JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a portfolio of smaller companies in developed Europe, excluding the UK. Francesco Conte and Edward Greaves run the £654m trust, searching for attractively valued, high-quality stocks with positive momentum which they believe can outperform the market. The managers believe that Europe offers a unique mix of companies, in particular a number which are disrupting industries with nimble business models. Three key themes are evident in the portfolio and typify the kind of opportunities the managers are seeking: sustainability, wellness and technology. Supported by a team of 49 analysts, the investment process uses both qualitative and quantitative methods to narrow down a universe of more than 1000 companies. This detailed approach helps to identify and compare three key characteristics for new investment ideas: quality, momentum and value. The managers believe that their balanced approach improves risk-adjusted returns and enables them to outperform through the different stages of cycles (e.g. both during growth rallies and at times when value comes back into favour). As we discuss in the Performance section, JESC has an excellent long-term track record of outperforming the benchmark and the peer group. Performance over the past year however has been slightly more subdued, largely due to the low exposure the trust has to the highest rated companies which have driven benchmark returns. This has resulted in JESC spending the last year trading at a double-digit discount, which currently sits at 17.1%, offering a potentially attractive entry point for investors looking to access some of the unique smaller companies in developed Europe.
Companies: JPMorgan European Smaller Cos Trust
JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a portfolio of smaller companies in developed Europe, excluding the UK. The £700m trust (in net asset terms), is managed by Francesco Conte and Edward Greaves who have a unique approach to narrowing down their 1000+ universe of companies, using a combination of qualitative and quantitative methods. The managers’ analysis helps them recognise and compare three key characteristics for new investment ideas: quality, momentum and value. Companies they select do not need to score perfectly on all three characteristics, but the resulting portfolio is expected to have a positive tilt to all three. The managers believe that their approach improves risk-adjusted returns, and enables them to outperform through the different stages of cycles (e.g. during growth rallies but also at times when value comes back into favour). JESC has a strong track record of outperforming the benchmark EMIX Smaller European Companies, and has done so in three out of the past five calendar years. Performance over the past year has been slightly more subdued, largely due to the continued political uncertainty in Europe. This has resulted in the trust spending most of the last year trading at a double-digit discount (12.5% as at 2 January 2020), which offers a potentially attractive entry point for investors looking to access some of the unique smaller companies in developed Europe.
As with most people, we are sick of discussing Brexit’s endless possible scenarios and how it might impact equity markets. The outlook is forever shifting, the large majority of “information” being pure conjecture. Nevertheless, the political and economic backdrop means that Europe is now one of the most out of favour investment regions. In the open ended IA sector, Q3 and Q4 of last year saw total outflows of -£1.6bn in Europe, relative to the US and Global sectors which saw inflows of £289m and £114m respectively. Only the UK saw greater outflows. The discounts on closed-ended funds also suggest an out-of-favour asset class. As can be seen below, relative to both historical averages and global peers, European investment trusts are good value. In fact, Europe is even more out of favour than the UK, judging by discounts.
Companies: HNE BRGS TRG FEV JESC
JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK. The £667m trust (in net asset terms), is managed by Francesco Conte and Edward Greaves and utilises a high-conviction, bottom up, stock picking approach. The team focus on three key characteristics when conducting fundamental analysis on new investment ideas; quality, momentum and value. Companies they select do not need to score well on all three characteristics, but the overall portfolio should have a positive tilt to all three. Over the longer term the trust boasts a strong track record. Over the past five years to 17th April 2019 for example, according to Morningstar the trust has delivered NAV returns of 70.7%, considerably greater than the benchmark EMIX Smaller European Companies index (52.4%) and the AIC European Smallers peer group (62%). Comparing the trust to open-ended peers in the IA OE European Smaller companies sector, it has also done a good job, outperforming the IA sector average by more than 11%. More recently, as economic lead indicators deteriorated through 2018, the managers tilted the portfolio towards more defensive stocks, and de-geared. This led the managers to hold as much as 3.5% net cash in Q4 of 2018. Initially this helped them outperform a falling market at the start of Q4, but in retrospect they were too early to buy back into a falling market, which meant that overall they marginally underperformed the benchmark in a more volatile year. Despite the strong long-term track record, the discount remains wide in absolute terms, but also relative to peers, and currently sits at around 14%.
JPMorgan European Smaller Companies investment trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK. It is managed through a high-conviction, stockpicking approach which has delivered impressive results over the 20 years that Francesco Conte has been at the helm. The trust is comfortably the largest and is one of the most liquid in the AIC European Smaller Companies sector, with a market cap of close to £600m. Fund managers Francesco Conte and Edward Greaves have consistently delivered high levels of alpha over one, three and five years. In comparison to the much larger IA Europe ex UK sector, the trust sits in the middle of the pack in alpha and returns over the short and long term. Bucking their historic trend, the managers have outperformed in the current period of volatility in markets. YTD, the trust is outperforming the benchmark and its IA and AIC peers thanks to Francesco and Edward having aggressively shifted the portfolio towards a more defensive stance during the summer. Overall, the managers remain benchmark agnostic, with sector and regional allocation driven by their stockpicking. The managers search for three key characteristics among companies; quality, momentum and value. Holdings often move from the value category to the momentum category but must be considered “good quality” throughout. Last summer, the managers moved away from cyclical stocks and shifted to a more defensive positioning. This now means that pharmaceuticals (+6.4%), oil equipment, services and distribution (+5.2%) and health care equipment and services (4.8%) are the largest overweights within the portfolio. At a stock level they are invested in companies that are macro-agnostic, and less dependent on overall country GDP. The trust saw its discount narrow during 2017 but so far in 2018 the discount has widened significantly from -5.7% on the 1st of January to -13.5% on the 12th of November. This movement echoes the entire AIC European Smallers sector, where the current average is -11.2%, and reflects troubled sentiment toward the region as a whole. Looking past short term noise, however, the managers are positive about the outlook, and see plenty of exciting opportunities in European markets.
Edison Investment Research is terminating coverage on JPMorgan European Smaller Companies Trust (JESC). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
JPMorgan European Smaller Companies Trust (JESC) aims to generate long-term capital growth from a portfolio of high-quality, reasonably valued, small-cap European equities. While the European stock market, in keeping with global markets, has been more volatile year to date compared with the abnormally low levels of volatility in 2017, the managers believe that there is potential for further upside. They cite an improving European and global economy, low inflation and a benign interest rate environment, which is supportive for corporate earnings growth. JESC has a very strong investment track record, outperforming the EMIX Smaller Europe ex-UK index over the last one, three, five and 10 years. The trust currently offers a 1.7% dividend yield.
Fresh news from the Quirinal Palace on Saturday – with the Italian president effectively vetoing the government put forward by the anti-establishment Five Star Movement and the far-right League – has put Italy, and the future cohesion of the Eurozone, in the spotlight once again. Stocks and bonds were already under pressure before the announcement that the coalition’s preferred candidate for finance minister – Paulo Savona – had been rejected by the president, who put forward instead Carlo Cottarelli, a former IMF official, who some argue plays into populists’ hands as another example of the Italian establishment’s thrall to Brussels. The League and the Five Star Movement have previously called for Italy’s withdrawal from the Euro and both support policies which would ride roughshod over eurozone rules on budget deficits. The danger is that, by appearing to pander to Brussels, the president’s action on Saturday may backfire – fomenting even greater populist feeling among a population already deeply resentful of EU ‘meddling’. While this may seem like a return to form for the troubled Union after an uncharacteristically smooth patch, we think a sanguine approach makes sense. Italian politics works on compromise and backtracking, and the coalition documents suggest an exit from the euro is not on the cards. In fact, with the economic environment in Europe generally positive, any volatility in Europe generated by the headlines surrounding Italy could throw up some interesting opportunities. Viewed with a cooler head, little has changed in Europe since the weekend and the environment of low inflation and cheap money looks set to remain dominant. Unprecedentedly loose monetary policy from the ECB remains firmly in place, and the debate continues over whether the eurozone economy will be strong enough to allow policymakers to end the QE programme in September. President of the ECB, Mario Draghi, has recently announced that the interest rates on refinancing and on lending would remain unchanged at 0 per cent and 0.25 per cent respectively for the foreseeable future, providing technical support for European stock markets.
Companies: HNE JESC BRGE BEE JEO
JPMorgan European Smaller Companies investment trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK, via a highconviction, stockpicking approach which has generated proven results. Fund managers Francesco Conte and Edward Greaves delivered more alpha (a quantitative measure which shows the value a manager has added above the returns generated by the market itself) than any of their peers in the AIC Europe or AIC European Smaller Companies sector over one, three and five years and are among the top three in each of these periods versus their closed-end peers and their rivals in the much larger IA Europe ex UK sector. The trust is the second best performing vehicle among 124 funds in the AIC Europe, European Smaller Companies and IA Europe sectors over five years to the end of December 2017, having generated NAV total returns of 174%. The managers are bullish on the outlook for Europe – citing the dominance of export led companies on the continent, still reasonable valuations, and the overwhelming strength of the figures coming from the global PMI for manufacturing. It is the largest trust in the AIC European Smaller Companies sector, with a market cap of £605m, giving its shares solid liquidity, and the managers place a high emphasis on the free float of companies in which they invest, avoiding those that might become liquidity traps. When we last met the managers (July 2017) they had taken some money off the table, in anticipation of the drawdown which usually occurs among European equities at some point during a typical summer, but since September they have redeployed that cash and geared up to reflect their bullish outlook. The trust has seen its discount halved since the start of 2017 and now stands at around 8%. While there is no guarantee that this trend will continue, over the last ten years the trust has tended to see its share price race ahead of its NAV when the underlying index (Euromoney European Smaller Companies ex UK) has been in positive territory.
Active fund management has come under increased scrutiny over recent times, with a greater availability of passively managed tracker funds and a keen eye on cost have all meant groups have had to justify their fees on a consistent basis. The argument surrounding active versus passive is rather tedious, given the definitive question of ‘which is better’ will never be answered. Given you won’t find a passively managed fund in the UK-listed investment trust space, we obviously predominately focus on active management – but we fully appreciate the benefits of index trackers, exchange-traded funds and other passive offerings for certain investors. Nevertheless, our take on the debate is that while many active funds will underperform, certain managers/strategies have proven, time and time again, that they can add value. As such, while identifying a manager who can consistently outperform is challenging, but our research shows that – with the considerable caveat that the past is no guide to future returns – there are certain sectors/regions that have been more suited to an active approach that others. As we discuss below, and using rolling five-year periods for the past 25 years, we illustrate that trusts in the European sector have been the most consistent in beating equity indices across all of the major AIC and IA sectors. Again, it is worth noting that this is a review of active manager performance, not a prediction of what might happen in the future.
Companies: JEO BRGS JESC
JPMorgan European Smaller Companies Trust (JESC) was launched in 1990 and aims to generate long-term capital growth from a diversified portfolio of small-cap European equities. The investment process involves screening the c 1,500 company universe to construct a relatively concentrated portfolio of 50-75 positions in firms with positive fundamentals and reasonable valuations. JESC has a very good investment track record, outperforming its benchmark over one, three, five and 10 years. It has also performed strongly versus the average of its four peers, ranking second over one, three and five years and first over the last 10 years, where its NAV total return is 23.6pp higher than its closest peer.
JPMorgan European Smaller Companies Trust (JESC) aims to generate long-term capital growth from a portfolio of European (ex-UK) small-cap equities. Despite a period of underperformance versus the Euromoney Smaller Europe ex-UK benchmark in 2016 due to conservative portfolio positioning, JESC’s longer-term performance record remains intact. It has outperformed the benchmark over three, five and 10 years. The managers believe that the European economic backdrop is favourable, political risk has been reduced and they are finding plenty of investment opportunities, across a range of industries, including companies that are adapting in a period of rapid technological change.
JPMorgan European Smaller Companies Trust (JESC) is managed by a dedicated, highly experienced, three-man team. The ‘best ideas’ portfolio, which generally comprises 60-80 holdings, currently numbers 63. Stocks are selected on a bottom-up basis from a universe of c 1,000 companies, which constitute the Euromoney Smaller Companies ex-UK index, the trust’s benchmark. Long-term performance has been strong, as evidenced by its 10- and 20-year NAV and share price returns, which comfortably outstrip the benchmark and the MSCI Europe ex-UK index.
JPMorgan European Smaller Companies Trust (JESC) is a relatively concentrated portfolio of 60-80 stocks offering the potential for capital growth. The fund has well-established managers: Jim Campbell since 1995 and Franceso Conte since 1998, who draw on their experience to select high-quality companies with strong management teams, with positive stock price and earnings momentum, that they perceive to be undervalued. JESC has outperformed its benchmark over both short- and long-term periods and over 20 years has outperformed its nearest peer by 410pp.
JPMorgan European Smaller Companies Trust (JESC) has a 25-year track record of seeking capital appreciation by investing in smaller Continental European companies. The managers note that the sector competes for investor attention against other high-growth areas such as emerging markets, and the recent sell-off in Asia could underpin investor demand, a trend suggested by the historically low level of discount. Performance has been strong versus the benchmark over both short and longer periods, with a 20-year NAV total return of 1,173% – all of which has been achieved under the long-serving current managers – beating the nearest peer by more than 60%. The managers favour cyclical stocks in the expectation of further economic recovery in Europe, driven by domestic demand.
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FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
Companies: Aviva Plc
Oil posted its first back-to-back weekly loss since April's rout with the end of the summer driving season and concern about OPEC's production compliance weighing on prices.
Futures in New York edged up on Friday, but prices fell 6.1% this week coinciding with a retreat in U.S. equities. Traders are also examining data indicating the United Arab Emirates since July has been regularly exceeding its quota under a deal between the Organization of Petroleum Exporting Countries and its allies.
The uncertainty over how much supply OPEC+ is returning to the market adds another wrench in the recovery for oil prices still reeling from the pandemic-driven blow to consumption. While U.S. supplies had grown tighter in past months and producers were expected to restrain production amid a weak financial backdrop, stockpiles rose again last week for the first time since mid-July.
Companies: XOM HES KOS JSE 88E ADV CAD CHAR ECHO ENOG EME I3E PMG RBD SQZ SOU TLW VGAS WTE PHAR
What’s new: CLIG results have beaten Zeus expectations at revenue, EPS and DPS. On 14 July CLIG provided an update which revealed $338m of net inflows (6% of opening FUM), outperformance of the Emerging Market and Developed strategies (98% of FuM) and 25% rise in FuM in 4Q to $5.5bn and an indication that the final dividend would be not less than last year. In our opinion, key features of CLIG’s full year results include:
4.4% rise in revenue to £33.3m (Zeus forecast: £32.0m);
6.1% fall in adj PBT to £10.7m (Zeus forecast: £10.3m), excluding gains/losses on seed investment 9.4% rise to £11.6m (FY19: £10.6m);
3.2% rise in adj EPS to 35.3p (Zeus forecast 32.5p);
11.1% rise in final DPS to 20.0p (Zeus forecast: 18p) with the total DPS of 30p (Zeus forecast: 28p) is 11.1% above the prior year excluding special DPS.
Net cash of £14.6m (Zeus forecast: £10.0m)
The acquisition of KMI is expected to complete on 1 October 2020.
Companies: City of London Investment Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Frontier IP has announced it has invested £320k in a £720k convertible loan financing of Nandi Proteins. Nandi Proteins is developing functional proteins for food ingredients aimed at reducing levels of fat, additives and gluten in processed foods addressing important social, health and environmental concerns about processed food. Frontier IP holds a 20.1% equity stake in Nandi Proteins; the last disclosed value of the holding was back in July 2017 at approx. £2.9m. Connected in part to the announcement today, we have used the opportunity to refresh our cash flow forecasts to reflect the net £2.1m proceeds of the July 2020 fundraise, the planned deployment of proceeds into bridge financing and refreshed our Sum-of-the-Parts valuation analysis to reflect the excellent portfolio progress made in FY’20. We anticipate a 50% increase in the unrealised profit on the revaluation of investments in FY’20e to £5.82m (vs. £3.0m prior estimate; £3.85m in FY’19). Applying the peer group multiple of 1.6x on Yr1 Book value of late-stage assets and incorporating the £2.1m proceeds and dilution associated with the July placing, implies an intrinsic value of 82p/share, 27% above the current share.
Companies: Frontier IP Group Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
Following a solid H120, HgCapital Trust (HGT) announced several portfolio transactions representing a considerable uplift to the carrying value at end March 2020 and translating into a c 12.0% ytd NAV total return (TR) to end August. On completion of these deals, HGT’s cash resources will improve significantly to £314m from £123m in early July, while its unfunded commitments will decline to £814m. Consequently, HGT’s commitment coverage ratio will improve markedly to c 39% vs 13% in early July.
Companies: Hgcapital Trust
Artemis Alpha Trust (ATS LN) has undergone a radical transformation over the past two years following a comprehensive strategic review. In April 2018, the trust held around 90 stocks with approximately 25% of NAV held in unquoted positions. Following the implementation of the review, Kartik Kumar (who has been with Artemis since 2012) was appointed lead manager alongside John Dodd remaining in place with an overseeing role. Kartik has since significantly reduced the number of stocks to a much more concentrated high conviction portfolio of just 36 stocks, and has significantly reduced the unquoted exposure to only 7%. This shift in focus has at the same time improved portfolio liquidity by moving up the market capitalisation scale.
Companies: Artemis Alpha Trust
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
Avation is a lessor of commercial aircraft to a diversified airline client base. In relation to the ongoing administration process of Virgin Australia, Avation has this morning announced that following the successful placing of five of the original thirteen aircraft that were on lease to the airline (two Fokker 100s plus three ATR 72-500s, with the latter having gone to two new customers), the remaining eight aircraft will be returned to Avation, being made up of three ATR 72-500s and five ATR 72-600s. Additionally, subject to approval at a creditors' meeting scheduled for 4 September 2020, the expected return to unsecured creditors is now anticipated at between 9-13% being paid prior to 30 June 2021.
Companies: Avation Plc
Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy Plc
Belvoir’s H1 results evidence both strategic progress and profits growth. Given the challenges presented by COVID-19, this bodes very well for the group’s long-term growth potential. H1 adj. EPS grew +16%, the acquisition of Lovelle contributed well and in July the group entered into a strategic alliance with The Nottingham Building Society. Cash flow remained strong and the progressive dividend policy has been reinstated, with a 3.4p interim declared plus an additional 2p, as partial compensation for the missed 2019 final. With the resilience of lettings and the current record activity levels in sales and new mortgages the Board is optimistic that full-year results will hit its pre-COVID expectations and we make no changes to our PBT/EPS forecasts. Our target price of 233p (48% upside) assumes a 10% discount to the small/mid cap market. Given the above average performance in H1 and continued evidence that the long-term growth strategy is yielding value we see good upside to this target over time.
Companies: Belvoir Group Plc
S4 Capital has reported interim results that are ahead of our expectations and indicates an acceleration in the pace of recovery in Q3. LFL Gross Profit rose +12.2% in H1, with Q1 +18.8% and Q2 +6.5%. Encouragingly, after the trough of +3% in April, recovery accelerated to +5% in May, +11% in June and July was an impressive +18% ahead. PBT and EPS were both slightly better than our forecasts, while the group delivered a particularly impressive cash performance leaving it with net cash in June even before the £113m July placing. While we maintain our FY20 LFL Gross Profit growth forecast of +14% (Q3 +12%, Q4 +18%), the strong July result makes this look conservative. Further, the group awaits the outcome of two 'whopper' pitches each worth $20m+ with one due 'very shortly' and it can now see the pathway to 20 whoppers. S4 Capital is in a growth sweetspot and has already started to deploy the funds from the July placing to build capability in eCommerce (Orca Pacific) and econometrics/media optimisation (Brightblue). There are a number of moving parts in our forecasts and overall we retain our EPS estimates of 7p for this year, rising to 10p in 2021. We believe landing the whoppers combined with further M&A as the group deploys its recent equity raise & increased debt facility could see EPS of 15p next year.