Stocks Update 15/3/2024

KMR – Refinancing and senior management change

RHM – Explosive growth

STVG – Netflix commission

 

RHM – Explosive growth

Rheinmetall released its FY 2023 results on Thursday. As expected, these showed a strong performance, with sales +12% at CER to €7.2bn and the operating result improved 19% to a record high of €918m. The operating margin expanded by 80bps to 12.8%. Most significantly, the RHM order book surged 44% to €38.3bn (end-2022: €26.6bn), providing strong long-term revenue and earnings visibility from its roster of blue chip Sovereign customers. The order book is likely to have grown further since the start of the year, in my view, given the steady stream of announcements around contract wins from the Group (including two for a combined €300m+ this week). The dividend has been raised from €4.30 in respect of 2022 to €5.70 (a 39% payout). Rheinmetall guides to another strong year in 2024, with expected sales of c.€10bn and an operating margin of 14-15%. I’ve previously noted the structural growth drivers for the business arising from Western investment in security, and it is unsurprising to see the RHM CEO say that “a new decade of security policy has begun”, adding that “we are investing massively, building new plants and significantly increasing our personnel”. Bloomberg consensus has RHM on 17.0x 2025 earnings and yielding 2.1%, this seems undemanding to me for a high quality growth stock. 

 

STVG – Netflix commission

Earlier today STV announced that its Studios business has been commissioned by Netflix to produce a new three-part drama series, The Witness, in what is its first order win from the streaming giant. This follows recent similar wins from BBC and Sky, while the Group launched another drama on AppleTV in January. My sense is that success breeds success in the Studios game, with STV’s growing roster of commissions likely to lead to further orders. STVG trades on just 6.5x consensus 2025 earnings and yields 5.6%, meaning that it is priced like an income stock, whereas its fast growing Studios and Digital units, powered by the cash cow legacy (and, within Scotland, commercially dominant) linear broadcast business, merit a growth stock multiple, in my view.

 

KMR – Refinancing and senior management change

Kenmare Resources announced earlier today that Michael Carvill, who has been MD since he founded the Group in 1987, is to step down after the Group’s interim results are released in August. He will continue to be available to the company in a consultancy capacity “until at least the end of 2024”. Under his stewardship, KMR has evolved into one of the world’s largest producers of titanium minerals, producing 7% of the global supply of titanium feedstocks from a single resource with a 100 year remaining reserve life. The Group has commenced a process to find his successor. Elsewhere, on Wednesday KMR said it had completed a debt refinancing, with a new $200m RCF put in place. This provides ample financial support for the coming period of investment. Kenmare is extremely cheap, trading on 4.8x consensus earnings and yielding 8.5%.

Stocks Update 8/3/2024

AV/ – FY results; Bolt-on acquisition

GRP – FY results; Compelling opportunity

GSK – Pipeline progress

HBR – FY results; Solid

IR5B – FY results; Solid

OGN – H1 results; already in the price

RHM – Contract win

STVG – Solid FY results; Strong strategic progress

 

HBR – FY results; Solid

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

 

AV/ – FY results; Bolt-on acquisition 

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

 

IR5B – FY results; Solid

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

 

GRP – FY results; Compelling outlook

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

 

STVG – Solid FY results; Strong strategic progress

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

 

OGN – H1 results; already in the price

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

 

RHM – Contract win

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

 

GSK – Pipeline progress

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

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 23/2/2024

BHP – Solid H1 results

BOCH – Very strong FY results

BT/A – Sells BT Tower 

CLIG – Solid H1 results

GSK – Pipeline progress 

LLOY – Solid FY results

RHM – Deepens Ukraine partnership; Austria contract

SPDI – Arcona NAV update

STM – Trading and takeover update

STVG – Contract wins

WDS – Scarborough farm-out

 

BOCH – Very strong FY results

Bank of Cyprus released a terrific set of FY 2023 results on Monday. The Group delivered an exceptional 24.8% ROTE last year, helped by its leverage to the rate environment (its net loans to deposits ratio is just 51%). NII of €792m was +114% y/y, while other income of €300m grew at a more pedestrian 3% y/y. Total OpEx rose just 5%, giving a Cost/Income Ratio of only 31%. Net income jumped to €487m from €57m in 2022, with EPS of 109c. On asset quality, despite a 62bps cost of risk, BOCH’s NPE ratio improved by 40bps to 3.6%, while NPE coverage is a very reassuring 73%. Given the strong profitability, it is no surprise that TNAV jumped 24% y/y to 493c last year, while organic capital generation of 482bps helped the Group to finish the year with Regulatory CET1 and Total Capital of 16.5% and 21.5% respectively. BOCH’s minimum capital requirements on 1 January 2024 were 10.91%+P2G (the latter is not disclosed) for Regulatory CET1 and 15.61% for total capital – both of these will rise by c.50bps due to a higher countercyclical capital buffer on 2 June, but it is clear that BOCH has very large headroom versus minimum capital requirements. On the outlook, BOCH guides to >17% ROTE for 2024 and >16% for 2025, based on a 15% CET1 ratio. The Group expects to deliver NII of >€670m (it previously guided >€625m) in 2024, and to pare NPEs to 3% this year and sub-3% in 2025. The Group expects to build prudently and progressively towards a 30-50% dividend payout ratio (it is engaged with regulators on the quantum of 2023 distribution). Mindful of its leverage to rates, BOCH is taking steps to reduce this through investment in fixed rate bonds, use of reverse repos, offering fixed rate loans and by expanding its structural hedge. All in all, a super set of numbers for 2023 albeit this is likely to be the peak in the cycle if the Group’s rate expectations play out. Nonetheless, even with a moderation in earnings, the Group is still very inexpensively valued and management has a “high quality problem” in terms of what to do with its glut of capital – the Group expects the CET1 ratio to climb to c.19% by end-2025 (unsurprising, given the 30-50% payout ratio). Subject to regulatory approval, buybacks are an obvious use of surplus capital at the current valuation, in my view, while the Group may also wish to further consolidate Cyprus’ highly fragmented banking market. BOCH trades on just 4.8x 2025 consensus earnings and yields 9.2%.

 

LLOY – Solid FY results

Lloyds Banking Group released solid FY results on Thursday. The Group continues to execute against its strategic objectives and expect to meet short- (2024 c.£0.7bn of incremental income and £1.2bn of gross cost savings) and medium-term targets (c.£1.5bn of incremental income). For FY 2023, the Group delivered a statutory net income of £5.5bn, with NII of £17.9bn +3% (+5% underlying), and a strong RoTE of 15.8%. Underlying other income was +10% y/y to £5.1bn, but operating lease depreciation jumped to £956m from £373m in the prior year, reflecting Q4 declines in used car values. Costs were +5% to £9.1bn, in-line with guidance and a creditable performance given the inflationary backdrop. The Group incurred remediation costs of £675m, +3x y/y, with two-thirds of this relating to a provision for the recently announced FCA review into historical motor finance commission arrangements. Impairments were only £308m net, equating to a 7bps CoR, well below the normalised CoR, helped by the well-flagged significant write-back in Q4. Bringing it all together, the Group delivered strong pro-forma CET1 capital generation of 173bps, bringing the pro-forma (post distributions) CET1 ratio to 13.7%, comfortably ahead of the revised ongoing target of 13.0% (was 13.5%) which LLOY “expects to pay down to…by the end of 2026”. TNAV finished the year at 50.8p, +9% y/y. On distributions, LLOY will pay a total ordinary dividend for 2023 of 2.76p, +15% y/y, and it will augment this with a £2bn share buyback programme. For 2024, the Group guides to c.175bps of capital generation, rising to >200bps by 2026. Marrying that to the guidance on the closing 2026 CET1 ratio, this implies strong distributions over the period. One side (and not unrelated) point is that the pensions triennial valuation completed in the period, leading management to pay £250m to clear the remaining deficit in December, with no further contributions in this triennial period. Since LLOY launched a series of buybacks in 2018, the share count has reduced by 11% from 72bn to 64bn. Given the discount at which the shares trade to TNAV, further buybacks is a good use of surplus capital. LLOY is very cheap, trading on 5.9x consensus 2025 earnings and yielding 7.7%.

 

BHP – Solid H1 results 

BHP released solid interim results after the market close on Monday (European time). Expectations were muted coming into the release as a result of the well-documented challenges in nickel, rising Samarco costs and uncertain commodity demand and pricing. In the event, BHP turned in an underlying attributable profit of $6.6bn, flat y/y, while signalling that “all assets are on track to meet their FY24 production and unit cost guidance”. Reported profits were -86%, reflecting the previously discussed nickel impairment and increased provision relating to the Samarco dam failure. BHP continues to invest in its portfolio of future facing commodities – capex was +57% to $4.7bn. The massive Jansen Stage 1 potash development in Canada (total planned capex $5.7bn) is 38% complete. Net debt was $12.6bn at end-December 2023, +$1.5bn h/h, reflecting $4bn of dividends and the aforementioned capex investment. While this is within the target range of $5-15bn, it was nonetheless unsurprising to see that the dividend was reduced to US72c/share, -20% y/y but a still respectable 56% payout ratio. Overall, a solid performance. Whatever about short term performance, BHP is fundamentally a play on future-facing commodities (copper, iron ore, potash) which leave it very well positioned to deliver attractive long-term returns. BHP trades on an undemanding 11.2x consensus FY 2025 earnings and yields 5.1%.

 

CLIG – Solid H1 results

City of London Investment Group released a solid set of H1 (end-December) results earlier today. The key item where CLIG is concerned is FUM and this was solid at $9.6bn at end-December, up slightly from $9.4bn at the start of the financial year on 1 July and also ahead of the $9.2bn end-December 2022 figure. For good order, FUM was marginally lower at end-January 2024, at $9.5bn. Given the quasi-mechanical relationship between net fee income and FUM, it is unsurprising that NFI was $33m in H1, up slightly from $32m in H1 2023. Profit before tax was $11.1m in H1, up marginally from $11.0m in H1 2023. An unchanged interim dividend of 11p/share has been declared. CLIG has ample capacity to add assets and in this regard it is encouraging to see management say that “marketing and sales activity picked up significantly in January 2024…the Group is focused on new mandated in a number of CLIG’s asset classes with very good long-term performance as [closed-end fund] discounts are at compelling levels”. All in all a solid release, but the pendulum will need to swing more towards active asset managers to effect a meaningful re-rating, in my view. The shares are inexpensive, trading on 9.9x 2025 earnings and yielding an attractive 8.6%.

 

STM – Trading and takeover update

STM Group issued an update on 2023 trading and the takeover of the company earlier today. On trading, STM said that 2023 revenue was £28.0m, ahead of market expectations, driven by interest income tailwinds. This benefit has, however, been offset by a further £0.7m of exceptional (non-cash) costs relating to the ongoing takeover of the Group, leaving earnings guidance for 2023 in-line with consensus. On the takeover, this continues to progress, with the expected timetable tracking to the schedule in November’s Scheme Document, with a long stop date of 28 May 2024. Given the multijurisdictional nature of the Group and associated multiple approvals, a lengthy takeover was always likely. On closing I will achieve a c.2x return on investment from STM, which is a very satisfactory outcome. 

 

BT/A – Sells BT Tower 

BT announced on Wednesday that it has agreed to sell the BT Tower in London for £275m to MCR Hotels. BT no longer needs the asset as a result of the network upgrades of recent years, including the migration of services into the cloud. BT has owned the building since 1984 so presumably there will be a CGT consideration in relation to the proceeds, which will be received “over multiple years, as BT Group equipment is progressively removed from the building, with final payment on completion of the purchase”. More fundamentally, this disposal is a reminder of the imminent step change in BT’s cost base, which I suspect is currently overlooked by the market (due to the low rating) arising from strategic initiatives – an upgraded network with lower run costs; a structurally lower headcount; and a planned reduction in the number of offices operated by BT from “more than 300 to around 30”. In addition to the obvious cost implications from a much reduced property estate, there is an associated capital efficiency benefit set to flow through to the Group as disposals of owned properties complete. The net book value of BT’s land and buildings was only £449m at end-March 2023, and I suspect the risks to this lie to the upside. BT is very cheap in my view, trading on just 5.7x 2025 earnings and yielding 6.9%.

 

WDS – Scarborough farm-out

Earlier today Woodside Energy announced that it has agreed to sell a 15.1% stake in the Scarborough LNG development, located 375km off the coast of Western Australia, to Japan’s JERA (owned by Tokyo Electric and Chubu Electric). The transaction involves three core elements – equity in the JV, LNG offtake and collaboration in new energy and lower carbon services. The consideration is US$1.4bn, with completion expected in H2 2024. WDS will supply six LNG cargoes a year for the 10 years from 2026 to JERA. Woodside previously agreed a similar deal with LNG Japan, which owns 10% of Scarborough. This reflects the strategic lens through which Japan views Australia as a supplier. Post completion, WDS will own 74.9% of Scarborough and remain as operator. Further farm-outs cannot be ruled out to help finance the delivery of WDS’ attractive development portfolio. WDS trades on 16.9x consensus 2025 earnings and yields 4.7%.

 

GSK – Pipeline progress 

GSK announced on Wednesday that LATITUDE Phase III interim trial data indicate that its majority owned ViiV Healthcare’s injectable Cabenuva treatment has superior efficacy compared to daily oral therapy alternatives. Encouragingly, the Data Safety Monitoring Board has recommended that the study be modified to stop randomisation and to give participants on the alternative therapy the option to transition to Cabenuva. While there is still a road to travel with this treatment, the headlines around it are very encouraging for GSK. The Group has 71 vaccines and medicines across Phase I-III/registration, a pipeline that I don’t believe is reflected in GSK’s cheap valuation of 9.6x 2025 PE and 3.9% dividend yield.

 

RHM – Deepens Ukraine partnership; Austria contract

Rheinmetall announced on Saturday that it plans to open a new plant in Ukraine with a local JV partner. The agreement was signed at the Munich Security Conference. The facility is intended to produce “a six digit number” of 155mm artillery rounds per annum, plus ancillary products. RHM will own 51% of the JV. This follows a recent announcement of a similar investment in a new production line at RHM’s Unterluess plant in Germany, which is set to open in 2025. The lead time on that (12 months from announcement to commission) presumably suggests a similar timeline for this Ukrainian initiative. RHM is also involved in initiatives to repair vehicles for Ukraine and is already a key supplier from facilities in partner countries for a range of its products. Elsewhere, Rheinmetall announced earlier today that Austria has ordered 36 of its Skyranger 30 system, to be deployed on the Pandur 6×6 wheeled vehicle, providing a highly mobile SHORAD capability. The systems will be delivered in 2026 in a contract that RHM says is worth “in the mid-three-digit million euro range”. Given recent developments around the use of drones, it is not hard to imagine other orders flooding into Rheinmetall for this system – at a minimum, RHM expects to sell this system to Germany, Denmark and Hungary too. RHM trades on 16.5x consensus 2025 earnings and yields 2.2%, undemanding given the structural growth in Western security investment.

 

STVG – Contract wins

STV announced contract wins for its Studios division on Thursday. Two Cities Television, which STV recently agreed to increase its shareholding in from 25% to 51%, has been commissioned to produce a new drama, Amadeus, for Sky. BBC has also commissioned Two Cities to deliver a further two series of Northern Ireland police drama Blue Lights. When STVG announced in January that it was increasing its stake in Two Cities, it flagged that the unit had secured revenues of £55m over the next three years – these commissions were included within that guidance. STVG’s Studios strategy is to use the linear broadcast unit as a cash cow to enable it to place bets on multiple creatives by taking stakes in production houses, provide them with back office/shared services to free the creatives up to make content, and gradually buy out the other shareholders over time. I think that’s a compelling strategy and am very positive on STVG’s long-term prospects. As an aside, with streamers under pressure to maximise cash flows, I think that will funnel more revenue to reliable larger production houses with a proven content roster, which will benefit consolidators like STV. The next scheduled newsflow from STVG is FY results on 5 March. STV is cheap, trading on 6.7x consensus 2025 earnings and yielding 5.5%.

 

SPDI – Arcona NAV update

Secure Property Development & Investment’s associate, Arcona Property Fund, released an update on its portfolio valuation on Tuesday. The Group had a good finish to 2023, which helped the value of its real estate portfolio close the year at €79m, +€1.55m y/y. On a less cheerful note, however, the adoption of the ‘Monetisation Process and Incentive Plan’, which will see an accelerated paydown of its remaining real estate assets, Arcona is recognising the full nominal value (previously 50%) of all DTLs in the calculation of its NAV. Bringing these together, this brings the provisional (audited results are due in April) end-2023 NAV to €10.97 per share, down from €11.55 after the payment of the dividend in October. Nonetheless, with this NAV still more than 2x the Arcona share price (€4.98), there is decent value to be had here, although the glacial pace at which SPDI is monetising its remaining assets makes me suspect that owning Arcona outright may well prove to be the more attractive option than holding it indirectly through SPDI. 

Stocks Update 16/2/2024

ABDN – Exits JV 

BHP – Exceptional items update

BT/A – Industry consolidation report 

GSK – Pipeline progress

IDS/AMZN – UK parcel market shake-up

KYGA – FY 2023 results

KMR – Shareholder calls for strategic review

RHM – Investment

WDS – Reserves and financial update

 

KYGA – FY 2023 results

Kerry Group released its 2023 results on Thursday. The strapline on these was “solid business performance in a challenging environment”, which seems fair.  The Group delivered revenue of €8.0bn (-8.6%), with volumes -0.9%, pricing -0.7%, net disposals contributing -4.1% and FX -2.9%, while EBITDA of €1,165m (-4.2% y/y) was negatively impacted by the impact of disposals and FX. The EBITDA margin climbed 60bps to 14.5%. Kerry had free cash flow of €701m, an impressive 92% conversion and above the prior year’s €640m notwithstanding lower EBITDA. Net debt reduced from €2.2bn to €1.6bn (1.5x EBITDA), reflecting cash flow and net disposal proceeds. A final dividend of 80.8c has been declared, giving a total 2023 dividend of 115.4c, +10.1%. The Group said it will announce a further buyback once the current €300m programme completes (a third of it was executed in FY 2023 after the programme commenced on 1 November, so an update is likely during H1 2024). Kerry guides to constant FX EPS growth of 5-8% for the current year, a touch lower than what the model is usually capable of, but the strong balance sheet is likely to see that revised higher through M&A/buybacks, in my view. Bloomberg has KYGA trading on 14.9x consensus 2025 earnings, cheap for a business of this quality. 

 

KMR – Shareholder calls for strategic review

Thursday’s Irish Times reported that Kenmare Resources’ shareholder JO Hambro has called for a strategic review, saying it favours a sale of the company. JOH owns just over 6% of the company and has set out its views in a letter to the Board. Kenmare produces c.7% of global titanium feedstocks from a single asset in Mozambique with a 100 year mine life, making it an attractive target for any large resources company seeking exposure to that commodity. While I welcome any review that may lead to the unlocking of shareholder value, my hunch is that the Group would likely attract a better price following the completion of the $0.3bn WCP A relocation in 2025/26, the completion of which would significantly reduce the risk profile of the company. I last valued the company at 874p/share after the 2022 results, although commodity pricing developments since then likely means that’s too ambitious. Nonetheless, based on the current very cheap multiple I think the shares are worth at least 2x where they are currently trading at (319p this lunchtime), which puts Kenmare on just 6.7x consensus 2025 earnings (and a dividend yield of 7.8%).

 

WDS – Reserves and financial update

Woodside Energy released a reserves statement and financial update on Thursday. In a welcome development, the Group replaced 158% of 2023 production by 2P reserves last year, reflecting sanctioned projects in the Gulf of Mexico and improved North West Shelf and Pluto performance, partly offset by reserves reductions in Shenzi. The latter is going to contribute $1.2bn of WDS’ guided $1.5bn non-cash post-tax impairment charge for 2023, which Woodside says will not impact the dividend calculation. Woodside’s proved reserves life is 12.2 years given 2023 production levels, putting the Group in the top quartile of global peers. WDS has 1P reserves of 2.5kMMboe; 2P reserves of 3.8kMMboe; and 2C resources of 5.9kMMboe. The impairment charge, while unwelcome, is non-cash, with the reserves upgrade being more significant, in my view. WDS had $35.9bn of shareholder equity at end-June 2023, so the impairment isn’t overly material given that context. I am positive on Woodside which has an attractive asset base and is leveraged to favourable structural changes in the energy sector – this week Shell said that it estimates that global demand for LNG will grow by more than 50% by 2040 as the world shifts to cleaner forms of energy, and Woodside provides around 5% of global LNG supply. Woodside trades on 17.1x 2025 consensus earnings, not unreasonable given the structural growth drivers for the business.

 

BHP – Exceptional items update

BHP provided an update on its FY 2024 exceptional items outlook on Thursday. The Group is to impair its Western Australia Nickel business and increase its provision in relation to the Samarco dam failure. On the nickel impairment, which has been driven by dumping in the market, BHP will take a $2.5bn post-tax impairment charge against the carrying value of Western Australia Nickel, taking its net operating asset value down to -$0.3bn (including closure and rehabilitation provisions of $0.9bn). BHP is considering potentially placing Nickel West into a period of care and maintenance, while the 21% complete West Musgrave project, which came to BHP as part of last calendar year’s OZ Minerals acquisition, is having its phasing and capex profile reviewed. BHP is doubling its Samarco provision from $3.3bn to $6.5bn. Taken together, these developments (notwithstanding the non-cash nature of the Nickel impairment, it is plainly driven by market pricing dynamics) point to significant downside risk for BHP’s near-term dividend profile. BHP had shareholders’ funds of $44bn at end-June 2023, so it has ample capacity to absorb these setbacks. BHP trades on 11.5x 2025 earnings and yields 5.0%, which is cheap to my mind given its exposure to attractive ‘future facing’ commodities.

 

RHM – Investment 

Rheinmetall announced on Monday that it is building a new plant at its sprawling Unterluess facility in Northern Germany, where the Group has had a presence for 125 years. On completion and full commissioning, the new facility will have annual production capacity for 200k artillery rounds (and ancillary products), material in the context of European ambitions to grow EU production capacity from 1.4m this year to 2.0m in 2025. The €300m investment will result in the creation of 500 new jobs. RHM management said that the facility will mean the Bundeswehr’s own needs can be met through domestic capacity and “especially in a crisis – to assure unrestricted transfers to partner nations” (presumably the latter is a bit of shade being thrown at the Swiss). Production is stated to start in 12 months, with scale-up to 100% capacity by year three. This investment is a no-brainer, given the need to replenish the drawdown of Western inventories to support Ukraine (RHM starkly says: “The Bundeswehr’s depots are empty; replenishing its stocks will cost an estimated €40bn”) and the demonstrated shortfalls in Western production capacity to go toe-to-toe with Russia in this domain. By 2025 RHM will have the capacity to produce 700k rounds annually at plants in Germany, Spain, South Africa, Australia and Hungary. For context, Russia is said to be scaling up to output of 2m rounds per annum, so RHM is clearly a globally significant player in this critical product line. RHM has had a good run this year, +35% ytd, but trading on 15.8x consensus 2025 earnings it doesn’t seem to be fully up with events, in my view.

 

GSK – Pipeline progress 

GSK announced on Monday that the US FDA has awarded bepirovirsen Fast Track designation for the treatment of patients with chronic hepatitis B (CHB). This designation was requested based on its potential for addressing an unmet medical need, supported by Phase IIb trial data. A confirmatory Phase III trial is ongoing. CHB affects nearly 300m people worldwide (although only c.10% of these people have a diagnosis and only 5% receive treatment), with current treatment options offering a “less than 2-8%” functional cure rate (i.e. the virus is undetectable and can be controlled by the immune system without medication). GSK’s Bepirovirsen is “the only single agent in Phase III development that has shown the potential to achieve clinically meaningful functional cure response when combined [with other treatments]”. Clearly, there’s still a road to travel, but this looks promising for GSK. GSK trades on only 9.6x consensus 2025 earnings and yields 3.9%, a multiple that doesn’t give credit for its attractive pipeline, in my view.

 

ABDN – Exits JV

Thursday’s Times reported that VMUK has bought ABDN’s 50% stake in their joint investment business. The duo had only launched the digital platform, including a mobile app, to allow VMUK customers choose a range of investments in April of last year. The consideration for ABDN’s stake is only £20m, tiny in a Group context (Abrdn’s market cap is £3bn). The platform is said to have had £3.7bn of customer assets from 150k customers at end-2023, implying an average pot of £25k. I view this move as a further step in the simplification strategy at ABDN, which has been selling peripheral assets and bulking up in core customer-facing propositions. ABDN trades on an inexpensive 12.2x 2025 earnings multiple and yields 8.9%, albeit consensus has the dividend uncovered until 2026 at the earliest. 

 

IDS/AMZN – UK parcel market shake-up

The Sunday Times reported that the PE owner (Advent International) of UK delivery group Evri are readying the business for a £2bn sale. The business is said to have net debt of £1.3bn and produces underlying profits of £0.2bn per annum off sales of £1.5bn. Wednesday’s FT reported that the Barclay family has agreed to sell parcel delivery group Yodel to a consortium led by the owners of Tuffnells, a specialist in “moving loads of larger and irregular sizes” which emerged from administration last year. How a small parcel specialist will marry up with Tuffnells remains to be seen. For context, the latest Pitney Bowes Parcel Shipping Index gives the size of the UK market at 5.1bn parcels, of which IDS’ Royal Mail delivered 25% in 2022 (this share is likely to have grown since then due to the resolution of labour relations issues at Royal Mail) with the rest of the market being comprised of Amazon 17%, Evri 14%, DHL (including UK Mail) 12%, DPD/Yodel/UPS 6% apiece, FedEx 3% and Others 11%. I suspect that the uncertainties around Evri and Yodel might create openings for Royal Mail and Amazon to pick up some extra contracts. IDS trades on only 10.1x 2025 earnings, while AMZN is on a similarly undemanding 11.8x 2025 EV/EBITDA.

 

BT/A – Industry consolidation report 

Press reports (The Daily Telegraph) this week suggest that VMO2 and TalkTalk are in merger talks. If a tie-up were to proceed, this would likely result in lost wholesale revenues for BT/A, as TalkTalk’s c.2.5m residential customers would presumably migrate to VMO2’s wholesale network from BT’s Openreach. That said, the practicalities of this are tricky – regulatory/competition clearance; VMO2’s current lack of a national wholesale network means that Openreach would likely still be needed for some customers; and technology may not be homogenous across the two. So the impact for BT/A would likely be phased in over a period of time. The hypothetical impact is also modest in a Group context – say, £15/month*2.5m = £450m which compares to annual revenues of >£20bn – and perhaps lower if some TalkTalk customers elect to switch to BT/A (not least due to the latter’s FTTP roll-out). BT is very cheap to my mind, trading on only 5.7x consensus 2025 earnings and yielding 6.9%.

Stocks Update 9/2/2024

DCC – Q3 trading update

GSK – Pipeline progress

IDS – Yodel developments

PCA – Disposals and debt update

RHM – Contracts; Peer lists in Frankfurt

ULVR – FY results

WDS – Santos talks end

 

ULVR – FY results

Unilever released its FY 2023 results on Thursday. The key highlight within the results was the return to volume growth, +0.2% for the year but importantly an exit rate of +1.8% y/y in Q4. Underlying sales growth was 7.0% (price 6.8%, volume 0.2%), with all divisions seeing growth of 2.3-8.9%. The underlying operating margin expanded by 60bps y/y to 16.7% (gross margin was +200bps y/y), while free cash flow of €7.1bn was +€1.9bn y/y. An unchanged quarterly dividend of 42.68c was declared, payable next month. While underlying EPS was only +1.4%, this was a creditable performance given a 9.6% FX tailwind, so +11% on a CER basis. The Group has announced a new €1.5bn share buyback, to commence in Q2, which follows the completion of the €3bn buyback programme. On distributions, ULVR returned €5.9bn in 2023 comprising €4.4bn dividends and €1.5bn of buybacks. I note that Visible Alpha consensus was for €2.0bn of buybacks to be announced in these results, rather than the €1.5bn declared, but a possible reason for this undershoot is that ULVR sees net finance costs climbing from 2.1% of average net debt in 2023 to between 2.5% and 3% this year. ULVR’s net debt of €23.7bn was in-line with the prior year, reflecting the distributions detailed above. Drilling down into performance, the focus on the 30 ‘Power Brands’ is paying off, as the brands, which account for 75% of ULVR turnover, saw USG of 8.6%, ahead of the Group average, supported by increased brand and marketing investment (+130bps to 14.3%), focused on the Power Brands. ULVR has been optimising its portfolio, buying K18 and Yasso for a combined €675m and agreeing the disposals of Elida (which will close in 2024), Dollar Shave Club and Suave North America, receiving €578m for the latter two. In terms of the outlook, ULVR sees USG in 2024 within its multi-year range of 3-5%, with more balance between volume and price than 2023, and a “modest improvement” in operating margins. I suspect this guidance is conservative, given that household real disposable incomes in most of its markets should be growing this year as inflation has cooled. Overall, a solid set of results and I would be optimistic of upgrades as we move through 2024. ULVR trades on an undemanding 15.8x forward earnings and yields 4.1%.

 

DCC – Q3 trading update

DCC released its Q3 (end-December) IMS on Wednesday. In a customarily qualitative update, the Group reiterated its operating profit guidance for the year. Operating profit in Q3 was “modestly ahead of the prior year”, led by a stronger Energy performance that offset falling profits in Healthcare and Technology. Management continues to expect that FY 2024 “will be another year of operating profit growth in line with expectations, and continued development activity”. On the latter, DCC has invested £355m on acquisitions year to date, of which c.£45m was invested in Q3 on bolt-on acquisitions by the Energy business in the UK (previously covered on this blog), Austria and Ireland. The acquisition of Germany’s Progas (LPG distributor) is expected to complete by end-FY 2024. All in all, a solid update from a solid company. Bloomberg has DCC trading on just 11.6x 2025 earnings and yielding 3.6%. The stock is cheap, in my view.

 

PCA – Disposals and debt update 

Palace Capital released an update on progress towards the monetisation of its real assets on Wednesday. The Group has sold three investment properties for £15.2m, 2.3% below the March 2023 valuation. “Several properties are currently under offer”, which assuming they complete “will provide the company with various options for returning capital to shareholders, including a tender offer”. PCA has been repurchasing its stock on and off at a discount to NAV, augmenting NAV per share for patient investors. At Hudson Quarter, another two apartments totalling £1.4m are under offer, leaving 16 remaining. It is a pity that the previous management team didn’t sell all of the apartment element of that scheme to an institutional buyer to effect a faster recycling of capital. On the liability side of the balance sheet, disposal proceeds facilitated the full repayment of the £5.6m floating rate loan from Barclays, which was carrying a 7.1% interest rate. The only remaining debt facility is a £8.3m loan from Scottish Widows, which has a 2.9% fixed rate until July 2026. The proforma LTV as at 6 February was just 2.5%. While we await the valuers to come in with the end-March 2024 portfolio valuation, it seems to me that Palace Capital likely trades on a c.20% discount to NTA, which offers an attractive risk-reward trade off in my view ahead of a likely full portfolio realisation over the next 1-2 years.

 

GSK – Pipeline progress

An illustration of the breadth of GSK’s pipeline (71 vaccines and medicines at end-2023 across Phase I – Phase III/registration) is the publication of three stock exchange releases on Tuesday morning relating to the pipeline. The Group’s blockbuster RSV vaccine Arexvy has been accepted under Priority Review in the US for adults aged 50-59 at increased risk. Arexvy is currently approved for use by over-60s in the US, so a broader constituency of potential patients would clearly be positive for GSK. Elsewhere, the DREAMM-7 phase III trial shows Blenrep combination nearly tripled median progression-free survival versus standard of care combination in patients with relapsed/refractory multiple myeloma. The clinically meaningful trend in overall survival should help drive future demand for Blenrep – there are c.176k new cases of multiple myeloma diagnosed globally each year. In other development news, China’s National Medical Products Administration has accepted GSK’s regulatory application for shingles vaccine Shingrix for use by over-18s. It is currently approved by the Chinese authorities for use by the over-50s, so as with Arexvy in the US, any step to broaden the addressable market would have obvious commercial benefits for GSK. There are c.6m annual cases of shingles in China each year, with shingles estimated to affect 1 in 3 people globally in their lifetime. Bloomberg consensus has GSK trading on only 9.6x 2025 earnings and yielding 3.9%, a valuation that doesn’t properly reflect the strength of the Group’s pipeline, to my mind.

 

WDS – Santos talks end

Woodside Energy said on Wednesday that merger talks with local peer Santos have concluded without agreement. Woodside said it “will only pursue a transaction that is value accretive for its shareholders” hinting that it will consider other deals in the global LNG sector that it believes “provides significant potential for value creation” (a view I share, although I wouldn’t downplay WDS’ very attractive development pipeline). Woodside shares closed up 0.5% in Australia post the news, while Santos fell 6%, giving a clue about the market’s assessment on who the winner and loser from the fizzling out of merger talks are. Woodside trades on 17.8x 2025 earnings, not the cheapest, but the long-term drivers of demand are very much intact, in my view. A 4.4% forward dividend is another pull factor.

 

RHM – Contracts; Peer lists in Frankfurt 

Rheinmetall announced on Tuesday that it had secured a contract worth £282m from the UK for the supply of 500 palletised load system trucks to the MoD. Delivery is to be completed in March of this year, just seven months from initial discussions. On Wednesday, the American Rheinmetall Vehicles and GM JV announced that they had supplied three prototype trucks to the US Common Tactical Truck programme. The US aims to ultimately replace its existing fleet, involving the production of 40,000 trucks valued at $14bn, with RHM clearly looking for a slice of that business. Elsewhere, Renk, a maker of gear boxes, slide bearings and transmissions for tanks, announced on Monday that it would list its shares in Frankfurt. The Group previously shelved an IPO back in October, but its owner, PE fund Triton Partners, said it would list 30% of its shares this week. The Group’s shares listed at a price of €15 on Wednesday and have since climbed to €20, giving a market cap of €2.0bn. KNDS, a JV between KMW and Nexter, and Wellington are corner investors, taking stakes of €100m and €50m respectively in the IPO, with Triton remaining the largest shareholder. In 9M 2023 Renk had revenues of €653m and EBITDA of €104m. The listing of this company may offer Rheinmetall, which was reported to have bid for Renk in 2019, a route to acquiring the business – RHM closed the purchase of Spain’s Expal in 2023 and has just announced the purchase of a 72.5% stake in Romania’s Automecanica Mediaș – as Rheinmetall plays its part in effecting the consolidation of a fragmented European market to better position itself for the step change in demand arising from Russia’s invasion of Ukraine. RHM trades on 13.7x 2025 earnings and yields 2.6%, a rating that I don’t believe adequately reflects its high potential in a changed Western security environment. 

 

IDS – Yodel developments

Press reports (The Times) on Thursday say that UK courier Yodel, which handled 191m parcels in 2023, “is getting ready to call in administrators after so far failing to find a buyer”. Teneo is said to be on standby if it goes into administration. Yodel competes with the likes of IDS’ Royal Mail, Evri and Amazon Logistics. The latest annual published accounts show revenues of £676m and PTP of £18m in 2021. Clearly an evolving situation, but one that may allow Royal Mail (which handled 841m domestic UK parcels in the 9 months to end-December 2023, +2% y/y) to pick up some extra market share, particularly given the competitive advantage provided by the increasing use of automation in the business. IDS trades on an undemanding 10.3x consensus 2025 earnings and yields 3.7%, per Bloomberg data.

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%.

Stocks Update 26/1/2024

ABDN – Transformation/Trading/Ratings 

BHP – Brazil bill

BOCH – Checks out of Russia 

CLIG – Trading update

DCC – Bolt-on acquisition

HLN – Divestment 

IDS – Positive Ofcom noises

RHM – German contract

RYA – Boeing risks

WDS – Trading update

ABDN – Transformation/Trading/Ratings 

Abrdn announced details of a new transformation programme and a trading update on Wednesday. Both had been extensively leaked to the media in advance, but the key points are: (i) ABDN is looking to remove £150m of annual costs by end-2025, addressing its structurally elevated cost/income ratio; and (ii) The Group saw continued net outflows in H2 2023 which, while disappointing, are also unsurprising given the well documented challenges facing active asset managers in the present climate. ABDN noted that it exceeded its previous £75m cost reduction target for 2023, which should give comfort around the execution of this new programme, most of which will be implemented in 2024, creating c.£60m of in-year benefit. Encouragingly, the cost of the transformation programme is guided to c.£150m, implying a strong payback profile. ABDN saw net outflows of £12.4bn in H2 (£6.7bn in Q3, £5.7bn in Q4), an acceleration on the £5.2bn that went out the door in H1. Corporate actions also pared AUMA by £6.9bn in H1 (disposal of the discretionary fund management (£6.1bn) and US PE (£4.1bn) businesses partly offset by the acquisitions of healthcare fund management business Tekla (£2.3bn) and four closed-end funds from Macquarie (£0.7bn). However, the tailwind from the rate environment has led to higher NII, leading the Group to expect “2023 adjusted operating profit to be broadly in-line with consensus, and adjusted capital generation to be above consensus”. All in all, no surprises here, but the Group can’t cut its way to glory – a rerating will likely require a return to growth in FUM (which will reduce lingering questions around things like the sustainability of the dividend). Elsewhere, Moody’s cut its rating on ABDN by one notch from A3 to Baa1 this week, citing: “idiosyncratic weaknesses in its credit profile, exacerbated by industry-wide headwinds”. Plainly, Moody’s is nervous around the potential impact of fund outflows on ABDN’s credit profile, although it should be noted that Baa1 is still three notches above speculative grade. On a more positive note, Moody’s noted that last year’s divestment of stakes in Indian insurance and asset management businesses would reduce the volatility of reported earnings going forward. Before those stakes were sold I had flagged the distortions, not just in terms of statutory earnings but also in terms of conventional valuation metrics (ABDN had a very elevated P/E relative to peers) caused by the investments in the Indian firms and also in the UK’s Phoenix (based on today’s prices, ABDN’s stake in Phoenix is worth £555m or 17% of ABDN’s market cap). So, the ABDN story has been simplified by the strategic consolidation around its core markets. ABDN trades on 13.2x consensus 2025 earnings and yields 8.4%, although consensus has the dividend above the EPS until FY 2026. 

 

CLIG – Trading update

City of London Investment Group released a trading update covering H1 of its financial year (6 months to end-December 2023) on Tuesday. The Group reported closing FUM of $9.6bn, up from $9.4bn at end-June. This was driven by strong performance across its core EM and KIM propositions, which helped to offset Group-wide net customer outflows of $294m. The Group says that “marketing and sales activity has picked up significantly in January as clients and prospects review their investment allocations”. CLIG sees good opportunities in closed-end funds, seeing discounts “at compelling levels” and noting that it has “ample capacity”. The current run rate for operating profit (pre-profit share) is $3.2m per month, down from the $3.4m run-rate reported in October, although the announcement of cost reductions that will deliver annualised savings of $2.5m offsets that (and any further growth in FUM should be a tailwind to income, absent any further attrition in asset management fees). An unchanged interim dividend of 11p/share has been declared, which will be paid in late March. The next scheduled CLIG news flow is H1 results, which will be published on 23 February. CLIG trades on an undemanding 9.5x consensus FY 2025 earnings and yields 9.3%.

 

WDS – Trading update

Woodside released a FY 2023 pre-close trading update on Wednesday. The Group delivered FY production of 187.2MMboe, at the top end of guidance of 183-188. This was delivered at an average realised price of $66.8/boe. Last year saw strong progress on its key development projects (Scarborough (Australia LNG) 55% complete; Sangomar (Senegal oil) 94% complete; Trion (Mexico oil) progressing procurement activities), while FID was taken on a three-well tieback extension to Mad Dog in the Gulf of Mexico. In terms of carbon and new energy initiatives, Woodside Solar Project in Australia has now received all necessary approvals; Angel CCS is going through the FEED stage; and the H2OK project is working out proposed US Federal tax incentives to see how they impact economics. For the FY, WDS had revenue of $14.0bn, -17%  from 2022’s $16.9bn. Full results for 2023 will be released on 27 February. For FY 2024, WDS guides to production of 185-195MMboe, split 70% gas 30% oil. Capex is guided at $5-5.5bn, slightly down on 2023’s $5.7bn, reflecting the stages of the aforementioned development projects. I’m positive on WDS, which offers a favourable asset mix for what I expect to be a non-linear energy super-cycle, with an attractive development portfolio. WDS trades on 17.0x consensus 2025 earnings and yields 4.6%.

 

HLN – Divestment 

Haleon announced on Thursday that it has agreed to sell its ChapStick brand to Yellow Wood Partners for a keen $510m (£400m) comprising cash proceeds of $430m and an $80m “passive” minority interest in the acquiring entity. HLN says it will use the cash proceeds to delever, pushing net debt to sub-3x EBITDA during 2024. ChapStick had £112m of revenue in FY 2023, so this is a good EV/Sales multiple of 3.6x – Haleon trades on a 2023 EV/Sales multiple of 3.4x. The disposal is expected to close in Q2. HLN has form for portfolio management – ChapStick’s sale follows the divestment of Lamisil in 2023 for £235m, while press reports have recently linked HLN to a potential sale of its Nicotinell brand for up to $800m. While HLN talks up its deleveraging plans, I’ve previously noted that it may look to buy back some or all of GSK’s remaining 4.2% stake in the Group this year. Haleon is cheap relative to consumer healthcare peers, trading on 15.3x consensus FY 2025 earnings and yielding 2.4%. Consensus also expects net debt to fall to £7.7bn by end-2024, comfortably below 3x consensus EBITDA of £3.0bn, and to fall by a further £1bn in FY 2025 (bringing it close to 2x EBITDA).

 

DCC – Bolt-on acquisition

On Monday UK firm eEnergy Group plc announced that it has agreed to sell its Energy Management division to Flogas UK, a DCC subsidiary. The division had revenues of £13.6m and adjusted EBITDA of £4.4m in the 12 months to end-June 2023. On completion, DCC will pay an initial £29.1m in cash, with additional contingent consideration (estimated by the vendor at £8-10m) to follow, based on performance for the period to 30 September 2025. eEnergy shareholders will be asked to approve the sale at a general meeting to be held on or about 7 February. DCC says the acquired business will further expand its energy management services capability, “providing a comprehensive range of products and services to partner with our customers on their journey to Net Zero”. DCC has been investing in enhancing its Energy proposition by growing into higher margin segments, so this deal, while small in a Group context, is strategically in-tune with DCC’s Energy ambitions. For a quality business, DCC is cheap, trading on 11.6x consensus FY 2025 earnings and yielding 3.6%.

 

BHP – Brazil bill

The fallout from the 2015 Samarco tailings dam issue continues to rumble on, with the Brazilian Federal Court this week making a ruling on the US$32bn Federal Public Prosecution Office claim. In May 2016 the prosecutor filed a claim for BRL$155bn which at the time was equivalent to US$43bn, but the Brazilian currency has devalued by around a quarter against the dollar since then, against Samarco’s 50-50 owners Vale and BHP. Reports this week say that an interlocutory decision relating to one of the categories of damages sought has been filed, seeking BRL$47.6bn / US$9.7bn, but BHP says it has not yet been served with any decision. BHP is also keeping its options open in relation to an appeal and hasn’t opined on whether it needs to amend its US$3.7bn provision stack against this matter. That BHP’s share price was little changed today suggests the market is keeping an open mind on where this litigation may end up. BHP trades on an undemanding 11.8x consensus FY 2025 earnings and yields 4.9%. 

 

RHM – German contract

Rheinmetall announced on Thursday that, alongside consortium partners, it has been awarded part of the development contract for Germany’s “advanced short- and very short-range air defence system”. The consortium members are RHM, Diehl and Hensoldt. The contract is worth €1.2bn, with Rheinmetall’s share of this at €607m. This has all the hallmarks of RHM’s typical contract wins – government partner, multi-year revenue, opportunities to leverage it to win similar contracts from other friendly Western nations. RHM trades on an inexpensive 13.0x consensus 2025 earnings and yields 2.7%.

 

IDS – Positive Ofcom noises

Wednesday’s FT reported constructive comments from Ofcom on Royal Mail’s lossmaking letter delivery service. IDS has been looking to axe Saturday deliveries, moving the business to a five-day-a-week model, but Ofcom publicly noted that while cutting Saturday deliveries would save £200m annually, moving to a three-day-a-week model would save £650m. Ofcom CEO Melanie Dawes said the postal service “is getting out of date and will become unsustainable if we don’t take action”. That’s all well and good, but I again note that changes will require legislative action and the mood music here is unhelpful, with the Tories clearly worried about leaking further support ahead of the next UK election. PM Sunak’s spokeman claimed that Saturday letter deliveries “provide flexibility and convenience for businesses” while the Postal Affairs Minister, Kevin Hollinrake said that the government views Saturday deliveries as “sacrosanct”. Royal Mail has said before that its letter delivery infrastructure has been designed for volumes of 20bn per annum, but letter volumes are running at 7bn p.a. and falling. Perhaps the best course of action for IDS would be for this decision to be deferred until after the election (expected in the autumn but at any rate no later than January 2025). IDS trades on just 10.8x consensus FY 2025 earnings, with analysts forecasting a dividend yield of 3.5%.

 

RYA – Boeing risks

The US FAA announced on Wednesday that it was halting Boeing 737 Max production expansion pending a resolution of Boeing’s well-documented quality control issues. While the Max 9 ‘door plug’ problem is not something that directly affects RYA, which doesn’t operate that model, the wider constraint on Max production may exacerbate risks to delivery timelines for RYA’s fleet investment plans. At the same time, RYA may be able to offset some of the volume downside if this risk materialises through stronger pricing. Q3 results from RYA on Monday will provide an opportunity for management to update the market on how it sees the outlook for deliveries. RYA is extremely cheap, trading on 8.8x consensus FY 2025 earnings and yielding 2.3%, so the downside risk from Boeing’s production constraints is likely modest.

 

BOCH – Checks out of Russia

The Bank of Russia confirmed on Monday that Bank of Cyprus has closed its two representative offices (in Moscow and St. Petersburg) in that country. Representative offices are not authorised to conduct banking operations, so this is a largely symbolic move, albeit one that arguably should have happened sooner given the optics around Cyprus’ past business dealings with Russia and the very changed geopolitical backdrop since February 2022. Of the 37 foreign credit organisations with accredited representative offices in Russia at the beginning of 2022, nine were shut down during 2022 and a further three in 2023. To be fair to BOCH though, we have seen many companies struggle to close Russian units so the delay may have been due to factors beyond its control. In terms of more tangible ties between BOCH and Russia, the Group’s Q3 2023 results show that, at end-September, BOCH had €607m of deposits from Russian passport holders (3% of the Group total), which was -13% since the start of the year. On the same date, the Group had only €14m of gross loans (essentially zero on a net basis) outstanding to Russian counterparties out of a total Group loan book of €10bn. Once again, that Russian exposure has been shrinking (loans to Russian counterparties were -29% in the first nine months of 2023). All in all, BOCH’s direct exposures to Russian entities are very small in a Group context. BOCH still has representative offices in China and Ukraine. Bank of Cyprus is extremely cheap on conventional metrics, trading on 4.6x consensus 2025 earnings and yielding 10.0%.

Stocks Update 19/1/2024

AMZN – iRobot disconnected?

BHP – Operational review 

BT/A – Pricing changes; Bond thoughts 

GSK/HLN – GSK places more Haleon shares

HBR – Trading update

IDS – Trading update

KMR – Trading update

LLOY – Sainsbury to exit 

MKS – Ocado Retail update

PRSR – Trading update

RHM – German order 

 

BHP – Operational review

BHP released a comprehensive operational review for the half-year ended 31 December on Thursday. As expected, this showed a strong performance across copper, iron ore and energy coal, and a more challenging half in metallurgical coal. The key highlights were 5% q/q production growth at WAIO, and 7% H1 copper production growth. In coal, NSW Energy had its best H1 in five years, but there was weakness in BMA “following significant planned maintenance and low starting inventories”. Nickel performance has been adversely affected by a sharp fall in prices, with management dropping a hint that there may be a non-cash writedown of the carrying value of its exposures here. For the FY, the Group has retained all of its production guidance for all assets, save for BMA, now seen at 23-25Mt (was 28-31Mt), while unit costs are expected to be within previous guidance, save again for BMA due to lower production. BHP says it finished H1 with net debt of between $12.5bn and $13.0bn, the top half of its target range, but this is influenced by the timing of the recent A$10bn OZ acquisition. On the development side, the $5.7bn Stage 1 of the giant Jansen potash mine in Canada is now 38% complete, with first production still targeted for end-CY 2026, while the Group sanctioned the $4.9bn Stage 2 in October. All in all, a mixed performance, which can be an occupational hazard for any individual results period given the Group’s diverse portfolio of commodities, but taking a long-term view, BHP’s skew to future-facing commodities leaves it well positioned through the cycle. The stock is inexpensive too, trading on 11.5x consensus 2025 earnings and yielding 5.0%.

 

HBR – Trading update

Harbour Energy released a trading and operations update on Thursday for 2023 ahead of the release of FY results on 7 March. Headline metrics for 2023 – production (186kboepd, split 50/50 gas/liquids); OpEx ($16/boe); capex ($1.0bn) and free cash ($1.0bn) were all in-line with guidance. The Group made solid progress on its development pipeline, starting production at Tolmount East in Q4; successfully appraising the Leverett discovery where production is slated to start in late 2024; making a significant gas discovery at its 20% owned Layaran-1 well in the Andaman Sea (where a multi-well exploration campaign continues); securing regulatory approval of the Zama FDP and striking the Kan oil discovery in Mexico; and progressing the two CCS projects in the UK. On the corporate development side, the Group has agreed the transformational Wintershall Dea acquisition, which is expected to complete in Q4 2024. Distributions remain a key part of the HBR ‘pull’ and in 2023 it returned $441m through a $200m dividend and share buybacks. The Group finished last year with a super strong balance sheet, with net debt of just $0.2bn (end-2022: $0.8bn) and it expects to briefly be in net cash during the first half of this year (as 2024 UK tax payments are back-ended). In terms of other 2024 guidance (which excludes Wintershall), production is slated at just 150-165kboepd due to “an unusually high level of planned shutdowns”, well down on the 2023 level; OpEx is guided at $18/boe (economies of scale apply here); capex is guided at $1.2bn; and the dividend will be $200m again (but higher on a per-share basis). For 2025, and again excluding Wintershall, the Group expects similar production and OpEx but higher free cash flow (presumably driven by commodity price assumptions). HBR shares came under pressure on the back of this week’s update, but trading on 7.8x consensus 2025 earnings and yielding 7.7% this isn’t a stock that’s remotely priced for perfection (not least given the super-strong balance sheet).

 

IDS – Trading update 

International Distributions Services, the parent company of Royal Mail and GLS, released a Q3 (end-December) trading update on Thursday. The main takeaway is that the Group is on track to meet full year guidance. Performance at the Group had been significantly negatively impacted by labour relations issues (since resolved) at Royal Mail, and the resolution of this resulted in Royal Mail seeing its best Christmas operational performance for four years. A key aspect of the deal with the unions was changes to work practices, and the results reflect the benefits of this, with sick leave -25% y/y in December (only 0.2% of the 54,000 ‘daily walks’ weren’t resourced on any given day by end-December) and increased recruitment of permanent employees on new flexible contracts leading to reduced use of agency staff. Group revenues were +9.8% y/y in Q3, helped by customer win-backs at Royal Mail (parcel volumes were +21% y/y in Q3 at 387m), and +3.8% y/y in the first nine months of the year, although the top-line growth has been offset by increased costs (pay and inflation). IDS expects a H2 adjusted operating profit that will broadly offset H1’s £169m loss. A key swing factor to look for in 2024 is Ofcom’s imminent review of the future of the Universal Service, which could unlock massive cost savings – Royal Mail has a delivery network designed for 20bn letters but it only delivers 7bn annually. However, with a UK general election on the horizon, any changes (which will require political approval) will presumably be back-ended to late 2024 or early 2025. IDS trades on a very cheap 9.8x consensus 2025 earnings, with analysts pencilling in a 4.0% dividend for the next financial year.

 

KMR – Trading update

Kenmare Resources released its Q4 2023 production report and initial FY 2024 guidance on Wednesday. The Group delivered just under 1m tonnes of ilmenite production in 2023, within its revised guidance range, with production of other products meeting or exceeding the original guidance. Softer external macro meant lower pricing, however, but the Group remains significantly cash generative – during 2023 it repaid $31m of debt, paid $58m in dividends, repurchased $30m of shares (a 5.9% share count reduction), started another material capex project (the transition to the Nataka orezone) and still finished the year with $21m of net cash (end-2022: $28m). The Group still guides to 2023 dividends of c.$50m (H1: $16.6m, implying a final dividend of >35USc). While the ilmenite production was -9% y/y, in part due to the effects of a severe lightning strike, shipments were only -3% y/y as KMR was able to use stocks to meet demand. For 2024, KMR guides to ilmenite production of 950k-1.05m tonnes, so flat y/y, but prices in early 2024 have been weaker than what was seen in the final quarter of last year. For the other products, primary zircon and concentrates volumes are guided to be a tad lower than in 2023, while rutile production is expected to be steady y/y. Cash opex is expected to be higher ($219-243m) in 2024 than in 2023 (c.$228m), in part due to higher power costs. Capex is guided at $224m, of which $189m is related to development projects such as Nataka. Kenmare will issue its FY 2023 results on 20 March. The absence of positive surprises saw the shares marked down this week, but the stock’s depressed rating (6.4x consensus 2025 earnings, 9.8% yield) is hardly demanding. For patient investors, a stock with net cash and a single resource with a 100 year mine life that accounts for 7% of global supply trading on a mid-single digit earnings multiple is clearly compelling.

 

PRSR – Trading update

The PRS REIT released its Q2 2024 (end-December) trading update on Wednesday. At the end of December it had 5,264 completed homes with an ERV of £60.3m, up from 4,913 homes with an ERV of £50.7m 12 months earlier. The number of contracted (under construction) homes has reduced from 613 at end-CY 2022 to 312 at end-CY 2023. Adding together completed and contracted sites means that the ERV of PRSR’s portfolio is now £63.4m, up from £57.3m at the end of December 2022. Asset management metrics are strong, with rent collection of 99% and occupancy of 98%. LFL rental growth for the 12 months to end-2023 was 11%, up from 6% in the prior year. Total arrears have reduced to £0.6m from £0.7m at end-December 2022. The portfolio income is very sustainable, with an affordability ratio of just c.22% of gross household income, well within Homes England’s upper guidance limit of 35%. The Q2 dividend will be announced later this month but I imagine it will be 1p/share, with the FY DPS looking (to me) like it will come in at an unchanged 4p/share, but importantly it will be covered in 2024 for the first time. The removal of the dividend risk this year (as dividends were previously uncovered); the removal of development risk as the pipeline completes; and expected interest rate reductions should be helpful catalysts for a share price rerating this year. In the meantime, the dividend offers a healthy income for patient investors. I also suspect the stock could be the subject of takeover interest given the reduced development risk profile and wide discount to NAV that it trades at. Bloomberg consensus has PRSR trading on just 7.7x 2025 earnings and yielding 5.1%.

 

MKS – Ocado Retail update

Ocado Retail released a trading update on Tuesday that showed improving momentum into the New Year. For Q4 2023 (13 weeks to 26 November), revenue was +10.9% y/y, a significant acceleration on Q3’s +7.2% y/y. This was driven by a combination of 4.8% y/y volume growth and higher average prices (+5.4% y/y). Active customers were 998k at end-Q4, +5.9% y/y, with average orders per week of 407k +6.3% y/y. For FY 2023, Ocado Retail’s revenue of £2.4bn was +7.0% y/y, despite a 0.9% y/y decline in volumes (this was clearly H1 skewed) that was driven by more selective buying by cash strapped households (average orders per week of 393k was +4.0% y/y but the average basket size was -4.5% y/y in volume terms). Ocado Retail delivered a “positive EBITDA for the full year”, although the absence of a disclosed number suggests to me that this was only modestly positive. Ocado Retail has improved MKS stock availability to c.90% of the addressable range, which is helpful for MKS’ Food business. In terms of trading since the start of FY 2024, Ocado Retail says it had “another record Christmas and hit its highest ever level of sales over the peak Christmas trading period”, noting that over 90% of peak [December 22-24] slots were sold by mid-October. On guidance, Ocado Retail says it expects to grow sales volumes “ahead of the market”, with volume growth driven by positive trends in customer acquisition, although revenue growth will be adversely impacted by mix (value) and moderating food price inflation. Nonetheless, mid-high single digit revenue growth is guided. EBITDA guidance is for continued progress on the journey to a “high mid-single digit” margin. All in all, a very solid update from Ocado Retail, with earnings from the JV set to be a tailwind for MKS for the current FY (year ending March) 2024 and beyond. Another consideration is that while the rate environment has weighed on Ocado Retail’s short term performance, in the longer term I see it as being very supportive, as more of the loss-making grocery delivery start-ups that only “made sense” in the era of loose money cut back on their operations, pushing more customers towards an Ocado Retail that has significant operating leverage. OCDO’s structural cost advantage (robotics) and scale / incumbency qualities means it has the staying power to win this contest. MKS is very cheap, trading on 10.2x consensus 2025 earnings and yielding 2.6%, per Bloomberg consensus.

 

GSK/HLN – GSK places more Haleon shares

In my 2023 portfolio review, noting that GSK had sold stock in Haleon at 328p in October, close to its 330p IPO price, I said: “I suspect it will look to sell more of its remaining 7% holding at or around this level in 2024”. I didn’t have to wait long for that prediction to come true, with GSK announcing on Tuesday evening its intention to sell down more of its stake in Haleon via an accelerated bookbuild. In the event, GSK confirmed on Wednesday morning that it sold 300m shares at 326p apiece, a modest discount to Tuesday’s close of 332.14p. This latest sale leaves GSK with 385m shares or a 4.2% stake in HLN worth c.£1.3bn – a useful future source of capital to support GSK’s growth strategy (as supportive, indeed, as the nearly £1bn of net proceeds from this week’s sale, coming just a week after GSK announced a $1.4bn acquisition). Haleon is also a winner from these sell downs, with the GSK shareholding reduction from 12.94% immediately post IPO to the new level of 4.2% mechanically increasing the free-float market cap of the company and triggering automatic buying by index trackers (HLN is a constituent of the FTSE 100). Pfizer has another 32% shareholding in HLN which it is expected to divest over time, although it should be noted that both Pfizer and GSK are subject to 60 day lock-ups post the settlement of this latest disposal. During 2023 I doubled my shareholding in HLN, with my reasoning being that the technical overhang from Pfizer and GSK was weighing on the share price, allowing patient investors to pick up HLN at a discount. As an aside, the GSK shareholding reduction also raises the prospect that HLN may consider buying back some of the residual GSK stake when it next comes to the market to sell stock. A potential source of funds to cover that outlay is a media report (Sky News) that says Indian firm Dr. Reddy’s Laboratories, is in talks to buy smoking cessation brand Nicotinell from Haleon for up to $800m. This follows the recent sale of antifungal brand Lamisil for £235m. GSK and HLN are both quite inexpensive relative to peers – GSK trades on 9.0x consensus 2025 earnings and yields 4.2%, making it one of the cheapest large cap (£64bn market cap) pharma stocks, while HLN trades on 15.8x 2025 earnings and yields 2.3%.

 

BT/A – Pricing changes; Bond thoughts

In an interesting development on Tuesday, BT announced significant changes to its consumer pricing model for both new and re-contracting customers in the UK. This follows a recent Ofcom consultation and will see the previous model of adjusting prices annually by CPI +3.9% replaced by a new system of easy to follow nominal ‘pounds and pence’ price increases – this summer, BT expects to increase mobile customers’ charges by £1.50 and broadband customers by £3, following a March price increase of 7.9% (i.e. the December annual CPI of 4.0% + 3.9%) – and these increases follow the 14% rise put through during 2023. Vulnerable customers are to be shielded from the planned increases (which is likely to be a tactical move by BT given Ofcom has yet to fully sign off on the new regime). With more than 30m retail customers in the UK alone, modest increases can lead to significant bottom line benefits, particularly as BT is materially reducing its cost base through network upgrades, a much reduced property footprint and increased digitalisation. Elsewhere, I also spent a bit of time this week digging into BT’s bond securities. Based off spot FX and disregarding early calls, the Group has £18bn of bonds outstanding with a weighted average coupon of 4.0% and maturity of 12.9 years. Clearly, market moves over the past two years means that the Group faces higher costs of new issuance than might otherwise have been, but the starting position as set out here and stock/flow effects (disregarding calls, BT has an average of £1.3bn of bonds maturing annually over the next 10 years) means that the incremental costs of new (versus retiring) issuance will not be material – a new GBP 10 year would probably come somewhere in the 5.5% area (and possibly lower if rates fall as the market expects them too). Another consideration is that BT/A is set to see a material step up in free cash flow generation once its FTTP roll-out to 25m premises in the UK concludes in December 2026. This should see net debt start to meaningfully come down thereafter – and an undrawn £2.1bn RCF and BT’s curve are both likely to be helpful in aiding this transition (on the latter, with no current scheduled maturities between 2034 and 2036, it’s not unreasonable to assume new 10 year issuances to help meet bond maturities between now and the end of FTTP in 2026) and the current absence of any maturities in 2038 and 2040 is also helpful given that 2028 and 2030 are the peak funding cliffs for BT, with maturities of £1.7bn and £2.1bn in those years respectively. Annual BT EBITDA of >£8bn; a cash dividend cost of £0.8bn; cash interest costs of (say) £0.8bn; pension contributions of £0.8bn; and post-FTTP annual capex of (say) £3bn could leave around £3bn per annum (c.25% of BT’s market cap) to divide between deleveraging, distributions and corporate development from the start of calendar year 2027 onwards. Indeed, Bloomberg consensus has BT/A net debt falling from £18.6bn in March 2026 to £18.0bn in March 2027. If my assumptions are right, we should see a meaningful rebalancing of value from bondholders to shareholders at BT/A in the medium term. BT trades on a very cheap 6.1x 2025 earnings multiple and yields 6.5%.

 

LLOY – Sainsbury to exit 

Sainsbury’s announced on Thursday that it is to commence “a phased withdrawal from our core Banking business”, with future financial services products to be provided to customers through a distributed model. During H1 of its current financial year Sainsbury’s Bank completed the sale of its mortgage book to The Co-operative Bank. Its remaining product set at that point were personal loans; credit cards; savings; insurance; and travel money. Press reports say that Sainsbury’s Bank has 1.9m customers and while I suspect that most of these are secondary banking relationships (i.e. customers of other banks who took out a Sainsbury’s financial services product as they shopped in the supermarket, while further circumstantial evidence for this hunch is that Sainsbury’s never launched a current account offering), there will be some opportunities for other banks to pick up some of these customers. As the largest High Street bank (it has a c.20% UK personal current account market share), Lloyds Banking Group will be a natural destination for some of the Sainsbury customers who will be looking for a new home. LLOY is very cheap, trading on 5.4x expected 2025 earnings and yielding 8.0%.

 

AMZN – iRobot disconnected?

Media reports this morning (Bloomberg) state that the EU is expected to block Amazon’s $1.4bn purchase of iRobot Corp on concerns that Amazon might be tempted to use its dominant position as an online retailer to favour iRobot products over those of its competitors. The reports also say that the US FTC is looking to block the deal. A $1.4bn acquisition is small beer for Amazon (market cap $1.6trn) although it would have been the Group’s fourth largest acquisition in history after Whole Foods, MGM and One Medical – which is more of a sign about how good AMZN is at internally generated value creation investments than anything else. Bloomberg consensus has iRobot delivering $929m of revenue and losing $117m at the EBITDA level in 2024, which compares to Amazon’s $636bn of 2024 income and $120bn of EBITDA on the same measure. So, not a game changer for AMZN, which has plenty of other growth levers (indeed, Bloomberg consensus has AMZN EBITDA growing to $167bn in 2026). AMZN trades on a 2025 EV/EBITDA of just 11.3x, a very cheap multiple for such a quality business.

 

RHM – German order

One of my New Year’s resolutions was only to cover material (nine digit) contract wins when updating on Rheinmetall newsflow. On Wednesday, RHM announced that the German Bundeswehr has contracted it to supply over €350m worth of 30mm rounds for the Puma IFV over 2024-27. Follow-up orders are expected. This order is synonymous with a lot of what sits in RHM’s >€30bn order book – multi-year contracts that offer multi-year visibility on revenue and earnings, while RHM is clearly a play on the structural growth in Western security investment. RHM trades on an undemanding 13.6x consensus 2025 earnings and yields 2.6%.

Stocks Update 12/1/2024

GSK – Acquisition; Pipeline

MKS – Christmas trading update

PMI – Q1 2024 AUM update

RYA – Traffic comments 

 

MKS – Christmas trading update

Marks & Spencer released its Christmas trading update on Thursday. The market was expecting a strong outturn given well-flagged market share gains from the Kantar data and while it was no surprise to see management increase guidance, the market was already there. LFL sales in Food were +9.9% y/y while Clothing & Home LFLs were +4.8% y/y. International sales (albeit at only £288m of Group revenues of £3.9bn, not a massive contributor at the best of times) were -6.4% y/y, “largely driven by the planned timing of franchise shipments in the Middle East and Asia and more challenging market conditions in India”. MKS has delivered strong market share gains in both verticals in the UK despite the well-documented pressures consumers are under, which is a reflection of the sterling job management is doing in terms of turning the business around. MKS says it has entered “2024 with a spring in our step, but clear eyed on the near-term challenges”. Management says results for FY (year-end March) 2024 “will be consistent with market expectations”, a c.3% upgrade on previous guidance, although as noted the market was already expecting this. One other point of note is that the 2020 employee share save scheme will vest on 1 February 2024 and over 9,200 colleagues will share in up to 70m new shares (a c.3% dilution on the old share count), with the typical colleague set to gain “over £10,000” as a result of the share price strength. That’s good in terms of employee buy in (and the UK High Street has ample examples of companies that allowed employee engagement to fall off a cliff, with disastrous commercial consequences) although I’d instinctively like to see the dilutive impact of this offset with a share buyback. Perhaps that’s just nitpicking though – 70m shares would cost nearly £0.2bn and the Group didn’t replace the £128m of bonds, with a 4.25% coupon, that matured in December, and on balance I’d prefer to see management redeem all of its remaining expensive (weighted average coupon of 5.37%, range 3.25-7.125%) legacy (non-lease) debt before moving on to reducing the share count – I see MKS’ balance sheet strength as providing a further competitive advantage relative to peers. Bloomberg has MKS trading on a very undemanding 10.7x consensus 2025 earnings and yielding 2.4%.

 

PMI – Q1 2024 AUM update 

Earlier today Premier Miton Group released an AUM update in respect of the quarter ended 31 December. The Group finished its Q1 with £10.1bn of AUM, up from £9.8bn at end-FY 2023 (end-September 2023), which was driven by market performance. The Group suffered £0.2bn of net fund outflows during Q1 and also saw a £0.1bn outflow linked to mandate transfer and fund disposal. Investment performance remains strong, with 75% of PMI’s funds in the first or second quartile of their respective sectors since launch or fund manager tenure. PMI announced that it has recently agreed to take on the management of a Dublin-based UCITS platform with c.£0.1bn of AUM, which along with the previously announced (but not yet completed) Tellworth acquisition should provide a welcome tailwind to AUM this year. At the end of December PMI’s £10.1bn of AUM broke down as follows: Equity £4.7bn; Multi-Asset £3.1bn; Fixed Income £1.3bn; Investment Trusts £0.4bn and Segregated Mandates £0.6bn. This diversification provides helpful resilience in uncertain markets. Bloomberg consensus has PMI trading on 8.6x FY 2025 earnings and offering a 9.4% yield.

 

GSK – Acquisition; Pipeline

GSK announced on Tuesday that it has agreed to acquire Aiolos Bio, a clinical stage biopharmaceutical company specialising in asthma. The acquisition expands GSK’s respiratory pipeline by adding AIO-001, a “phase II ready” long-acting antibody that “could redefine the standard-of-care with dosing every six months”. GSK is to pay an initial $1bn with a further $400m to follow based on the achievement of regulatory milestones. This is a high risk but also potentially high return bet by GSK, which has a buy and build strategy for its pipeline encompassing M&A such as this deal and in-house R&D. Indeed, we got a flavour for the latter on Wednesday with news from GSK that Chinese regulatory authorities have approved its Nucala drug for use in severe asthma, following the conclusion of a phase III trial. Around 6% of China’s 46m adults with asthma have a severe form of it, which gives a sense of the addressable market for Nucala in that market. Nucala has previous approvals from the US, EU and “over 25 other markets” in place. GSK trades on just 9.0x consensus 2025 earnings and yields 4.1%, making it one of the cheapest large cap pharma stocks.

 

RYA – Traffic comments

In comments to the FT on Tuesday, RYA CEO Michael O’Leary said that the carrier expects to be short up to 10 new aircraft this summer as a result of delivery issues at Boeing. RYA says this means it will likely carry 200m passengers in FY (year-end March) 2025, versus the 205m previously forecast. Last week I noted that the previous upside I expected for FY 2024 passenger volumes (RYA says 183.5m, it has carried 181.8m in the 12 months to end-November 2023) has given way to a now in-line expected outcome due to a combination of geopolitical developments (Israel/Gaza) and the recent spat with what RYA characterises as “OTA Pirates”. While unhelpful, a 2-3% reduction in passenger volumes for FY 2025 doesn’t really move the dial given the starting point of an 8.7x FY (year end-March) 2025 earnings multiple means RYA is not exactly priced for perfection to begin with. I also expect RYA to be able to offset at least some of the volume weakness through yield management.