Today's news & views, plus announcements from KGF, MRO, UU, BAB, BRW, FUTR, GNS, HICL, LIO, AEXG, FUL, KWS
Companies: AEX GNS HICL
Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
HICL offers exposure to institutional-quality, lower-risk core infrastructure assets, aiming primarily to provide a steady, sustainable income stream with low correlation to GDP growth and equity markets. HICL’s portfolio is diversified by asset type, sector and geography, meaning it has proved resilient through the COVID-19 crisis. However, 18% of the portfolio (three assets) has been impacted over the short term. These assets (plus a harsher regulatory determination for Affinity Water) meant the last financial year saw a meagre NAV total return of 1.9%. Following the lockdown easings, HICL recently announced that of the demand-based assets, recent data for the two toll roads indicates a faster recovery from that assumed in the calculation of the 31/03/2020 NAV. Assuming no further lockdowns, this should positively impact returns going forward – through cash generation and valuation. The other asset (High Speed 1 in the UK) remains marginally behind the forecast. The manager remains mindful the recovery has a significant course to run and any restrictions to contain further pandemic waves would weigh on asset performance, as would deterioration in GDP forecasts for key demandbased assets’ jurisdictions. Illustrating the strong income flow provided by HICL, in September this year IPO investors will have had their original capital (99.5p) back in dividends. The board has historically provided guidance for dividends up to two and a half years ahead. However, reflecting COVID-19 uncertainty, the board has revised its dividend guidance for the current financial year down from 8.45pps to 8.25pps, in line with the prior year. The board has not given guidance for the following year, but has promised to revisit guidance when things become clearer.
Companies: HICL Infrastructure Company
HICL offers investors an exposure to over 100 institutional quality, lower-risk core infrastructure assets. The primary aim is to provide a robust and steady income stream, with low correlation to changes in GDP or equity markets. HICL’s portfolio has been built up over the past thirteen years, with the manager’s aim being to pay a sustainable dividend, as well as to diversify and extend the income stream as much as possible. The manager invests in lower-risk, core infrastructure assets with good correlation to inflation over the long term, as well as longevity. Whether investing new capital or reshaping the existing portfolio, the manager seeks to continually improve and optimise the portfolio’s overall characteristics. Over the past year or two, they have been paying particular attention to the portfolio composition. During the last financial year, the manager took advantage of favourable market conditions to make two strategic disposals (realising a total of £148m) and reinvesting £167m in six assets. The manager has been successfully extending the average portfolio duration over time, and in the last financial year managed to keep the duration level at 29.5 years, despite a year having elapsed. Over that period the manager reviewed a number of investment opportunities with the objective of improving total returns, portfolio yield, cash flow longevity, and inflation correlation. We understand that during the last year InfraRed looked at 65 deals which fit HICL’s investment policy; of these they conducted detailed due diligence on 11 deals on HICL’s behalf, which eventually resulted in five investments being made to deploy the capital resulting from the two strategic disposals. On a total return basis, HICL has outperformed UK equities since its IPO, delivering a total return of 9.4% p.a. to 31 March 2019, against 6.0% for the FTSE All Share. This strong track record applies even over shorter time frames, with the company having outperformed UK equities over both five years and 12 months. HICL continues to deliver consistent returns with low volatility. The portfolio’s discount rate, less HICL’s ongoing costs, gives an idea of expected returns going forward. The weighted average discount rate (as at 31 March 2019) was 7.2%, and ongoing costs last estimated as 1.08% pa. Any deviation from this expected return could be a result of either ‘alpha’ delivered by the manager (upside), portfolio risks such as that posed by Carillion (downside), or changes to underlying valuation assumptions (the company is most exposed to changes in the discount rate and inflation assumptions). The depth of resource and breadth of expertise in the HICL management team helped to minimise the impact of Carillion’s failure, and the HICL board has drawn a line under that episode, with a final estimate of the total costs attributable to Carillion coming in at £33m (1.1% of NAV).
Bonds have traditionally been a core part of private client portfolios. Harry Markowitz is generally credited with developing and popularising the modern approach to investment diversification, as part of his doctoral thesis in 1952. Markowitz’s 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors. The attractions were clear: aside from the solid income that bonds offer investors as a portfolio component portfolio, they also provided something of a hedge to equity exposure.
Companies: UKW TRIG HICL SOND
HICL Infrastructure – Finals to 31 March 2019 | Funding Circle SME Income – EGM on managed wind-down |
Companies: HICL Infrastructure Company (HICL:LON)Iconic Labs plc (ICON:LON)
HICL Infrastructure – Interserve and new investment | US Solar Fund – IPO update | Primary Health Properties – Forward funding acquisition
Companies: Primary Health Properties PLC (PHP:LON)HICL Infrastructure Company (HICL:LON)
HICL Infrastructure – Preferred bidder | John Laing Environmental Assets – Results of share sale
Companies: John Laing Environmental Assets Group Lt (JLEN:LON)HICL Infrastructure Company (HICL:LON)
Many investors think ISA investing is all about sticking equities away for the long term and forgetting about them. However, we think there are good reasons for allocating to alternative income-generating assets in your ISA, even for those concerned with longterm capital growth. We think that many investors don’t fully appreciate the benefit of reducing the volatility on a portfolio. When thinking about long-term returns, the tendency is to think of the average return in the long run as what you will get, and to think of volatility as a measure of the mark to market “discomfort” along the way. However, this ignores the devastating effect of sequencing risk, and the fact that a particular average annual return can be consistent with negative eventual outcomes. Adding uncorrelated assets, such as alternative income funds, to your portfolio can massively reduce the risk of a terrible investment outcome, and, as we shall see, without necessarily reducing the expected return. This is certainly true when you consider how favourably the returns of these alternative income funds compare to those from equities in recent years, another fact we think is under-appreciated, and which sets them apart from traditional diversifiers such as high-quality bonds. There is no guarantee that future return patterns represent the past, of course. With respect to the alternative income funds we consider below, there are specific risks to capital which have to be considered. However, we think that there is a way to use these trusts taking these risks into consideration. The re-investment of the income from these trusts, reliable in the short term, gives the investor the opportunity to “pound-cost-average” their investment in equities when they look cheap, or reinvest in the same high yielding alternative assets. We consider how this might work below, and look at a range of alternative income funds that might be suitable.
Companies: TRIG UKW HICL NBLS MGCI
CATCo Reinsurance Opportunities – Recommended orderly run-off | HICL Infrastructure – Update to 28 February 2019 | Renewables Infrastructure Group – Acquisition | Woodford Patient Capital – Listing, acquisitions and share issuance |
Companies: TRIG SUPP HICL
HICL offers shareholders an exposure to institutional quality, lower risk infrastructure assets. The manager, InfraRed Capital Partners, has an emphasis on achieving strong income returns, generated through sources as robust and diverse as possible. Certainly, with Carillion a relatively fresh memory, and with no corresponding adverse impact on the dividend paid by HICL, the diversified approach looks like it is, well… paying dividends. The majority of the company’s assets offer predictable cashflows, and are uncorrelated to the economic cycle. The manager has been investing a greater part of the portfolio in demand-based assets, which can have returns more correlated to GDP and inflation, but also have a significantly longer life than traditional PFI / PPP assets. Whilst allocations to these types of assets have risen from 9% of NAV in March 2017 to 19% at the current time, the manager has a soft limit of 20% to ensure that the portfolio, as a whole, is largely uncorrelated with the wider market. At the heart of HICL is a portfolio of investments with annuity-type income. As such, in our view, the longevity of the assets owned by HICL is important, given that at the end of each contract’s life there is a zero terminal value. The manager has been successfully extending the average portfolio duration over time. Indeed, over the year to 30 March 2018, the managers succeeded in increasing the weighted average asset life from 24.4 years to 29.5 years. On a total return basis, HICL’s NAV return has outperformed UK equities since IPO, delivering a total return of 9.5% p.a. to 30 September 2018. The team performed a ten-year review of the various drivers of returns since inception to 31 March 2016. InfraRed believes that the NAV was ahead of forecast by 44.2p, of which 30p was due to “alpha” (or portfolio outperformance derived from the actions of the manager), and 14.2p due to “beta” (or economic factors such as a decline in corporate tax rates, and discount rates declining). The company continues to deliver solid and consistent positive returns. However, infrastructure investment risks, as well as the value of having an experienced manager behind the wheel, were shown in early 2018 with the insolvency of Carillion which in time (after the dust has cleared) is currently expected to have had an impact on NAV of around 1%. Distributable income, net of costs, according to the manager, is expected to cover the dividend. The Carillion insolvency has meant that income from several of the related projects has been “locked-up” within the special purpose vehicles (SPVs) through which projects are held, which meant that dividend cover for the six months to 30 Sept 18 reduced to 1.06x (excluding the one-off impact of profits from disposals).
Residential Secure Income – Finals to 30 September 2018 | HICL Infrastructure – Preferred bidder
Companies: Residential Secure Income Plc (RESI:LON)HICL Infrastructure Company (HICL:LON)
Carador Income – October 2018 NAV and partial redemption | Blackstone / GSO Loan Financing – October 2018 NAV | HICL Infrastructure – Interims to 30 September 2018 | Syncona – Interims to 30 September 2018
Companies: BGLF SYNC HICL
HICL – HICL Infrastructure – Completion of acquisition | CREI – Custodian – Acquisition
Companies: Custodian REIT PLC (CREI:LON)HICL Infrastructure Company (HICL:LON)
Phaunos Timber – Rayonier Update | HICL Infrastructure – Disposal
Companies: Phaunos Timber Fund (PTF:LON)HICL Infrastructure Company (HICL:LON)
Research Tree provides access to ongoing research coverage, media content and regulatory news on HICL Infrastructure Company.
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Litigation Capital Management (LCM) is an alternative asset manager specialising in disputes financing, with its main operations in Australia and the UK. The company provides funding for litigation in exchange for a share of any settlement and has built a strong track record of supporting winning c
Companies: Litigation Capital Management Ltd
Mondelez International has announced that it has appointed MediaMonks to manage global technology infrastructure, global websites and content production for North America, Latin America and AMEA. We believe this account win by S4 Capital further vindicates the unitary structure and integrated offer of the group as Mondelez initially worked with MightyHive before broadening the scope of this relationship to encompass MediaMonks. S4 Capital describes the account as a Whopper, indicating that it will generate revenues of over $20m when the account is fully transitioned. We will update our forecasts for the account win at the next financial newsflow from the group. We currently forecast LFL Gross Profit growth of +26% for FY21 and believe the Mondelez win will further accelerate this. We raise our target price to 500p (was 475p) and retain our Buy recommendation.
Companies: S4 Capital plc
Liontrust has delivered in line interims, however AuM growth since the HY point drives higher earnings estimates. In H1, net inflows remained strong despite the backdrop and, alongside performance, contributed to 28% AuM growth. Post-period, performance momentum has boosted AuM by a further 5% to £28.1bn, plus the completion of Architas. Together, this results in a step up in the run rate. We update our forecasts for higher than expected AuM driving a +5% upgrade to FY21e EPS and +10-13% in outer years. We do not forecast scaling in Architas or Global which could prompt further upgrades, reducing the 15x FY22e PER.
Companies: Liontrust Asset Management PLC
President Trump likes to project himself as a highly successful businessman, but surprisingly little is known about his true financial position. Various articles, including a 2016 in-depth analysis by The Wall Street Journal, have speculated about his income and asset base. All sorts of claims and counter-claims have been made about his wealth – by Trump himself, pitching his fortune at some $9bn, and by journalist Timothy O'Brien, suggesting that it is as “low” as $150m-$250m. It is doubtful whether we shall ever know the truth, but we can use Trump’s UK corporate filings to gain an insight into his businesses in Scotland.
Companies: AVO ARBB ARIX CLIG DNL FLTA ICGT PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
Today’s $2.3m framework agreement with an existing Tier 1 global customer is further validation of Clareti’s competitive advantage, of its ability to land and expand and, logically, is the augury of incremental revenues ahead. Gresham continues to gain market share in the critical Tier 1 space and we expect this to show in a resumption of revenue growth next year. Trading on forward Clareti recurring revenues of c. 4.1x, we see significant upside.
Companies: Gresham House
Today's news & views, plus announcements from Capita, JD Wetherspoon, HarbourVest Global Private Equity, Walker Crips Group, Randall & Quilter*, Michelmersh Brick, LoopUp, Schroders British Opportunities Trust and Baillie Gifford UK Growth Trust.
Companies: Randall & Quilter Investment Holdings Ltd.
The COVID-19 pandemic has accelerated trends in online retailing, to the benefit of the European logistics market, in which Tritax EuroBox (EBOX) is a leading player. Demand for logistics space is growing exponentially, while supply of existing and new stock is depleted. This dynamic is even more acute in prime locations close to heavily populated conurbations and prolonged rental growth is forecast. EBOX has amassed a portfolio of big box facilities located in major logistics hotspots across Europe. Numerous value-add opportunities also exist within the portfolio, including development and asset management projects. One of the key differentiators of EBOX to its peers is its exclusive ties with established logistics developers. Through the relationships, EBOX has access to and first right of refusal over a pipeline of development assets worth €2bn.
Companies: Tritax EuroBox Plc
Palace Capital’s (PCA) H121 performance was robust and ahead of our central expectations. We have slightly increased FY21 earnings forecasts and introduced FY22–23 estimates, with growth driven by Hudson Quarter completion, on track for March 2021. Significant additional reversionary potential and development/refurbishment represent significant value creation potential.
Companies: Palace Capital plc
Alliance Trust (ATST) underwent a major overhaul three and a half years ago, refocusing on its global equity portfolio. Non-core parts of the company have been sold and overheads slashed. Today, the trust’s assets are managed by nine of the world’s best stock pickers. Investing sustainably is a strong theme within the fund, but the manager, Willis Towers Watson, seeks to blend managers with different styles so that the trust is not beholden to any particular fashion in markets.
Companies: Alliance Trust
Murray Income Trust’s (MUT) recent combination with Perpetual Income and Growth Investment Trust (PLI) has doubled the trust’s assets under management to £1.1bn and is expected to deliver a substantial fee reduction to investors. MUT invests in a diversified portfolio of mainly UK equities and aims to provide a high and growing income, combined with capital growth. It has achieved these objectives, having just delivered its 47th consecutive year of increasing annual dividends, while also outperforming its benchmark (a broad UK stock market index) and most of its peers over both the short and longer term. Manager Charles Luke’s success – even in the current climate, which has been characterised by widespread dividend cuts – confirms his conviction that ‘quality, sustainable and growing income is out there, if you know where to look’. He intends to maintain his research-intensive search for resilient companies capable of growing future earnings and dividends over time.
Companies: Murray Income Trust
NextEnergy Solar Fund’s interims show continued generation outperformance, driving a NAV rise from 98.4p in June to 99.6p in September. Pricing was also ahead with power sales contracting adding £5.4m of benefit in the period. The company continues to benefit from efficient financing which we believe, along with low operating costs, gives it a cash cushion protecting the dividend. The shares offer the lowest NAV premium and highest yield of the UK renewable yieldcos.
Companies: Nextenergy Solar Fund
Standard Life UK Smaller Companies (SLS) manager Harry Nimmo is very bullish on the outlook for UK small-cap stocks, with the proviso that Brexit presents a near-term risk. He notes that despite current challenges due to the coronavirus, many companies are trading above expectations and there are now only a handful of SLS’s portfolio companies that are not paying dividends. The manager is comfortable with the trust’s ability to maintain its own dividend payments and is hopeful its valuation will improve given its very strong performance record. SLS’s NAV has outperformed its benchmark over the last one, three, five and 10 years; however, Nimmo cautions that given the trust’s focus on quality businesses, if there is a cyclical recovery in the UK market with a ‘dash for trash’, SLS is likely to underperform during this period.
Companies: Standard Life UK Small Co's Tst
Aberdeen Asian Income Fund (AAIF) has recovered well from the widespread market sell-off driven by the coronavirus pandemic, although its focus on quality stocks with attractive dividends has held back returns relative to the broad Asian index, which is increasingly dominated by non-yielding Chinese internet companies. Portfolio manager Yoojeong Oh says the team has ridden the technology wave differently, with exposure to semiconductor companies that are supporting the cloud-based boom in working from home, as well as e-commerce stocks in high-yielding markets like Taiwan, and firms that benefit from green stimulus in Europe. While gearing (currently c 8%) was a drag in the March market falls, keeping it steady has helped boost returns in the recovery, and the fund is on track to deliver a 13th consecutive year of dividend growth, partly supported by reserves it has built up over the past decade.
Companies: Aberdeen Asian Income Fund
1H’21 results cover the depths of the initial market impact of COVID-19. We note the 4.7% fall in EPRA NTA and the effect of the dividend rebasing announced some months prior. There are no negative surprises. The focus on regional offices is a positive. There are other positives that we consider to be important, namely the ongoing contractual performance of the leisure asset tenants and lengthening of leases there, and the continuing encouraging residential sales (and small letting) at the mixed-use development of PCA’s newly created Hudson Quarter, York. Here, we see just one of PCA’s initiatives to unlock value and deliver attractive returns.
Today's news & views, plus announcements from AV, BVIC, PZC, RQIH, PMI, MUL, AEXG, INCE
Companies: AEX RQIH INCE