation in revenue growth (in part due to base effects, but also a “softening in close-in fares”) and poor H2 visibility. Accordingly, RYA sees FY net income “modestly ahead of last year” but that seems very conservative to me given the starting position of Q1 net income being +290% y/y, so my hunch is that the path of least resistance for earnings guidance lies to the upside. Ryanair’s shares look as cheap as its seat fares, trading on just 10.1x current consensus earnings.

GRP: NAV and dividend update

Greencoat Renewables provided a Q2 (end-June) NAV and dividend update on Wednesday. The Group’s NAV was 113.2c at end-Q2, while a dividend of 1.605c/share has been declared. The NAV was +1.2c q/q while the dividend was (in line with guidance) unchanged. Greencoat offers a prospective dividend of 6.1% and trades at a 7% discount to end-June NAV. To my mind it’s cheap.

 

CLIG: Pre-close trading update

City of London Investment Group released a pre-close trading update for the year to end-June 2023 on Tuesday. On a consolidated basis, FUM were $9.4bn/£7.4bn at end-June, which compares to $9.2bn/£7.6bn at end-June 2022. Unhelpfully, the Group saw net outflows of $357m during the year, despite aggregate investment performance having been ahead of benchmark (the glass half full response to that being that it should make for easier sales pitches in the second half of this calendar year). The Group is accruing income at a weighted average rate of c.71bps of FUM, so taking into account fixed costs of c.£1.9m per month gives a run-rate for operating profit (pre-profit share and amortisation) of an annualised £31.2m. For FY 2023, CLIG guides to basic EPS of 30.4p which leaves the FY 2023 proposed dividend of 33p slightly uncovered. FY results are due on 18 September. From an administrative standpoint, I note that CLIG will switch its reporting currency to USD with effect from 1 July 2023. All in all, the fund outflows are unhelpful, but this is hardly unusual in these markets. Bloomberg has CLIG trading on 12.0x estimated FY 2024 earnings and yielding 9.6%.

 

PCA: Trading update, strong disposal activity

Palace Capital released a trading update on Wednesday ahead of its AGM. The key highlight is the strong progress that the Group has made on disposals, with eleven investment properties sold since the start of its financial year (i.e. since1 April) for an aggregate £57.9m or 6.4% ahead of the end-March 2023 book value. Of these, three were sold since the release of FY results on 15 June for a combined £16.8m, including one of the Group’s largest assets (1 Derby Square, Liverpool) which was sold for £12.0m or 10.1% above the end-March book value. The Group continues to progress the sale of residential units at the Hudson Quarter (York) apartment scheme, with five units sold for £2.2m since 1 April and a further one under offer, leaving 18 units remaining. The Group continues to manage the portfolio well, agreeing three new lettings, three lease renewals and two rent reviews delivering £0.5m of additional annualised contracted rent, +2% versus the end-March ERV. Rent collection in Q1 (to end-June) was 99%. Net debt was just £7.1m (a pro-forma LTV of 5.2%) as at 24 July. The Group has repurchased 1.9m shares since the start of FY 2024, which have accreted 2.8p to EPRA NTA (pro-forma for this and better-than-book-value disposals, EPRA NTA is 304p/share). Management is “reviewing its options for returning further cash to shareholders later in the year” – my strong preference would be for this to be via a tender offer and/or on-market buybacks given the tax treatment of individual shareholders. The pro-forma EPRA NTA of 304p compares to a share price of 238p earlier today – I think this stock is inexpensive here, although the risk/reward trade off (c.25% upside to NAV versus risks from UK CRE valuations / realised disposal proceeds) means it may stay inexpensive until more of the real estate assets are converted into cash. 

 

PRSR: Pre-close trading update

The PRS REIT released its Q4 (end-June) trading update on Tuesday. The key highlights were strong LFL rent inflation of 7.5% and resilient asset performance. PRSR notes that average rents across the portfolio are 25% of gross household income, which is very reassuring. At end-June 2023 PRSR’s portfolio was 5,080 completed units (end-June 2022: 4,786) with an ERV of £55.0m (end-June 2022: £47.8m) and a further 444 homes under construction (end-June 2022: 693). Taking the contracted homes into account gives an ERV of completed and contracted sites of £58.8m, up from £52.2m at end-June 2022. Rent collection in the year was 99% with occupancy at 97% at end-June (I would read the latter as reflecting timing of completions as opposed to any demand weakness). The Group has a strong funding base, with 82% of debt covered by long-term facilities with an average term of 16 years and a blended interest rate of 3.8%. The Group has access to a £75m floating rate facility. PRSR has 549m shares in issue, so a 4p/year annual dividend has a cash cost of c.£22m. The ERV of £55.0m, so assuming a 20% gross-to-net walk gives net rental income of £44.0m, with (say) £400m of net debt at a cost of (say) 4% incurring interest costs of £16m. This leaves £28m to cover the dividend of £22m plus management fees. To this end, the achievement of a ‘covered’ dividend in FY 2024 is something that will further de-risk the PRSR investment story, allied to the removal of development risk once the rump of homes under construction are completed. My sense is that PRSR is likely to attract bid interest given the discount to NAV it trades on (the share price earlier today was 81.8p, versus a NAV of 117.1p at end-December) plus strong income generation attributes (annualised dividend of 4p/81.8p share price = 4.9% yield) underpinned by >5,000 individual income generating units and the UK’s structural undersupply of housing.

Stocks Update 26/5/23

AV/ – Solid Q1 update

BT/A – Equinox pricing report; Drahi raises stake

MKS – Strong FY results 

RKT – Buying out minorities 

RWI – Solid FY results; optimistic for the future

RYA – Strong FY results 

SPDI – Cost and share register changes

STM – All’s well that ends well

 

RWI – Solid FY results; optimistic for the future

Renewi, which is my largest position, reported its FY results on Thursday. Revenue of €1.9bn and underlying EBIT of €133m were broadly flat y/y. Core net debt widened from €303m to €371m, reflecting the €66m Paro acquisition during the year and also the unwind of COVID tax holidays. The Group continues to report “good progress” on the strategic initiatives to deliver €60m of additional EBIT by FY 2026, with €20m of this delivered so far. Customer satisfaction is a noticeable highlight, rising from +3 to +18. The recycling rate is an impressive 63.6%, +180bps y/y. On the near term outlook, management says the Group is trading in line with market expectations (revenue of €1.96bn; EBITDA of €258m; EBIT of €128m) for FY 2024. A dividend will be recommenced in the current financial year, which is good to see. Further out, the Group expects to deliver revenue of €3m in five years “at high single digit margins as a minimum”, through market share gains, higher recycling recovery and targeted M&A. As an aside, I am pleased to see the Group sign further deals with ‘household name’ partners – Playmobil will make toys containing >80% recycled plastic and Electrolux will make inner liners for new fridges from >70% recycled plastic; in both cases from Renewi’s Coolrec fridge recycling business. All in all, a solid update. The long-term structural drivers of growth for the circular economy that Renewi enables are only going to strengthen, in my view. I’m very happy for this stock to be a core holding in the portfolio. Bloomberg data have Renewi trading on just 7.3x consensus 2024 earnings, which is very cheap in my opinion.

 

MKS – Strong FY results 

Marks & Spencer released a strong set of FY (March year-end) 2023 results on Wednesday. PBT came in at £482m, well ahead of consensus of £429m, with this beat helped by strong topline growth (C&H sales +11.5% and Food sales +8.7%, with both >1ppt higher than consensus growth rates). The strong results reflect the successful execution of MKS’ strategic plans to refresh its core product offerings; achieve structural cost reduction; rotate the estate; modernize the supply chain; and strengthen the balance sheet. A dividend will return with the H1 results in November. On the balance sheet, net debt was £2.64bn on a headline basis, down from £2.70bn in FY 2022, with this modest decline reflecting new leases entered into as part of the store rotation programme. Excluding leases, net debt was £356m versus £420m in the prior year. I had expected MKS to transition to net cash on a pre-lease basis, but free cash from operations moderated to £170m from £740m in the prior year, driven by investment in working capital; higher capex (store rotations); cash tax and a £30m loan to associates. The Group has announced a £225m bond buyback of the 2025 and 2026 maturities – it is worth highlighting that MKS’ deleveraging is in stark contrast to certain of its peers who have been loaded up with debt by their owners. This is a further useful source of competitive advantage for MKS. The Group guides to “modest growth” in revenues in FY 2024, while margins will be negatively impacted by a combination of: (i) investment in ‘trusted value’; (ii) cost reductions; (iii) higher energy costs; and (iv) wage inflation; leading to guidance for slightly smaller earnings in FY 2024 which I suspect is too conservative – I would not be surprised to see earnings growth in the current year. All in all, MKS is in great shape, outperforming the market in terms of revenue growth; benefiting from self-help cost measures; and strengthening its financial position during FY 2023. Bloomberg data have MKS trading on 11.5x consensus 2024 earnings, with the Group expected to pay a dividend equivalent to a 3.3% yield this year.

 

AV/ – Solid Q1 update

Aviva released a solid Q1 update on Wednesday. The headline was that the Group is “on track to meet or exceed” its targets for the full year. GI GWP was +11% to £2.4bn; Protection & Health sales were +11% to £102m; Workplace net flows rose 25% to £1.8bn; Retirement sales were +17% to £1.5bn; and the COR improved 30bps y/y to 95.4%. On costs, controllable costs were -1% y/y with the Group saying it remains “on track to deliver savings target of £750m (gross of inflation) by 2024 relative to our 2018 baseline”. The Solvency II ratio was 196% (pro-forma 193%), down from 212% at year end which largely reflects distributions. Importantly, it is still comfortably above the 180% management target, opening the door to further buybacks in time. The share price stuttered a little after this release, likely reflecting a combination of technical factors (share buyback nearing completion; activist fund Cevian having announced it has exited the register; equity markets in general had a soft day on Wednesday). Whatever about the technical factors, the broad-based growth evident in Q1 show that Aviva’s fundamentals are clearly in great shape. Aviva is very cheap, trading on just 6.1x 2024 consensus earnings and offering a prospective yield of 8.8%.

 

RYA – Strong FY results 

Ryanair released a strong set of FY (year-end March) 2023 results on Monday. Helped by the rebuild in air travel post-COVID, customers were +74% y/y to 168.6m and loads were +11pts at 93%. Revenue mushroomed to €10.8bn (+124% y/y), propelling strong operating leverage (costs were up ‘only’ 75% to €9.2bn) effects that delivered a net income of €1.43bn (FY 2022: a loss of €355m), which was above the range of estimates of €1.32-1.42bn. The balance sheet is in super shape, with net cash of €0.56bn (a €2bn y/y improvement) leaving the Group well positioned ahead of major capex investment on fleet expansion (300 MAX-10s ordered to help grow traffic to 300m p.a. by FY 2034). On the outlook, RYA notes that Boeing delivery disruptions means it may be short “up to 10” B-8200s for peak (June and July) summer 2023 schedules. That’s a minor near term risk but hardly something that will move the investment case. RYA says that demand is robust and fares are higher than prior year periods. The Group guides to a “modest year-on-year profit increase”, with higher revenues largely offset by a €1bn y/y higher fuel bill. As ever with RYA though, my suspicion is that the risks to guidance lie to the upside. Consensus estimates have RYA trading on an inexpensive 12.3x FY 2024 earnings, falling to a bargain basement level of 7.5x consensus FY 2026 earnings if profits evolve as the sell-side forecast they will.

 

RKT – Buying out minorities 

Reckitt announced on Thursday that it has agreed to buy out the minority shareholders in its majority owned business unit in mainland China and Hong Kong. The Group will buy out the non-controlling investors holding between 20% and 25% of three subsidiaries in multiple stages over the period to end-2038 (it is not clear to me why such a long timeframe is involved). The estimated total consideration over the 15 or so years is £0.3-0.4bn. Clearly, buying out minorities in businesses it already controls and knows very well is a lower risk strategy to ‘greenfield’ M&A. As such, this seems like a good use of the Group’s strong balance sheet, albeit the amount in question is not material in a Reckitt (market cap £46bn) Group context. Bloomberg data have RKT trading on an undemanding 17.3x consensus 2024 earnings and offering a prospective yield of 3.1%.

 

BT/A – Equinox pricing report; Drahi raises stake

On Wednesday it was announced that Ofcom is to approve BT’s new pricing model (Equinox 2) at its networking division Openreach. This is despite complaints from rivals who alleged that it would give BT ‘an unfair competitive edge’. Equinox 2 offers lower prices to retail providers (e.g. BT, Vodafone, TalkTalk) who use its full-fibre products over the legacy copper network, and is seen as a magnet to attract these retail providers to BT over rival wholesalers. As such, this is a positive development for the Group. Elsewhere, French billionaire Patrick Drahi announced that, through his Altice UK vehicle, he has increased his stake in the UK telco from 18% to 24.5%. In a statement, Drahi he says he does not intend to bid for the whole company, which rules out the prospect of this for a minimum of six months under UK Takeover rules, except in specific circumstances. Drahi first bought 12% of BT/A in 2021. From whom these shares were purchased is not yet known, with Deutsche Telekom (which held 12% of BT at the start of the year) one possible seller, given recent management comments. BT trades on a very cheap multiple of just 7.7x consensus 2024 earnings and yields an attractive 5.4%.

 

STM – All’s well that ends well 

STM Group announced on Thursday that financial statements for its two Gibraltar life assurance subsidiaries for the year ended 31 December 2021 have now been signed. This had been held up by a delay in the receipt of regulatory approval from the Gibraltar financial regulatory, without which a ‘material uncertainty relating to going concern’ disclosure would have been required to be inserted in the accounts. With this now resolved, Grant Thornton can now be formally appointed as auditors to these subsidiaries, which will allow for the release of audited FY 2022 results for the Group next month. STM Group (market cap £14.6m), which is profitable, trades broadly in line with its net cash (guided at £14.0m at end-2022, results are due next month), making this a clear value play to my mind. 

 

SPDI – Cost and share register changes 

Secure Property Development & Investment, the AIM listed Eastern European focused property group, announced on Thursday that a connected party, SECURE Management, which is wholly owned by the CEO, will absorb all existing HR and office costs in all of the jurisdictions that SPDI operates in, except for Ukraine. SPDI will pay SECURE €24,000+VAT a month for this service, which will run for at least an initial eight months, with the contract cancellable with one month’s notice thereafter. This €288k p.a. agreement compares to 2021 and 2022 costs of c.€600k and c.€425k respectively. Time will tell if this proves to be a value for money arrangement. Elsewhere, Nat Rothschild has sold his entire 6.6% shareholding in SPDI. While it is somewhat unsettling to see a ‘big name’ investor exit the register (and at a meaningful discount – the shares were sold at just 4.475p/share, well below the 5.625p they were quoted at earlier today), comfort can be drawn from the fact that most of the Rothschild holding has been snapped up by management and directors at SPDI, which in theory should mean a greater alignment of interests. SPDI will release an updated (end-2022) NAV as part of its FY results due next month – the latest disclosed NAV was 13p at end-June 2022, with the stock currently trading at less than half of this level.