News

News round-up: 13 September 2024

The biggest investment stories of the past seven days

Alex Hamer
Alex Hamer

[Centamin/Greatland bits to run on the same page] 

Gold major launches £1.9bn offer for Centamin

The board of gold miner Centamin (CEY) has backed a £1.9bn cash-and-shares buyout from gold giant AngloGold Ashanti (US:AU), taking yet another significant gold miner off the London Stock Exchange.

Centamin operates the Sukari mine in Egypt, which it expects to produce up to 500,000 ounces (oz) of gold this year.

The deal would hand shareholders in the smaller company 9.5p in cash and 0.0683 AngloGold shares for each Centamin share held. Centamin shares climbed 25 per cent to 149p a share on the news, a four-year high, while AngloGold dropped 8 per cent in New York. 

The offer is a 37 per cent premium to Monday’s closing share price. 

Centamin’s valuation has ticked up this year alongside the higher gold price, although it remains below its peak in 2020, after which operational issues saw production drop. Fellow Africa-focused gold miner Endeavour Mining (EDV) made a play for Centamin in late 2019, but could not bring investors onside. 

Centamin chair James Rutherford said the offer would provide shareholders with “participation in the continued growth of our operations under the stewardship of AngloGold Ashanti”. AngloGold chair Jochen Tilk said Centamin’s portfolio “offers enormous geological potential that we are very well placed to develop”.

AngloGold, which shifted its primary listing from Johannesburg to New York a year ago, has struggled with high costs in recent years after leading the sector previously. It has mines in Africa, South America and Australia. 

The company also needed to top up reserves, with assets in Australia at particular risk of running out in the years ahead. Its Geita mine in Tanzania is similar to Sukari, with both open-pit and underground operations, and AngloGold said its experience in running that operation could help boost the Egyptian mine. 

As well as Sukari and nearby exploration sites, Centamin owns the Doropo project in Cote d’Ivoire, for which it completed a feasibility study just a few months ago.

Peel Hunt analysts Peter Mallin-Jones and Alex Gorman valued the pre-production asset at $386mn, compared with $1.99bn for Sukari (post-earnings split with the Egyptian government). This would put the $2.5bn buyout slightly ahead of fair value, once costs and debt are taken into account. 

Centamin’s major shareholders are institutional, with the El-Raghy family selling down its significant stake alongside their exit from the board a few years ago. Egyptian-Australians Josef El-Raghy and his father Sami built up the company, with Josef standing down as chair in 2020.

The buyout marks the latest in a series of gold transactions that have largely taken miners off the London market.

Alongside the withdrawal of the Russian majors after the 2022 invasion of Ukraine, Shanta Gold was bought out earlier this year. Yamana Gold returned to the bourse for three years before being acquired and split up by Pan American Silver (US:PAAS) and Agnico Eagle (US:AEM) last year.  AH

 

Greatland Gold raises $325mn for Havieron buyout

While Centamin (CEY) looks set to leave the London Stock Exchange, Aim-traded gold hopeful Greatland Gold (GGP) has pulled together a financing package that quickly vault it up the ranks of UK-listed miners. 

Under a deal with joint venture partner Newmont (US:NEM), Greatland will no longer be merely a part-owner of its Havieron operation in Western Australia. It is raising enough cash to buy both the 70 per cent held by Newmont and the Telfer mine and plant down the road. The gold company has raised $325mn (£249mn) to fund most of the $475mn acquisition, which will come with 426,000 ounces (oz) of gold production between next month and early 2026. 

Greatland will still need to take on A$750mn (£382mn) in debt to get Havieron to full operation, which it forecasts will eventually produce 258,000 ounces (oz) of gold a year. 

The raise will double its share count, with mining magnate Andrew Forrest’s Wyloo Metals providing around $100mn of the total raise. The agreement with Newmont was contingent on the gold major fixing the tailings dam at Telfer, a fault that has stopped processing at the site since April, although mining has continued. Greatland said it would add an Australian listing within the six months of closing the deal, and would hold onto its London listing. Its shares fell 25 per cent in response to the raise. AH

 

Private equity buyers return to listed property sector

Private equity (PE) is back on the prowl in the listed property space. Brookfield’s expression of interest in Tritax EuroBox (EBOX) earlier this summer was followed by Starwood Capital’s bid for Balanced Commercial Property Trust (BCPT) last week.

The listed sector has been trading at a discount to net asset value (NAV) since interest rates went up. Until this summer, Blackstone’s spring 2023 take-private of Industrials Reit, which was at a premium to net tangible assets, has been the only private equity bid in the space. Deals have instead focused on listed players using cash and shares. 

Interest rates are a significant factor in the re-emergence of private equity buyers, said Peel Hunt analyst James Carswell. “Yields have moved out quite significantly, [so] the spread between risk-free rates and property yields I think looks attractive again whereas 18 months ago it probably didn’t.” The board-backed BCPT offer is still at a 9 per cent discount to NAV, so there is plenty of value out there for those with bullish outlooks. 

The recent base rate cut has also given the market confidence that the cycle has turned. “The expectation now is that interest rates will come down… so your spread should improve going forwards,” Carswell added.

This has an impact on both yields and the debt needed by investors to finance their acquisitions. Starwood’s offer will be financed by equity from its funds, but “I’d be very surprised if there isn’t going to be leverage against this portfolio,” said Carswell. This follows a familiar pattern: Blackstone initially financed both its Industrials Reit and St Modwen acquisitions via equity, later issuing debt backed by its assets.

Recent take-privates have had one thing in common: their portfolio, or at least part of their portfolio, is located in an attractive sub-sector. This means that those specialising in regional offices or retail are unlikely to appeal. By contrast, discounted real estate investment trusts (Reits) with a moderate market capitalisation and with portfolios in popular sub-sectors, such as industrial, healthcare and residential, are the most likely candidates. External managers will also be in the spotlight since those with lengthy contracts will have to be bought out, adding costs for a prospective buyer.

Of the Reits trading at a discount, Warehouse Reit (WHR), which currently trades on a discount of 28 per cent to NAV per share, Impact Healthcare Reit (IHR) on a discount of 24 per cent and Empiric Student Property (ESP) on a discount of 20 per cent all look like good candidates. Even Helical (HLCL), which specialises in central London offices, looks attractive on a 30 per cent discount. “I think there’ll definitely be more deals going forward,” said Carswell. NV

 

Rightmove rejects £5.6bn REA Group bid

The board of Rightmove (RMV) has announced it rejected a bid from Australia’s REA Group (AU:REA) that valued the business at around £5.6bn, which came after the News Corp (US:NWS)-controlled company had flagged its interest earlier in the month. A tie-up would see the two dominant real estate advertising platforms in the UK and Australia combine, although analysts pointed to limited cost savings available given the different country focus. 

The board of Rightmove judged REA’s proposal, which valued each Rightmove share at 698p using REA’s share price from this week, to be “wholly opportunistic and fundamentally [undervaluing] Rightmove and its future prospects.”

REA said in a statement that its offer had valued Rightmove’s shares at 705p, or a 27 per cent premium to Rightmove’s share price on 5 September. Its shares have dropped 10 per cent since news of a share-based buyout emerged, although it remains on a far higher valuation than Rightmove, with a forward price/earnings ratio of 46 times against 24 times. 

REA, which is controlled by Rupert Murdoch’s News Corp, now has until 30 September to announce either a firm intention to make an offer for Rightmove or announce that it does not intend to make an offer. The company said it would add a secondary London listing if a deal is reached. “This would provide the opportunity for a wider pool of investors to gain exposure to a global and diversified digital property company on the London Stock Exchange,” REA said. 

Panmure Gordon analyst Sean Kelly said the premium would likely have to be 60 per cent for a deal to be done. NV

Feature

IC Top 50 Funds 2024: Alternatives

Our selection of property, infrastructure and private equity funds for 2024

Dave Baxter

ALTERNATIVES

INFRASTRUCTURE/PROPERTY (6 FUNDS)

Rising interest rates and higher government bond yields did plenty to erode confidence in trusts focused on real assets back in 2022, and it's fair to say that confidence is yet to return. Infrastructure and property trusts both continue to languish on big share price discounts to net asset value (NAV), by and large, with pressure in the sector also evidenced by a high level of merger and acquisition activity.

Having said that, sector consolidation and the start of interest rate cuts should mean better times ahead, suggesting investors may do well to take advantage of the big discounts and dividend yields available at the moment. We stick with last year's roster of funds, many of which are big and established names, but also add one infrastructure play that has been exciting a few of our panellists.

 

HICL Infrastructure (HICL)

HICL remains a large, well-established fund with an experienced team, and one that seeks long-dated income with a good degree of inflation protection. It has a big focus on public-private partnership (PPP) projects and regulated assets, giving its revenues a good degree of stability.

HICL still looks cheap to many observers, what with its shares on a discount of around 18 per cent to NAV, a wider level than for comparable peers such as BBGI Global Infrastructure (BBGI) or International Public Partnerships (INPP).

That may reflect some issues, such as the fact that HICL's dividend payouts have failed to rise for several years, in part due to issues with major holding Affinity Water.

But as we argued earlier this year ('This trust offers a high yield at an even higher discount', IC 24 May 2024) improvements could be coming: Affinity Water has looked more stable and the HICL team has more generally been busy overhauling the portfolio, gradually offloading PPP assets and focusing more on regulated and demand-based assets.

The rationale here is to extend the average life of the income derived from the portfolio, improve the inflation linkage and broaden the exposure of the portfolio to minimise investment risk.

Investors should be aware that HICL could become more volatile over time. But it should ideally be able to offer longer-dated income and bigger dividend payouts over that same period. Either way, it does continue to stand out as a source of income with less volatility than the likes of equities.

 

New: 3i Infrastructure (3IN)

Having removed one name from the bonds category, we add another infrastructure fund that has caught the attention of our panel.

3i Infrastructure invests in various forms of infrastructure, from Infinis, a UK facility generating electricity from captured landfill and mineral methane, to TCR, a Belgian owner and lessor of airport equipment, and Oystercatcher, which runs oil product storage terminals in the Netherlands, Belgium, Malta and Singapore. The 'megatrends' it seeks to target include the energy transition, digitalisation and demographic change.

Why consider this fund? Emma Deuchars, one of this year's panellists, sums it up: "The fund differs from others in the sector in that its focus remains capital growth rather than a higher-yield strategy. And its philosophy of blending steady returns and demand-based risk has produced strong long-term performance."

That's clear enough from the data, with the trust's share price dividend yield of 3.7 per cent looking modest versus that of some rivals, and the 4.3 per cent premium to NAV on which the shares trade not offering an obvious bargain in the same way as others.

However, 3i Infrastructure has notably outpaced the competition in terms of share price total returns over five years, suggesting it will appeal to those who want a slightly racier infrastructure play.

 

Renewables Infrastructure Group (TRIG)

Renewable energy infrastructure funds have faced plenty of challenges in the past year. Two of the battery storage names have had to can dividends in the face of revenue problems, and there has been widespread consolidation in the space as a whole. Against this backdrop, we continue to like TRIG, a well-established name that serves as something of a one-stop shop.

The shares recently traded on a 16.5 per cent discount to NAV and a dividend yield of more than 7 per cent, and the portfolio itself is reasonably diversified. Around half the fund's assets are in onshore wind, with 34 per cent in offshore wind, 13 per cent in solar and 5 per cent in flexible capacity. Some 60 per cent of the portfolio is in the UK, with 40 per cent in different parts of Europe.

We've mentioned before that investors might be tempted to access niche subsectors more directly using other funds. But as the travails of the battery funds have illustrated this year, that can come with its own risks.

 

TR Property (TRY)

We remain keen on this trust thanks to the fact that it invests mainly in the shares of property companies in Europe and the UK, meaning the investment manager can quickly get in or out of a holding – unlike those funds that typically require months to buy or sell a physical asset.

TRY had an especially strong 2023, with shareholders enjoying a total return of more than 18 per cent. The trust's shares still look attractively priced, however, trading on an 8 per cent discount to NAV and with a dividend yield of some 4.6 per cent.

 

Tritax Big Box Reit (BBOX)

Tritax Big Box Reit's shares roared back to life in 2023, returning over 25 per cent. That might have restored some faith in a fund battered by the 2022 sell-off, even if the 'bargain' case for this fund has lessened somewhat. The trust's shares now trade on a discount of around 11 per cent to NAV compared with 27.7 per cent at the point when we compiled the 2023 list.

We still think Tritax targets an interesting structural growth trend, with its focus on warehouse assets, a key beneficiary of the rise and rise of ecommerce. This is one of the more interesting property plays out there, although investors should remember that it's quite a niche one at that.

 

Schroder Real Estate (SREI)

Uncertainties continue to haunt the commercial property space, but we still see this asset class as a useful part of a portfolio, and one that still looks fairly cheaply priced.

Schroder Real Estate, which we added to the list last year on the back of its balance sheet strength and high dividend cover, has had a strong year but still ticks the 'cheap' box.

Shareholders enjoyed a 10 per cent total return in 2023 and are up by nearly 14 per cent so far this year, but the shares still traded on a discount of 23 per cent to NAV in late August, with the dividend yield coming to nearly 7 per cent.

This is a fairly concentrated portfolio, with the top holding (a Milton Keynes industrial estate) representing 11 per cent of the fund and the top 10 accounting for almost 70 per cent of assets.

There's a good mixture of subsectors, however, with half the portfolio in industrial property, a quarter in offices and the balance in the likes of retail warehouses and retail spaces.

 

PRIVATE EQUITY (3 FUNDS)

It has been an eventful 12 months for the private equity trusts. Big share price discounts to NAV have not gone away, and nor have concerns about how the asset class might ultimately hold up in a world of higher interest rates.

But performance has been acceptable for the time being and trusts have managed to dispose of some assets. On top of that, Pantheon International (PIN) unveiled a chunky share buyback programme and several trusts followed its lead by adjusting their capital allocation policies to allow for buybacks and even special dividends in certain circumstances.

We stick with last year's three selections, which offer some very different takes on the asset class.

 

HgCapital (HGT)

It's unusual to see private equity trusts trading on a share price premium to NAV. One name that has done so is the gravity-defying 3i Group, which has traded on eye-wateringly high valuations for quite some time. HgCapital, which focuses on software-as-a-service businesses, also commands a premium, if a small one.

It takes some justification to buy a trust trading above NAV at a time when so many appear to be going on the cheap, but HgCapital still focuses on a promising niche, and manages to diversify in terms of the industries in which its holding companies operate. Performance has also continued to stand out for now, with shareholders making a 26.4 per cent return in 2023 and more than 23 per cent so far this year.

 

Harbourvest Global Private Equity (HVPE)

A striking contrast to the very specialist HgCapital, HarbourVest Global Private Equity diversifies aggressively by holding a combination of funds and direct investments. Some 49 per cent of the portfolio is in 'primary' investments, or money deployed in private equity funds at the time of launch, with 31 per cent in the 'secondary' investments left over from funds that have matured, and 20 per cent in direct investments made in companies alongside other investors.

This approach means the trust holds an enormous number of underlying companies, reducing the impact if something goes wrong at an individual business. It also diversifies by geography (with a big skew to North America) and sector (with its biggest weighting to tech and software), as well as the kind of private equity investment it makes, from buyouts to venture and growth equity.

HarbourVest has made reasonable returns in the past 18 months and trades on a notably big discount of more than 35 per cent, albeit this kind of discount is relatively common among the more diversified names in the sector.

Of note is the fact that the trust has adopted a new capital allocation policy, where a new "distribution pool" can be used to fund future share buybacks or special dividends in select circumstances.

We continue to like this trust's diversified approach, but as ever would caution that the outlook for private equity assets has its fair share of uncertainties.

 

Oakley Capital Investments (OCI)

A name that hasn't lost momentum for some time now, OCI has delivered a shareholder total return of 18.4 per cent in 2023 and of around 6 per cent so far in 2024. Yet the shares still trade on a discount of more than 25 per cent to NAV. We like the fact this portfolio is relatively simple and consistently delivers the goods.

The investment team invests directly in businesses across four sectors: technology, consumer, education and business services across Europe. Holdings include sailing clothing company North Sails in the consumer segment, Germany's private university entity IU Group in education, software-as-a-service play Cegid in technology, and Phenna Group in business services, the latter providing testing, inspection, certification and compliance services.

Oakley continues to stand out as a strong performer and a portfolio that, thanks to its concentrated nature, is easier to assess and understand than the likes of HarbourVest. But as mentioned last year, we do have a gripe about the fact that the trust no longer seems to regularly disclose what it actually holds. That means investors will have to dig into its annual reports, and might be tempted to opt for a rival with greater transparency.

 

FINANCIAL PLANNING AND EDUCATION

Shares I love: AJ Bell

The platform can benefit from economies of scale as it grows, says Ninety One UK Equity Income’s manager Ben Needham

Val Cipriani
Val Cipriani
  • AJ Bell is good at monetising its customers’ assets, argues the manager
  • The company has a strong balance sheet and looks undervalued

Ben Needham, manager of Ninety One UK Equity Income, explains why the fund invests in AJ Bell:

AJ Bell (AJB) is one of the largest investment platforms in the UK, with more than £80bn of assets and 500,000 customer accounts. It is an ‘economies of scale’ investment case, with growing assets thanks to the structural tailwinds in the UK savings market combined with a good value proposition. An increasing portion of the UK population has to take ownership of its wealth and wants to invest.

AJ Bell monetises client assets in a well thought-out and sustainable way. Revenues derive from customer trading, custodian fees and interest income from reinvesting clients’ cash. Different segments of the revenue base can benefit at different parts of the economic cycle. For example, trading revenues generally pick up when the economy is buoyant. In that environment, assets typically grow quite quickly as equity markets rise, which boosts revenue from custodian fees. Conversely, interest income usually increases when inflation and interest rates are higher.

AJ Bell has a low starting point on price and positive client service, which facilitates market share gains and further scale advantages, as well as placing the business on the right side of Consumer Duty regulations. It also has an industry-leading client retention ratio of 95 per cent and shares economies of scale with customers, through price reinvestment and improved service, often driven by reinvesting in technology.

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AJ Bell is unique in that it has a dual-pronged approach to the savings market through its direct-to-consumer and adviser-led businesses, covering most demographics of the UK market while also sharing fixed costs. Additionally, its financial model is inherently attractive. When an existing user adds savings to its account, the incremental costs required to process those savings are minimal, so AJ Bell can grow in a capital-light manner and generate healthy levels of free cash flow. The company’s balance sheet is strong, with cash levels far surpassing regulatory requirements, so it can return cash to shareholders over time through dividends.

Since listing in 2018, AJ Bell has more than doubled its number of users and platform assets, with leading rates of organic growth across both sides of its business. Combined with an attractive financial model, this growth has enabled the company to compound its earnings per share at over 20 per cent a year. Yet as of this summer it was priced on a very reasonable 19 times price/earnings multiple for FY1 (September 2025). 

Finally, M&A activity has increased in recent years in the unloved, cyclically depressed UK savings space. Close peers Interactive Investor and Hargreaves Lansdown (HL.) have been acquired and subject to a takeover deal, respectively. If we were to apply the market cap to asset ratio from these deals, it would imply AJ Bell is worth 60 per cent more than today. That said, we doubt AJ Bell would sell today – the opportunity for standalone growth and value creation is too good. 

As of 30 June 2024, AJ Bell was the third biggest holding in the Ninety One UK Equity Income fund, accounting for 5.5 per cent of the portfolio.

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FINANCIAL PLANNING AND EDUCATION

Shares I Love: Diageo

The spirits giant remains a compelling investment despite its Latin America woes, says Orbis manager Neha Aggarwal

Val Cipriani
Val Cipriani
  • Diageo is as cheap as it was during the pandemic
  • The business can grow earnings and revenues, says the manager

Neha Aggarwal of Orbis Investments explains why she invests in Diageo:

Diageo (DGE) is the largest spirits manufacturer globally; known for iconic brands such as Johnnie Walker, Smirnoff, Tanqueray and Guinness. It has the biggest market share in the spirits category overall across key markets, accounting for 10 per cent of all spirits sold, and holds around 5 per cent of total alcohol sales globally when including beer and wine.

Barriers to entry in spirits, especially non-aged spirits, are low. However, barriers to scale are high – brands need demand for their drinks to sell to bars, restaurants and supermarkets, but simultaneously need to be in front of customers to generate demand. Diageo’s flywheel is fuelled by its large scale, enabling leading routes to market, marketing prowess and customer insight. In the US, its largest and most profitable market, Diageo holds a circa 20 per cent market share, more than twice as much as its nearest competitor.

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Globally, spirits have gained market share from beer and wine with the former's sales growing 7 per cent per year, compared with 4 per cent for the total alcohol market, over the past decade. This growth has been driven primarily by 'premiumisation': consumers paying for quality. People are drinking more moderately, but better. As a result, premium and luxury spirits have been growing at two-to-three times the rate of lower categories.

Diageo has upgraded its portfolio significantly in the past decade, with premium categories representing two-thirds of revenues, against just one-third a decade ago. This is driving its growth.

Growth in spirits increased significantly during the pandemic when consumers shifted spending away from services and towards accessible indulgences. Post-pandemic sentiment on the entire alcoholic beverage sector has been low due to growth rates slowing and concerns about demand normalisation. These headwinds have been particularly acute in Diageo’s Latin American business, where inventories piled up as demand slowed. Management has revised its estimates lower for the current year, but expects the industry to return to its prior growth trajectory within the next 12-18 months. The related uncertainty has led to Diageo trading at the same price today as it did during the lows of the pandemic, but with operating profits that are about 50 per cent higher.

Diageo sells liquid luxury. Its products are accessible, relatively affordable and benefit from the tailwinds of premiumisation. We believe the company can continue to grow revenue and earnings at 5-7 per cent per year over the long term. It has a consistent track record of growth and hasn’t seen negative organic growth in the past 25 years outside of 2020 lockdowns hit sales to bars and restaurants.

The company tends to return the majority of its earnings to shareholders via dividends and buybacks. We see a well-positioned, high-quality and defensive company.

As of this summer, funds managed by Orbis including the Orbis Global Equity Fund (GB00BJ02KW01) are invested in Diageo.

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Companies

Alfa Financial entering a 'golden era'

The asset finance software company upgraded its full-year guidance off the back of an impressive run of new deals

Arthur Sants
Arthur Sants
  • Total contract value up 40 per cent
  • Cheap relative to its strong cash flow

Asset finance software company Alfa Financial Software (ALFA) is offering the unusual combination of fast growth and strong cash flow relative to its price. Investors should take note.

In the six months to June, Alfa Financial saw its total contract value (TCV) increase by 40 per cent to £193mn. This jump wasn’t unexpected. This time last year, TCV was flat but management flagged that a few late-stage companies were about to sign on. Promisingly, there is still a strong late-stage pipeline, with 11 prospects. Meanwhile, 8 of the 11 are working under letters of engagement and Alfa is accelerating recruitment to meet this “expected demand”.

Broker Investec has claimed that Alfa Financial is in the ‘foothills of the golden era’. Alfa has switched to a subscription model, which has been underpinning this TCV growth. It said revenue in the second half of the year is ahead of expectations and has increased its full-year revenue guidance by £1mn. Correspondingly, Investec has increased its 2025 and 2026 EPS forecasts for Alfa by 5 and 6 per cent respectively.

Most of Alfa’s profit is being converted into cash. Cash generation was 95 per cent and the aim is for it to be around 100 per cent going forward with plans to return excess money to shareholders. With a free cash flow yield of 6 per cent there should be plenty to return and this quarter it announced a special dividend of 4.2p a share.

Fast growth and a relatively cheap valuation compared to its cash flow is a great and rare combination. We stick to buy.

Last IC View: Buy, 171p, 14 Mar 2024

ALFA FINANCIAL (ALFA)      
ORD PRICE: 214p MARKET VALUE: £632mn
TOUCH: 213p - 214p 12-MONTH HIGH: 215p LOW: 139p
DIVIDEND YIELD: 0.7% PE RATIO: 28
NET ASSET VALUE: 15p* NET CASH: £12.9mn
Half-year to 30 Jun Turnover (£mn) Pre-tax profit (£mn) Earnings per share (p) Dividend per share (p)
2023 52.9 16.6 4.52 4.00
2024 52.3 16.1 4.05 4.20
% change -1 -3 -10 +5
Ex-div: 26 Sep      
Payment: 08 Nov      
*Includes intangibles of $32mn or 11p a share. 

Read all the latest stocks & shares news and analysis here

Companies

Profitable Trustpilot rewards investors

Another buyback is on the cards for the cash-rich reviews platform

Jennifer Johnson
Jennifer Johnson
  • Increase in paying customers
  • Operating profit in the black

Consumers can – and do – post their reviews on Trustpilot (TRST) free of charge. But if the businesses being critiqued want greater insights into their customers’ opinions, they’ll need to pay a subscription fee. 

This is the essence of Trustpilot’s business model – and it appears to be effective. The number of paying customers on the platform increased 2 per cent year on year in the first half, while annual recurring revenue was up 18 per cent at constant currency to $211mn (£161mn). The group also managed to deliver an operating profit (of $1.8mn) for the first time, against an operating loss of $2.1mn in the first half of last year. 

This momentum will surely prove encouraging for investors, although it doesn’t wholly explain why the shares rocketed up 15 per cent on the morning of the interim results. That was as much to do with the latest share buyback, as well as the assertion that full-year Ebitda will be at the top end of expectations.

The group said that, beginning on 11 September, it will commence a share purchasing scheme of up to £20mn, due to be completed before its next AGM. It also completed a similar buyback in the first half, which left it with a still-substantial cash pile of $76mn at the period’s end.

“Trustpilot seems to be going against the wind, while others have suffered from a more restrained corporate spending environment, the company is flourishing,” noted Peel Hunt analysts. “The strong bookings performance could lead to an upgrade [...] further down the line.” The company currently trades on around 4x EV/sales for FY 2025, which the broker claims is 40 per cent lower than its peer average.

With profitability attained, there’s scope for further upward movements in the stock. Buy.

Last IC view: Hold, 212p, 19 March 2024

Bearbull: Should investors really be giving Trustpilot five stars?

TRUSTPILOT (TRST)      
ORD PRICE: 212p MARKET VALUE: £884mn
TOUCH: 211-212p 12-MONTH HIGH: 240p LOW: 79p
DIVIDEND YIELD: NIL PE RATIO: 68
NET ASSET VALUE: 13¢ NET DEBT: 41%
Half-year to 30 Jun Turnover ($mn) Pre-tax profit ($mn) Earnings per share (¢) Dividend per share (¢)
2023 84.6 -3.98 -0.60 nil
2024 99.8 2.55 1.80 nil
% change +18 - - -
Ex-div: -      
Payment: -      

Read all the latest stocks & shares news and analysis here

Small Companies

Embrace AI with a media group on the upgrade

A social and digital media group’s AI offering is attracting new clients and boosting profitability

Simon Thompson
Simon Thompson
  • Adjusted pre-tax profit up 20 per cent to £1.8mn
  • Underlying EPS increased 17 per cent to 0.14p
  • Net cash set to surge in the second half

A robust first-half trading performance from London-based social and digital media group Brave Bison (BBSN:2.5p) prompted analysts to push through 13 per cent upgrades to full-year earnings forecasts.

Although net revenue of £10.1mn only edged up in the six-month period, this reflects the decision not to renew low-margin and loss-making contracts with clients in the US and mothball operations there. Adjust for the negative £0.7mn revenue impact, and retained businesses reported 7 per cent higher net revenue and on higher margins, too. This highlights the board’s core focus on driving profitability through operational efficiencies, a key part of a three-pronged strategy that also strives for organic growth through innovative AI-powered tools and making complementary and value-accretive bolt-on acquisitions.

 

Brave Bison embraces AI

In the first half, Brave Bison won a record number of new business engagements with global clients including SharkNinja, Sony Pictures, Reed and The Travel Corporation. These clients engaged Brave Bison due to its differentiated proposition and ability to combine strategic consultancy with experienced execution. Clients are being attracted by the group’s artificial intelligence (AI) proposition, too.

The offering includes AudienceGPT, a media planning tool that uses AI models to create marketing personas for the purpose of media planning and provides insights from 'silicon audiences'. It enables Brave Bison to test client strategies faster, buy media more effectively and improve returns. AudienceGPT is the second proprietary tool Brave Bison has developed over the past two years and follows Scribe, a copywriting bot that uses AI to generate product descriptions. These proprietary tools underpin a technology-enabled approach to marketing services, which is driving better results for clients as well as improving client retention rates, too.

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Improving profitability

The use of technology is also improving Brave Bison’s profitability, one factor behind the eye-catching growth in the first-half pre-tax profit margin from 15 to 18 per cent. It explains why analysts at house broker Cavendish raised their full-year pre-tax profit and earnings per share (EPS) estimates by 13 per cent to £3.7mn and 0.29p, respectively, on flat net revenue of £21mn. Moreover, the directors expect over £2mn of cash inflows in the second half to boost net cash from £6.8mn (0.53p) to £9mn (0.7p) by the year-end.

True, the all-share offer for UK advertising and marketing specialist Mission Group (TMG: 24p) was rebuffed, but Brave Bison only incurred nominal professional fees in making the bid approach. In any case, with net cash forecast by Cavendish to increase to £11.9mn (0.9p) by the end of 2025, expect management to seek out other targets.

Brave Bison’s share price is up 43 per cent since I initiated coverage (‘Alpha Research: A social marketing profit play for the digital age’, 10 May 2022), but the shares still only trade on a cash-adjusted price/earnings (PE) ratio of 6.8. That’s a harsh rating for a company that’s on course to deliver its fifth consecutive year of improved profitability. Buy.

Read more from Simon Thompson

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.yorkbookshop.com at the special discounted price of £5 per book plus UK P&P of £5.15, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of Simon’s market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the content of the books can be viewed on www.yorkbookshop.com. 

Small Companies

Why we're calling time on Sylvania Platinum

Investor sentiment could be tested by multiple headwinds in the coming year, so it’s best to take a watching brief

Simon Thompson
Simon Thompson
  • Annual cash profit down 80 per cent to $13.5mn
  • Total dividend of 3p per share
  • Closing net cash of $97.8mn
  • Forecast earnings recovery
  • Material increase in planned capital expenditure

Annual results from Sylvania Platinum (SLP:49p), a South African producer and developer of platinum group metals (PGM) and chrome, bear the scars of a significantly lower basket price and a rare miss on production guidance.

The combination of a 36 per cent decline in the average basket price to $1,339 per ounce (oz) and 4 per cent lower production of 72,700 ounces resulted in 37 per cent lower net revenue of $81.7mn in the 12 months to 30 June 2024. At the same time, the group faced inflationary pressures which pushed up all-in costs 13 per cent to $1,168 per oz. The business is still profitable, albeit both adjusted cash profit and pre-tax profit declined 80 per cent to $13.5mn. Net finance income on the group’s $97.8mn cash pile accounted for $6mn of pre-tax profit.

Although house broker Panmure Liberum anticipates a recovery in earnings this year, analysts have reined in expectations since my last article (‘A smart way to play record chrome prices’, 31 July 2024). Based on annual revenue of $133mn, they now expect underlying operating profit to rise from $7.4mn to $31.3mn in the 12 months to 30 June 2025 and pencil in $6.9mn of interest income. On this basis, pre-tax profit and earnings per share (EPS) would almost treble to $37.2mn and 10¢ (7.6p), respectively, implying the shares are rated on a forward price/earnings (PE) ratio of 6.4.

Please note that the forecasts are based on an annual production target of 73,000 to 76,000 PGM ounces and an improvement in the basket price. Sylvania’s internal price assumptions are for an 18 per cent recovery in the average basket price to $1,577 per oz, well below the $2,046 average using Nedbank CIB’s outlook.

Shareholders should also note that capital expenditure guidance for the new financial year has materially increased from $21mn to $47.5mn. This is due to $4.2mn of slippage from the last financial year, new regulations in South Africa that doubles the cost of new tailing damns Sylvania builds at its sites, a strengthening of the Rand against the US dollar, and a $7mn increase in capital expenditure at the group’s Thaba joint venture.

It means that the cash outflow from the business will be significant even if PGM markets improve. Panmure Liberum predict net cash could fall to $51mn at the 2024-25 year-end based on its commodity forecasts. It doesn’t leave much cash for shareholder dividends, hence why the brokerage has halved its 2025 forecast pay-out to 1.5p a share which cuts the prospective dividend yield to 3 per cent. Panmure Liberum reduced its target price from 87p to 69p, too.

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Decision time

The holding has delivered a 450 per cent total return (TR) in my 2018 Bargain Shares Portfolio, although it is only fair to point out that it is showing a 29 per cent loss in my 2022 Bargain Shares Portfolio and the share price is down 10 per cent since my last buy call in July.

Although there is value in the lowly rated shares, I feel that the share price could continue to slide as investors react to lower dividend expectations, materially higher capital expenditure plans and a lower cash pile that will negatively impact the group’s enterprise valuation. I am also becoming concerned that despite PGM prices being firmly in the cost curve, major mining groups have yet to restrict supply to tighten the underlying supply and demand balance in the market and force original equipment manufacturers (OEMs) to change their inventory management. Sell.

Read more from Simon Thompson

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.yorkbookshop.com at the special discounted price of £5 per book plus UK P&P of £5.15, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of Simon’s market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the content of the books can be viewed on www.yorkbookshop.com.

News

Grenfell report: uncertainty hangs over construction stocks

The final volume of the Grenfell report could shake up the industry

Natasha Voase
Natasha Voase

The failings found by the Grenfell Inquiry are clear. Page by page, the second and final instalment of the Grenfell Inquiry's report detailed how the failings of the government, regulators and cladding providers collectively contributed to the 2017 fire that claimed the lives of 72 people. Less clear are the implications for the construction industry.

Through the seven volumes of the report, the inquiry set out a “path to disaster” stretching back to the 1990s and looking at the broader conduct of the construction industry. Arconic, Kingspan (IR:KRX) and Celotex were singled out for their direct responsibility, with page after page detailing how they had ignored internal warnings about the fire risk posed by their products.

The litany of mistakes listed in the report leads naturally to the question of liability. The inquiry cannot make findings of civil and criminal liability. However, the Metropolitan Police is now handling the next stage of the investigation into the fire and is currently investigating “19 companies or organisations and 58 individuals as suspects”.

Also highlighted in the report was the wider construction industry. In its recommendations, the report called for changes including licences for contractors working on higher-risk buildings, with the system overseen by a new construction regulator.

The report also singled out the definition of a higher-risk building in the Building Safety Act 2022, which came into force last year and introduced a raft of new requirements for these buildings. It defined higher-risk buildings as those with at least two residential units and either a height of at least 18 metres or seven storeys. The Grenfell report called this into question.

“We do not think that to define a building as 'higher-risk' by reference only to its height is satisfactory, being essentially arbitrary in nature,” it said.

Instead, the report says “more relevant is the nature of its use, and particularly the likely presence of vulnerable people, for whom evacuation in the event of a fire or other emergency would be likely to present difficulty. We therefore recommend that the definition of a higher-risk building for the purposes of the Building Safety Act be reviewed urgently”. 

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The report gives recommendations, so it is not yet clear whether the government will decide to amend the Building Safety Act. Given the need for certainty before putting shovels in the ground, this could increase barriers to building for the wider industry.

Listed companies are already in the process of remediation work to remove unsafe cladding in the wake of the Grenfell fire, but this report could increase the pressure to get this finished. Research from investment bank Jefferies earlier last month pointed to Barratt (BDEV) as having the highest remediation provisions, with almost £800mn put aside. Berkeley (BKG) has completed the most remediation projects by far, at more than 400 buildings, with another 400 in progress or not yet started. Taylor Wimpey (TW) has around 400 remediation projects on the books, with 300 either not yet started or under way, according to Jefferies. 

Alongside its annual results on Wednesday, Barratt said the remediation process could take another three to five years, and flagged a shortage of fire safety engineers as a barrier to quickly removing cladding flagged in the years after Grenfell. The company said it had identified 26 more buildings needing remediation in the 12 months to 30 June, taking its total to 262 buildings across 92 developments. 

The key recommendations from the report: 

  • Creation of a new construction regulator to "oversee all aspects of the construction industry"

We are aware that in the period since the Grenfell Tower fire Parliament has passed the Building Safety Act 2022 to regulate work on higher-risk buildings, to impose particular duties on those involved in the construction and refurbishment of such buildings and to establish a Building Safety Regulator responsible for building control and for overseeing standards of competence. However, responsibility for the range of functions identified above remains dispersed

  • Changing the definition of a "higher-risk building" as defined by the Building Safety Act, currently 18m or seven stories

More relevant [than height] is the nature of [a building's] use and, in particular, the likely presence of vulnerable people, for whom evacuation in the event of a fire or other emergency would be likely to present difficulty. We therefore recommend that the definition of a higher-risk building for the purposes of the Building Safety Act be reviewed urgently.

  • Introducing a licensing scheme for contractors 

Our investigations have shown that levels of competence in the construction industry are generally low and that by the time of the Grenfell Tower fire many contractors, designers and building control officers treated the statutory guidance as containing a definitive statement of the legal requirements.

  • Mandatory fire safety strategies for high risk buildings 
  • Appoint a new Chief Construction Adviser to work with government on all matters affecting the construction industry
  • Bringing responsibility for functions relating to fire safety into one department under a single Secretary of State 

Read more on Property companies

Companies

Is Churchill China a contrarian play?

Order intake has been broadly flat over the past couple of years

Mark Robinson
Mark Robinson
  • Hospitality demand remains subdued
  • Gross margin up despite wage inflation

Robin Williams, chairman of Churchill China (CHH), said that the ceramics group will be “dependent on the stronger demand normally experienced in the final four months to meet our expectations for the year”. Unfortunately, that outcome is far from certain given subdued activity in its European markets. The outlook for the 'rest of the world' segment is more positive, and revenues have held up reasonably well in the domestic UK market. Although order intake has been broadly flat over the past couple of years, total volumes were down on the 2023 comparator, while constant currency revenue contracted by 6.4 per cent.

There isn’t much that Churchill’s management can do about the global hospitality market, but it has certainly been taking measures to ensure that the group is in a better position to optimise commercial opportunities once the market turns. Indeed, Williams added that “skill levels in the factory have recovered through training and the near elimination of agency workers, with low levels of staff turnover”. So, although the top line remains under pressure, the group increased the gross margin by 2.3 per cent – a creditable outcome given wage inflation in the period. Factory yields have also improved, along with the value-added production mix.

FactSet consensus gives earnings per share (EPS) of 79.6p, rising to 82.5p in 2025.

The share price pulled back sharply on results day, although nervous shareholders would be well advised to take account of volumes on results day (they tend to be rather thin, hence the wide spread). We view Churchill as an efficiently run enterprise faced by an unavoidable cyclical downturn. With the shares changing hands at an undemanding 12 times forward earnings and a forecast dividend yield approaching 4 per cent, we sense a contrarian opportunity. Buy.

Last IC view: Hold, 1,132p, 10 Apr 2024

CHURCHILL CHINA (CHH)      
ORD PRICE: 971p MARKET VALUE: £107mn
TOUCH: 950-1,000p 12-MONTH HIGH: 1,495p LOW: 947p
DIVIDEND YIELD: 3.8% PE RATIO: 14
NET ASSET VALUE: 552p NET CASH: £7.15mn
Half-year to 30 June Turnover (£mn) Pre-tax profit (£mn) Earnings per share (p) Dividend per share (p)
2023 44.0 4.69 31.9 11.0
2024 40.6 4.80 32.8 11.5
% change -8 +2 +3 +5
Ex-div: 12 Sep      
Payment: 11 Oct      
NB: 2023 EPS has been restated to take account of £393,000 in employee restructuring costs and £34,000 of income in relation to the voluntary wind up of the British Pottery Manufacturers' Federation

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