Tag Archives: market value

NW Brown September 2017 Market Review

This edition of the Market Review considers whether markets will continue to climb a “wall of worry”.

September 2017 Market Review

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Points of View: Insurance

This week I have been looking at the unfolding 2017 hurricane season and the effects that Harvey, Irma and Maria could have on the US economy and the broader insurance sector.  These events have caused devastation across the Caribbean, Texas and Florida.  The financial impact that they will have is difficult to judge this early on.  However, total losses are expected to be between $80 and $125 billion.  Over the short term there will be a negative impact to the US economy. US jobs data has already shown that the number of jobs created by the economy has contracted for the first time since 2010 and the hurricanes have been seen as a large contributor. However, economic activity is expected to return as insurance policies pay out, property is rebuilt and damaged items such as cars are replaced.

Closer to home the impact will be felt by Lloyd’s Insurers, the London based, global insurance market. They have estimated that Harvey and Irma will cause around $4.5bn in losses to their members.  This is expected to lead to an underwriting loss for the year but CEO, Inga Beale, has stated that this is to be expected in such events and that “this is what we are here for”.

Natural disasters are both good and bad for those insurers covering this market. On one hand, they will suffer some large capital pay-outs in the short term. On the other hand, such events inevitably help push future premiums up. This is especially relevant at the moment given that the lack of disasters in recent years has driven premiums down to a level that has caused problems in the market.

 

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

Stocks in Focus: Shell

This week I am writing on Royal Dutch Shell, a company I last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.

The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business.  On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.

While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels.  A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand.  One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids.  To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions.  Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market.  While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.

Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available.  The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.

The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources.  Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated.  However if Shell delays investing in renewable energy it risks being left behind in a declining sector.

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

Stocks in Focus: Herald Investment Trust

This week I am looking at Herald Investment Trust, a UK-based fund that invests primarily in small-cap companies within the technology, media and telecoms sectors.  Herald has been run by Katie Potts and her team since it began in 1994, which is somewhat unusual for a fund but has ensured a consistent long term strategy for investors.

Unlike some other technology funds, Herald aims to pick stocks from the smaller end of the investment universe where the team sees significant opportunities in under-researched and often hard to access companies. These early-stage businesses are often held for long periods of time demonstrated by the fact that over 20% of the portfolio holdings have been held for over 13 years.  Of course, with early stage companies there can also be considerable risks and to counter this the fund is much more diversified than other collective vehicles, with over 260 stocks in its portfolio.

The Team’s breadth of experience and extensive company meeting programme has so far proven successful, and the Fund has enjoyed annualised Net Asset Value (NAV) total returns of 12% since inception, which has strongly outperformed both small-cap and technology indices.

That said, investing in the smaller end of the technology sector has not been without its difficulties in recent years, and Katie continues to struggle with the increase of acquisition activity from larger, global companies that has diminished the pool of companies she can invest in. Following the rush of takeovers at the end of 2016 the fund has maintained a higher level of cash than usual, which currently sits at 7.5%. This is however fairly consistent across many Managers, who have found value hard to come by given many company valuations are close to all-time highs.

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

Stocks in Focus: Intertek

This week I am looking at Intertek Group Plc, the global inspection, testing and certification company. The specialist organization has more than 42,000 employees across 100 countries and provides quality and safety assurance to companies across several industries.

The company’s latest interim results were better than expected for the first six months of the year. Revenues were up nearly 14% compared to last year, while pre-tax profit jumped almost 28%. Management also upgraded their profit margin guidance from “moderate” to “robust”. Indeed, it has been a good couple of years for Intertek and this has been reflected in the share price, which has risen nearly 125% since the end of 2015 to its recent all time high of 4880p per share.

The global quality assurance industry has seen rapid growth in recent years as regulators are demanding stricter compliance measures and increased focus on risk management following several high-profile scandals that highlighted gross negligence by the companies involved. Intertek was well positioned to capitalise on the increase in demand.

That said, its resources division, which provides services to the oil, gas and mining sectors, suffered a dip in revenues. This was due to lower capital investment from its clients, but investors seem to have looked past this isolated weakness given the division’s relatively small contribution to overall revenue and the fact that the majority of its oil & gas exposure comes from fairly stable sources of operational expenditure and cargo inspection. The question for long term investors, however, is whether the strong performance and upbeat prospect still leave the stock as an attractively priced investment given the recent rise in the share price.

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

Stocks in Focus: GlaxoSmithKline

I am once again looking at GlaxoSmithKline (GSK) following the announcement of its first set of results since the appointment of Emma Walmsley as Chief Executive. Ms Walmsley has been with GSK for seven years, having previously worked at L’Oreal in a variety of marketing and management roles. With Pharmaceuticals being the core of GSK’s business, it is unusual to have a CEO whose experience lies outside the core division – although the ability to review the division from a fresh perspective could well be advantageous.

The second quarter results were slightly ahead of consensus, giving Ms Walmsley a solid start to her tenure. Alongside the results she set out her key objectives for the first time, highlighting the need to prioritise improvement of the core Pharmaceutical division. In short, GSK needs to become better at developing and commercialising lucrative drugs. Despite launching high volumes of new drugs, the company has not seen many of these lead to huge sales. Indeed, GSK’s last “blockbuster” product release was the asthma treatment, Advair, which at its 2013 peak made up one-fifth of the group’s revenues.

Ms Walmsley therefore plans to strengthen the pipeline by a) increasing the amount spent on research & development, and b) channelling 80% of this spend on a narrower set of four therapy areas (Respiratory, HIV, Immuno-inflammatory and Oncology). She also plans to bring about a more dynamic/accountable commercial model to help the business make the most of its innovations.

With an enthusiastic, fresh CEO at the helm and a credible plan in place to increase productivity over the long term, GSK looks well set. However, it is fair to say that previous attempts to increase productivity and commercial success have not been entirely successful – and investors may therefore want to wait for some evidence of success before buying into Ms Walmsley’s vision.

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

Stocks in Focus: HSBC

This week I am looking at HSBC, one of the world’s largest banks, which delivered promising half year results at the end of last month.

The results showed a pre-tax profit for the first half of 2017 of $10.2billion, an increase of over 5% on the same period last year.  The better numbers were thanks to a boost from rising US interest rates, which generally enables it to make wider margins on loans, and an improved trading environment. In particular, the bank continues to see growth opportunities in Asia, where it makes three quarters of its profits.

Additionally, management announced a new $2billion share buyback, which will raise the amount of total stock that they have pledged to repurchase in the last year to $5.5billion. On the subject of management, investors are keeping a keen eye on the bank’s succession planning. Mark Tucker has recently been appointed as the new chairman and one of his first priorities will be to find a replacement for existing Chief Executive Stuart Gulliver, who is due to step down next year.

The shares have performed well of late and are currently trading close to a four year high following a rise of more than 50% over the last year. This leaves the shares trading on a relatively high valuation of 1.4x book value at a time of management uncertainty. Set against this, there are still plenty of positives. The bank is financially strong, offers an attractive dividend yield of over 5%, and is well placed to benefit from further normalisation of US interest rates.