Tag Archives: market commentary

Stocks in Focus: SDL Buffettology Fund

This week I am looking at the SDL Buffettology Fund, an open-ended investment vehicle that operates within the UK All Companies sector and targets outperformance against the UK stock market over the long-term, which the manager defines as 5 to 10 years.

The fund was launched by manager Keith Ashworth-Lord in 2011 and as the name would suggest, Keith is a follower of the ‘Business Perspective Investing’ process made famous by Warren Buffett and Benjamin Graham. This process involves pure stock picking, paying no attention to external factors such as the economic outlook, but concentrating on purchasing shares in companies below their intrinsic value. Further to this, Keith prefers to find companies with durable operating franchises, high return on capital, strong free cash flow and an experienced management team.

Keith can invest in any company listed on the London Stock Exchange or Alternative Investment Market but his strict process filters down the universe of investable companies to around 40-60 names. The fund will generally hold between 25 and 35 of these companies at a time. Although the fund is constructed on a “bottom up” basis, Keith employs controls to ensure that he does not inadvertently end up with too high a concentration of companies operating in a particular industry or sector.

This high conviction approach to investing in quality companies has proved very successful for Keith since he launched the fund. Over this period the fund has gained 218%, compared to 81% for the UK All Companies sector and 78% for the FTSE All-Share index. This impressive record has also been achieved with below average volatility. However, the fund has not yet been tested in falling markets and a bias to small and micro cap companies (67% of assets) could prove challenging as the market gets to grips with the outcome of the Brexit negotiations.

 

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Stocks in Focus: CLS Holdings

This week I am writing on CLS Holdings, a FTSE 250 property company with a portfolio worth approximately £1.9bn.  CLS has a large historic family holding, with the Sten and Karin Morstedt Family and Charity Trust owning 51% of the company. It published its first half results on 15 August 2018.

CLS Holdings owns and manages property in the UK, Germany and France.  It is primarily (over 90%) office space and focusses on good non-prime locations close to major transport links.  They rent the properties to reliable tenants, with 28% of rents paid by governments and a further 28% by major corporations. A large proportion of these rents are index linked, so increase in line with inflation.

The first half results were broadly positive.  The value of CLS’s underlying properties increased by 3%, mainly driven by a 4.6% increase to their German property portfolio.  The company’s earnings increased by 15% and management announced an increase to the interim dividend of 7%.  CLS also redeemed a retail bond early at the end of July and thereby reduce its cost of debt.

Property companies have a number of dynamics to consider when deciding to invest.  They tend to have a higher amount of borrowing (as people understand with their own mortgages) so the cost and level of debt are important.  CLS maintain that the rental yield they receive is greater than their cost of borrowing and so the difference, or arbitrage, is a primary driver of returns.

https://www.nwbrown.co.uk/news/company-report-library/

 

The share price of a property company can deviate from the underlying value of the property assets held by that company.  This can give rise to a discount or premium, which gives an indication of how expensive the shares are.  Currently the shares of CLS trade on a 25% discount with a 2.7% yield.  This seems reasonable value considering the company’s proven track record of managing a diversified portfolio of assets.

Stocks in Focus: Centrica

This week I am looking at Centrica, owner of Britain’s biggest energy supplier British Gas, following its recent half year results.  The company saw its underlying earnings increase by 3% for the six months to 30th June, but the results were still disappointing for investors, with underlying operating profits falling by 4% to £782m.

Much of the fall in profits came from its consumer business that owns British Gas, with the biggest fall coming from the UK Home division. The “Beast from the East” cold weather snap resulted in increased energy consumption in the first quarter of 2018, but with it came an additional £15m in call-out costs. The company also announced a 5.5% price rise in April this year due to rising wholesale gas and electricity prices. Despite an initial fall in the share price following the results, the share price has slowly risen this year, suggesting that investor sentiment may be improving.

Centrica and its peers are also bracing themselves for the forthcoming price cap on Standard Variable Tariffs (SVT), which is expected to come into force later this year. The group has been working hard to reduce the number of customers on Standard Variable Tariffs, withdrawing SVT contracts from new business, and reducing the number of customers on SVTs from 4.3 million to 3.5 million this year.  Last week, management announced that the SVT would be increasing by 3.8% from October, a decision that may have been made to encourage customers onto fixed-term deals, and to help limit the financial impact when Ofgem implements the price cap. The regulator is expected to announce the composition of the tariff later this month, but the precise level will not be known until October.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Diageo

This week I’m looking at Diageo, the world’s largest spirits company, following its recent preliminary results for the year ending 30 June 2018.

The results were better than expected following an increase in revenues and profits, despite growth being partially offset by adverse moves in currency exchange rates.  The company reported net sales of £12.2bn, an increase of 5%, slightly ahead of the 4.3% that had been forecast by management.

The company’s largest gin brands have been especially successful in the last year, with Tanqueray gin performing well and the launch of Gordon’s pink gin providing a boost. Sales of gin have been helped significantly by a gin boom in Western Europe, as well as increasing popularity of colourful drinks and cocktails among millennials. The 14% increase of gin sales was only outperformed by tequila, which saw sales soar by 56%, with much of the growth coming from the US and Mexico. Due to the success of tequila in recent years, the company has continued to expand its portfolio via the $1bn acquisition of George Clooney’s premium tequila brand ‘Casamigos’. Vodka was the only category to decline in the last year, with Smirnoff sales down 2%.

Although sales growth has been positive, management have forecast headwinds for the new financial year. Potential issues include exchanges rates, which management expect will reduce full year sales by up to £70m and operating profit by £10m. There is also the potential for higher interest rates, which would increase the cost of borrowing, and an increase in tax rate is also expected.

Despite the concerns, the board announced an additional share buyback programme of up to £2bn as a result of the strong cash flow figures. Having already returned £1.5bn to its shareholders over the last year, this move should reassure shareholders about the future prospects for the group.

Stocks in Focus: Reckitt Benckiser

This week I am looking at Reckitt Benckiser after it reported better-than-expected figures last week, helped by good performance in its consumer healthcare division. Profits for the first half of 2018 rose by 9% compared to the same period in 2017. Overall, management estimates that revenue growth will now be in the order of 14-15% this year, up from its previous 13-14% guidance.

A major contributor to the numbers was strong sales of infant nutrition products in China after the company expanded into baby formula last year with a $16.6 billion takeover of Mead Johnson. The acquisition increased sales by double digits in China as the country experienced high birth rates following the end of its one-child policy in 2016. However, growth for the region is expected to normalise as birth rates in China stabilise.

The group restructured into two standalone lines of business earlier this year. One division focusses on Reckitt’s better-performing consumer healthcare brands and the other on household consumer goods such as detergents and cleaning products. In the consumer goods industry, prices are being pushed down by a combination of Amazon’s rising prowess in selling household staples, a decline in brand loyalty as consumers shop around online, and the growing popularity of discount retailers. Consequently, Reckitt has joined rivals in warning that this very competitive retail marketplace is affecting profitability.

Broadly, the interim update brings a breath of fresh air to the group after a series of tough quarters that included a cyberattack and a failed product launch in the Scholl foot-care line. Reckitt now looks to be recovering its poise as synergies from the Mead Johnson acquisition start to materialise and earnings growth starts to improve. CEO, Rakesh Kapoor, stated that they are not on top of everything yet but are well on track.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: GlaxoSmithKline

GlaxoSmithKline (GSK), the UK based global pharmaceuticals business, is reportedly considering a potential spin-off of its consumer health division from the main pharmaceuticals business. This has come about on the back of large shareholders expressing doubt that there is a benefit to these two fairly independent divisions being part of the same company.

Last year GSK found a new CEO in Emma Walmsley, formerly of L’Oreal and more recently GSK’s consumer health division. She has kept investors on-side and delivered steady results, with a resultant share price rise of over 18% year-to-date. However, this is still down over 4% from 12 months ago.

The news that GSK is considering streamlining the business follows a theme observed across pharmaceutical companies. Pfizer recently attempted to sell its healthcare division and GSK is buying out Novartis’ stake in their joint venture. The purchase gives GSK outright control in determining the future of the consumer health division.

There are motives for maintaining the diversification of GSK; one being the perceived benefit of having the steady, cash generative consumer health business to reduce risk against the innovative medicine development cycle. Innovation tends to be unpredictable and while the possibility of blockbuster drugs with patent protection offering superior margins is attractive, they remain elusive and difficult to develop.

While being a diversified business does appeal, investors also like a company to focus on their core competencies and not get distracted by smaller, less significant parts. Some investors have argued that the sum of the parts is greater than GSK’s current valuation and this could lead to an eventual breakup anyway.

 

https://www.nwbrown.co.uk/news/company-report-library/

Points of View: UK Market Review

The end of June brought with it the end of the first half of this calendar year.  This week I take a look back over the period since 1 January and consider the relative attractions of the UK market.

Stock markets suffered their first meaningful fall for nearly two years at the start of the year. Having hit a peak of approximately 7800 in January, the FTSE 100 fell nearly 12% to a 12-month low of just under 6900 in late March. Since then, stock markets have promptly recovered and again sit close to all-time highs.

Despite this, the UK stock market is stubbornly out-of-favour with global investors thanks to the political uncertainties of Brexit and the threat of a left-wing government coming into power with a mandate to hike taxes and nationalise large parts of the economy. Indeed, global investors have clearly taken a consensus underweight position on the FTSE, which is arguably at its most unloved point in decades relative to other developed stock markets.

On the one hand this is frustrating for UK investors, but on the other hand it is re-assuring; looking forward, it seems to us that the UK stock market offers very attractive relative value for long-term investors. The FTSE 100, for example, currently yields approximately 3.8%; in contrast, the yield offered by the S&P is 500 is a miserly 1.9%. Moreover, it is important to remember that the UK economy is not the same as the UK stock market. There is some overlap, but it is far less deep than most people assume. The domestic macroeconomics of the UK has very little to do with the collection of international businesses the make up the UK stock market. To this extent, the UK stock market provides a natural hedge against any woes that befall the UK economy.

https://www.nwbrown.co.uk/news/company-report-library/