Tag Archives: market volatility

Stocks in Focus: Bunzl

This week I am focusing on Bunzl, the global distribution and outsourcing company. The company supplies a wide range of non-consumable not-for-resale products to help clients run their businesses, varying from cleaning supplies and safety clothing to disposable healthcare items. The company recently announced an update for their end of year, including information on transactions and expectations for performance.

Bunzl has always been active in using acquisitions to grow its revenue. Over the last 14 years the company has completed over 151 transactions spending more than £3.1bn in the process. The company confirmed its acquisition of Volk do Brasil, a safety equipment distributer, is progressing well. Management has also announced the purchase of CM Supply, a Danish foodservice distributor.

The company stated that revenue is set to increase by between 8% and 9% from last year. This growth is being delivered through their acquisitions as well as organically through winning new contracts and cross-selling products and services. From an investment perspective, the hope is that Bunzl can continue to deliver steady organic growth, supplemented by further disciplined acquisitions within what remains a fragmented industry. However, relying on acquisition for growth can be risky as acquiring companies tends to cost a premium and projected synergies are not always deliverable. Another risk is margin deterioration in the event that inflation rises and Bunzl is unable to pass higher costs onto their clients. In the meantime, the business continues to enjoy relatively predictable recurring revenues given that it controls business critical stock and deliveries for companies so that they can function day-to-day.



Points of View: Global Markets

Global equity markets have tracked downwards over the last few months and suffered a further bout of weakness last week in light of growing concerns over US-China trade frictions and the potential for this to damage economic growth. Alongside this, the ramifications of tighter monetary policy around the world and other political risks such as a disorderly Brexit are also weighing on sentiment.

Despite President Trump’s announcement that a ceasefire had been agreed at the recent G20 summit, US-China tensions have again been stoked following the arrest last week of Meng Wanzhou, chief financial officer of Chinese telecoms giant Huawei.  The arrest was made while she was in transit in Vancouver, following a US extradition request that is based on accusations of breaking US sanctions on Iran.  Over the weekend, China demanded her release and investors are concerned that this could mark the start of further disagreements between the two superpowers.

Closer to home, the difficulties in agreeing a Brexit deal continue despite apparent progress being made on the draft agreement announced last month. In the latest setback, Theresa May has been forced to abort a parliamentary vote on her Brexit plan at the eleventh hour.

The broader context to the recent equity market weakness is that it follows a period of strong gains throughout 2016 and 2017. Fundamentally the global economy continues to perform robustly, especially in the US, where the recent rises in interest rates represent a pre-emptive policy decision by the Federal Reserve to manage growth and control inflationary pressures. Over the long term, we remain convinced that global growth will continue to be dragged upwards thanks to rising populations, continuing innovation and productivity improvements. In turn, this should help equities to continue to deliver attractive long term returns – despite volatility in the short term.


Stocks in Focus: Prudential

This week I am looking at Prudential, the multinational life insurance and financial services company, following its recent trading update covering the first nine months of the year.

I last wrote about Prudential a year ago, after the company had seen significant growth from the Asian market, as a result of a growing and increasingly affluent Asian middle class that had driven demand and sales.  One year on and the company has announced a 15 per cent rise in new business profit in Asia to the end of September. The group also reported record performances in some of its Asian operations led by increasing sales in health and protection products.  As a result, Asia has overtaken the US as the largest contributor for Prudential’s profits earlier this year.

In other areas, M&G Prudential, the UK and European business, has also seen strong performance, with an increase of 18 per cent in new business profit due to continuing demand for its PruFund range of products.

Earlier this year Prudential announced its plan to demerge the UK and European business, which is valued at around £12bn and on an earnings multiple of 16x, against an industry average of 13x. This will result in two separately-listed companies, each with their own distinct investment prospects.  Despite some uncertainties, the demerger should be a positive for both companies, in particular helping management of Prudential to continue to focus on building out their Asian operation. Mike Wells, the group CEO, continues to believe that profitable growth prospects of the Asian businesses remain substantial and are central to the Group’s long term growth ambitions.

Prudential reassured shareholders that it was making good progress with the demerger, and we expect to see more information regarding this in the full year results due early next year.


Stocks in Focus: Vodafone

This week I am looking at telecommunications giant, Vodafone, which announced its half year results last week. The group reported a loss of €7.8 billion, predominantly on account of impairment charges in weaker European businesses and the challenges faced by the company’s Indian operations. The results may not look encouraging on the surface but the group is on course to cut operating costs for the third consecutive year and to hit the mid-point of its revenue growth forecast this year of about 3%.

Market sentiment has been weak of late due to concerns about competition pressures in India, the cost of acquiring cable assets in Europe and big investments on new spectrum for 5G services, all of which added to the company’s debt. Investors fearing a dividend cut were reassured by the announcement that the payout would be frozen, but not cut until debt is reduced. CEO, Nick Read, also announced a renewed focus on cost cuts and the creation of a new division to maximise the value of the company’s masts and towers to drive higher returns. The cable acquisitions across Europe have given Vodafone an edge against competitors because having a larger customer base, owning infrastructure and having scale are important in terms of price setting power and control over the quality of services.  Mr Read remains confident that the cable acquisitions, cost cuts and improving operational performance will enable the company to maintain dividends and return it to growth in the long term. Vodafone’s share price rose by around 6% on the day the results were released.

This stock is a good example of the challenges faced by long term investors. Risks surrounding debt and dividend remain in the short term but improving results, a renewed strategy and a committed new management team can boost the company’s growth over the long run.


Points of View: Airlines

This week I am looking at UK-listed airline companies and two significant factors that influence their share prices; oil price and industrial action.

Jet Fuel is a major component of an airline’s expenditure, so clearly the fluctuation in oil prices will impact costs and therefore profits. This typically leads the share price of airlines to move in the opposite direction to fuel prices, in the short term. Airlines however endeavour to mitigate this risk in two ways: using complex financial instruments to hedge against fuel price movements and passing on any increase in cost to passengers. Furthermore, higher fuel prices act as a barrier to entry, so dissuading new entrants to the industry who could otherwise disrupt the incumbents.

Industrial action resulting from union disputes is another perennial sticking point. These range from pilots demanding better pay to baggage handlers seeking a better working environment. These disputes create costly disruption for airlines both in respect of compensating passengers for delayed flights and lost customers frustrated with the particular airline. Unions and employers generally resolve their issues promptly, however the threat of industrial action remains ever present in this highly unionised industry.

In addition to the above, the sector suffers disruption from terror threats and adverse weather. These unpredictable events cause volatility in the share price and from an investment perspective it is unsettling that they are beyond the control of management.

Offsetting these negatives, passenger numbers have grown at an average of 5.5% per annum over the last twenty years and together with the limited capacity at a number of airports has given airlines control over their pricing power.

The sector is therefore not without its rewards, but the risks and volatility associated with regular headlines on terror threats, weather warnings, strikes and gyrating fuel prices will put many off.


Emerging Markets

This week I take a look at Emerging Markets. Having enjoyed a strong 2017, Emerging Market equities have been firmly out of favour this year on the back of persistently negative news flows relating to economic, political and market developments.  In particular, crises in Turkey and Argentina have prompted concerns of contagion risk. More broadly, Emerging Markets have come under pressure from rising trade tensions and a strengthening US dollar, which is being supported by the fact that the US Federal Reserve is raising interest rates relatively quickly compared to other major central banks.

The reason that US dollar strength is seen as a negative for Emerging Markets is that their economies typically borrow in dollars whilst paying the interest out of local currency profits, leading to a potential funding mismatch in the event of dollar strength. In the late 1990s, this situation led to defaults by Brazil and Russia, followed by a crash in the Asian “tiger” markets. Since then lessons have been learnt and central banks in these countries have kept better controls over borrowing in US dollars. However, it is worth noting that overall borrowing across all Emerging Markets ballooned from $21 trillion in 2007 to $63 trillion in 2017.

Intriguingly, this negative sentiment has left Emerging Market equities looking cheap both in absolute and relative terms. In aggregate, they now trade at a historically large discount to Developed Market equities, despite having a superior long-term growth outlook. In 2018 and 2019, for example, Emerging Markets are expected to grow roughly twice as fast as Developed Markets. This looks attractive for investors with a long-term focus that will be able to ride out further short-term weakness in the event that US/China trade frictions escalate and/or the dollar strengthens further.


Stocks in Focus: Standard Life UK Smaller Companies Trust

My focus this week is Standard Life UK Smaller Companies, a £380m investment trust that aims to achieve long-term capital growth by investment through quoted UK smaller companies.

The trust was launched in 1993 and the current manager, Harry Nimmo, took over in 2003. Nimmo started working for Standard Life Investments in 1985 and is currently entrusted with almost £2bn of assets under management in the UK smaller companies sphere.

The Trust comprises of approximatively 60 holdings representing Nimmo’s highest conviction investment ideas. The ideas are initially found within the Numis Smaller Companies Index; however, in contrast to many peers, he will hold onto companies which have grown larger than his reference benchmark. This philosophy is only true of companies that still fit his criteria. The risk is managed carefully by trimming large holdings, ensuring that they stay below five percent of the total portfolio.

Nimmo focuses on the fundamentals of companies and has a quality bias, preferring companies with long term contracts, an element of pricing power over competitors and without excessive debt. This investment process has worked well for the Trust, which has delivered a five year capital return of 77.6% for its share price compared with 38.9% for his reference index.

Earlier this year, the trust announced a potential merger with the Dunedin Smaller Companies Trust, which has a market cap of £137m. The merged entity will still be managed by Nimmo and the larger assets under management will enable the trust to reduce the annual management charge and improve liquidity, benefitting all shareholders. Overall, the Trust offers exposure to an under researched area of the UK market via an experienced manager with a proven track record and process.