Monthly Archives: November 2014

Stocks in Focus: Reckitt Benckiser

Reckitt Benckiser (RB) has been in the spotlight this week following the company’s announcement that it will be spinning off its pharmaceutical division, which once accounted for a fifth of the group’s earnings. The fate of RB Pharma has been the subject of lengthy speculation as it sits at odds with the rest of the group’s focus on cleaning and hygiene goods. The division derives almost all of its £780m million of revenue from Suboxone, a market leader in drugs to treat addiction to opioids, including heroin. However, it has become the group’s problem child of late as patents on the drug have expired and cheaper generic rivals are entering the market. Indeed, CEO Rakesh Kapoor had already made it clear that addiction treatment is not “a space they want to be in” following the reclassification of RB Pharma as a non-core division of the group.

The demerger is expected to complete on December 23 and the new company, named Indivior, is estimated to be worth around £2.7bn. Its strategy will be to push through the development of new products (the likes of an injectable Suboxone, a nasal spray to treat opioid overdoses, and drugs for alcohol, cocaine and cannabis addiction are in the pipeline) and to expand beyond the United States, which currently accounts for 80% of revenue.

Ultimately, the aim of demerger appears twofold; to create a cleaner investment case for RB’s remaining consumer goods business, and to help attract a buyer for the standalone Indivior.


UK Equity Research – finding new investment ideas for clients’ portfolios

An investment manager essentially wears three hats – undertaking company research to keep up to date with existing holdings in clients’ portfolios and to identify new investment ideas; managing portfolios on a day to day basis; and regular contact with their clients including providing valuation reports and attending meetings.

When wearing the company research hat, the investment manager’s search for new ideas is wide ranging and includes investigating potential opportunities amongst both large and small/mid cap companies.  Often investment opportunities present themselves when a company’s management has taken the decision to make major changes to the existing business.  This often involves reshaping the historic core business and adding one or more new divisions thus transforming a more traditional business into a very different company.  Management will set out the strategy for how they will deliver the newly shaped business over the coming years. The process is often accompanied by a re-rating of the shares.  When looking at such opportunities time needs to be given to understanding the business as it is at the start of the process and what it will look like in the future.  Key to all of this is meeting the management, understanding their strategy and building the confidence in their ability to deliver on this strategy.

Two examples of such investment opportunities that we have added to clients’ portfolios recently are Connect Group and St Ives.

Connect Group (formerly known as Smiths News) was originally part of WH Smith but has been a stand-alone business since the demerger in 2006.  The company is being transformed from its historic focus on newspaper and magazine distribution into a much broader distribution business.  The company is the UK’s largest newspaper and magazine wholesaler and a leading UK book supplier. Diversification is being achieved via acquisitions such as Consortium (a leading specialist distributor of consumable products to the education market).  Significantly in recent weeks management have announced a tie up with Amazon to offer same day delivery for customers to collect their parcels from their local convenience store and the proposed acquisition of a specialist distribution company.

From an investment perspective, Connect Group is a company at an interesting stage in its development.  The rating is still low as investors continue to assess how management will deliver their target of having 50% of the company’s profit from outside newspaper and magazine wholesaling by 2016.  It is clear that management are putting the strong cash flow from the historic core business into new, higher margin, long term growth areas.  The shares trade on a low price to earnings ratio, have a high yield and good dividend cover.

Another example is St Ives where the management are further on in the reshaping of the business.  They have completely restructured the legacy Print business (exiting the commoditised operations such as magazines, direct mail, Report & Accounts printing).  The reshaped core publishing business is cash generative, providing resource for the mostly acquisition led diversification of the business.  Management have made good progress building a faster growing, higher margin Marketing Services business which is focused in particular on data and digital marketing.  The shares have started to be re-rated but, as is often the case in such situations, there is still more to come. 

Points of View: Foreign exchange crackdown

Last week saw the FCA impose the largest fines in its history following its investigation into alleged market manipulation in the foreign exchange market.   Five banks agreed to a settlement of £1.1bn with the FCA alongside similar sized fines levied by the US regulator (the CFTC). The two UK banks penalised by the FCA were HSBC (£216m) and Royal Bank of Scotland (£217m), while Barclays hit the headlines for pulling out from a settlement at the last minute.  Its reasoning for this surprise move is that it wants to wait for an agreement that will include other US regulators, but investors have thus far been critical, saying the uncertainty created will undermine the share price.

These latest settlements, and their significant size, serve to reinforce the need for banks to have efficient controls in place to prevent such problems and to apply lessons learnt across their businesses. There are a number of investigations ongoing and regulatory fines have become entrenched in the banking landscape. RBS, for example, had set aside a provision of £400m which covered its total fines of £382m while Barclays have a provision of £500m. The increase in fines that we have seen in the sector in recent years has been significant and, from an investor viewpoint, regulatory risk is one of the main ‘known unknowns’ in the banking sector. As with all investments, one must be aware of the risks before investing so that they may be weighed up against potential returns.

Points of View: ECB to expand its balance sheet

My last article highlighted the divergent policies of the US and Japanese central banks.  This week, the European Central Bank (ECB) followed the lead of the Japanese by announcing the expectation of further stimulus.  At a press conference, ECB president Mario Draghi suggested that its balance sheet could expand by a further €1tn and made it clear that ECB officials are unanimous on their willingness to increase stimulus if needed.

Whilst the euro has reacted by falling to a two-year low against the US dollar, equity indices in Europe took heart from Mr Draghi’s words and have rallied, despite ongoing fears of deflation.  Indeed, investment trusts with a focus on European equities have in aggregate seen their discounts to net asset value narrow from as wide as 7.3% within the past 12 months to 3.3% on average at the time of writing. However, it has not been such a good week for one European focused investment trust, Henderson Eurotrust (HNE), which announced it has written off the value of its investment in OW Bunker after the Danish ship fuel supplier warned it may go bankrupt in light of discovering fraud in a Singapore subsidiary. Whilst the resulting 1.1% fall in HNE’s NAV is disappointing for investors, this is the first write-off suffered under Tim Stevenson, who has a proven track record since he began managing the fund in 1992.

Points of View: Divergent Central Banks

Quantitative Easing (QE) has dominated investor headlines this week. As had been expected, the US Federal Reserve officially ended its QE stimulus programme last Wednesday, having been gradually reducing its asset purchases from a peak of $85bn per month.  In its accompanying commentary, though, the Federal Reserve was keen to reassure investors that US interest rates will remain low for a considerable period of time.  Furthermore, within 48 hours, the Bank of Japan (BoJ) surprised markets with a huge increase in its QE activities, reminding investors that other central banks are moving in precisely the opposite direction to the US Federal Reserve.

The decision from the BoJ only held a 5-4 majority from the policy board and is the latest of its policies aimed at preventing sustained deflation. The level of stimulus in Japan, relative to the size of the economy, is far larger than that of any other major central bank and the Yen has now fallen approximately 30% against the Euro over the past year.

With similar deflationary pressures prominent in Europe, the European Central Bank (ECB) will no doubt be monitoring the results of this extra Japanese monetary stimulus very carefully.  Should it not prove effective in restoring inflation it would suggest that monetary policies alone are not sufficient in tackling the growing global deflationary forces.  However, if the Japanese monetary policy does return inflation to Japan, there will be an increased demand on the ECB to introduce full-blown QE in the Eurozone.