It is something of a truism to say that emerging markets are not a homogenous blob, but a range of highly differentiated economies and stock markets. Yet as investors, we often categorise them as one and the same, especially from an asset allocation and risk management perspective.
Companies: FCSS BRFI ANII BEE BRLA
BlackRock Frontiers (BRFI) offers access to the fast-growing, least developed markets in the world to which most investors have little or no exposure. BRFI aims to identify those companies which can benefit from faster GDP growth than developed markets and deliver long-term capital returns. Thanks to the nature of the market and healthy earnings growth in the portfolio companies, the trust is yielding 4.5%, despite the focus on capital growth. We consider the yield and dividend cover further in the Dividend section. Managers Sam Vecht and Emily Fletcher use a mixture of both top-down macroeconomic analysis and bottom-up fundamental stock research to build their portfolio, and they estimate that over the long term around 50% of the alpha they have generated has come from each. The process is highly flexible, with the managers able to short stocks and use cheaper derivative contracts rather than buying the equities themselves (useful in markets which have lower liquidity than the more developed ones). This can lead to considerable gearing on a net and gross basis. In themselves, the markets BRFI invests in tend to display relatively low correlation to developed and emerging market indices. Given the diversification that the managers are able to achieve, the trust has tended to display relatively low volatility in the past, which may be surprising given that less developed markets are regarded as riskier. The trust has tended to trade on a premium in recent years, but is currently trading at par.
Companies: Blackrock Frontiers Inv Tst
Since the start of 2018, investors in Asian equities have had a torrid time, with the region underperforming global stock markets. Perhaps reassuringly for investors, the drivers of this underperformance have not been economic fundamentals but more unpredictable factors, which are external to the economies and markets of the region – namely, the ongoing trade dispute between the US and China, and expectations for the US federal funds rate (the global economy’s risk-free rate). However, this does make it harder to read what the future has in store for the region and the trusts that invest in it. Interestingly, despite the poor returns from markets and the growing negative news flow (concerns about the demand for smartphones have been another factor weighing on markets), managers of trusts investing in this region remain bullishly positioned, with a few exceptions. As we show below, on average investment trust managers have retained their strong bias to economically-sensitive companies and sectors. We consider the possible scenarios that could develop from here, economically and financially, and the ramifications for the different trusts in the sector.
Companies: IAT JAI SST PAC ATR BRFI
BlackRock Frontiers Investment Trust (BRFI) invests in the world’s least developed markets in pursuit of capital growth, offering a portfolio exposed to fast-growing economies with stock markets with low correlations to each other and to the other major markets. Porfolio managers Sam Vecht and Emily Fletcher apply a combination of top-down macro-economic analysis and bottom-up fundamental stock analysis to build their portfolio, and they estimate that over the long -term around 50% of the alpha they have generated has come from each. The managers gain access to these markets either through direct equity investment or via contracts for difference (CFDs), which allows them to gear up the trust and provides far greater flexibility, at a lower cost than traditional bank borrowings. Additionally, the mandate allows them to short stocks through CFDs . Over the past year, the portfolio’s average long exposure has been 111%, with short exposure of 6%, giving a gross exposure of 117%, and average net exposure of 105%. BRFI has outperformed the MSCI Frontier Markets Index over the long run. However, relative performance over the past year has been more disappointing, predominately as a result of a larger position relative to the index in Argentina, and the unfortunate timing of the change of benchmark back in April 2018. The trust now invests in the emerging and frontier markets universe, minus the eight largest countries in the emerging markets index, which usually dominate the majority of emerging market portfolios. The MSCI Frontier Markets Index has been jettisoned as being too concentrated and suffering too many changes of composition as countries were regularly promoted in and out of the Index which led to trading activity for reasons other than the attractiveness of stocks. The new index is more diversified and should be more stable in composition in the future. BRFI offers a healthy yield of 4.2%, despite income not being an explicit objective of the managers. This is thanks to the growing earnings on underlying companies, and we would note that the trust has revenue reserves worth 45% of last year’s full dividend. The current yield is also higher than all but one of the emerging markets trusts in the sector and all but one of the global equity income trusts. This trust is one of few options available in the open or closed-ended space that enables investors to access frontier markets, and this, plus the strong long-term performance, may explain why it has tended to trade on a premium in recent years – now at 2.5% (as at end April 2019), compared to the 7.4% discount of for the average emerging markets trust.
Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
We have highlighted, on many occasions, the high level of concentration among UK equity income funds – in particular, the fact that many managers in the AIC UK Equity Income and IA UK Equity Income sectors rely on a small handful of mega-cap FTSE stocks for their dividends. This isn’t necessarily an issue in itself, but the fact many of these companies are fundamentally challenged due to low levels of dividend cover compounds the potential problems going forward. For example, in a piece of research we wrote in November , we showed that 10.6% of all income generation in the closed-ended AIC UK Equity Income sector comes from Royal Dutch Shell and BP – and, at the time of writing, both had dividend cover of less than 1x (suggesting that the companies are taking from last year's profits to pay this year's dividend, which isn’t sustainable). Given it is a very similar story in the open-ended IA UK Equity Income sector (whereby the five most popularly-held stocks, which have a dividend over of less than 1x, account for 20% of the total dividends paid in the peer group), many investors have been looking elsewhere to try and find a more reliable income stream. A popular destination for those investors has been the global equity income peer group, where managers literally have the whole world to choose from for income-producing opportunities. Indeed, many funds and trusts in the space market themselves as the natural home for UK income investors seeking diversification. However, as we will highlight in this report, many closed and open-ended funds in the Global Equity Income sectors also have a significant proportion of their assets and income reliant on UK dividend-paying stocks.
Companies: MYI SAIN HINT BRFI FCSS BEEP
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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