Intelligent Investing

Transcription

1 To us there are no foreign markets. TM Intelligent Investing Published: 6 October 2014 Contents View on Europe View on Europe 1 Equities Dunelm Group PLC Anglo American PLC 2 2 Equity Screen 3 Investment Trusts Picton Property Income Limited 4 Fixed Interest Ladbrokes PLC 4 Profit Takers 5 The information provided in Intelligent Investing is not tailored advice it has no regard for the specific investment objectives, financial situation or needs of any specific person. Investment involves risk. The value of investments and the income from them can go up as well as down and you may not get back the amount originally invested. This is a marketing communication under FCA rules. For important information please see the full disclosures. Intelligent Investing October 2014 One area of the world that remains problematic is Europe. Whilst growth is picking up elsewhere, conditions remain very subdued here. Italy is back in recession and France is at least as bad with virtually no inflation or growth and unemployment standing at around 10%. Even Germany, which accounts for almost 30% of Eurozone GDP appears to be struggling, posting negative growth in Q2. Although there has been some improvement in the peripheral countries, the growth outlook is looking extremely uncertain, especially as the sanctions against Russia will be a strong deflationary force. The ECB has done so much less than other central banks to rejuvenate its economy and has not entertained up to now the idea of fully fledged Quantitative Easing (QE). However, there are now signs that this could be changing. ECB President, Mario Draghi, has once again made a statement of similar importance to his earlier promise to do whatever it takes to stabilise the Eurozone in August This time a statement that he would use all the available instruments needed to ensure price stability was greeted very favourably by markets as it hinted at the likelihood of the introduction of QE, in the future. It was generally accepted that the ECB was unlikely to implement any new measures at this time as it would wait to see the beneficial effects of the earlier measures announced in July. However, the deterioration in the economy has forced them to move early. The important innovation was that the ECB will now start buying Asset Backed Securities (ABS). Whilst the size of this market in Europe is relatively small this does suggest that fully fledged QE in the form of purchasing sovereign bonds may be introduced in the future. This would be a total change of policy. In addition to the ABS purchases, the ECB will also buy covered bonds which are a safer form of ABS. These measures should make it easier and cheaper for riskier borrowers to obtain loans and will help the ECB achieve its aim of rebuilding its balance sheet to its 2012 size, which implies a 1 trillion expansion. However, there is no guarantee that these new measures will be effective in kick-starting the economy. Recent Euro weakness is helpful and the ECB is hoping that a combination of cheap loans, negative interest rates and these new measures will be enough to encourage investment, home buying and construction. What is still required, however, is for all European governments to support structural reforms without which no significant sustainable progress can be made. France and Italy have to eventually accept this and act accordingly. The Bundesbank is unlikely to be happy if the ECB is eventually forced to buy up the sovereign bonds of countries whose credit rating is declining due to their failure to implement necessary reform. President Draghi has again pulled a rabbit out of a hat but against a backdrop of political disunity and geopolitical uncertainty, not to mention the worrying longer-term demographic issues of a rapidly ageing population it would appear he will continue to have his work cut out to engineer faster European growth. Nigel Cuming Chief Investment Officer 1

2 Equities Dunelm Group PLC Market cap: Share price: 2014A 2015F 2016F Revenue ( M) Earnings per Share (p) Dividend per Share (p) Dividend Yield 2.1% 2.6% 2.9% Free Cash Flow Yield 3.9% 5.2% 5.7% Price Earnings Ratio Return on Capital Employed 1,603m 794p 69.6% 67.5% 65.6% Simply Value for Money Since its founding from a market stall in Leicester in 1979, Dunelm has grown to employ over 9,000 people in 140 stores across the UK. They are now the market leader in the 10bn UK homeware market focusing on home textiles and also offering a made-to-measure service for curtains, blinds and accessories. In mid-september they published full year results to the end of June. Annual revenue grew by 7.8% to 730m with likefor-like growth up 2.1%. During the year a number of operational improvements and initiatives were implemented: a) next day delivery now offered on 15,000 items, b) Dunelm at Home bespoke service was rolled out in 49 stores, c) opened 12 new stores and plan to open another 11 this year, d) launched their inaugural TV advertising campaign. Over the last ten years, the business has consistently delivered high teen returns well ahead of the sector. More impressive still, it has produced these returns while steadily reinvesting in growing its capital base. They are now the market leader having taken substantial market share from both Argos and John Lewis. In spite of these achievements and the enviable outlook the shares have fallen like a stone in recent months, down 22% since mid-april. This presents an excellent buying opportunity for this quality business that has plenty of growth potential. It trades on a very respectable 16.0x 12 month forward earnings and yields 2.8%. It is also worth noting that the dividend per share has being growing at an annual rate of 30% over the last five years. Simon McGarry Senior Equity Analyst Anglo American PLC Market cap: Share price: 18,533m 1327p 2013A 2014F 2015F Revenue ( M) Earnings per Share (p) Dividend per Share (p) Dividend Yield 3.3% 3.7% 3.7% Free Cash Flow Yield -5.3% -4.6% -0.1% Price Earnings Ratio Return on Capital Employed 13.2% 10.5% 10.9% Glimmers of Hope Anglo American is one of the world s largest mining companies and through its portfolio of assets including precious commodities (platinum, diamonds), base metals (copper, nickel) and bulk commodities (iron ore, manganese, coal) is uniquely exposed to three distinct end markets; Consumables, Infrastructure and Energy. Like its global peers Anglo American is leveraged to the commodity super cycle, which is widely viewed to be slowing down as Chinese growth enters a more mature phase. Unfortunately Anglo American has also had its own company specific issues, with a return on capital employed that has historically been below its peers due to an eclectic range of non-core, lower returning assets. The group also has significant exposure to South Africa, accounting for 63% of 2013 operating profits, with the recent strikes and calls for the nationalisation of the mining industry not playing well with investors. On a more positive tack, since 2007 the company has embarked on a significant restructuring program, demerging non-core assets and acquiring new copper and iron ore resources. Furthermore the arrival of new CEO Mark Cutifani in April 2013 seems to have improved the labour situation in South Africa, culminating in the signing of a 3 year wage agreement with the unions earlier this year. Therefore, whilst the macro environment remains challenging for all the companies in the sector, the company specific issues affecting Anglo American are dissipating and we believe that the underperformance of the shares, -28% over the last 5 years, looks increasingly unjustified compared to both BHP Billiton and Rio Tinto which have outperformed by 4% and 21% respectively over this period. Marc Pullen Senior Equity Analyst Rio Tinto BHP Billiton Anglo American Source: Bloomberg Past performance is not a reliable indicator of future results. Intelligent Investing October

3 Equity Screen European concern As discussed earlier in this publication the Eurozone economies have been weaker than expected this year. Of the 4 largest Eurozone economies only Spain managed to report positive GDP growth in the last quarter with Italy, Germany and France contracting at an annual rate of 0.7%, 0.6% and 0.1% respectively. Eurozone unemployment remains stubbornly high at 11.5% while the latest Purchasing Managers Index has hit a 9 month low. With Eurozone inflation (CPI) at just 0.4% and growth slowing the ugly prospect of deflation has become more likely. This is in stark contrast to the performance of the UK economy. Here GDP is growing at an annual rate of 3.6%, unemployment is down to 6.2% and inflation is a healthy 1.5%. As a result we have decided to search through Canaccord Genuity s proprietary equity tool Quest for UK listed companies that have strong domestic franchises (i.e. low exports), are cheap with healthy balance sheets and a history of strong returns. We believe these stocks should provide a good opportunity for positive real returns for investors over the long term. Search Criteria 1. Cheaper than the average stock in the FTSE Exports are less than 50% of total revenue 3. Average returns have beaten the cost of capital over the last 10 years 4. Leverage of less than 3x 5. Fixed charge cover of more than 4x Market Cap ( m) Prior Year Exports/ Total Sales Dividend Yield 12 month forward Price Earnings Ratio Prior Year Net Leverage Prior Year Fixed Charge Cover Performance over previous 1 Month 3 Month 6 Month Centrica Gas Water Multi Utilities 15,093 34% 6.0% % -4% -8% BSkyB Media 15,041 0% 4.0% % -3% -2% SSE Electricity 14,733 3% 6.1% % -6% 2% First Quantum Indl Metals & Mining 6,880 42% 0.9% % -15% 8% Randgold Mining 3,850 0% 0.8% % -16% -9% Sage WM Morrison Berkeley Group Software & Services Food & Drug Retail Household Goods 3,839 44% 3.6% % -9% -14% 3,710 0% 8.6% % -13% -23% 2,967 0% 8.2% % -12% -15% Drax Electricity 2,502 0% 2.7% % -10% -17% Rightmove Media 2,049 1% 1.7% % -8% -20% Homeserve Support Services 1,049 49% 3.6% % 2% 1% Paragon Group Financial Services 1,030 0% 3.0% % -5% -20% N Brown Genl Retailers 1,006 4% 4.5% % -17% -38% Northgate Support Services % 2.7% % -10% -12% This screen returns an interesting mix of stocks across a variety of sectors. These include the Berkeley Group the UK house builder and WM Morrison which yield 8.2% and 8.6% respectively ranking them both among the top 3 yielding stocks across the entire FTSE 350. BSkyB also makes an appearance, it yields 4.0% and has grown the dividend for 10 consecutive years at an annual rate of 18%. Unsurprisingly with their strong domestic franchises, utility companies feature prominently with Drax, Centrica and SSE all present. SSE appeared in last month s edition of this publication due to its extremely impressive dividend track record, 6.0% yield, 22 consecutive years of grown at an average annual rate of 10%. Paragon, the specialist UK finance provider published impressive Q3 results in July with profit up 17% year on year, loan impairments down and an improving net interest margin. It looks cheap on a range of valuation metrics most notably 12-month forward P/E of 9.8x. Despite yielding 3.0% they have an extremely conservative dividend policy of 3x cover. Business management software company Sage has an exceptional record of improving their returns. Roughly 44% of their revenues are generated outside the UK but it is worth noting that they have substantial exposure to the US which grew GDP at an annual rate of 4.2% in the last quarter. A recent acquisition of a US payroll service provider for 96m should also help Sage shift their focus towards more of a subscription based model. Past performance is not a reliable indicator of future results. Intelligent Investing October

4 Investment Trusts Picton Property Income Limited Market cap: 276m Share price: 62.75p Latest NAV (30/6/2014): 58.9p Premium / (Discount): 6.5% Gross dividend yield: 4.75% Property Portfolio London 30% South East 35% Rest of UK 35% Source: Picton Property Income LTD Property Picking Up Since its establishment in 2005, Picton Property Income Limited has grown aggressively having made a NAV accretive acquisition of Rugby Estates Investment Trust in With a portfolio of 441m they are now one of the largest London listed offshore property investment companies. Gearing has also been reduced to 40% which is a relatively modest level by commercial property standards. This debt is very secure with an average maturity of 13 years making it one of the longest books in the sector. They own and manage a diversified secondary property portfolio that is skewed toward the south of the UK. Tenancy is good with an average lease length of 6.6 years whilst void rates continue to decline, standing at 8% currently, below the industry average. Additionally there is excellent diversification across their five primary sectors: office, retail, retail warehousing, industrial and leisure. They are looking to scale the business further through the acquisition and refurbishment of secondary UK property, which in CEO Michael Morris s own words will help to enhance the potential for NAV and income growth from the portfolio. With a fully covered dividend, inflation protection and growing earnings we expect further dividend and NAV growth. This view is supported by the fact that UK property prices, outside of London are still a third below their 2007 peak. Despite the strong performance of commercial property in 2014 coupled with its income and growth appeal, property remains an under-owned asset class compared to historical levels. As a result, this fund should be considered by investors looking for a mix of real asset diversification, income and growth. Ross Garrard Stockbroker Fixed Interest Ladbrokes 5.125% Sep 2022 Rating: BB/BB (S&P/Fitch) Market price: Yield to maturity: 4.9% Odds on Favourite Ladbrokes is the second largest operator in the UK retail gaming industry. The business is divided along the lines of retail (betting shops) and digital (online betting and games). International operations include Ireland, Belgium, Spain and Australia (online only). Retail has proven to be a relatively stable source of income. It generates 92% of group operating profit and comprises mainly of over the counter sports betting and gaming machines. They have struggled in digital gaming which has been the major area of growth for the UK betting industry. Their recent deal with Playtech should put their games offering on par with their competitors but the sports book product remains uncompetitive. They are also under represented in the mobile market, which is the next avenue of growth. All of this points to potential higher investment capex requirements in the future. However, while they are behind the curve in terms of digital development, there needs to be a very significant dent in their retail business before credit metrics become stretched. So far, this division has been stable throughout the economic cycle. Their cash conversion is high resulting in good liquidity profile and they plan to maintain net leverage at under 2x giving plenty of buffer from the bank covenant tests. Currently they are subject to relatively conservative covenants, with net leverage of no more than 3.5x, and interest cover of no less than 3x. These bonds rank equally with bank credit facilities and have an incurrence test whereby Ladbrokes cannot assume more debt if interest cover is below 2.75x. Overall, this bond is a sound credit with good covenant head room and at its current yield offers attractive value in the retail bond market. KyVan Tang Senior Credit Analyst 3.0x 10.0x 2.5x 9.0x 8.0x Net Leverage 2.0x 1.5x 1.0x 7.0x 6.0x 5.0x 4.0x 3.0x Intrest Cover 0.5x 2.0x 1.0x 0.0x FY2009 FY2010 FY2011 FY2012 FY2013 FY x Source: Ladbrokes Net Leverage Interest Cover Intelligent Investing October

5 Profit Takers In addition to providing insight and analysis of particular investment opportunities each month, we also review stocks that have shown strong performance in recent months and as a result investors might consider taking profits. These stocks are not necessarily explicit sell recommendations however, you may feel now is a good time to take profits and allocate your capital elsewhere. Please do contact your portfolio manager to discuss any of these ideas or any other aspect of your portfolio held at Canaccord Genuity Wealth Management. Market Cap ( m) Share Price (p) Prior FY Dividend Per Share (p) Current FY Dividend Per Share (p) Prior FY Price Earnings Ratio Current FY Price Earnings Ratio Performance over previous 1 Month 3 Month 6 Month Go-Ahead 1, % 5% 29% BTG 2, % 6% 27% Micro Focus 2, % 19% 25% Pearson 9, % 5% 19% InterContinental Hotels 5, % -9% 16% Royal Bank of Scotland 41, % 8% 13% BAE 14, % 6% 11% Man Group 1, % 0% 11% Smith & Nephew 8, % -3% 10% AstraZeneca 54, % -3% 9% SABMiller 53, % -2% 9% Reckitt Benckiser 37, % 1% 8% Imperial Tobacco 25, % -3% 8% Compass 16, % -7% 7% Legal & General 13, % -2% 6% National Grid 32, % 2% 6% Pennon 3, % -5% 6% Reed Elsevier PLC 11, % 2% 6% Glencore 43, % -3% 5% Capita 7, % -1% 5% SEGRO 2, % -1% 5% RSA Insurance 4, % 0% 5% Cineworld % -10% 5% William Hill 3, % 7% 4% Premier Oil 1, % -9% 4% British American Tobacco 64, % -4% 4% Domino's Pizza Group % 9% 4% Past performance is not necessarily a reliable indicator of future results. Intelligent Investing October

6 Glossary The glossary is not intended as a technical definition as most of these metrics can be calculated in a number of different ways. Earnings per Share (EPS): EBITDA: Dividend Yield: Free Cash Flow Yield: Interest Cover: Net Leverage: Price Earnings Ratio (P/E): Return on Capital Employed: Tables: Canaccord Quest TM An indicator of a company s profitability, it is the portion of profit after tax allocated to each outstanding share in issue. Earnings before Interest, Tax, Depreciation and Amortisation: Enables better comparison between companies as it is not affected by the way that the company is financed or by subjective accounting charges for depreciation and amortisation. Dividend per share divided by the share price, often expressed as a percentage. For historic periods the average share price for the year is used, for forecasts the current share price is used. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow yield is the annual free cash flow of the company divided by the market capitalisation of the firm. This is a measure of how easily a company can pay interest on outstanding debt. It is calculated as EBITDA divided by net interest payable. Net debt divided by EBITDA; it s a measure of a company s ability to meet financial obligations. Share price divided by EPS. For historic periods the average share price for the year is used, for forecast years, the current share price is used. It shows how much investors are willing to pay per pound of earnings. A measure of a company s profitability and the efficiency with which it uses its capital. It is calculated as operating profit divided by capital employed. F Forecast results, figures based on the combined estimates of analysts covering the company. A Actual results company s published results. Canaccord Genuity s proprietary online valuation and analytical tool which combines consensus market figures with the QuestTM Discounted Cash Flow (DCF) Valuation Model. Investments discussed in this document may not be suitable for all investors. Investors should make their own investment decisions based upon their own financial objectives and resources, and if in any doubt, seek specific advice from an investment advisor. Intelligent Investing is a marketing communication under FCA rules; it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and we are not therefore subject to any prohibition on dealing ahead of its dissemination. Prices are as at market close The information provided is not to be treated as investment advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein. Canaccord Genuity Wealth Management is a trading name of Canaccord Genuity Wealth Limited (CGWL) and Canaccord Genuity Financial Planning Limited (CGFPL), both of which are authorised and regulated by the Financial Conduct Authority. Both are wholly owned subsidiaries of Canaccord Genuity Group Inc. and have their registered office at 41 Lothbury, London, EC2R 7AE. CGWL is registered in England no , CGFPL is registered in England no Canaccord Genuity Wealth Management ( CGWM ) is a trading name of Canaccord Genuity Wealth (International) Limited ( CGWI ) which is licensed and regulated by the Guernsey Financial Services Commission, the Isle of Man Financial Supervision Commission and the Jersey Financial Services Commission and is a member of the London Stock Exchange and the Channel Islands Securities Exchange, CGWI is registered in Guernsey no and is a wholly owned subsidiary of Canaccord Genuity Group Inc. Registered office: 2 Grange Place, The Grange, St. Peter Port, Guernsey, GY1 2QA. Intelligent Investing October