L&G posted a rare update of its main figures in Q1 20, as it usually only releases half-year results. The company said it is in a good shape, with a developing Pension Risk Transfer business (transactions of £1.2bn with a business pipeline of £26bn). Annuity sales are growing and the asset management business recorded net inflows of £10.6bn. The insurer will issue Tier 2 subordianted debt and said its capital position remains solid. This announcement confirms our estimates for the 2020 performance.
Companies: Legal & General Group
L&G released operating profit from continuing divisions of £2,514m, up 17% yoy. All business units posted an upward trend in earnings. The profit excludes the mortality release of £155m and the Mature Savings and General Insurance businesses (£11m). Net profit stood at £1,834m. The proposed dividend is 12.64p/share, bringing the annual dividend to 17.57p. The Solvency II ratio stood at 184%. We keep our positive opinion on L&G, the business model of which allows it to benefit from increasing numbers of deaths.
L&G’s operating earnings improved significantly in the H1 19 (5.6% to £1,005m). This performance was better than expected. The insurer will revise its mortality hypothesis in the H2 with an additional £200m on operating earnings by the end of the year. The reduction in the capital position is not particularly a source of concerns and it should recover in the H2. The increased interim dividend to 4.93p/share and the growing business confirm the solidity of the Group.
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L&G reported FY18 operating profit from divisions of £2,231m, 1% above estimates. All business lines posted an improvement in profitability, mainly L&G Retirement which recorded a 21.8% increase in its operating earnings to £1,115m. AuM crossed the threshold of £1tn. Net profit reached £1,827m, -3% yoy, as the prior year recorded a one-off US tax benefit of £246m, and perfectly in line with estimates. The proposed final dividend is 11.82p. We keep our positive opinion on the company.
According to Sky News, L&G has instructed Fenchurch Advisory Partners to sell its general insurance business. This is a small business unit that has no significant impact on the insurer’s operating earnings. The revealed valuation matches our figures. However, this sale may be difficult to achieve, as the general insurance market remains tough.
L&G reported an operating profit of £909m, up 5% year-on-year. Except for General Insurance, all business lines posted an improvement in profitability. The Solvency II surplus reached £6.9bn and the coverage ratio stood at 193%. The Board recommended an interim dividend of 4.6p/share vs. 4.3p the year before. We will increase the full-year dividend as we expected only a 2.6% increase compared to FY 17. Our opinion remains positive on the insurer.
The Financial Times revealed in an article that several employees at Legal & General Investment Management (LGIM) have accused the asset manager of a series of compliance and risk failures that potentially cost its clients millions of pounds. The risk culture within the group was qualified as “toxic” and “is reaching crisis levels”.
The insurer said that it has taken these issues seriously. In the months since these allegations were first made, it has conducted a full investigation using external advisers. Results confirmed that LGIM has “a positive, respectful, professional and client-focused culture”. At the same time, the Financial Conduct Authority declined to comment.
L&G posted excellent figures: an increase in its operating profit by 32% to £2,055m, in pre-tax profit by 32% to £2,090m and in net profit by 50% to £1,902m. This exceptional performance is due to the positive impact of the mortality release (£332m) and the one-off US tax benefit (£246m). The proposed final dividend is 11.5p/share, bringing the total dividend to 15.35p/share. Excluding exceptional items, no major changes are expected in our model. We keep a positive opinion on the insurer.
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L&G reported an operating profit of £988m, up 27% year-on-year. Except for General Insurance which recorded a 52% drop in operating profits to £15m, all business lines posted an improvement in profitability. The best performance was posted by Legal & General Retirement (LGR) which recorded a 40% increase to £566m, remaining the major contributor to operating profits (more than 50%). Legal & General Investment Management (LGIM) operating earnings saw a 13% increase to £194m. Legal & General Capital (LGC) raised its profits by 5% to £151m, while Legal & General Investment Management’s (LGIM) earnings were stable at £151m. The Solvency II surplus reached £6.7bn over its Solvency Capital Requirement, corresponding to a coverage ratio of 186% on a shareholder basis. The Board recommended an interim dividend of 4.3p/share vs. 4p a year before.
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AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
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Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
Hipgnosis Songs Fund (SONG LN) has today announced a trading update for the full year ending 31 March 2020. The unaudited NAV has risen 13% YoY to 116.7p, up 14.3% since the last published NAV of 102.2p as at 10 January 2020. This represents a like for like valuation uplift of 11.4%. All equity has been fully deployed and shareholder approval has been sought to increase net debt from 20% to 30%. Revenue is strong with £64.7m generating an EPS of 10.7p (more than 2x the annual 5p dividend target). NAV growth has been driven by revenue statements which were up 2%, and an increase in streaming growth rate assumptions by the independent valuers. The portfolio comprises 54 catalogues, with 13,291 individual songs, now valued at £757m which was acquired at purchase price of £697m on an acquisition multiple of 13.9x – now valued on 15.0x historical earnings.
Companies: Hipgnosis Songs Fund
Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
TCS has confirmed it will pay the previously announced interim dividend of 3.25p. A number of mitigating actions to preserve cash ensures that this is affordable. We estimate the £1.7m payment is less than 10% of cash and available facilities, which should be little changed from the April update. Rent collection levels of 75%, or 86% including deferrals, is resilient under the circumstances. There are also optimistic signs from Europe that people will be shopping in material numbers from 15 June. TCS will have all locations safely open from that date. We lower our NAV forecasts c.2%, mostly for the dividend payment, but also for a tougher outlook for CitiPark. Official guidance understandably remains withdrawn. The shares currently price in a c. 30% decline in underlying property values, which we think is excessive. On this basis, we see upside to the share price, setting it at 235p, still a c. 25% discount to NAV while short-term visibility is low. BUY
Companies: Town Centre Securities
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
Today's update confirms Equals delivered another quarter of significant revenue growth YoY, delivered by organic and acquisitive means. Performance across the product range has varied unsurprisingly and we expect these trends to continue over Q2/20E. Given the great uncertainty over the duration and severity of COVID-19's impact on the group, we withdraw FY20-21E forecasts and place our recommendation Under review, awaiting further clarity. Equals is supported by a strong, debt-free, balance sheet and is undertaking measures to further conserve cash.
Companies: Equals Group
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
Seneca Global Income & Growth Trust (SIGT) is managed by a four-strong team at Seneca Investment Managers, seeking undervalued securities across multiple asset classes in order to diversify the trust’s risk and return drivers. Its UK equity portfolio was particularly negatively affected by the coronavirus-led market sell-off in March, given its focus on domestic, mid-cap value stocks, which performed relatively poorly. However, these holdings could stand SIGT in good stead during an economic recovery. The trust’s board has committed to continue paying quarterly dividends, using reserves where necessary if income falls short, which seems likely given the number of dividend cuts announced by corporates in response to the global pandemic.
Companies: Seneca Global Income & Growth Trust