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STOCK SCREEN: HOW OUR CONTRARIAN PORTFOLIO IS BACK TO FULL STEAM AHEAD
Ignore the US at your peril
Copper-bottomed gold investments
Why risk pays
Investing for the grandchildren
28 JULY - 3 AUGUST 2017 | £4.90
CONSUMEER
H
HEALTH
EALTH C
CHECK
HECK
Can British
households keep
on spending?
vol 201/2555
investorschronicle.co.uk
CONTENTS
this week...
Consumer h
Consumer health
ea
alth ccheck
heck
k
22 Harriet Russell
examines the available
data to take the pulse of the
consumer and to work out
how chang ging spending
patternss will affect a
range of retailers
FEATURES
Stock screen: How our SEVEN DAYS 6
Ignore the US
at your peril Contrarian portfolio is The biggest business and investment stories
47 Don’t let high valua- full steam ahead again of the past seven days: plus what’s rising,
what’s falling, what’s making the head-
tions put you off the US 64 Algy Hall reveals the new picks for his Ken Fisher- lines, and the key market statistics
market, says Kate Beioley. inspired contrarian screen and reports on its 26 per
Instead stay focused on cent total return against 16 per cent from the market NEWS 9
the fantastic companies
based there and good
Copper-bottomed gold 9 Jimmy Choo shareholders handed
easy exit Michael Kors has made
fundamentals investments an £896m offer for the British shoe
66 Alex Newman explains why investors should company
pay heed to the strong backing being given to • Sage fully valued after weak organic
mining projects that involve copper as well as gold growth
Investing for grandchildren 10 Capacity concerns weigh on airlines
• Tritax Big Box secures key site
34 A grandfather who wishes to give his grand- inside the M25
children a helping hand asks for advice on the • Recovery in sight for Revolution Bars
underlying investments 12 Payments sector ripe for M&A
Why risk pays Takeover offers for Worldpay and Paysafe
are unlikely to be the sector’s last
15, 30, James Norrington finds out how his Best of 350
portfolio stands up to a risk analysis while Chris Dillow
CONTENTS CONTINUED OVER PAGE
helps us to understand the best times to hold small caps
28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 3
28 JULY 2017
INVESTORSCHRONICLE.CO.UK
COMMENT 14 FEATURES 22 probe into DIY investment platforms
34 Portfolio Building a solid
Our columnists offer in-depth analysis 22 Consumer health check Harriet
financial base
and investment ideas: Russell makes sense of retail data
14 Chris Dillow When uncertainty to work out which retailers are
doesn’t matter: The IMF is wrong to likely to benefit from changing
TIPS 40
claim that policy uncertainty is a consumer spending patterns 40 Share tips
threat to stock markets 28 Momentum marches on Momentum 44 Fund tip
16 Simon Thompson Five small-cap investing still works, as the recent 45 Tip updates
plays: Simon Thompson highlights strong performance of our no-thought
five small-cap shares offering decent holdings demonstrates. FUNDS 46
growth and upside potential Chris Dillow reports 46 Fund news High-yielding trusts lead
18 Mr Bearbull Satellite of hope: The 30 Does fortune favour the bold? asset growth among new launches
Bearbull income fund finds a growth Risk specialist Covisum’s fat-tail risk 47 Big theme Avoid US equities at
opportunity – hopefully model gives a nuanced picture as to your peril
20 The Trader Rankings are based on whether our portfolio offers better
international access, daily market reward for risk than the FTSE 350, SHARES 50
turnover, store of value, and says James Norrington 50 Taking Stock Are you listening
commercial usefulness carefully? Reading between the
21 Property Matters The NHS needs a dose MONEY 32 prepared lines
of medicine: The NHS needs more Financial planning, tax and 51 Results The lowdown on the latest
primary healthcare centres, but investment wisdom: company results: Unilever, Nichols,
progress is agonisingly slow 32 Financial planning FCA launches Moneysupermarket.com, Sports Direct,
Arbuthnot Banking Group, IP Group,
Howden Joinery, Drax, Beazley, Capital
Subscriptions & Counties, Acacia Mining, Ascential,
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Associate Editors Algy Hall, Philip Ryland and Simon Thompson value plays
Sectors Editor Harriet Russell Tel: 0333 222 0927 Fax: 01795 414 555
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Deputy Personal Finance Editor Kate Beioley
mining projects is any indication, you
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4 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
SEVEN DAYS
THE EDITOR
it increasingly hard to operate in
THE BIG Tanzania. Despite strong produc-
tion, a ban on unrefined gold is
Get your teeth STORIES leading to big cash outflows and
could soon force the closure of
into strategy
the Bulyanhulu mine. Since then,
matters have worsened. First, the
group was accused of taking a
Goodbye “militarised” approach to mine
I was intrigued this week by news that meat substitute Quorn was sell-
ing like hotcakes as health-conscious consumers reduce the amount
of meat in their diets. Quorn’s latest owner, Philippine food group
leaseholds
security by UK charity Rights and
Accountability in Development. A
day later, the Tanzanian govern-
Monde Nissin, isn’t listed in London, but previous owners of the brand Government proposes ban ment handed Acacia a $190bn tax
have been, and the history offers a really interesting case study in how Leaseholds on new-build houses bill, for what authorities claimed
companies create – or don’t as the case may be – value from innovation. could become a thing of the past if were undeclared sales, plus
The last listed owner of Quorn was Premier Foods, which sold it government proposals come to frui- interest. Shares in the gold miner
to a private equity firm for £205m in 2011. But the innovation behind tion. Communities secretary Sajid closed at 233p on half-year results
the protein took place over 10 years in the agricultural labs of ICI Javid said the plans – which will be day, but had sunk a further 30
in a joint venture with the conglomerate Rank Hovis McDougall, subject to an eight-week consulta- per cent when we went to press.
whose bread business, Hovis, subsequently formed the spine of tion – would affect future sales,
Premier Foods. RHM eventually sold its share in the joint venture to
AstraZeneca, which then offloaded it to private equity a decade later
excluding very few exceptional
circumstances such as houses Emissions
for £72m, who then sold it to Premier Foods for £172m.
Think about that circle of transactions. Premier Foods spent share-
that have shared services. Mr Javid
said around 1.2m houses were eradicated?
holders’ cash on a business that in a way it had been instrumental leasehold in England and were End in sight
in creating. To add further context, when Quorn was again sold the rising rapidly, “exploiting home
price tag had risen to £550m – a £345m gain for its second private buyers with unfair practices”. New diesel and petrol cars and
equity owner and higher than Premier’s current market capitalisation Plans to set ground rents, which vans will be banned in the UK
of £330m. We don’t know how much Quorn is worth now, but the have increased significantly in from 2040, under proposals by
recent strength of its trading and the massive expansion of its ranges recent years, to zero levels will also environment secretary Michael
and factories suggests it is likely to be much higher. be subject to public consultation. Gove. The measure is part of the
Premier’s long-suffering shareholders should be asking how suc- government’s air quality plan,
cessive management teams have let so much value slip through their
fingers. Indeed, while current complaints lie with the rejection of a Acacia’s which will make all new cars
fully electric within the next 25
recent 65p a share bid, two-thirds higher than today’s share price, they
should be more upset that instead of creating a steady accumulation woes worsen years. Local authorities will also
be given funds for a range of
of value for shareholders management has instead created a steady Tax bill issued measures, including changing
stream of cash for investment bankers and private equity groups. road layouts or encouraging
This is not something I say with 20:20 hindsight, either – when Acacia Mining (ACA) is finding residents to use public transport.
Premier sold the brand in 2011 I pondered on our now defunct
THE NUMBERS
Chronic Investor blog that it had perhaps sold off the wrong part of its
product portfolio in its desperation to keep its bankers happy. Quorn
was on the right side of a trend towards healthy eating, with difficult
to replicate intellectual property and few noteworthy competitors
– what Warren Buffett might call an economic moat. On the other
hand, the kitchen staples that made up the rest of the portfolio were
$1.20 0.3% $506m
The amount UK GDP growth during The amount Apple
being squeezed on price by new entrants, own- and licensed brands Antofagasta’s (ANTO) the three months to has been ordered to
and aggressive supermarket buyers. A quoted Quorn-only business net cash costs fell to per the end of June. This pay by a US judge
could have been as exciting for investors as, say, Fever Tree Drinks, pound of copper mined was up from the 0.2 to the University of
another premium niche product making a market its own. during the second per cent reported Wisconsin-Madison
As investors we pay lots of attention to a company’s headline finan- quarter. This should during the first over a patent dispute.
cials and forecasts. But the case of Quorn shows that we need to dig rise to no more than quarter, but represents The US tech giant
deeper still to put them into context – into strategy and management’s $1.30 for the full year, a slower rate of year- intends to appeal the
ability to execute it, and the motivations for dealmaking. Numbers the Chilean group said. on-year growth. decision.
matter, but the businesses and trends behind them matter more.
6 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
BAD
GOOD WEEK FOR
WEEK FOR: PROVIDENT
FEVERTREE FINANCIAL
DRINKS P60 P57
development for a solid-state
Alphabet’s electrolyte battery, both smaller
and lighter than the lithium-
numbers ion varieties currently in
widespread use. The new
Google still growing technology could be in electric
vehicles as early as 2020 with
Trouble in Rio Reported numbers from
Google’s parent company
Alphabet (US:GOOGL) were
the potential to significantly
boost the total charge capacity
and extend the range of electric
It was another bad news week for Rio Tinto (RIO). The Serious knocked by the $2.7bn (£2.1bn) vehicles. Engineering such a
Fraud Office has launched an investigation into the Australian fine imposed by the European battery at a realistic price point
mining giant regarding suspected historic corruption by the com- Commission earlier this year. has been a challenge for manu-
pany, “its employees and others associated with it” in the Republic Half-year pre-tax profit fell facturers, so investors would
of Guinea. Last year, Rio reported itself to the fraud agency after 28 per cent to $3.5bn, which do well to monitor Toyota’s
discovering emails dating back to 2011, which related “to con- sent the shares down 3 per progress.
tractual payments totalling $10.5m (£8.1m) made to a consultant” cent on the day of the results
involved in the Simandou iron ore project. An internal investigation
by the commodities giant also led to the resignation of Rio’s long-
announcement. Ignore the fine
though, and the world’s biggest Buy-to-let up
serving legal and regulatory group executive Debra Valentine and company is still beating expec- Credit demand growing
the suspension of energy and minerals chief executive Alan Davies. tations. Revenues were up by
a fifth as both the Google Despite market nerviness around
search engine and YouTube the buy-to-let market following
“There is a school of continue to attract a growing
proportion of the global adver-
the increase in stamp duty last
April, credit demand seems to
thought that speak king tising market. be holding up for a challenger
bank Paragon (PAG). Buy-to-let
to management, when Toyota’s lending was up 2 per cent during
the first nine months of the
making an investm ment 2020 vision year, surpassing the £1bn mark.
The proportion of professional
decision, can be ass Any old ion landlords in the pipeline has
risen to 70 per cent of the buy-to-
risky as it can be Reports have emerged that
Toyota is close to a major
let total during the third quarter,
up from 62 per cent at the start
educational” breakthrough in electric car
technology. The Japanese auto
of the year. Perhaps in a sign of
relief, investors sent the shares
TAKING STOCK, PAGE 50
giant has reached the “produc- up 5 per cent on the day of the
tion engineering” stage of announcement.
Chart of the week: Profit warnings reach 7-yr low UK main market companies issued
Risers and fallers (%)
45 profit warnings during the second
quarter of this year – the lowest level TT Electronics +15.76
70 in seven years. This was down from 66 Renewi +10.43
65
warnings put out by FTSE groups for the Helical Reit +7.71
Number of warnings
same time during 2016 (see chart), ac- RPC +6.94
60 cording to research by EY. EI +6.30
55 However, analysts at the professional
services group caution: “Earnings fore-
50 Provident Financial -7.56
casts have dipped and the economy’s
Mitie -6.65
45 relative outperformance has enabled
Johnston Press -5.66
more companies to meet expectations.”
40 Premier Oil -5.60
2011-2017 FTSE general retailers issued seven
profit warnings, the highest number of Spectris -4.73
Source: EY
Week to 25 July 2017
any sector during the period.
For more market data go to page 8
28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 7
SEVEN DAYS MARKETS THIS WEEK
UK stock market Commodities
1-week 1-month 1-year Dividend 25/07/17 Year high Year low
Index 25/07/17 change (%) change (%) change (%) Year high Year low PE yield (%)
Dow Jones UBSComm. Index 328.93 347.28 302.10
FTSE 100 7,434.82 +0.60 +0.14 +10.80 7,547.63 6,634.40 31.6 3.77
BrentCrude $/barrel 50.03 57.06 42.09
FTSE 250 19,641.28 +0.14 -0.22 +14.92 20,024.92 16,997.13 22.8 2.67
Comex gold $/ounce 1,251 1,367 1,127
FTSE All-Share 4,068.25 +0.54 +0.11 +11.80 4,130.15 3,603.96 29.5 3.55
LME three-month copper 6,225 6,225 4,607
FTSE Aim 4,926.70 +2.85 +1.28 +38.52 4,969.33 3,560.43 42.5 1.27 Cocoa £/mt 1,569 2,455 1,390
Coffee Brazil ¢/lb 131.45 170.90 115.39
FTSE 100 rolling 30-day Share performance
7550 Falls Rises
7500 100
90
Currencies
7450 80
Rate 1 year max. 1 year min.
70
US$ vs £ 1.30 1.34 1.21
7400 60
50 Euro vs £ 1.12 1.20 1.11
7350 40
Yen vs £ 145.63 147.75 126.09
30
7300 20 SFr vs £ 1.24 1.31 1.19
Jun Jul 10
Source: Thomson Datastream 0
MORE ONLINE
28/06/2017 05/07/2017 12/07/2017 19/07/2017 26/07/2017
For more cross rates and a currency convertor, see
IC ONLINE http://markets.investorschronicle.co.uk
For more UK market data, see http://markets.investorschronicle.co.uk
Other major markets Official interest rates
1-week 1-month 1-year Dividend Rate (%) Since
Index 25/07/17 change (%) change (%) change (%) Year high Year low PE yield (%) UK Bank rate 0.25 4/8/16
Eurofirst 300 1,496.90 -0.40 -1.75 +11.30 1,558.02 1,296.32 23.80 3.42 ECB Repo rate 0 16/3/16
CAC 40 5,161.08 -0.24 -1.99 +17.62 5,432.40 4,321.08 19.06 3.20 US Fed Funds 1.00–1.25 14/6/17
Dax 30 12,264.31 -1.34 -3.68 +20.26 12,888.95 10,144.34 19.79 2.73 Japan -0.1–0.1 29/1/16
Dow Jones 21,613.43 +0.18 +1.02 +16.87 21,640.75 17,888.28 18.72 2.30
S&P 500 2,477.13 +0.67 +1.59 +14.23 2,477.13 2,085.18 21.58 1.97
Nasdaq Comp 6,412.17 +1.07 +2.34 +25.79 6,412.17 5,046.37 34.24 1.10 Government bonds
Nikkei 225 19,955.20 -0.22 -0.88 +20.07 20,230.41 16,083.11 19.10 1.72 Govt bond yields % Year high Year low
UK: 10-year gilts 1.32 1.51 0.61
Hang Seng 26,852.05 +1.23 +4.60 +22.09 26,852.05 21,574.76 14.48 3.30
US: 10-year Treasuries 2.33 2.61 1.46
Australia ASX All Ords 5,775.30 +0.65 +0.36 +2.99 5,976.40 5,238.30 20.43 4.08
Germany: Bunds 0.50 0.57 -0.22
Japan: JGBs 0.07 0.11 -0.30
Key emerging markets
1-week 1-month 1-year Dividend
Index 25/07/17 change (%) change (%) change (%) Year high Year low PE yield (%) MORE ONLINE
Brazil iBovespa 65,667.63 +0.50 +7.50 +15.46 69,052.00 56,162.38 17.70 2.99 For more global bond data, see
http://markets.investorschronicle.co.uk
Russia RTS 1,010.06 -2.73 +2.14 +8.53 1,195.61 903.04 7.00 5.35
India CNX Nifty 10,328.47 +1.48 +4.43 +16.97 10,328.47 8,093.89 23.25 1.31
China SE Comp 3,243.69 +1.76 +2.72 +7.56 3,288.97 2,953.39 17.45 1.95 Corporate bond indices
Thailand SET 1,581.42 +0.63 -0.06 +4.55 1,591.00 1,406.18 16.19 3.10 25/07/17 Yield (%) Year high Year low
Turkey ISE 100 107,040.60 +1.25 +7.43 +44.31 107,417.50 72,519.81 11.38 2.49 Investment grade 97.23 1.14 99.75 96.42
Argentina Burcap 60,173.45 +1.55 +2.99 +36.43 62,932.77 42,155.36 na 0.90 High yield 120.25 2.71 120.33 116.54
Economic indicators MORE ONLINE
For prices of popular corporate bonds and Pibs, see
Indicator UK US Germany Japan www.investorschronicle.co.uk/bonds.
Inflation (IndexJan 87=100) 272.3 (Jun) 245.0 (Jun) 109.0 (Jun) 99.8 (Jun)
Change onyear +3.5% +1.6% +1.4% +0.1%
Unemployment
Change onyear
0.81m (Jun)
+4.6%
6.98m (Jun)
-10.5%
2.55m (Jun)
-5.5%
2.05m (May)
-3.3%
UK yield curve
Industrial production 104.1 (May) 105.2 (Jun) 114.1 (May) 100.1 (May) 2
Change onyear -0.3% +2.0% +4.9% +4.7%’ 12 months ago
Average earnings £473.0 (May) $9.28 (Jun) 111.2 (May) 101.2 (May) 1.5
Change onyear +2.2% +0.9% +2.7% +0.4%
Retail salesvolume 115.9 (Jun) $479,358m (May) 112.4 (May) ¥11,766bn (May) 1
Change onyear +2.9% +4.4% +4.9% +2.1% 3 months ago
0.5 26 July 2017
Current account -£16.9bn (Q117) -$116,781m (Q117) +€17.29bn (Jun) +¥1,400.90bn (May)
Actual change on year +£8.83bn -2.0% -3.5% -8.6%
Moneysupply– M1 £82.4bn (Jun) $3,497.7bn (Jun) €2,813.3bn (May) ¥712,525bn (Jun) 0
Change on year +6.3% +7.7% +5.0% +7.6% 1M 3M 6M 2Y 3Y 5Y 10Y 15Y 20Y 30Y
Maturity
8 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
NEWS
PERSONAL GOODS
Jimmy Choo shareholders Sage fully valued after
weaker organic growth
handed easy exit strategy Sage (SGE) waited until after market-
close to issue both a trading update and
Michael Kors has made an £896m offer for the British shoe company the news that it will acquire Intacct – a
provider of cloud financial management
solutions in North America. The market
did not react well, with Sage’s shares
HARRIET RUSSELL falling 5 per cent in early trading on
J ust three months after its largest share-
holder announced it was up for sale,
Jimmy Choo (CHOO) has found a buyer.
Wednesday before partially recovering.
This decline perhaps reflected the high
price paid for Intacct, at $850m (£654m).
Michael Kors (US:KORS) – the US-listed Equally, investors might have balked at
behemoth which also takes its name from the weaker organic growth of 5.6 per cent
its founder and lead designer – has agreed reported for the third quarter, compared
to pay a 37 per cent premium to the share with 6.3 per cent during the second quar-
price the day prior to the sale announce- ter. That said, management reiterated its
ment. It has made a 230p all-cash offer German investment group JAB – which owns full-year guidance of 6 per cent organic
totalling £896m. The market reacted well, 70 per cent of Jimmy Choo – is backing the deal growth, with an underlying operating
sending Jimmy Choo’s share price up margin of no less than 27 per cent.
17.5 per cent on the day of the news. activity has also helped push individual France was an area of weakness
German investment group JAB – which stock valuations upwards. Just three months for Sage, with flat performance. The
owns 70 per cent of Jimmy Choo – is backing ago, conglomerate LVMH (MC.) agreed to software provider’s overall recur-
the deal, as is the company’s own chairman shell out £10bn for the remaining stake ring revenue growth rate for the nine
Peter Harf. Mr Harf said a combination with it didn’t already own in Parisian couture months to end of June was 9.3 per
Michael Kors would allow Jimmy Choo to house Christian Dior, while US handbag- cent, less than the 10.1 per cent growth
embark on its next phase of growth and maker Coach (US:COH) has agreed a $2.4bn during the same period a year earlier.
provide opportunities for the benefit of Jimmy (£1.8bn) takeover of accessories brand Kate North America helped to drive growth
Choo customers, employees, shareholders Spade. By way of comparison, that last deal and management sees the acquisition
and other stakeholders. constituted a 27.5 per cent premium to Kate of Intacct as supportive of this. For
But this is something the company has Spade’s undisturbed share price. analysts at Numis, such an acquisition
struggled to accomplish during its three years might be transformational for Sage,
as a listed entity. Growing levels of competi- • In our opinion, this is a very generous which would have found it almost
tion and a shift in consumer tastes culmi- offer, and a great outcome for Jimmy Choo impossible to develop a solution like
nated in a 0.8 per cent dip in like-for-like shareholders. Valuations across the luxury Intacct’s on its own.
retail sales growth at Jimmy Choo during 2016 sector have looked very toppy this year, so At 667p, Sage’s shares are trading on
which, along with declines in the wholesale there’s a concern that if consolidation con- a multiple of 23 times forecast earnings
business and costs associated with new open- tinues, premiums could be thin. Not so in for 2017. The integration of Intacct may
ings, dragged pre-tax profit down by a fifth. this case. The acquisition implies an enter- bring a different, growth-enhancing
That said, the share price has benefited prise value multiple of approximately 17.5 element to the overall group. However,
this year from improved sentiment for the times 2016’s adjusted cash profits. What’s with lower organic growth forecasts in
luxury sector, particularly as the weak more, the offer price is actually a 59.6 per mind, we think the shares look fairly
pound drives more tourists to London and cent premium to Jimmy Choo’s six-month valued. We move to hold.
helps deliver reported currency benefits for volume weighted average share price of Harriet Clarfelt
a number of global brands. A surge in M&A 144p (to 21 April 2017). At 228p, hold.
28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 9
NEWS
REAL ESTATE INVESTMENT TRUSTS
Tritax Big Box gets
key site inside M25
JONAS CROSLAND
T ritax Big Box Reit (BBOX) has exchanged
conditional contracts for £65m to buy a
development site at Littlebrook in Dartford. This
is the former Littlebrook Power Station that
was closed in 2015 and is a rare site inside the
M25. It covers 124 acres and has the potential to
provide around 1.7m of development space.
Tritax will be working in conjunction with
specialist logistics developer Bericote Properties
to apply for planning consent to cover the 1.2m
sq ft that currently does not have consent for
use for storage and distribution. The site will be
Budget airline easyJet is likely to encounter some turbulence developed in phases, with site costs estimated
at £25m, and construction will commence on a
TRAVEL & LEISURE pre-let basis from autumn 2018.
Capacity concerns • This is a big addition to the portfolio,
and given the location it’s unlikely there
weigh on airlines
will be any trouble finding tenants.
Tritax is running an unexpired lease
length of around 15 years, and pays an
attractive and fully covered dividend. At
Increasing capacity could weigh on yields for easyJet and Ryanair 147p, the shares remain a buy.
TRAVEL & LEISURE
of 93.1 per cent, an improvement of 1.1
Recovery in sight
JULIA FAURSCHOU
B udget airline easyJet (EZJ) may soon
encounter some turbulence. Outgoing
chief executive Carolyn McCall has warned
percentage points. Revenue per seat was up
2.2 per cent at constant currency and total
revenue increased 16 per cent to £1.4bn, for Revolution Bars
that increased capacity could soon put although this was largely aided by Easter
pressure on yields during the group’s latest falling during the third period of this year. JULIA FAURSCHOU
quarterly update. This excess capacity is an
issue across the wider industry, as airlines
tend to increase the number of seats they
• At 1,271p, shares in easyJet are
creeping towards the top end of their
R evolution Bars (RBG) appears to be on
the mend after its profit warning in May
sent its shares down more than 40 per cent.
offer when lower fuel prices makes it historical valuation, at 15 times forward The company announced that total sales in the
cheaper to operate flights. earnings. This looks expensive given year to July were up 9 per cent to £130m, while
Jozsef Varadi, chief executive of the warning on yields, and analysts like-for-like sales were up 1.5 per cent. Terrorist
fellow low-cost airline Wizz Air (WIZZ), expect that leverage and free cash flow attacks in Manchester and London impacted
expressed similar sentiment to Ms McCall could take a hit at the expense of higher sales in the final quarter, but growth in the
earlier this week when he warned that capex. This could pose a threat to the past six weeks has recovered to 2.7 per cent.
airlines tend to compete away the benefit dividend. The fact the company has Costs were one of the main issues in May’s
of lower fuel prices with extra capacity. secured its future operations in Europe profit warning. The living wage, the double
As a result he is “cautious on the prevail- with an Air Operator Certificate in increase to the minimum wage, the appren-
ing yield environment” during the second Austria is positive. However, at this lofty ticeship levy, and above-inflation increases
half of the year. Management at Ryanair valuation – especially compared with to business rates ended up being more of a
(RYA) also stated in May that average peers Ryanair (RYA) and Wizz Air (WIZZ) headwind than previously expected.
fares during the year to March 2018 could – we’re going to shift to hold for now.
fall by between 5 and 7 per cent, due to a Ryanair appears to be in a similar situa- • A new chief financial officer was
combination of weak sterling and continu- tion as easyJet where increasing capac- appointed last month, after Revolution Bars
ing excess capacity in Europe. ity could eventually weigh on yield, so had gone through three in two years. The
easyJet has continued to increase also a hold. However, we believe Wizz share price rally suggests a correction may
capacity this year. It was up by 9.5 per cent Air is well positioned to exploit the be on the horizon, after the dramatic slide
during the third quarter to 24m seats. The long-term prospects for central and in May. At nine times Bloomberg consensus
number of passengers carried increased eastern European air travel, keeping us earnings, we think the shares represent
by 10.8 per cent to 22.3m with a load factor bullish on that budget airline. good value for a growing business. Buy.
10 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017NEWS SPOTLIGHT
Payments sector
ripe for M&A
Takeover offers for Worldpay and Paysafe are unlikely
to be the sector’s last
HARRIET CLARFELT
P ayments. It might not sound like the most exciting of
industries. But something about the sector has got
major businesses – including Vantiv, Blackstone and CVC
Capital Partners, among others – hot under the acquisi-
tive collar. As we noted earlier in July, following Vantiv’s
successful bid for payments giant Worldpay (WPG), the
payments sector is being propelled forward by the global
shift towards e-commerce. And, as consumers around
the world continue to use cash less frequently, payments
processors will only become more integral to everyday Vantiv’s bid for Worldpay shows it expects more growth to come
life. We appear to be witnessing consolidation across the
payments industry – begging the offered its support for a potential deal, other sharehold-
‘We appear to questions, which company will ers may not find the terms so attractive. Each share-
be witnessing be targeted next as a potential holder would receive 590p in cash per share, equating to
consolidation acquisition? And why would one a premium of 34 per cent to Paysafe’s average share
across the pay- want to acquire such a company? price during the six months to the end of June 2017.
It seems fair to assume that the However, Paysafe’s shares have enjoyed a bullish run in
ments industry bidders for both Worldpay and, recent months, rising 46 per cent since the start of the
– begging the more recently, Paysafe (PAYS) year. The shares closed at around 540p on the day prior
question, which anticipate further growth for the to the offer announcement – just a 9 per cent discount to
company will be businesses going forward. the takeover price.
Payment processors have fast Could Paysafe be better off on its own? The bidding
targeted next become the acquisition du jour. consortium would want to sell off Paysafe’s non-
as a potential Over the past month, we not core Asia Gateway business to help finance the acquisi-
acquisition?’ only witnessed Vantiv’s bid for tion. For Mr Khan, based on a valuation of eight times
Worldpay, but also the pur- earnings, Asia Gateway could be worth 55p a share.
chase of Digital River Payments If Paysafe was to sell this business itself, Mr Khan
by Worldline, Ingenico’s takeover of Bambora, and believes management could drive the group’s share price
Permira taking a 10 per cent stake in Swedish payments up as high as 650p as a standalone entity, making the
processor Klarna. By the time Paysafe announced it had 590p offer price look relatively cheap.
received a possible takeover offer from a private equity There is no certainty about whether a deal will go
consortium comprising funds managed by Blackstone ahead. However, Paysafe is operating against a dog-
and CVC last week, the market had spent several days eat-dog backdrop of consolidation, demonstrated by its
acclimatising to a developing trend. Shares in Paysafe own acquisition of MCPS for $470m (£362m). This should
rose 8 per cent on the news, a reaction subdued enable it to save money in the US while generating higher
perhaps by prior M&A activity in the payment process- returns and enhancing its presence there.
ing sector. The market response was also obscured by
Paysafe’s announcement of its own acquisition: Texas- • Based on UBS’s forecast EPS of 51¢ for the 12
based Merchants’ Choice Payments Solutions (MCPS). months to December 2017 prior to the bid, the offer
For Canaccord Genuity analyst Daud Khan, the offer price equates to 15 times forwards earnings. This is
for Paysafe is motivated by the heightened acceleration well below the value attached to Worldpay (WPG) by
of consolidation in the sector. Mr Khan does not believe its bidders, at 30 times forward earnings. Admittedly,
this will be the private equity duo’s only acquisition the latter has a market capitalisation more than three
in the payments area – rather, Paysafe may form the times that of Paysafe. However, this is by no means
cornerstone of consolidation, with two or three more a done deal and other bidders may come forward.
acquisitions to follow. Considering this trend towards consolidation, it is
An important question is whether the terms of the worth watching other players in the market – such
offer will satisfy enough shareholders for the deal to as Paypoint (PAY) or small-cap Monitise (MONI).
complete. While Old Mutual – Paysafe’s largest share- For Paysafe, the shares look fairly priced at 583p.
holder, with a stake of around 10 per cent – has already Hold
12 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017ECONOMIC OUTLOOK
Inflation to fall
since fallen by a percentage point.
This might not be due simply to difficulties in measur-
ing ‘equilibrium’ unemployment but rather to a changed
relationship between spare capacity and inflation.
Chris Dillow says inflation will probably This introduces a new element of uncertainty. Not only
fall from now on do we have ordinary environmental uncertainty – about
the likely influences upon inflation such as sterling,
consumer spending. productivity and so on – but we
also have model uncertainty: what is it, precisely, that
determines inflation?
Our best guess might be that inflation will fall towards
T he threat of sustained above-target inflation has
passed. The Bank of England is likely to say in next
week’s Inflation Report that it expects CPI inflation to fall
its target. But there are risks around this.
next year to below its 2 per cent target. Next week’s economics…
There are two fundamental reasons for this. The economy is growing slowly, which means there’s little
One is that wage inflation has fallen, from 2.8 per cent chance of an interest rate rise soon, next week’s news
in November to just 1.8 per cent in the latest numbers. This might tell us.
is a big surprise: most economists had expected higher Purchasing managers’ surveys are expected to show
price inflation and lower unemployment to raise wage only moderate growth. In manufacturing, growth might
growth. This means there is now little danger of a wage- dip to a 12-month low, and in services to an 11-month one.
price spiral. The construction sector might also be weak.
The other is that global inflation is low. Commodity Bank of England data on lending isn’t likely to show a
prices have fallen by 8 per cent since January. Thanks to much cheerier picture. The good news is that these could
this, UK producer input prices have dropped almost 2 per show that lending to companies has increased recently.
cent since then. Such a welcome development is, however, mitigated by
These disinflationary forces should mean that CPI the fact that corporate cash holdings are also rising a lot.
inflation will fall soon simply because rises in import prices In the household sector, we could see another drop in
caused by last year’s fall in the pound will drop out of the mortgage approvals, confirming a slowdown in the housing
annual data. It now looks as if those rises will cause only market. But we should also see that consumer credit is
a one-off jump in the level of consumer prices, rather than rising at a steady 10 per cent-plus annual rate. Some see
sustained inflation. this as evidence of irrational profligacy among consumers,
This doesn’t, however, mean inflation will slump. One but it might instead be a hopeful sign, that people are look-
problem is that labour productivity is stagnant. If this ing through the current squeeze on real incomes towards
continues, it means that even modest wage rises won’t be better times, and are borrowing in anticipation of them.
offset by efficiency gains. Two per cent wage growth would On Thursday, the Bank of England publishes its
then mean a 2 per cent rise in unit wage costs, which in Inflation Report. This is likely to predict a drop in infla-
turn would mean 2 per cent inflation unless raw materials tion next year. The recent fall in CPI inflation and surpris-
or import prices fall or unless profit margins get squeezed. ing weakness of wage inflation has reinforced hopes that
Also, a recent Bank of England survey found that house- inflation will fall next year as the rise in import prices
holds plan to continue to increase their nominal spending passes out of the numbers. With the Bank also likely to
next year. This is an environment in which retailers might highlight the weakness of real growth, this will point to
try to edge up prices. interest rates staying low.
Nor does it mean that interest rates won’t rise. There’s This doesn’t, though, mean rises are off the table. If
a case for trying to return rates to a more normal level the Chancellor’s Autumn Statement retreats from auster-
– or at least to remove last year’s insurance cut. Unless ity, looser fiscal policy might trigger a rate rise next year.
growth is very weak, some MPC members will continue to Overseas, we should see good growth, at least outside
make this case. of China (where purchasing managers might report only
It’s also possible that the chancellor will interpret the a sluggish expansion). In the eurozone, purchasing
general election result as a vote against austerity and so managers should confirm that although growth slowed
use the Autumn Statement to relax fiscal policy. Less tight last month it remains near a six-year high, while official
fiscal policy should lead to less loose monetary policy. figures should show a drop in unemployment. And in the
There is, though, a big and under-appreciated uncer- US, the ISM survey should show strong growth in manu-
tainty here. It’s that the dominant traditional theory of facturing while Friday’s numbers should show a 200,000+
what causes inflation is now in question. Economists used rise in net new jobs.
to think inflation depended in large part upon the amount This growth is not, however, causing significant
of spare capacity in the economy. The fact that wage infla- inflation. In the eurozone, Monday’s figures should show
tion has fallen, despite low unemployment, brings this into core consumer price inflation running at around 1.2 per
question. Back in November, the Bank estimated that the cent – only a slight rise in recent months and well below
“unemployment rate is currently close to its medium-term target. And in the US, wage growth is likely to be stuck
equilibrium rate — that consistent with neither upward nor around 2.5 per cent despite unemployment falling to a
downward pressure on wage growth”. But wage growth has 16-year low.
28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 13COMMENT
CHRIS DILLOW
But this isn’t the case. Since January 1997 the cor-
relation between the CBOE’s Vix index and subsequent
annual changes in MSCI’s world index has been just 0.04
– essentially zero. Volatility, then, tells us nothing about
future returns. This is consistent with low volatility being
a sign of disagreement rather than of complacency.
But what about the combination of low volatility,
When uncertainty policy uncertainty and “rich valuations”?
One obvious sign of “rich valuations” is the cycli-
cally-adjusted price-earnings ratio (or caper) on the S&P
doesn’t matter
500, complied by Yale University’s Robert Shiller. It is
now just over 30, which is almost twice its average since
1871. This is “rich”.
The IMF is wrong to claim that policy Global economic policy uncertainty index
uncertainty is a threat to stock markets 300
250
200
I
n its latest economic forecast, the IMF says 150
something odd. It’s this: “Rich market valuations
100
and very low volatility in an environment of high
policy uncertainty raise the likelihood of a market 50
correction.”
There are several problems with this. 0
97 99 01 03 05 07 09 11 13 15 17
One is that high policy uncertainty should already Source: policyuncertainty.com
be reflected in share prices. In fact, if policy uncertainty
increases downside risk it should be a source of a risk
premium in equities – something that generates high So, how do this, the Vix and policy uncertainty taken
returns for the investor brave enough to take it on. altogether predict returns? We can answer this simply by
History shows that this is the case. We have an index a regression equation linking annual changes in MSCI’s
of global economic policy uncertainty compiled by world index since 1997 to these three variables.
Stanford University’s Nick Bloom and colleagues. Since Such an equation tells us that the caper is indeed
January 1997 (when their data begins) the correlation associated with lower subsequent returns. But policy
between this index and subsequent annual changes uncertainty and the Vix have no statistically significant
in the MSCI world index has been slightly positive, at association with subsequent returns. Valuations tell us
0.2. (That between policy uncertainty and subsequent something, but volatility and policy uncertainty don’t.
changes in the All-Share index has also been slightly This regression points to global equities rising
positive, at 0.17.) This means that above-average policy slightly over the next 12 months, albeit with a significant
uncertainty has been associated with equities being chance of a fall – around a one-in-five chance of a drop
slightly more likely than not to do better than average of 10 per cent or more. Maybe this corroborates the IMF’s
in the following 12 months. Which is consistent with warning of a heightened chance of a correction. But if
uncertainty being priced into markets and generating it does, all the work is being done by valuations: policy
a risk premium. For example, uncertainty peaked in uncertainty and volatility are irrelevant.
January of this year and since then global equities have Does this mean the IMF is wrong to warn of the risk
risen almost 7 per cent. of a correction?
There’s another problem. Low volatility is not a Not at all. There is such a chance simply because
sign that investors are complacent. It’s a sign that they there always is.
disagree: share prices are stable and volatility is low I suspect that what the IMF is doing here is trying to
when sellers can easily find buyers and vice versa. find a rational basis for what is in fact a hunch or gut
Disagreement, however, should have no predictive feeling. Frankly, I share that hunch: in fact, I reduced my
power in itself for share prices. equity exposure in May. But it’s hard to fully justify such
We can test this. If the IMF is right, we’d expect to a hunch. And it might even be impossible: if there were
see a significant positive correlation between volatility obvious warnings of market falls, investors would sell as
and subsequent changes in global equities – so that low these warnings became clear and so there wouldn’t be a
volatility leads to poor returns. subsequent fall at all.
14 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017Not all hunches, however, reasonable, can be wholly market does well. Controlling for the other things which
rationalised. Not all useful economic statements are we’ll come to, a 10 percentage point above-average
entirely scientific. annual return on the All-Share index is associated with
small caps outperforming large ones by 2.7 percentage
points.
When to buy small caps Valuations also matter. Dividend yields on small
Should investors hold lots of smaller stocks? It depends caps and the FTSE 100 also predict subsequent annual
upon your time horizon and attitude to risk. returns.
In the long run, it doesn’t matter much, because small Short-term interest rates also matter. High and/or
caps do about as well as larger ones. Since 1990, total rising rates are bad for small caps.
returns on the FTSE small cap index have been much the Another determinant is the 10-year gilt yield. When
same as those on the FTSE 100. this rises, small caps do well. Taken with the adverse
Yes, small caps did outperform before the 1980s. But effect of rising short rates, this implies that a flattening or
investors wised up to that fact in the 1980s and bought inversion of the yield curve is bad for small caps, while
smaller stocks so much as to raise their prices and so bid a steepening is good. This is consistent with small caps
away their previous underpricing. Markets do sometimes being cyclical. Flattenings of the yield curve often point
learn. to slower growth, and this is worse for small caps than
In fact, there’s a good reason to expect similar long- for big ones.
term returns on small and large stocks. It’s Gibrat’s law, Two other things confirm that small caps are cyclical.
the idea that growth is independent of size. If smaller One is that they tend to outperform the FTSE 100 when
companies grew faster than big ones, we’d eventually manufacturing grows well, but underperform when it
end up with a market in which all stocks were the same falls. Small caps did badly, for example, in the recessions
size. And if big ones grew faster, we’d end up with a giant of 1991 and 2008-09.
monopoly. Neither outcome has happened over three The other is that small caps outperform when sterling
hundred years of capitalism, which is reason to suspect it rises. One reason for this is that FTSE 100 stocks get most
won’t happen (although not, of course, proof.) of their earnings from overseas, and a stronger pound
Over shorter periods, however, small caps can be reduces the sterling value of such earnings. Another
very attractive. For example, in the last five years they’ve reason is that a stronger pound is often a sign of rising
returned 133 per cent, 75 percentage points more than the confidence in the UK economy, and this benefits small
FTSE 100. caps more than big ones. When sterling fell after the vote
to leave the EU (because investors anticipated slower
Annual changes in small caps relative to growth), small caps fell relative to the FTSE 100.
We could use these factors to predict relative returns.
FTSE 100 I reckon that on consensus assumptions, they point to
50
small caps outperforming the FTSE 100 slightly over the
40
Actual
next 12 months. This is because they should benefit from
30
Fitted small rises in the All-Share index and in output more
20 than they suffer from a small rise in interest rates, and
10 valuations aren’t sending a strong message either way.
0 I’d rather, though, use all this as a guide to risk.
-10 The big risk here is not so much that small caps would
-20 be hurt by rising interest rates. If rates do rise signifi-
cantly, it will probably be because economic growth
-30
justifies a normalisation of rates – in which case what
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
small caps lose from rising rates they should gain from
Source: Thomson Datastream & Investors Chronicle
rising output.
Instead, the big risk is of recession. Falls in output,
Which poses the question: what determines shorter- sterling and gilt yields – all of which would probably
term fluctuations in small caps relative to big ones? happen in a recession (or if investors fear recession) – are
One problem we face in answering this is that returns bad for small caps.
on the FTSE small cap index relative to the FTSE 100 are In the near term, the threat of recession is probably
very volatile. It’s common for returns on small caps to small. In fact, there’s hope for small caps; they would
deviate by more than 20 percentage points from FTSE benefit (in relative terms at least) if, as I suspect is pos-
100 returns over a 12-month period. Anything that’s so sible, sterling rises.
volatile will be hard to explain. Because of this, raw In the longer-term, though, a recession is inevitable.
correlations between annual relative returns and factors Any gains you make on small caps are probably just a
you’d expect to explain such returns are quite low. reward for taking on this risk.
If we take such factors together, however, a pattern
does emerge. There are a few things that help explain MORE ONLINE
relative returns. E-mail chris.dillow@ft.com. See more articles by Chris at:
One of these is the All-Share index. Small caps on www.investorschronicle.co.uk/comment/chris-dillow
average outperform the FTSE 100 when the general
28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 15COMMENT
update from Lombard Risk Management (LRM:10.5p),
COLUMN
SIMON THOMPSON
TITLE a provider of collateral management and regulatory
reporting software products to clients including 30 of
the top 50 global banks, hedge funds and asset manag-
ers. The shares were marked down 16 per cent to 11p, so
retracing more than half the gains made after I advised
buying at 9p (‘Banking on regulation’, 13 March 2017)
and have dropped well below the 13.75p level at which I
Five small-cap plays maintained a positive stance at the full-year results (‘Five
growth opportunities’, 30 May 2017).
I think this is a massive overreaction and one that was
Simon Thompson highlights five partly driven by news that “revenues will be weighted to
the second half of this year”. However, this has always
small-cap shares offering decent been the case: in the past three financial years, the
revenue split has been 45:55 between the first and second
growth and upside potential half. More important is confirmation that the landscape
for the company’s products remains “positive and largely
unchanged since the full-year results in May”. Although
not mentioned in the update, I can confirm that the
A
directors are optimistic of hitting the unchanged fore-
im-traded stockbroker and financial services casts of analysts Paul Hill and Hannah Crowe at Equity
outsourcer Jarvis Securities (JIM:458p) has Development. These suggest the company will grow
reported another record set of results, following revenue from £34.3m to £40m in the 12 months to the
a bullish trading update in May that prompted end of March 2018, hitting cash profit break-even after
analyst Nick Spoliar at house broker WH Ireland to research and development costs, and achieving cash-flow
upgrade his forecasts by 16 per cent at the time (‘Five break-even to maintain net funds at £6.8m.
small-cap opportunities’, 23 May 2017). I first spotted the I also feel that investors are losing sight of the fact
investment potential last autumn when they the shares that “the board is encouraged by the pipeline of new
were languishing at 305p (‘High-yielding income play business being pursued by the company through its
with capital upside’, 15 November 2016). direct sales force and channel partners”, and the back-
My positive stance was based on the likelihood of an drop remains favourable given the need for financial ser-
improved performance from both of Jarvis’s business vices clients to make cost savings while fully complying
units: a corporate division, which provides outsourced with existing and a raft of new legislation. Lombard is
and partnered financial administration services to a hardly being overvalued, either, as its current enterprise
number of third-party organisations and has cash under value of £35.2m equates to just 0.9 times forecast annual
administration in excess of £150m, all of which is placed sales, a 75 per cent discount to the sector average.
on short-term deposit with triple-A-rated banks; and Admittedly, Equity Development has “prudently”
a broking operation that has more than 100,000 retail reined back its target price to 20p, bringing it back in
clients who use its ShareDeal-Active and X-O low-cost line with mine. However, this is still almost double the
Simon Thompson’s online share trading services. current share price and I would certainly use the current
book Stock Picking The company has certainly delivered, by posting a weakness as a buying opportunity.
for Profit can be 38 per cent increase in first-half pre-tax profit to £2.35m
purchased online on 22 per cent higher revenue of £4.8m, buoyed by buoy- Accrol hits guidance
at www.ypdbooks. ant trading volumes despite political uncertainty this Aim-traded Accrol (ACRL:151p), the Blackburn-based
com, or by telephon- year, and cash under administration hitting an all-time maker of toilet rolls, kitchen rolls and facial tissues, has
ing YPD Books on high. This means that well over half of WH Ireland’s delivered a 14 per cent rise in revenue to £135m in the
01904 431 213 and is full-year pre-tax profit estimate of £4.4m has been year to the end of April 2017, buoyed by a slew of contract
being sold through booked, thus derisking the investment case and opening wins in the discount sector, including one worth more
no other source. It up the possibility of more upgrades if the momentum is than £10m a year with Lidl. In turn, this produced the
is priced at £14.99, maintained. That’s good news for the dividend, as is the 58 per cent rise in underlying pre-tax profit to £13m and
plus £2.95 postage 50 per cent-plus rise in net cash reserves to £4.6m, a sum better-than-expected adjusted EPS of 12.4p. The board
and packaging. Si- worth 40p a share, after taking into account £12.7m of declared a full-year payout of 6p a share, in line with
mon has published cash set aside for the settlement of market transactions. guidance I was given when I initiated coverage around
an article outlining WH Ireland predicts a 25 per cent rise in the payout per the 100p level when Accrol floated its shares on Aim last
the content, ‘Secrets share to 22p covered 1.45 times by EPS estimates of 31.8p. summer (‘Clean up with Accrol’, 6 June 2016).
to successful Trading on 13 times earnings net of cash, underpinned However, analyst Mike Allen at joint house broker
stockpicking’, which by a healthy dividend yield of 4.8 per cent, and offering Zeus Capital reduced his current year-full diluted EPS
can be read on the 15 per cent upside to my 525p target price, the shares are forecast by 4.5 per cent to 12.8p, reflecting a more
Investors Chronicle worth buying. prudent gross margin assumption to reflect delays in
website. pushing through retail price increases in key brands,
Lombard buying opportunity and the impact of US dollar appreciation on input costs
Investors have reacted negatively to the latest trading following the EU referendum. Private-label shelf prices
16 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017You can also read
