Another fairly quiet week for UK share news, here is what caught our eye:
City of London Investment Group (CLIG.L) - Half-Year Results
Given the simplicity of the model here and timely trading updates, these results are largely known:
Funds under Management (FuM) of $9.6 billion at 31st December 2023. This compares with $9.4 billion at the beginning of this financial year on 1st July 2023 and $9.2 billion at 31st December 2022
This is the only new news:
FuM at 31st January 2024 of $9.5 billion
Effectively flat, again. The risk is that kind of growth may not be enough to maintain fee income given long-term slow but steady falls in percentage fees.
Net fee income representing the Group's management fees on FuM was $32.6 million (31st December 2022: $31.9 million)
This is ∫(aum(t) x feerate(t)) dt, and so the profile of AUM throughout the period is important, not just the average and terminal. But anyway, this is definitely not enough to keep up with cost growth at the moment:
Underlying profit before tax* was $13.3 million (31st December 2022: $13.6 million).
This underlines the issue with fund management: without growth, profits will fall. There are some reasons for optimism on this front:
Over the six-month period, further investment was made in IT infrastructure based on technology advancements, allowing for significant monthly cost reductions going forward.
But at the end of the day, this is largely a people business, and here, costs are increasing:
Salary levels are moderate relative to our competitors as a result of the volatility of markets causing variability in our results. The modest increase in salary and benefit costs over the FY2024 interim period is a product of a tight labour market and continued inflationary pressures. The group has responded to these pressures focusing salary increases on key personnel and areas where the shortage of talent is most acute.
The company is in a niche with little to no growth, so in the long term, they must diversify or die. That was why they merged with Karpus, but there is only limited evidence of underlying growth there. They may get some tailwinds from CEF discounts that have been a headwind recently:
The current very wide discounts in CEFs remind me of my early investing days…When Alan Greenspan and the Fed began raising interest rates in early 1994, I was then able to invest in well-managed CEFs at 15-20% discounts at a time when emerging markets were in a severe correction…Our Founders Barry and George developed their investment processes and teams to buy low and sell high. Now in our fourth decade, this spirit of buying quality at discounts resonates strongly within the Group.
Long term the outlook isn't good in my view, although that will be mitigated by consolidation. Anyway, all this does really is explain why the shares are so cheap. Many holders are here for the dividends, and a maintained interim will be the main headline for them:
Maintained interim dividend of 11p per share (31st December 2022: 11p) payable on 28th March 2024 to shareholders on the register on 1st March 2024
H&T (HAT.L) - Acquistion
H&T have rather blotted their copybook recently, with a stealth profits warning via their broker, followed up with an actual profits warning. This rather strange acquisition isn’t going to help matters:
H&T Group Plc, the UK's largest pawnbroker and a leading retailer of high quality new and pre-owned jewellery and watches, is pleased to announce the acquisition of certain assets of Maxcroft Securities Ltd ("Maxcroft"), for a cash consideration of £11.3m. Maxcroft is a longstanding and successful pawnbroking business based in Essex.
This is a single-store business bought for 1.9x Book, and no profit figures are given. This is the website of the acquired business. Although they seem to have got it suspended!
The mean value of the acquired pledge loans is £4,063, which is larger than that of H&T's mean pledge loan value of £423. So what kind of customers do they have?
The acquired expertise, particularly in serving the needs of business owners utilising the pawnbroking service for working capital purposes...
This just adds to the questions. For example, what kind of business needs pawnbroking for working capital purposes? It is more "out of town" than most pawnbrokers. For example, they will lend on vehicles and serve a wider catchment.
Their website says that vehicles go to offsite storage, and if they get the LTV right shouldn’t face losses, even in a used vehicle market that is currently declining rapidly. However, you have to question the behaviour of customers. How desperate do you have to be to pledge a depreciating asset that you presumably bought to use as collateral to sit in storage for a loan to keep your business solvent?
In the same announcement, we also get the benefit of an independent view of the quality of the business:
The additional financing of £25m from Pricoa, comprises a note purchase and guarantee agreement of £10m secured notes at a fixed rate of 8.37% that fall due February 2029 and £15m secured notes at a fixed rate of 8.43% that fall due February 2031.
These would be fine as spot rates, but for 5-7 years are far higher than others are paying.
Although the acquisition seems overpriced, way outside of their area of expertise, financed with expensive debt and subject to higher legal risks, it does potentially bring with it the expertise to expand into a new type of business with nonetheless some synergies with their existing shops. However, unquantified synergies hardly seem a compelling reason to take a risk of owning H&T when Ramsden’s seems cheaper and better run (although with higher holiday FX risk).
Hargreaves Lansdown (HL.L) - Half-Year Report
Anyone who thinks the market for large-cap shares is efficient need look no further than this week’s results from Hargreaves Lansdown. The headlines are not stellar:
But they are not terrible either, given the subdued markets for retail share trading. Underlying EPS is down only slightly, and the dividend has increased slightly. Costs are now said to be at the lower end of guidance despite strategic investment. Perhaps the biggest negative point was a small deterioration in client retention, but this appears to be offset by growth in the activities of the clients they have retained.
However, the “underlying” figures look to be overly optimistic as they exclude a load of costs that would appear to be the normal part of business to us:
Still, the market often ignores these types of things and takes a less cynical view than we do. Otherwise, there would be a whole load of small caps whose share prices would be materially lower if their management didn’t adjust out all the regularly occurring bad stuff.
Given that this is one of the most shorted shares in the UK markets, you’d think the lack of anything really bad and the need to fund a 6% dividend as well as borrow costs, would have the shorts running for the hills:
And perhaps they did on the open as the price rose a couple of per cent. but then the market sold off, with the shares down 8% at one point. Seems a little harsh for what remains one of the UK’s leading retail wealth managers with excellent returns on capital. With over a month of average volume sold short from disclosable stakes alone, the possibility of an almighty short squeeze remains at some point.
ME Group (MEGP.L) - Final Results
In their pre-close trading statement, the company said:
For the 12 months to 31 October 2023, the Group expects revenue to be marginally below the lower end of the previous guidance range1 but to be no less than £298 million. Nevertheless, given the Group's focus on profitability, EBITDA remains in line with the previously stated guidance range1 and the Group expects it to be significantly above £100 million. Profit Before Tax is expected to be towards the top end of the previous guided range1 and no less than £67 million.
So these headlines were largely known:
We’ll forgive them a 0.1% miss on revenue and call these in line. They still look impressive written down, with double-digit growth almost everywhere & EPS up 30%. Here is the outlook:
The Board looks ahead to the future with confidence and, notwithstanding changes in the macro environment, expects the Group to build on the success of FY 2023 and achieve continued revenue and earnings growth in FY 2024.
Broker Cavendish leave forecasts unchanged, which prior to this week were for an undemanding forward P/E of 9. The company also has net cash, but £33.9m doesn’t really move the valuation needle for a company this size.
The forecast EPS growth rate is a more pedestrian 10% pa for the next couple of years, so overall, it looked good but not exceptional value. With a decent dividend, growth, a share buyback and sub-10 P/E, we thought this should do well over the medium term, and the shares opened up a few per cent. However, during the day of the results, the shares ket rising and closed up 20%. This seems a little excessive, given these results were in line, and brokers kept future forecasts the same. The forward P/E is now around 12. It seems like the value may have outed already.
Sylvania Platinum (SLP.L) - Interim Results
These results are effectively known to anyone who can add up 2 quarterly updates, so they shouldn’t really have moved the market. Perhaps the sell-off is simply because of how bad they look when the explicit comparison to the previous year is made:
· Net revenue generated for the Period totalled $40.8 million (HY1 FY2023: $79.9 million), a decrease due to the drop in basket price in USD terms;
· Group EBITDA of $7.3 million (HY1 FY2023: $45.6 million), a decrease compared to the prior period, due to the drop in basket price in USD;
· Net profit of $3.1 million (HY1 FY2023: $32.6 million);
They had good operational performance doesn’t overcome the weak PGM prices, and hence a 90% drop in Net Profit. Another reason for the fall may be that the dividend was cut. However, broker Liberum say this is in line with their forecast, so again shouldn’t be a surprise.
Liberum reiterate their full-year forecasts, but these are starting to look a bit far-fetched. Going from $40m Revenue in H1 to Liberum’s forecast of $70m in H2 on the same production, and the PGM basket prices the same in H2 as H1 so far, just looks crazy. Going from $7.3m EBITDA in H1 to $47.5m for the FY looks equally daft. Our simple model suggests that PGM prices could double in Q4, and they would still miss these.
It may be that some investors are seeing the oversupply in the sector, so Sylvania, as one of the lowest-cost producers, will survive and, if demand returns, earn decent money again. But that could be several years out. However, the fact that some shareholders were surprised by this week’s H1 results, despite all the figures being in the quarterly reports, seems to suggest that these types of shareholders are a very small proportion of the shareholder base here.
For example, an article this week in the Investor’s Chronicle entitled “Sylvania Platinum looks like a recovery buy” bases its bull case on the same broker’s forecasts saying:
full-year pre-tax profits and earnings per share (EPS) are still forecast to fall 24 per cent to $50.7mn and 13¢ (10p)
So it seems it won’t just be a few shareholders who will be shocked when the full year results are published.
That’s it for this week. Have a great weekend!