Tag Archives: stock prices

Stocks in Focus: Aberforth Smaller Companies Trust Plc

This week I am looking at Aberforth Smaller Companies, a UK-focused investment trust that invests predominantly in smaller quoted companies. The fund is run by a team of six experienced investment managers, including Alistair Whyte and Richard Newbury, who have both been with Aberforth since the fund was launched in 1990.

Each manager specialises in a group of sectors, and picks stocks based on the Trust’s value style of investing. This approach focuses on companies that are undervalued and often out of favour with investors, offering the opportunity for greater returns when the company returns to favour.

As a company grows and transitions from a value stock to a growth one, the managers take profits in order to reinvest in other value opportunities, starting the process again. Following this process, the levels of turnover seen recently have been higher than usual (22%) due to the disparity of valuations between stocks and the increased volatility the market has seen since the beginning of the year.

The management style has remained consistent and this strategy has proven successful over the long term, achieving annualised returns of over 13% since it launched. Reassuringly, the fund has maintained this strong performance over the last 12 months, gaining 10% in Net Asset Value (NAV) against 7% for its benchmark.

Over the last few years, some company valuations have become somewhat stretched despite market uncertainties spanning the UK and US.  In addition, there has been a significant amount of corporate activity as companies look to grow through acquisition rather than purely organic means. These factors make it increasingly difficult to identify undervalued smaller companies with reasonable prospects and it is common for investors to use a collective fund such as Aberforth Smaller Companies for exposure to this part of the market.



Stocks in Focus: Rolls-Royce

This week I am looking at 112-year-old British company, Rolls-Royce, and its biggest transformation plan in nearly 20 years. During a capital markets event last week, chief executive, Warren East, stated that an overcomplicated way of working was holding the engineering giant back. A six-month long evaluation revealed unnecessary complexities in processes and a lack of accountability and cost awareness throughout the business. As a result, Mr East has announced that he will be implementing some further restructuring in the business as part of the ongoing changes.

Earlier this year, the CEO announced plans to consolidate the company into three focused business units – Civil Aerospace, Defence and Power Systems, as opposed to the current five business unit structure. This is designed to remove management duplication between the three new units, with each having a greater degree of autonomy to allow them to work faster. The announcement made last week will involve cutting 4,600 back office and middle-management jobs over the next two years to make the business simpler and more efficient. All of the redundancies will involve non-manufacturing staff, with roughly two-thirds affecting the UK headquarters in Derby. The company currently needs production staff to help it deliver a sizeable order book of new aero engines. This shake-up is aimed at saving £400m a year by 2020 and generating about £1.9bn in free cash flow over the next five years.

It has been a tough couple of years for Rolls-Royce after five profit warnings, dividend cuts and a dividend freeze. The new plan sounds promising and brings a breath of fresh air. Investors welcomed the transformation plan and sent the shares soaring to a six-month high. However, the business will need to start delivering against its targets on operational improvements, cost reductions and cash generation before it can convince the market that it is on a sustainable path to recovery.


Stocks in Focus: Pennon Group

This week I am looking at Pennon Group, which recently released its full year results to 31 March 2018. The group is split between two main functions, water and sewage services the South West of England and Viridor, the UK’s largest waste management recycling company.

Pennon’s results were met with a positive reaction from the market and shortly after the release the shares had risen by 5%. Pre-tax profits had risen by 25%, following strong performance from the Viridor and South West Water divisions, and the company confirmed another dividend rise of 7.3%.

Viridor accounts for 52% of the group’s revenues and within the results they announced that they have been encouraged by the ‘Blue Planet’ effect. Ever since the popular BBC program aired in late 2017, the country has gained focus on the need to control plastic consumption and to improve recycling efficiency. Viridor is at the forefront of this and are hoping that changes will be announced in the Resources & Waste Strategy later this year that will continue this momentum.

Despite these positive results, the sector still faces regulatory pressures and the utilities industry is set to see price controls from 2020. The price controls are based on the Regulatory Asset Base, this is a system designed primarily to encourage investment in the expansion and modernization of infrastructure.  However, these utility companies will work on an allowed rate of return in which they recoup the investment from consumers, therefore capping future income.

These pressures are affecting the whole industry but Pennon remains in a strong position. They have the best record of water quality and customer service in the sector and have less regulatory exposure than competitors due to the diversification offered by the Viridor business.


Points of View: US/China Trade

This week saw a step back from the brink of a US/China trade war.  The two countries announced that the US has halted plans to impose tariffs on up to $150bn of imports and China made pledges to significantly increase its purchases of US agriculture and energy exports.

President Trump’s administration has taken a strong stance against Chinese exports, stating that Beijing needs to pay the price for decades of unfairly acquiring US intellectual property.  Washington is also keen to rebalance the $337bn trade deficit it has with China.  Towards the end of March, Trump announced tariffs on up to $60bn of Chinese imports.  Beijing retaliated with tariffs on $3bn of US imports, with the threat of this escalating into a full trade war.

The market has reacted positively to the recent announcement; however hardliners on both sides are disappointed with the change of stance.  US critics are unhappy that the focus has shifted to reducing the trade deficit, rather than a harder push for reforms in China to prevent the acquisition of US intellectual property.  In the middle of the trade negotiations is the fate of ZTE, a Chinese telecoms company that has been handed a seven year ban on sourcing US components.  The ban came in last month, after the company admitting violating US sanctions on Iran and North Korea.  Chinese critics are unhappy that the fate of the company, and its 70,000 employees, has not been secured.

Whether the US can reduce their deficit with China and achieve real change in the country remains to be seen but neither will be easy.  In return China will expect a lifting of US restrictions on high-tech exports to China imposed in 1989 and a quick resolution for ZTE.  These negotiations are complex and the threat of them breaking down and a trade war re-emerging is still present.


Points of View: Schroder Asia Pacific

This week I am looking at Schroder Asia Pacific, an investment trust which invests in equities listed in the Asia Pacific region excluding Japan. The fund has been managed by Matthew Dobbs since inception in 1995 and has become the largest trust in the sector.

Performance of the fund has been very strong over the last 3 years, 51% vs 29% for the MSCI Asia ex Japan benchmark, which has been driven by large weightings to Chinese and technology based stocks.

Chinese equities make up around half of the portfolio (this is c3.7% overweight compared to the benchmark) and this has been steadily increasing over the last couple of years. Mr Dobbs gains exposure to these stocks through the Chinese and Hong Kong stock exchanges, traditionally preferring the Hong Kong listed companies due to tougher listing requirements and better corporate governance. Mr Dobbs feels that this weighting is justified due to favourable economic conditions and a shift towards services and the consumer.

Technology is the largest sector weighting in this fund at 34%. Over the last 18 months the technology sector has seen strong performance and those listed in Asia have been no different. Despite the strong rise in the share price of companies like Alibaba and Tencent (the Chinese equivalent of Amazon and Facebook respectively), Mr Dobbs feels that these companies will continue to be the key beneficiaries of the technological disruption going on in the region. Tencent already has around 320m users who spend more than 4 hours a day on the platform.

Arguably, the large weightings to China and technology increase the risk of the fund. However, over the 23 years since inception, Mr Dobbs and his team have established a great track-record of identifying drivers of growth for the fund to benefit from.


Stocks in Focus: Greene King

This week I am looking at Greene King, following a strong share performance at the end of last week after announcing its pre-close update.  The share price jumped over 10% on Thursday 12 April and, at the point of writing, has continued to rise since.

Recent snow and cold weather negatively impacted sales and contributed to an overall fall in sales when compared with last year.  Like-for-like sales were down 1.8% for the first 49 weeks of its financial year.   Accommodation and drinks had positive like-for-like sales, indicating that the food-led pubs were the weakest part of Greene King’s business.  The results were broadly in line with consensus, however the shares rose strongly following the announcement.  Sentiment has been low towards the stock and investors reacted positively to a lack of bad news.

Greene King continues to operate in a competitive industry, facing a number of challenges.  Food-led pubs in particular face significant competition, which is putting pressure on margins and issues with Greene King’s Fayre and Square brand have further impacted profits.  Looking forward, consumer spending remains an on-going question and real wage growth remains flat.  However, the shares look cheap on a valuation basis and pay a dividend yield of approximately 5.8%.  Greene King’s management would also point out that the dividend has increased for the last 64 years – an impressive record.  The recent share price movement may be an indication that sentiment towards the stock is changing and goes to show that for an out-of-favour stock, no bad news can sometimes be good news.


Point of View: US/China Trade

The swing towards populist politics around the world continues to add strength to nationalist agendas and, in turn, act as a catalyst for trade frictions. Of particular concern to investors is the escalating trade fight between the US and China, which has been set in motion by the protectionist policies that have been coming out of the White House since early March.

Initially, the Trump administration announced hefty tariffs of 25% and 10% on steel and aluminium imports respectively. The move was broadly condemned (the EU, for example, threatened tariffs on bourbon, jeans and Harley-Davidson motorcycles in response) and broad-based exclusions were quickly rolled out for its allies. Subsequently, and more significantly, Mr Trump has chosen to target China alone. Towards the end of March he announced tariffs on up to $60bn of annual Chinese imports and stated that Beijing needs to pay the price for decades of unfairly acquiring US intellectual property. For its part, Beijing quickly revealed plans to apply tariffs on 128 US products (accounting for roughly $3bn in imports) and stated its intention not to back down. Since those announcements, there have been further tit-for-tat statements and the Trump administration is reportedly planning tariffs on an additional $100bn of Chinese imports.

This is clearly a concern as escalating trade tensions between the two largest economies in the world could inflict meaningful damage to global growth prospects. Our view is that investors should expect common sense to prevail. Politicians in democracies need growth and prosperity to be re-elected. Tariffs are therefore likely to settle at a level that is mildly inflationary but does not significantly curtail economic activity and growth.