A long, long time ago, I can still remember how, that election had us all talking about sterling (well, some of us). Instead now we are hard put not to talk about mass dividend cuts, with Link Group estimating dividend cuts of 47% or more in the UK equity market. Way back in those distant epochs of early December 2019, we appeared to be approaching a greater degree of certainty about the shape of the future in the UK: an election was in the offing which promised to help resolve the outlook for our relationship with the EU and the rest of the world, and to clarify what kind of environment businesses would face going forward. At the time, GBP looked undervalued on the basis of the Economist’s ‘Big Mac’ index (a way of looking at the relative valuations of various currencies based upon the relative cost of a McDonald’s Big Mac in different countries). With signs that global investors’ positions in UK assets were starting to move towards normality from their previous large underweights, it seemed prudent to highlight that a rising currency could prove a headwind for dividend streams. With UK payout ratios (the proportion of earnings paid out as dividends) very elevated, and in general terms a roughly inverse relationship between UK corporate earnings and the strength of the currency, dividends funded by overseas earnings logically seemed somewhat vulnerable. Sure enough, following the general election we saw the GBPUSD rate move up to c. 1.35 in fairly rapid fashion (having traded below 1.30 since May 2019). Even so GBPUSD remained short of the ‘fair value’ level of c. 1.42 suggested by the ‘Big Mac’ index at the time, but there were certainly positive signals in sentiment surveys that suggested sterling was setting up for a more durable rally.
Companies: TIGT ASEI JCH CTY DIG SCF BRIG ASL
March is traditionally considered ‘ISA season’, when UK investors focus on their annual ISA allowance and are encouraged to ‘use it or lose it’. As we highlighted in our article last year, investment trusts within ISAs are an excellent way to benefit from the power of compounding over the long term, without worrying about the tax consequences of whether you are receiving capital gains or dividend income. Our analysis last year showed that the top ten compounding trusts – since Personal Equity Plans or PEPs (the precursor to ISAs) were first introduced – come from a very wide range of asset classes. We determined that the distinguishing factors between them were manager skill and the unique ability, afforded by the structure, for investment trust managers to truly invest with a longer-term horizon than the open-ended competition.
Companies: UKW JCH JPGI ASEI CTY
Aberdeen Standard Equity Income Trust (ASEI) aims to provide shareholders with an above-average income and real (inflation-adjusted) growth in capital and income, through investment in a diversified portfolio of predominantly UK equities. ASEI is managed by Thomas Moore, who also manages/co-manages the open-ended Standard Life UK Equity Unconstrained Fund and the ASI Income Focus Fund. ASEI holds companies where the manager believes the market has not correctly understood (and valued) the changing operational dynamics of the underlying business. The manager adopts an all-cap approach, holding a substantial proportion of assets in small- and mid-cap companies; ASEI’s closed-ended structure allows Thomas to hold greater exposure to less liquid smaller companies, compared with his OEIC product. Portfolio construction is unconstrained by benchmark weightings, and driven by bottom-up stock analysis. ASEI has now raised its dividend every year for the past 19 years (each year since launch). The present yield of c. 5.1% (as of 14/02/2020) represents a sizeable premium to the wider market and a yield premium to the trust’s own history under Thomas’s tenure, and is now at around its highest level since 2009. The board has announced it intends to increase the dividend by at least 4.4% over 2020 to a minimum of 21.4 pence per share. ASEI currently has net gearing of c. 13% in place; this is a function of the stock-specific opportunities Thomas and the team have presently identified. Long-term returns have exceeded the benchmark, but performance more recently has been challenging; however, this is not surprising given the wider market environment. This has likely contributed to the discount widening to c. 7.8% (as of 27/02/2020), which we discuss in more detail in the Discount section.
Companies: Aberdeen Standard Eqty Inc. Tst
It used to be said that in central London you were never more than six feet from a rat. Nowadays, the saying has been updated: you are never more than six feet from a Pret-aManger. Before Pret came McDonald’s, serving the same burgers in the same buns from London to Tokyo. Such was the ubiquitous nature of the fast food giant that in 1986 The Economist launched the ‘Big Mac Index’. Presently, this famous index of relative currency strength suggests sterling is seriously undervalued  . Sterling has certainly been weak since the 2016 Brexit referendum, and remains c.12% below its level on the day before the Brexit vote. Yet it has climbed c.8% from its lowest point in August (as of 26 November) as a no-deal Brexit appears to be off the table. We believe a more sustained rebound in the currency could be on the horizon – at least, assuming the Conservatives win the general election. This could be good news for those owning UK assets but, for UK companies with overseas earnings, it might make meeting and growing dividends more challenging. For UK large-caps in particular, a further rise in sterling could lead to dividend growth being weak, given the large proportion of those companies’ earnings are derived from overseas. Open-ended equity income funds will have no protection against this, but it is exactly the sort of environment where the closed-ended structure can shine. By being able to build up revenue reserves, investment trusts have the ability to build up a safety net against this sort of eventuality, as we discuss below.
Companies: SCF JCH BRIG CLIG ASEI
In recent years active management has been under almost constant attack from the rise of passive funds. Yet threats often give rise to opportunities: we believe that complacency is always the real enemy, and so competition from passive funds can be seen as a positive development in the industry. Active managers have been forced to up their game, and as we discuss below, our research shows that the UK closedended universe has become significantly more active in response to the challenge of cheap passive products. Here we discuss this shifting landscape, its implications for investors and the varying measures for ‘activeness’ available to investors.
Companies: EWI SMT HOT ASEI
Aberdeen Standard Equity Income aims to offer investors an above-average income, while also providing real growth in capital and income for investors. This is achieved through investing in a diversified portfolio of predominantly quoted UK equities. The long-standing manager, Thomas Moore, utilities a bottom-up approach to identifying opportunities, and is entirely index agnostic in his approach. The end result is a portfolio very different to peers and the benchmark. A stand out characteristic of this is the bias towards the FTSE 250, offering exposure to considerably more growth companies than peers and a typical equity income trust. This is illustrated in the fact that over 60% of the portfolio is invested outside the FTSE 100, showing Thomas’s ability to find companies in unloved areas and take advantage of areas that other managers may be overlooking. For Thomas, the valuation of a company and its cash flows are the most important metrics and he hopes to invest in companies that have high dividend growth potential and a high yield, but with potential for a re-rating in the future. Over the past five years the performance has been volatile, and the trust has struggled to keep up with the benchmark. However this is principally due to the out of favour, value-driven approach of the manager. In particular Q4 of 2018 hindered performance, however the trust has since recovered some of the losses in 2019 and the trust has outperformed the benchmark FTSE All Share year-to-date. The trust has an exceptional record for dividend increases, growing the dividend for 18 consecutive years. Last year saw an increase of over 12%, despite there being considerably fewer special dividends than the year before. The trust is currently trading on a discount of 6%, wider than the sector weighted average discount of 3.5% and the trust’s one-year average discount of 1.9%. Should we see the uncertainty surrounding the UK dissipate, the discount would likely return back close to par.
Aberdeen Standard Equity Income Trust (ASEI, formerly Standard Life Equity Income Trust [SLET]) has been managed by Thomas Moore since November 2011. He is bullish on the long-term outlook for the trust as the yield on the portfolio is the highest since the end of the global financial crisis in 2009, suggesting UK share prices are discounting a recession or another global crisis. The manager says that ASEI’s holdings – chosen from across the market cap spectrum – can be classified in one of three ‘buckets’: global yield (c 40% of the portfolio), domestic opportunities (c 30%) and uncorrelated value (c 30%), and he is finding good opportunities in all three. The trust’s revenue was higher than projected in FY18, leading to an annual dividend increase of 12.3%, which was much higher than the 7.5% compound annual growth rate over the last five years.
Aberdeen Standard Equity Income Trust (ASEI) aims to generate a generous level of dividend as well as long-term growth in capital and income. The board has announced that the FY18 dividend will be at least 18.7p, which is +9.4% year-on-year, considerably higher growth than the rate of UK inflation. This increase will mean that SLET’s dividend has grown for 18 consecutive years. Manager Thomas Moore is continuing to find attractively valued companies with positive fundamentals. He is confident that investment performance will improve with a change in investor focus away from high-growth, highly valued stocks, and he will be able to build on the trust’s positive longer-term record. He says the current growth style bias in the UK stock market means that reasonably priced companies delivering strong results are not being rewarded with higher valuations.
Standard Life Equity Income Trust (SLET) has been managed by Thomas Moore since 2011. He aims to generate above-average income and real capital and income growth from a portfolio of UK equities, which is invested across the market cap spectrum. Following an index-agnostic approach, the manager has restructured SLET’s income stream over the past few years and shareholders are now enjoying a higher distribution, with less revenue going into reserves. The board has recently announced a higher than previously forecast final dividend for FY17 and says the annual dividend in FY18 will be at least 5% higher than the FY17 distribution. SLET’s current dividend yield is 3.5%.
Standard Life Equity Income Trust (SLET) aims to generate above-average income and real capital and income growth from a relatively concentrated portfolio of c 50-70 UK equities. Since 2011, SLET has been managed by Thomas Moore, who says that the trust’s strong revenue growth is leading to higher dividend growth. The board has indicated that the FY17 annual dividend will be at least 9.1% higher than in FY16. Following a tough period of relative performance surrounding the Brexit vote, as companies with domestic businesses underperformed those with overseas operations, the manager is now more positive on the outlook. SLET’s performance is improving versus both the FTSE All-Share benchmark and its peer group. Moore is placing greater emphasis on higher-growth smaller companies that are reasonably valued and have faster-than-average dividend growth.
Standard Life Equity Income Trust (SLET) aims to generate above-average income and real growth in capital and income from a portfolio of UK equities across the capitalisation spectrum. At end-December 2016, more than 55% of the portfolio was invested outside of the FTSE 100 index. While the last year has seen a tough period of relative investment performance as a result of outperformance of large-cap companies with overseas earnings, which were not held, SLET continues to have a good long-term track record; it has outperformed the benchmark FTSE All-Share index over both five and 10 years. With the exception of one year of static dividends, SLET’s annual dividend has increased every year since launch.
Standard Life Equity Income Trust (SLET) is a multi-cap UK portfolio made up of manager Thomas Moore’s 50-70 best ideas for achieving a high and growing income with the potential for capital appreciation. The manager seeks attractively valued stocks with strong earnings and dividend growth potential that may not have been fully appreciated by the market. He currently sees better fundamentals in stocks outside the blue-chip FTSE 100 Index, and the trust has a large weighting (60%+) to smaller and mid-cap stocks as a result. Recent performance has been affected by poor sentiment towards UK domestic stocks in the run-up to the EU referendum; there is potential for this to reverse if, as widely expected, Britain votes to remain in the EU, although a Brexit vote could have the opposite effect.
Standard Life Equity Income Trust (SLET) follows an unconstrained approach to seeking above-average income with real capital and income growth potential. Manager Thomas Moore selects a portfolio of 50-70 UK stocks where dividend growth is backed by earnings growth, strong balance sheets and sensible valuations. Since taking on the fund in late 2011, Moore has changed SLET’s focus from a predominantly large-cap fund to a portfolio tilted to mid-sized and smaller companies, with exposure to AIM stocks as a further differentiating factor from most UK equity income peers. The trust has maintained or grown its dividend every year since launch and ranks second of 21 funds for risk-adjusted NAV total return performance over one and three years. SLET may use gearing of up to 15% and is currently c 11% geared.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Aberdeen Standard Eqty Inc. Tst.
We currently have 21 research reports from 4
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.
Premier Miton have reported their H1’20 results, which have shown delivery of key operational milestones during the period and strong performance despite the COVID-19 fears. Since the end of March, markets have recovered and net flows have been positive in April, meaning AUM has reached £9.9bn. We believe this shows the resilience of the business and that the benefits of the merger are coming through. As delivery continues we believe Premier Miton will see a significant re-rating as the shares currently trade on just 9.7x CY20 P/E, a significant discount to peers and historic levels of 12.5x. We reiterate our BUY rating and DCF based target price of 152p, implying 52% upside.
Companies: Premier Miton Group
The Renewables Infrastructure Group - £120m capital raise
Marwyn Value Investors - Proposed share acquisition by manager and crystallisation of carried interest
DP Aircraft I - 5% ownership stake in Norwegian
Companies: Renewables Infrastructure Group Marwyn Value Investors
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
Despite the disruption caused by COVID, Harworth has continued to make good progress across each business area. Liquidity has also been enhanced with an increase in the RCF announced at the end of April.
Companies: Harworth Group
Companies: AVO AGY ARBB ARIX BUR CMH CLIG DNL GDR HAYD PCA PIN PHP RE/ RECI RMDL STX SHED VTA
There has been much comment on the fact that equity markets in the US and Europe have been shrinking for some years now, certainly in terms of the number of quoted companies, if not in total market capitalisation (MCap). This paper has been written with the assistance of the Quoted Companies Alliance (QCA) and focuses on the evidence for such in the London market and, in particular, that for smaller and midcap companies. It assesses that evidence and considers explanations. Finally, we ask why it matters, and assuming that it does, what practical steps can be taken to reverse the trend. Successful public markets have been a key part of the United Kingdom’s economic success for generations, even centuries, and we should not allow them to wither on the vine.
Companies: AVO AGY ARBB ARIX ASAI DNL GDR HAYD NSF PCA PIN PXC PHP RE/ RECI RMDL STX SCE TRX TON SHED VTA
We believe RECI’s 21% discount to NAV reflects a reduction in investors’ confidence, reflecting the uncertain outlook, security values and potential impairments. When considering if this discount is excessive, we note i) a relatively low-risk profile, ii) strong liquidity means RECI can optimise recovery returns, iii) restructuring is a core competency, iv) realised losses to date are just 2.1p, v) bond valuations are expected by RECI to be repaid at par, but priced at 17% below par, and vi) borrowers have been injecting equity into their deals. The stable 3p 4Q dividend and unchanged policy show confidence and re-investment returns rising.
Companies: Real Estate Credit Investments
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
Companies: Merchants Trust
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
Trading Update – Showing Resilence
Companies: Manolete Partners
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.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
AFH Financial released an AGM statement suggesting that trading for FY20 remains in line with expectations. In the first four months of FY20 AFH has continued to see inflows at Q4’19 levels. The company also expects to see continued consolidation and a growing need for financial planning. Although the current market uncertainty has hit the industry, we believe that AFH is less affected than others by market movements due to its protection broking revenues and initial advice fees totalling 40% of revenues. We leave our forecasts and TP unchanged. These show AFH trading on 10.8x FY20 P/E falling to 9.7x in FY21, and yielding 2.8% rising to 3.1%. BUY.
Companies: AFH Financial Group
Given the substantial share price decline for Ramsdens in the last month, following clear risks to near term earnings, we revisit the group’s valuation and suggest a potential impact to earnings from the COVID-19 related lockdown. The analysis shows that Ramsdens has a solid balance sheet with a number of clear valuation supports and will be able to withstand the extreme conditions that are likely to occur over the coming months. We use an 8x multiple on FY20 earnings as a reflection of a normalised earnings base which reduces our target price to 180p from 258p. At this target price Ramsdens would trade on a FY21 P/B of 1.6x and yield 4.5%. This target price offers 114% upside and we retain BUY.
Mattioli Woods has issued a trading update around the impact of the ongoing COVID-19 pandemic. We are reassured to hear that trading for the first 9m of FY20e (to Feb-20) was in line with expectations. There is likely to be a revenue impact, from falling asset prices and limits to normal business activity, however, it is not possible to quantify this just yet. A number of proactive measures are being taken to adjust the cost base to mitigate the short term impact, including reduced senior management team/variable compensation. We would highlight that c.55% of MW’s revenue is not linked to the value of client assets, providing a degree of insulation to asset prices. We make no forecast changes at this stage, but will monitor events and make any adjustments when there is greater certainty
Companies: Mattioli Woods