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25 August 2022 | SHARES | 3 Contents
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Keep some cash back even though markets are rising
Why Fed chair’s Jackson Hole speech matters so much to the markets / Zoom
Communications is struggling to keep pandemic growth going / Cineworld shares now only worth pennies
06 NEWS
as it faces bankruptcy / Why global investment trusts have lagged behind their open-ended counterparts / Artisanal Spirits’ maturing whisky stock ‘worth 10 times’ the value of the business 11 IDEASGREAT New: L&G Cyber Security ETF / Velocys Updates: FRP Advisory 16 FEATURE For sale: Good time to buy housebuilders on the cheap 25 FUNDS The battle of the income funds: how Evenlode’s two products fare 28 MARKETSEMERGING How India’s strong 2022 performance compares longer term 30 ASK TOM Cost of living crisis: How will inflation affect different types of pensions? 33 FINANCEPERSONAL How to use your pension to beat the sneaky 60% tax rate 36 UNDER BONNETTHE How National Grid makes its money and the big regulatory challenges it faces 40 RUSS MOULD Five key tests of the markets’ tone for investors to monitor 42 REPORTSECTOR Investors worry recession will hurt advertising companies’ earnings 45 INDEX Shares, funds, ETFs and investment trusts in this issue 46 SPOTLIGHT Bonus report on small cap companies
Capital at risk. Pension rules apply. YOURRETIREMENTWAY? Open our low-cost Self-Invested Personal Pension for total flexibility and control over your retirement with free drawdown. youinvest.co.uk SIPPs | ISAs | Funds | Shares
While many stocks are still sitting depressed, there are plenty which have started to bounce back. So, if you’ve just come back from holiday and don’t welcome the prospect of returning to work, the recent performance of your investment portfolio might still put a smile on your face. One of my personal portfolio holdings is Fidelity Index World (BJS8SJ3), a fund that tracks an index of approximately 1,500 companies across 23 developed market countries. Between the start of January and mid-June, the sterling version of the fund had fallen by 14% in value. But the rebound has been fast and hard. As of 17 August, the fund has clawed back most of those losses and at that point it was only down 1.4% year-to-date. That vindicates my decision to have kept investing money each month into the fund while the markets were weak earlier this year. I essentially managed to buy units at discounted prices not seen since 2021. Even though markets are now picking up, I will continue to put more money into the fund. It’s a no-brainer way to access companies around the world at a low annual charge of 0.12%.
Conditions still warrant a more cautious approach
Daniel Coatsworth
A s the long hot nights become a distant memory, many investors will be giving their portfolios a sneaky peek to see how their investments are faring. Hopefully it will be a nice surprise as markets have risen since June. A lot of people will have been too scared to look at their portfolios over the summer given the carnage experienced across global markets in the first half of 2022.
I’m not the only one feasting on market opportunities. It feels as if quite a few investors are regaining their appetite for equities. Since midJune, the US Nasdaq index is up 21.4% and the S&P 500 index is trading 16.5% higher.
Growth stocks which went out of favour late last year have been among the stronger risers recently. In the past month, the MSCI World Growth index has jumped by 12.1%.
DISCLAIMER: The author owns units in Fidelity Index World Fidelity Index World bounces back after market sell-off Shares Source: Refinitiv
2020 2021 2022Chart:40%200−20
The big question is whether we’re at the turning point for markets and it’s all plain sailing upward from here. The experts don’t seem convinced. On 16 August, Bank of America published the results of its latest survey of fund managers around the world. It said that while sentiment was no longer ‘apocalyptically bearish’, fund managers were still sitting on an average 5.7% of assets in cash which the bank considers to be high. In a strong market, cash in a portfolio can act as a drag on returns. In more uncertain times, it gives you the means by which to snap up bargains if prices suddenly get a lot cheaper. Given the ongoing uncertainties around inflation and recession, having some ‘readies’ to hand might be a wise move. It’s great that markets are currently moving higher, just don’t assume it’s going to be a smooth ride.
Keep some cash back even though markets are rising
25 August 2022 | SHARES | 5 EDITOR’S VIEW
magazine •
In this context the words of Fed chair Jerome Powell on 26 August will be closely watched.
He is widely expected to disappoint markets by suggesting rates may need to go higher and stay there for longer to control rising prices.
NEWS 6 | SHARES | 25 August 2022 Powell’s words could determine the direction of stocks and shares for the autumn
The key question facing investors is whether the moves we have seen since June represent a return to a bullish outlook or a so-called ‘bear market rally’.Ina recently published piece of research, Bank of America noted the average gain in 43 bear rallies (of more than 10%) since 1929 was 17.2% in 39 trading days. The most recent one is eerily similar at 17.4% in 41 days.
200−20−40UK GFK CONSUMER CONFIDENCE INDEX Chart: Shares magazine • Source: Refinitiv T
Traders on the money markets (the market for short-term loans) are pricing in an increase in UK rates to 3.75% by next May.
Consumer sentiment in August plunged to its lowest level on record according to the latest reading from data provider GfK. This paints a bleak outlook for consumer-facing businesses, particularly retailers. While ONS figures for July showed a surprise increase in UK retail volumes, up 0.3% versus a 0.2% decline in June, this was boosted by online discounts which will have hit companies’ margins.
Why Fed chair’s Jackson Hole speech matters so much to the markets
Given Bank of England data suggests UK households borrowed a net £1.8 billion in June, up from £900 million in May and largely on credit cards, a recession driven by weaker consumer spending appears increasingly likely.
The release of the core Personal Consumption Expenditures index data, the Fed’s preferred measure of inflation, on the same day, may also help to determine investor sentiment.
The situation in the US seems somewhat brighter than the UK where inflation continues to run very hot and looks increasingly entrenched.
Posh wellies seller Joules (JOUL:AIM) has predicted a significant loss for the first half of its current financial year. Sales of big-ticket items look particularly vulnerable as people cut back and online furniture retailer Made.com (MADE) has revealed it is planning a potential emergency fundraise.Whilespending on leisure time and travel may be prioritised for now, that may get tougher once the full impact of increased energy prices and borrowing costs come through. [TS] UK consumer confidence is at a record low 1980 1990 2000 2010 2020 he global rally in recent months has been material but is beginning to be tested with the Jackson Hole summit in Wyoming, starting today (25 August), set to dictate the future trajectory of stocks.
Driving the recovery in shares was a softening in US CPI inflation for July and a subsequent expectation of a pivot away from aggressive interest rate hikes from the US Federal Reserve.
Communications
Analysts are anticipating $0.205 earnings per share on $305.5 million revenue in the three months to the end of July, compared to the $0.17 and $286.8 billion respectively in the previous quarter, and up to 60% revenue growth for the full year. [SF]
NEWS 25 August 2022 | SHARES | 7
At first glance, the latest market reaction may look harsh relative to a miss of less than 2%, but that means a $20 million revenue gap in the quarter. Investors were also reacting to lower guidance for Q3, with Zoom steering the market for adjusted EPS of $0.82 to $0.83 on revenue of $1.1 billion sales. Analysts had previously been looking for $0.91 in adjusted EPS and $1.15 billion in Basedrevenue.on data from Investing.com, this is the fifth quarter straight of revenues between $1 billion and $1.1 billion. Zoom’s 204,100 enterprise customers increased less than 3% from 198,900 three months earlier. It’s a far cry from two years ago when Zoom seemed to have the world at its feet, and its video conferencing software appeared as ubiquitous as Google’s Gmail or Microsoft Word. But Zoom is not alone among pandemic winners to have struggled to keep the growth fires burning. This year has seen Netflix (NFLX:NASDAQ) subscriber numbers decline for the first time in a decade, while Peloton (PTON:NASDAQ) has issued a series of growth misses as losses escalate.
Cloud security firm Zscaler (ZS:NASDAQ) will report Q4 results on 8 September, and they at least offer investors hope that not all pandemic winners are now Admittedly,losers.Zscaler has suffered a 46% share price decline this year, as investors turned away from growth and tech equities. However, it has a long track record for meeting and beating quarterly forecasts that stretches back to 2018.
The conferencing company is one of several lockdown winners year
to stumble this
video
Zoom is struggling to keep pandemic growth going
Zoom revenue growth has slowed to a crawl ($bn)Revenue 1.02 1.05 1.07 1.07 1.10 2022Q2 2022Q3 2022Q4 2023Q1 2023Q2 Table: Shares magazine • Source: Investing.com
Z oom Communications (ZM:NASDAQ) is struggling to grow fast in the post-pandemic world after its latest earnings release once again disappointed investors. The San Jose company reported second quarter to 31 July 2022 adjusted earnings per share of $1.05, beating the $0.94 expected by analysts, but revenue growth slowed to single-digits. Its $1.10 billion of revenue missed expectations of $1.12 billion, representing 8% year-on-year quarterly growth, sending the share price plunging more than 11% to $86.36. The stock peaked at $559 in October 2020.
The company took on significant leverage as part of the $3.6 billion deal to acquire US operator Regal in 2018. This may have made it the second largest cinema chain in the world but, from that moment, it was always vulnerable to a big extraneous shock which was then provided by the pandemic.
faces bankruptcy Cineworld vs AMC Rebased to2018100 2019 2020 2021 2022 4003002001000Cineworld AMC Entertainment Chart: Shares magazine • Source: Refinitiv
The best outcome if it goes down this route is, in its own words, ‘very significant dilution’ for existing investors as the company faces a testing combination of weaker trading and an extremely stretched balance sheet.
It stands in stark contrast to the position of the number one player in the cinema world, AMC Entertainment (AMC:NYSE). AMC benefited from the ‘meme stock’ phenomenon as investors coordinated their efforts through social media platforms to drive up its share price.
This is reflected in a share price which is down 87% since close on 16 August as rumours around the financial situation of the business started to build. At 2.7p as we write, the shares are down more than 99% from highs above 300p seen in 2019.While Cineworld hasn’t been helped by a lack of blockbuster releases this year, its real problems stem from its level of borrowings. Net debt at the last count totalled more than $4.8 billion.
The company raised $1.8 billion from shareholders in 2021 and is still sitting on cash of more than $1 billion. This provides it with a decent buffer to contend with any short-term downward trend in Cineworld’strading.UK peer Everyman Media (EMAN:AIM), which strives to deliver a high-end experience, has endured a sluggish share price performance in 2022, falling 18.3% this year.
In its latest trading update (27 July) the company confirmed it had increased its number of cinemas from 28 in the first half of 2019 to 37 and said it had delivered record sales and earnings in the first six months of 2022. Net debt stood at £8.4 million at the end of 2021. The company is scheduled to announce its first-half results in full on 28 September. [TS] it
Cineworld shares now only worth pennies as
While the shares have subsequently retraced much of those gains and the company has been guilty of some questionable strategic decisions of late, including investing in a gold mine and launching a popcorn venture, it was shrewd in taking advantage of its moment in the spotlight to secure more funds.
NEWS 8 | SHARES | 25 August 2022 Weak movie slate hasn’t helped company but balance sheet woes are the real issue S hareholders in cinema operator Cineworld (CINE) face an uncertain future as the company confirms it may enter Chapter 11 bankruptcy in the US.
NEWS 25 August 2022 | SHARES | 9
Kepler reveals that Global Opportunities Trust (GOT) and Brunner Investment Trust (BUT) trade at significant discounts to net asset value, of 13.7% and 10.2% respectively. They also both have a negative one-year Z-score indicating that their discount today is wider than its average over the past 12 months. [MGar]
Investors looking for deep-value opportunities should note that shares in online premium whisky purveyor Artisanal Spirits (ART:AIM) trade at a material discount to the value of its maturing stock of Scotch whisky. As Equity Development notes, this inventory has an estimated value of £430 million, more than 10 times Artisanal Spirits’ £40 million market capitalisation at 57.15p a share. A curator and provider of premium single cask Scotch malt whisky for sale mainly online to a global membership, Artisanal serves up first-half results on 14 September.Ithasalready pre-announced 25% sales growth to knocking on £10 million, including what management dubbed a ‘standout’ performance in China, as well as a 24% advance in its Scotch Malt Whisky Society membership to over 35,500. Artisanal Spirits’ management also reiterated its ambition to double sales between full year 2020’s £15 million to £30 million by 2024. Equity Development argues fair value for the shares is 150p, implying 162% upside at these levels. It says Artisanal Spirit’s ownership of ‘an abundant supply of maturing whisky stock should ensure that the company is capable of meeting the growth in demand for its products. The company is both hedged against inflation and insulated from any risks associated with supply chain disruption.’ [JC]
Investment trusts are able to borrow money that can be invested alongside shareholder capital, also known as gearing, while open-ended funds cannot.
Artisanal Spirits’ maturing whisky stock
T he fact they are able to invest using borrowed money has contributed to the underperformance of global investment trusts compared with global open-ended funds over the last 12 months, according to recent research by Kepler.
Gearing is expressed as a percentage and is calculated by dividing borrowings by net assets. It can magnify shareholder performance in both directions.According to Kepler 10 out of 16 sampled investment trusts use some form of gearing.
Why global investment trusts have lagged behind their open-ended counterparts
‘worth 10 times’ the value of the business
Gearing has exacerbated losses for trusts with international horizons
Investors don’t seem interested given its share price has halved since June 2021
The total net asset value (NAV) return for the AIC (Association of Investment Companies) Global Sector has fallen by 12.2%, versus a 3.2% decline for the Investment Association global sector.
Martin Currie Global Portfolio Trust (MNP) and Scottish Mortgage Investment Trust (SMT) are amongst the worst performers in the global sector during the last 12 months. They are also fairly highly geared (11%), and focused on growth stocks which have struggled against a backdrop of rising interest rates.
SHARPEN YOUR INVESTING SKILLS WITH A SUBSCRIPTION TO SHARES HELPS YOU TO: • Learn how the markets work • Discover our best investment ideas • Monitor stocks with our customisable watchlists • Enjoy our guides to sectors and themes • Get the inside track on company strategies • Find out how fund managers make money Digital magazine Online toolkit Investment ideas
The ETF is large enough so that liquidity is not a problem, broad enough for reasonable diversification, and has scale to lower costs, which it did last year.
Top
This is how to play a surge in spending on cybersecurity around the (ISPY) £17.60 Fund size: £1.8 billion WHY YOUR PORTFOLIO NEEDS CYBERSECURITY
On a five-year basis the L&G Cyber Security ETF has delivered 17% annualised returns. L&G Cyber Security ETF should benefit from the big money companies are spending to protect their computer systems from online attacks
It’s still not particularly cheap for a tracker fund, with ongoing costs of 0.69%, but it does have an attractive five-year total returns track record when most of its peers have only been around for a year or two, such as the WisdomTree Cybersecurity ETF (CYSE) and the Global X Cybersecurity ETF (BUGG).
25 August 2022 | SHARES | 11
world L&G SECURITYCYBERETF BUY
Other countries were also put on alert, including the UK, and in January the nation’s National Cyber Security Centre called on businesses to ‘bolster their online defences’ from potential Russian hackers.Asaresult, the cybersecurity industry looks set L&G Cyber Security ETF 10
T hreats to society’s cybersecurity are as old as the internet but Russia’s invasion of Ukraine has made the issue more acute for investors, as has more remote working in a postpandemic world. Backing the wider theme through a low-cost ETF makes sense for several reasons, and we believe the L&G Cyber Security ETF (ISPY) ticks many of the right boxes for investors.
The space includes companies that provide security basics, like firewalls, anti-virus defence and passwords protections, but fighting off hackers is the much larger threat. Where hackers were often tech-savvy individuals or small groups motivated more by ideology and putting one over on the establishment than money making, hackers today are far more sophisticated, organised and better funded, typically either state sponsored actors or criminal gangs looking to make vast profits.
This year the Ukrainian government was forced to bring in swathes of underground hackers in response to massive cyberattacks which were suspected to come from Russia as part of its war against the country.
holdings Darktrace 6.0% Cloudflare 5.3% Ping Identity 4.8% Trend Micro 4.4% Splunk 4.2% Qualys 4.1% Blackberry 4.0% CyberArk 4.0% Cisco Systems 3.8% SentinelOne 3.8% % of assets Table: Shares magazine • Source: Morningstar, 22 August 2022
The ETF also has a stake in Trend Micro (4704:TYO), the Japanese company that provides cloud computing protections to hyperscale cloud players including Amazon’s (AMZN:NASDAQ) AWS, Alphabet’s (GOOG:NASDAQ) Google Cloud and Microsoft’s (MSFT:NASDAQ) Azure.
PERFORMANCE IS PICKING UP
12 | SHARES | 25 August 2022 to benefit from the significant rise in attacks on government agencies and major businesses which need to increase their spending on digital defence, and investors have already started to react.
For example, Alphabet has plans to spend over $10 billion to improve cybersecurity in the next five years while the overall industry is forecasted to hit $352 billion in 2026, up from $156 billion in 2020, according to Mordor Intelligence. In March 2022, Alphabet agreed to pay $5.4 billion for cybersecurity firm Mandiant to bolster its Google Cloud platform, with clear intentions of combining its own automation expertise with Mandiant’s intellectual property.
Microsoft has committed to spend $20 billion in security research and development over the next five years, dwarfing the R&D spend of any specialist security players.
Companies in the broader investment universe are only eligible if they meet size requirements and have a three-month average daily traded value of at least $1 million. The underlying index applies a modified equal weight methodology where company weights are relative to the size of their respective sector and their liquidity versus peers within each sector.
2016 2018
This year the L&G Cyber Security ETF is down 5.4%, according to FE Analytics data. The performance was a lot worse until recently, with the ETF having rallied 22% since mid-June, bolstered by the $2.4 billion buyout of US-listed Ping Identity and takeover talk surrounding the UK’s Darktrace (DARK), the fund’s largest single stake at a little more than 6% of assets.
BEING TAKEN MORE SERIOUSLY Cybersecurity is a complex space and a rapidly expanding area for investment, with the issue widely recognised as business critical. According to Gartner, 88% of company bosses accept digital protections and safety is now a board level topic, with potential impacts of not doing enough too big and too costly to ignore.
Data from industry specialist McAfee shows the global cost of cybercrime went from an estimated $300 billion in 2013 to $945 billion in 2020, while the average cost of a data breach has jumped 17% in the past few years to $4.2 million, say IBM (IBM:NASDAQ) analysts.
Shares magazine • Source: Refinitiv
Constituents are also screened against Legal & General Investment Management’s Future World Protection List, which flags companies that violate the United Nations Global Compact. The latter is a pact to encourage businesses around the world to adopt sustainable and socially responsible policies.
[SF]
INVESTMENT POURING IN Cybersecurity companies have tended to develop systems in-house and use mergers and acquisitions to build out product sets and expand into vertical markets. Even the very biggest tech companies are expanding in this area.
The L&G Cyber Security ETF physically replicates the ISE Cyber Security UCITS index of 45 stocks. This basket includes a mix of infrastructure providers developing software and hardware for protecting access to files, websites and networks and service providers offering consulting and cyberbased services.
L&G Cyber Security ETF (p) 2020 20222,0001,0000Chart:
Other leading companies in the ETF portfolio include network security specialist Cloudflare (NET:NYSE), big data analytics platform Splunk (SPLK:NASDAQ) and identity management tools firm CyberArk (CYBR:NASDAQ).
Clients do not want to be tied to one supplier of cybersecurity tools, part of their own risk mitigation, which means taking a sector-based approach makes sense for retail investors.
Velocys
t’s often said that where there’s muck there’s brass, and recycling companies are much in vogue with investors nowadays.
25 August 2022 | SHARES | 13
Its products are aimed at the heavy transport and aviation markets which are integral to the global economy but at the same time difficult to ‘decarbonise’.
[IC]
The end products are high-quality versions of existing fuels and don’t require any changes to engines or infrastructure, they simply burn cleaner, cutting exhaust pollutants and reducing greenhouse gas emissions.
On the back of this grant, British Airways’ parent company International Consolidated Airlines (IAG) signed a deal to take 73 million gallons of sustainable aviation fuel from the firm’s Bayou Fuels project in Mississippi for 10 years starting in The2026.deal counts for a third of the facility’s planned output, with Southwest Airlines (LUV:NYSE) taking the remaining two thirds of production over a 15-year period from 2026.
VELOCYS BUY (VLS:AIM) 5.58p Market Cap: £78 million revenues over the life of the contract’ according to Velocys, as each gallon is expected to generate tradeable greenhouse gas credits which Southwest has guaranteed to buy at a minimum price.
The inclusion of sustainable aviation fuel tax credits as part of the Act, along with incentives to develop advanced fuel technologies, represents a major source of additional income for Velocys in future US projects.
I
Meet the company which literally turns rubbish into jet fuel
Recent US climate legislation included in the 2022 Inflation Reduction Act has allocated $369 billion to expand production and use of domestic clean energy and reduce emissions.
Last September, Velocys won a grant from the UK Department for Transport under the ‘Green Fuels, Green Skies’ initiative to develop a project jointly with British Airways to convert hundreds of thousands of tonnes of residual waste into sustainable aviation fuel.
The Southwest deal, which covers the purchase of 219 million gallons of sustainable aviation fuel, ‘has the potential to generate multi-billion Velocys has already agreed large forward sales with two major airline groups
One of the less well-known firms is Velocys (VLS:AIM), previously known as Oxford Catalysts, which makes sustainable fuel from waste items.
Velocys’ niche is in making compact, commercially ready reactors which use a chemical reaction to take carbon monoxide and hydrogen from household and forest waste residues and turn them into advanced biofuels like diesel and jet fuel.
2018 2019 2020 2021 2022Chart:3020100 Shares magazine • Source: Refinitiv
Given the firm is currently loss-making, pays no dividends, and isn’t expected to become cash-flow positive until 2024, this is a high-risk investment and is only suited to investors who have a longterm perspective. STOCK (p)
Why FRP shares are up 34% since we said to buy FRP Advisory (p) 2021 2022Chart:150100500 Shares magazine • Source: Refinitiv
In mid-September 2021, when we initially recommended buying FRP, it was trading on a calendar 2022 price to earnings ratio of 15.9. This now stands at 21.4-times. The shares are no longer attractive from a valuation perspective given that management left earnings guidance unchanged at the full year results in July. Broker Liberum forecasts pre-tax profit and earnings per share growth for the current financial year (to 30 April 2023) of 5.6% and 3.9% respectively. For the following year profit is expected to rise by 6.5% but earnings per share growth is forecast to be flat. [MGam] a surge in administrations and insolvencies
14 | SHARES | 25 August 2022
FRP ADVISORY (FRP:AIM) 164P Gain to date: 34% It has benefited from
WHAT SHOULD INVESTORS DO NEXT?
We recommend taking profits given the 34% share price increase coupled with the substantial re-rating in the earnings multiple.
The subsequent advance in the share price has been driven by a rise in the number of insolvencies and administrations since the start of According2022. to data from the Insolvency Service, total company insolvencies increased from 1,567 in January to 1,827 in July, with the majority of these being creditors’ voluntary liquidations. These have increased from 1,359 in January to 1,609 in July. The number of County Court judgments filed by creditors trying to recover debts has also been on an increasing trend. This rebound has been boosted by a clearing of the Covid-induced backlog. The corporate finance division has also driven growth as FRP has benefited from the Spectrum and JDC Group acquisitions. The former, acquired for £9.4 million, extended the group’s geographical footprint in London and the south. The latter acquired for £5.3 million provided FRP with a presence in the east of England and bolstered its forensic accounting footprint.
We originally recommended buying advisory group FRP at 122p on 16 September 2021 because we believed it would benefit from an increase in insolvencies as the Government ended pandemic-linked insolvency restrictions. The company specialises in corporate restructuring and helps businesses navigate the process of going into administration or liquidation.
WHAT’S HAPPENED SINCE WE SAID TO BUY?
A Swedish oat milk producer? An American specialist in surgically implanted contact lenses? A femalefriendly dating app? These businesses don’t fit the digits-and-data growth stereotype, but they too hold big profit potential, according to Monk’s manager Spencer Adair.
The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research. Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
CASTING THE
NET WIDER
The other was the potential for surging consumption in emerging markets to propel favoured brands to newTheheights.problem is that these trends are maturing. They’re unlikely to repeat the eye-popping results of their earlier years. To find new sources of growth, Monks has veered away from internet titans towards “earlier-stage, less certain, much more disparate, much less correlated growth drivers”.
Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN. The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.
Monks has broadened its view of what drives expansion. Like many growth portfolios, its holdings used to reflect two megatrends.
One was the power of
The key, he says, is recognising that a few big digital platforms no longer hold a monopoly on hypergrowth. The range of double-digit growth companies has broadened, and Adair has cast his net wider to capture as many of them as possible.
“What we’re trying to achieve is a portfolio of the best global growth ideas from every corner of the world,” he says. “We want to identify them early, hold them for a long time and let compounding work its magic.”
Anyone who thinks growth investing consists of simply loading up on a few mega-cap tech giants will be shocked by some of the companies in Monks’ portfolio.
Some are no surprise – the shift to electric cars, for instance. Others include attempts to combat dementia, improve education and speed the shift to a more plant-based diet.
ADVERTORIAL
Please remember that the value of an investment can fall and you may not get back the amount invested.
Among the more than 60 stocks that Monks classifies as disruptors are STAAR Surgical, which seeks to replace laser eye surgery with implantable contact lenses, and Denali Therapeutics, which is working on Alzheimer’s drugs. Online education pioneer Chegg, and plant-based milk producer Oatly and Elon Musk’s SpaceX aerospace venture also appear, as does Bumble.com, a dating app. Adair’s strategy for Monks will be tested in the years and decades to come. In the meantime, any manager whose portfolio spans both oat milk and space rockets can speak with authority on how variety brings opportunity, and with it, more chances of success.
Growth stocks are becoming more diverse, meaning stock-pickers need to embrace the unfamiliar, says Spencer Adair, manager of The Monks Investment Trust tech giants to disrupt traditional media and retailing.
Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
16 | SHARES | 25 August 2022 R ecent UK house price surveys seem to show the property market is beginning to cool, so should investors steer clear of the housebuilders or does their poor share price performance this year mean the worst is already factored into their valuations? In this article we look at the survey data, compare it with the messages coming from the housebuilders themselves and pick two stocks we think offer the right mix of growth, value and income. SEASONAL DIP There’s no disguising the fact that several of the most widely watched house price indices have recently shown a month-on-month fall in average prices. FOR SALE GOOD TIME TO HOUSEBUILDERSBUYONTHECHEAP By Ian Conway Companies Editor Share price returns of UK housebuilders year-to-date Persimmon −44% Barratt Developments −41% Bellway −35% Taylor Wimpey −35% Vistry −32% Berkeley −22% UK Housebuilders Share Price Table: Shares magazine • Source: Shares, Google Finance. Data correct as of 22 August 2022 Share price returns of US housebuilders year-to-date Toll Brothers −31% DR Horton −26% KB Home −25% PulteGroup −21% US Housebuilders Share Price Table: Shares magazine • Source: Shares, Marketscreener. Data correct as of 19 August 2022
Even though the monthly figures showed a slight decline, the annual figures show selling prices still rising by between 11% and 12%, suggesting the housing market is in rude health despite the costof-living crisis.
Rightmove, which has been compiling its index for 20 years, says national average asking prices more than doubled in that period (up 134%), outstripping salaries (76%) and general inflation (93%).Itputs part of the August 2022 dip down to buyers being on holiday and part down to sellers pricing ‘more competitively’ to secure a buyer
It also notes new listings are up 12% year-onyear this month but says there is still a ‘massive imbalance’ between demand and supply with the amount of available stock almost 40% below 2019’s level.
Despite this, extra funds saved during lockdown, the ready availability of 90% loan-to-value mortgages and strong demand in the first-time
Meanwhile, the Halifax and Nationwide reports, which record actual selling prices rather than asking prices and tend to lag the Rightmove survey by a few weeks, both showed a decline of a couple of hundred pounds between June and July.
quickly, as the average time from accepting an offer to completing is four months and many people want to move before Christmas.
UNDERSTANDINGTHESITUATION
Price gains for bigger houses are noticeably outpacing those for smaller homes and first-time buyer properties too, with the average price of a detached house up 15% or over £60,000 in the year to July compared with 7.7% or around £12,000 for flats.
The Rightmove index, which measures housing market activity and the price of property advertised for sale, saw average prices drop by 1.3% or £4,795 to £365,173 between July and August.
25 August 2022 | SHARES | 17
After the recent rise in UK interest rates, the average monthly mortgage payment for first-time buyers putting down a 10% deposit has risen above £1,000 per month for the first time, 27% higher than at the start of the year, according to Rightmove.
As Tim Bannister, the firm’s director of property science, reflects: ‘The sixth consecutive interest rate rise, this time by 0.5% to 1.75%, will no doubt be in the minds of many would-be home-movers. Together with the rising cost of living, it will lead to reconsiderations of what they can afford to borrow and repay each month.’
The immediate reaction from several analysts was to claim that rising interest rates in response to the country’s severe inflation woes were starting to weigh down the housing market.
Does this mean the housing market is about to grind to a halt and prices are going to fall? Far from it.
In fact, the monthly fall was perfectly normal as asking prices typically ease back at this time of year and the scale of the decline was in line with the August average over the last decade.
RISK FACTORS As Shares sees it there are two things which could stymie the housing market, namely interest rates and energy bills.
Prices are still racing ahead in the regions, with Wales at the top of the table for annual house price inflation followed closely by the South-west of England, with rises of 14.7% and 14.3% respectively in July according to Halifax.
18 | SHARES | 25 August 2022 Key Ratios for Persimmon, Barratt and Berkeley Index FTSE 100 FTSE 100 FTSE 100 Market cap £5.4 bn £4.7 bn £4.3 bn Forecast revenues £3.8 bn £5.2 bn £2.5 bn Forecast P/E 6.9x 5.7x 9.7x Forecast P/TNAV 2.6x 1.3x 1.8x Prospective dividend yield 13.8% 8.3% 5.6% Average selling price per home £245,597 £300,000 £603,000 Number of plots for development 89,052 85,500 66,163 Value of plots £21.9 bn £25.7 bn £40 bn Persimmon Barratt* Berkeley** Table: Shares magazine • Source: Sharepad, company data, Shares magazine. Data correct as of 18 August 2022. Notes: Average selling prices as of June 2022 * Barratt Developments targets a land bank of 4.5 years of between 18,000 and 20,000 plots per year ** Berkeley average selling price and number of plots as of April 2022. P/TNAV = Price to tangible net asset value Key ratios for Taylor Wimpey, Bellway and Vistry Index FTSE 250 FTSE 250 FTSE 250 Market cap £4.2 bn £2.8 bn £1.9 bn Forecast revenues £4.5 bn £3.5 bn £2.7 bn Forecast P/E 6.2x 5.4x 5.9x Forecast P/TNAV 1.5x 1x 1.4x Prospective dividend yield 8.1% 6.1% 8.6% Average selling price per home £300,000 £314,400 £305,000 Number of plots for development 88,000 88,894 80,218 Value of plots £26.4 bn £28 bn £24.5 bn WimpeyTaylor Bellway*** Vistry**** Table: Shares magazine • Source: Sharepad, company data, Shares magazine. Data correct as of 18 August 2022. Notes: Average selling prices as of June 2022. *** Bellway average selling price as of July 2022, number of plots as of January 2022 **** Vistry average selling prices and number of plots as of December 2021. P/TNAV = Price to tangible net asset value
The impact of higher energy prices from October means households are going to be under even greater strain.
25 August 2022 | SHARES | 19
THE US SITUATION
The confidence indicator from the US National Association of Home Builders fell for the eighth month running in August to 49, meaning sentiment had swung from positive to negative for the first time since the pandemic.
Younger generations – typically those buying their first home or taking a second step up the property ladder – have never known double-digit inflation, so this is likely to be something of a shock to the system.
Ratings agency Fitch recently said it expected a minor slowdown in the US housing market, although it cautioned a severe downtown – with prices falling by more than 10% and transactions down by 30% – was also ‘possible but not yet probable’.
As David Jane, multi-asset manager at Premier Miton Investors (PMI), observes: ‘Anecdotal evidence suggests the recent rises in interest rates are having a material impact on homebuyers; US buyers typically take 30-year fixed rate mortgages and the cost of these has increased materially since the lows of ‘Combined2021.with house price rises over the same period, the cost of moving home has increased materially. The housing market has often led the overall economy in the US.’
From an investor’s viewpoint, what goes on in the US matters a great deal for UK housing developers as even though none of them are active in that region, the US housing market forms a key part of consumer sentiment.
Meanwhile, as the latest ONS figures show, consumers are facing unprecedented strain with the official inflation rate topping 10% last month for the first time in 40 years due to sharp spikes in food and drink prices.
This year alone the share prices of the largest half-dozen UK developers are down by between 30% and 45% with only one, Berkeley (BKY), falling byYetless.in its latest summer forecast, the Construction Products Association predicts private housebuilding activity will grow by 1% this year and flatline next year, while house prices will rise by 6% this year – consistent with the ONS forecast of 7% –and by 2.5% next year. Moreover, the Construction Products Association says if house price inflation continues to surprise positively and high mortgage availability supports demand, risks to its forecasts ‘may be skewed to theInupside’.asimilar vein, Shares’ conversations with building materials and merchanting firms have recorded the common view that, while the industrial and infrastructure markets may be growing faster, the new-build private housing sector is still in good health. Although the end of the Government’s Help to Buy scheme in March 2023 may be a concern for some observers, the reality is the housebuilders have been weaning customers off the programme for some time to avoid a ‘cliff-edge’ scenario next spring.
buyer sector – 32% higher than summer 2019 –would suggest the market may cool from what one agent describes as ‘the frenzied bun-fight of the pandemic’, but prices are unlikely to go into reverse.
‘Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,’ said the NAHB’s chief economist Robert Dietz. He is undoubtedly playing to the gallery, and visions of a financial crisis-style housing crash are far from reality, but it is worth noting some housebuilders have lowered prices by 5% to increase sales or limit cancellations.
THE INDUSTRY VIEW It’s certainly not all clear skies for the housebuilders, but when you look at the average equity market valuation for the sector, share prices already seem to be factoring in tougher times ahead.
Barratt
Under its new dividend policy, the full-year payout will be based on coverage of 2.25 times adjusted net income, and the board will update shareholders on its capital allocation policy –such as the potential for more special dividends and buybacks – with its results scheduled for publication on 7 September.
TWO
It is the only developer to have been awarded the five-star customer rating 12 years in a row by the House Builders Federation and is one of the most highly rated firms in terms of sustainable building.
Barratt Developments is the nation’s leading housebuilder. It delivered nearly 18,000 homes across England, Scotland and Wales in the financial year to June 2022. It predominantly sells three and four-bedroom homes, which are most in demand, with limited exposure to flats and in particular London flats, which we think will serve it well as the regions are set to continue outperforming the capital.
We have gone for two national housebuilders, both of which have extremely solid financials underpinning their above-average dividends together with a long runway of growth as shown by their total number of plots.
For the year to June 2022, pre-tax profits are expected to have beaten forecasts at around £1.05 billion while year-end net cash was £1.125 billion after a land spend of £1.05 billion and the £250 million acquisition of Gladman Developments.
20 | SHARES | 25 August 2022
Even without any special dividends or buybacks, the shares currently yield over 8% and trade on a similar price to earnings ratio as they did during the onset of the pandemic and, going back much further, before the global financial crisis.
Price/Earnings Ratio (Adjusted) 2014 2016 2018 2020 2022Chart:403020100 Shares magazine • Source: Refinitiv Barratt Developments (p) 2014 2016 2018 2020 2022Chart:1,0005000 Shares magazine • Source: Refinitiv
‘We have delivered an excellent performance this year, reflecting the strong customer demand for our homes and the productivity of our sites,’ said chief executive David Thomas.
The company had forward sales, including joint Developments
STOCKS TO BUY
ventures building affordable homes, of 13,579 units equivalent to £3.6 billion or nine months of revenues, and it aims to complete 20,000 homes a year. Barratt has targeted a land bank of 4.5 years’ worth of development, and it expects land approvals in the current financial year to be between 18,000 and 20,000 plots.
BARRATT DEVELOPMENTS (BDEV) 449.2p
Like Barratt, shares in Vistry are trading close to all-time lows on a price to earnings basis which combined with the dividend and the runway for growth makes an attractive combination.
Group - Price/Earnings Ratio (Adjusted) 2014 2016 2018 2020 2022Chart:403020100 Shares magazine • Source: Refinitiv Vistry Group (p) 2014 2016 2018 2020 2022Chart:1,5001,000500 Shares magazine • Source: Refinitiv
Results for the first half to June ‘significantly exceeded’ the firm’s expectations according to chief executive Greg Fitzgerald, with the average private weekly sales rate up 11% on last year.
Private completions were up 3% to 3,219 units while partnership completions were up 24% to 1,106 units, and thanks to higher margins both divisions are seen topping their full year profit targets.Thetotal value of forward sales climbed 16% to £2.1 billion, representing 92% of forecast units for the year, and the firm more than replenished its land bank in the first half with returns on capital of above 25% on private plots and above 40% on partnership plots.
‘The business is in great shape and well positioned to maximise the broader market opportunities,’ said Fitzgerald. He added: ‘Whilst mindful of the wider economic uncertainties, we are positive on the outlook and expect to see significant margin progression in the full year, with adjusted profit before tax at the top end of market forecasts.’
Net cash increased from £32 million to £115 million at the half year, and as well as paying a healthy 8%-plus dividend yield the company announced in May it would buy back up to £35 million of its shares.
Vistry
25 August 2022 | SHARES | 21
VISTRY832(VTY)p
Our second choice is Kent-based developer Vistry, which was named Best Large Housebuilder last year at the Housebuilder Awards. It operates around 200 sites across England both under the Vistry and Bovis banners as well as in partnership with local authorities providing affordable and social housing.
SEEKING CHARACTERISTICSWITHTHROUGHPROTECTIONINFLATIONCOMPANIESUTILITY-LIKEKeytakeaways
2. When most people consider utilities, they think of electricity, water and telecoms. However, these utility-like qualities can also be found in other sectors – some of them perhaps surprising.
Stephen Anness Head of Global Equities
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As a result, providers often have the power to raise prices in line with inflation, which could help their share prices in times like these.
1. Utilities are necessities and are therefore the last costs we cut when times are hard.
3. From technology to lifts, read on to discover the sectors where these utilitylike qualities can also be found.
When most people consider utilities, they think of electricity, water and telecoms. These are necessities and are therefore the last costs we cut when times are hard. Consequently, providers often have the power to raise prices in line with inflation, which should help their share prices in times like Thesethese.utility-like qualities can also be found in other sectors – some of them perhaps Takesurprising.technology.
Microsoft Office is so deeply embedded in workflows worldwide that replacing it with a new system would be an enormous task for any Chief Technology Officer. Consider how many companies relied
Lift companies make most of their profits from ongoing equipment maintenance rather than from installation. Installing a new lift is expensive and time-consuming and can cause major disruption, especially in large office blocks with hundreds of people going in and out all day long. A building owner is unlikely to install a new lift without good reason. Additionally, there are usually regulations imposed upon owners of public buildings, requiring them to have their equipment serviced regularly – meaning recurring income for manufacturers.
In Microsoft’s early days you would buy software on a CD and upload it to your machine. This meant you could delay buying an update until it was absolutely essential. It also left the software vulnerable to piracy. Nowadays, however, most people use a subscription model. This means software is downloaded online and constantly updated. It also means you have to continue paying if you want to use it, which gives Microsoft a constantly recurring income and allows the company to pass on inflation costs to consumers.
Audio We cannot claim that music is as essential to life as water or electricity. Nonetheless, it is still one of the last costs consumers cut. In a world where few of us buy CDs anymore, streaming services like Spotify have become the equivalent of toll roads for music Earlierconsumption.thisyear we bought shares in Universal Music Group (UMG). UMG owns and operates businesses engaged in music recording, publishing, merchandising and creating audio-visual content.
Communications frameworks Another business with such qualities is American Tower – one of our biggest holdings. The company owns and operates wireless and broadcast communications infrastructure – the towers that hold satellite dishes for phone companies. It has around 221,000 sites across six continents. Individual phone companies would struggle to build towers just for their own dishes as competitively as renting from American Tower, so the business has very high levels of client retention. Maintenance costs are low, so it has strong recurring income. And the fees it charges for renting tower space are typically linked to inflation. The phone companies themselves are good at passing on costs. This is because, though we can put off upgrading handsets, few of us can survive without a mobile phone service. So income looks secure, too, in our view.
Inflation protection Companies with utility-like qualities can be susceptible to regulatory oversight and, like all businesses, are vulnerable to disruption. There is always the risk of their share prices falling and investors losing money. But we believe the qualities we have outlined help mitigate many risks, making them appealing to us in the current environment.
Lifts Once you start looking for these qualities, you find them everywhere. Lift manufacturer Kone is another example. Much like the computer software sector, there are only a handful of major players in the lift and escalator industry – Otis, Schindler, Kone and Mitsubishi Electric.
on Microsoft’s video-conferencing software, Teams, to continue working during the pandemic – and how many continue to use it today to support hybrid working.
It owns the music rights to many of the world’s best artists – past and present. It clips royalties every time its artists are streamed. In addition, modern technology means it can monetise its catalogue better than ever, picking up when music is being used for commercial purposes online and by broadcasters. Film producers, advertisers and videogame creators all use music – and must pay for it.
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Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henleyon-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. Want to know more?
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Select Trust plc Global Equity Income Share Portfolio
Important Information This article is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade beforeWherepublication.individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
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The Invesco Select Trust plc – Global Equity Income Share Portfolio invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise.
Both funds back quality companies and are popular with retail investors
In particular, the FTSE 100 is a popular hunting ground for equity income stocks given above-average yields. Insurer Abrdn (ABDN), housebuilder Persimmon (PSN) and mining giant Rio Tinto (RIO) are among the big names luring investors with income yields above 8%, yet neither Evenlode fund owns these stocks.
The battle of the income funds: how Evenlode’s two products fare I n bear and bull markets, economic expansion or recession, income is rarely out of fashion with retail investors. Evenlode Income (BD0B7D5) has become one of the UK’s favourite fund options, a £3.34 billion actively managed fund that has outstripped its UK equity income category almost three-to-one over the past decade.
SHARED INVESTMENT IDEOLOGY
Both Evenlode funds share an investment ethos that focuses not on the biggest potential payouts, but on characteristics such as attractive structural growth opportunities; sustainable competitive advantages; and sustainable reinvestment that safeguards and extends their businesses. A large part of the Evenlode process is focused on cash flow. ‘We spend a lot of time looking at whether a company has attractive economics so it can generate lots of cash flow, and whether it is getting high returns on its invested capital,’ says Ben Peters, Evenlode co-founder and fund manager. But there are more esoteric queries.
‘I’m also thinking about what the company does and why the capitalist system might allow it to have these attractions,’ he says. ‘Is the company competitive? What are its advantages? Where’s the value-add for the customer? We spend a lot of time thinking about this.’
It’s possible to see this rationale play out by spinning through both funds’ respective portfolios. Here you’ll find names like Microsoft (MSFT:NASDAQ), Relx (RELX), LVMH (MC:EPA), GSK (GSK) and PepsiCo (PEP:NASDAQ) – just some of the businesses many would comfortably predict will still be alive and paying dividends to shareholders 10 years from now.
In a year of red-hot inflation and interest rates rising from historic lows, the Evenlode Income fund has been more robust in 2022 than its sister product, Evenlode Global Income (BF1QNC4), yet the opposite applies over a three-year basis.
The predominantly UK-focused Evenlode Income has achieved 3.8% annualised total return versus 7.8% from Evenlode Global Income, according to Morningstar data. That may surprise readers given that the UK has a reputation for being a market that pays much more generous dividends than many overseas regions such as the US.
Comparing income funds (%) 2018 2019 2020 2021 2022 6040200 Evenlode Global Income Evenlode Income Chart: Shares magazine • Source: FE Analytics. Total return in GB
25 August 2022 | SHARES | 25
Peters champions patience and a long-term investment horizon, but he is not above swooping on what he considers quality companies that may have tripped up. New holdings added to Evenlode Income this summer include credit checking agency Experian (EXPN) and distribution business Diploma (DPLM).
You get exposure to a portfolio of quality companies which should be growing dividends each year. Buy the accumulation version of the fund and enjoy the compounding benefits of the fund automatically reinvesting dividends.
TILTING THE STOCK SCALES
In March, Adidas (ADS:ETR) was added to the Evenlode Global Income fund for the first time after sliding nearly 20% during the first quarter, an opportunity to buy one of the world’s largest sportwear brands seemingly too good to resist. Testing firm SGS (SGSN:SWX), a Swiss rival to Intertek (INTK), was added in June.
Fundamentally, while superficially a UK and global fund respectively, several stocks appear across both Evenlode portfolios, albeit in different weightings. For example, Microsoft is the Evenlode Global Income’s largest single stake, worth 5.7% of its £1.8 billion assets, whereas the software giant ranks 15th for Evenlode Income at 2.1% of assets. This means every 1% move in Microsoft’s share price adds or subtracts about £1.3 million to/from the global fund’s net assets, with a rough £700,000 impact on Evenlode Income.
DISCLAIMER: Editor Daniel Coatsworth owns units in Evenlode Global Fund By Steven Frazer News Editor
KitKat maker Nestlé (NESN:SWX) features exclusively in Evenlode Global Income. It has significantly increased capital expenditure to secure supply chains to satisfy consumer demand, but this will pinch free cash flow.
Evenlode Income aims to have at least 80% of its assets in UK stocks with the remainder free to be invested anywhere in the world.
The fund manager says all his own long-term savings are invested in Evenlode funds. That’s encouraging as it suggests he won’t take excessive risks to drive rewards.
26 | SHARES | 25 August 2022
Peters even sees plenty of investment opportunity, saying, ‘Several high-quality cash compounding companies that we follow have seen drawdowns of between 40% to 50% over the last few months without any change in our view on their long-term fundamentals.’
WHICH ONE TO BUY?
Peters accepts it has been a discouraging year for investors yet says he finds it reassuring that the bedrock of Evenlode Income and Evenlode Global Income’s cash generation is underpinned by repeatpurchase business models. The manager estimates about 78% of the former’s portfolio is invested in companies that ‘we categorise as having below average economic sensitivity’. He is also supportive of portfolio companies across both funds using the flexibility of superior cash flows to invest in their long-term future even during the current difficulties.
RESILIENT COMPANIES
As for which fund investors should buy, while both are attraction propositions, on a long-term view we prefer the Evenlode Global Income fund for its ability to pick the very best opportunities in the world rather than be principally constrained to the UK market. Its 2% yield is less than the 2.6% paid by Evenlode Income and may not be enough for someone who needs to use the dividends to pay their bills today, yet there is merit in owning the global fund if you’re still in the wealth accumulation phase of your life.
SPOTLIGHT WEBINAR www.sharesmagazine.co.uk/videos
NextEnergy Solar Fund (NESF) Ross Grier, Managing Director, UK, NextEnergy Capital NextEnergy Solar Fund Limited (NESF) is a specialist renewable energy investment company that invests in operating solar power plants and battery storage assets. NESF’s investment objective is to provide ordinary shareholders with attractive risk-adjusted returns and is targeting a dividend yield of 7.52p for the current financial year.
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Royal Road Minerals Luis Puerto, VP of Corporate RoyalAdministrationRoadMinerals (TSX - RYR) (FRA – RLU) is the product of many years of collective experience in mineral exploration, security and reincorporation in post-conflict environments such as the Balkans, the Caucasus, Africa, South America and the Middle East.
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Henderson Diversified Income Trust Nick Ware, Portfolio Manager
Henderson Diversified Income Trust (HDIV) seeks a sustainable level of annual income and capital gains consistent with seeking to reduce the risk of capital losses, by investing in a diversified portfolio of global fixed income and floating rate asset classes.
Emerging Markets
Five-year
10-year
India has outperformed wider emerging and developed markets 18.3% 5.7% 10.1% 12.4% 6.9% 9.4% 13.2% 8.9% 10.8% annualised return annualised return annualised return MSCI MSCI MSCI, data July
This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here
2022
EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST 28 | SHARES | 25 August 2022
How India’s strong 2022 comparesperformancelongerterm
World Chart: Shares magazine Source:
Three-year
15.0%10.05.0
MSCI India
According to data from MSCI, over three years its Indian index has delivered an annualised return of 18.3%, over five years 12.4% and over 10 years 13.2%. The comparable figures for the wider emerging markets index are 5.7%, 6.9% and 8.9% respectively. The MSCI World developed markets index, despite being dominated by what has been a buoyant US market over the last decade, has also not kept pace with India. Over three years its annualised return is 10.1%, on a five-year view 9.4% and over 10 yearsThe10.8%.removal of some of the bureaucracy which has plagued the Indian economy seems to be helping, and big tech consultancies like Infosys and Tata Consultancy Services are seeing buoyant demand thanks to a post-pandemic digitisation drive. While inflationary pressures, particularly rising commodity prices, are an issue for India, the latest economic outlook from the International Monetary Fund still expects 7.4% growth in 2022 and 6.1% in 2021. Longer term the country is expected to benefit from favourable demographics with a large working age population.
to 29
The country’s forecast economic growth is robust and it has demographic advantages T he Indian stock market has outperformed the wider emerging markets space so far in 2022, just as it did in While2021. this follows on from a period of underperformance, on a long-term view, the showing of Indian stocks compares favourably with both the developed and developing world.
about
TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT) Managers Andrew Ness Edinburgh
Porfolio
Three things
TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.
EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST 25 August 2022 | SHARES | 29
1.
3. The US dollar tradeweighted weakenedindexmodestly in July after reaching a cycle high in the month as investors discounted the timing of a peak the Franklin Templeton Emerging Markets Equity team are thinking today Sehgal Singapore
2. Earnings growth in emerging markets (EMs) for 2022 has been cut to -6% from +6% at the start of the year, based on consensus estimates. China has driven the reduction in EM earnings growth, with forecasts for 2022 declining to 4% growth from 14% over the same period. Analyst earnings revisions indicate further in the US interest-rate cycle. The direction of the US dollar matters to EMs as it influences capital flows and the availability of liquidity. A strong US dollar tends to coincide with capital outflows and reduced liquidity availability in EMs, whereas a weak US dollar tends to coincide with capital inflows and the opposite trend for liquidity. As the US dollar strengthens and liquidity declines, companies with foreign currency debt find it harder to refinance foreign currency debt or raise new loans and vice versa. Expectations that the US Federal Reserve may be closer to the end than the start of its rate-hiking cycle have recently led the US dollar to weaken, leading to an improvement in liquidity conditions in EMs –foreign fund flows have increased into selected EMs, including India.
Emerging markets: Views from the experts
Chetan
Latin American markets rebounded in July, with Chile, Brazil and Peru among the leading performers, while Mexico and Colombia lagged. In Brazil, a smaller-thanexpected increase in consumer prices in the first half of July, raised expectations of the start of a downward trend in inflation. Additionally, the labour market continued to recover with June unemployment falling to its lowest level since 2015. Although Mexico’s second-quarter GDP growth exceeded market expectations, investors expect to see easing growth in the second half of 2022 on the back of weaker US demand.
downward pressure on earnings forecasts is likely. The first half 2022 earnings season is expected to be weak, but the market has already discounted this scenario. Investors are likely to focus on guidance for 2023. Consensus expectations for next year call for 8% growth, relatively unchanged since the start of the year.
Anyone in drawdown needs to think carefully about how they respond to rising prices.
Discover the potential rise in the state pension amount and more THOSE IN DRAWDOWN
The good news is that you’re in complete control, thanks to flexible pension reforms that allow savers to choose exactly how they use their pension. However, that also means it is up to you to ensure those savings last throughout your retirement. The natural thing to do in response to rising living costs might be to take more income from your pot to maintain your standard of living, but this increases the risk of your fund running out early. This risk will be further exacerbated if larger withdrawals are combined with substantial market falls –something many have already experienced in 2022. I’m 70 and have been following the ‘4% rule’ since I started taking an income in drawdown on my 65th birthday. However, if I keep to that plan, I’ll need to increase withdrawals by 10%+ in September this year. Is that sensible or will I risk running out of money in retirement?
HOW THEMIGHTINFLATIONDRIVEUPSTATEPENSION
Paul Tom Selby, AJ Bell Head of Retirement Policy says: Soaring inflation affects everyone, including those in receipt of a pension income. Not all pensions are made equal, however, with some – most notably public sector pensions – benefiting from generous and uncapped inflation protection. State pensions are also set to rise substantially next year, with all eyes on September’s inflation figure, which is traditionally used to uprate benefits the following year. If by that time inflation has reached the Bank of England’s forecast 13%, the new state pension would breach £200 a week for the first time, with the Exchequer wearing an estimated £13 billion bill.
If inflation in September 2022 hits 13%, this implies the basic state pension would rise by £18.45 to £160.30 per week (£8,335.60 per year), while the new state pension would rise by £24.10 to £209.25 per week (£10,881 per year) This isn’t a reason to panic, but retirement investors must not stick their heads in the sand either. Think carefully before increasing your withdrawals and make sure you have considered the impact that decision could have, ideally
30 | SHARES | 25 August 2022
Cost of living crisis: How will inflation affect different types of pensions?
The ‘basic’ state pension and the ‘new’ state pension both benefit from the triple-lock guarantee, meaning they increase by the highest of average earnings, inflation or 2.5%. The inflation part of the triple-lock will almost certainly apply for the 2023 increase, assuming the triple-lock is retained.Former chancellor Rishi Sunak suspended the triplelock temporarily due to an unforeseen year-on-year spike in wage growth in 2021 after the pandemic supressed wages in 2020. Nonetheless, it would be extremely divisive to break the triple-lock pledge again because of an unexpected rise in inflation – particularly with a general election on the horizon.
Other pensioner-related benefits – such as additional state pension (which applies to state pensions for those who reached state pension age before April 2016) and pension credit – and working-age benefits also usually rise in line with September’s inflation figure.
HOW DOES INFLATION IMPACT ANNUITIES?
25 August 2022 | SHARES | 31 with the help of a financial adviser.AJBell customer research suggests investors are taking a mixed approach, with the majority (60%) keeping withdrawals the same, while 24% are cutting back withdrawals in the face of market uncertainty and 16% are increasing withdrawals. All these actions may be perfectly sensible depending on the person’s circumstances.
Annuities lock in a retirement income for life. This provides extra certainty but limits flexibility and extinguishes the possibility of generating further investment growth. The impact of high inflation on those who have already bought annuities will depend on the type of annuity bought. Some will have inflation protection baked into the terms of the contract, although this is often capped. If inflation exceeds the cap – which it will for many this year – then your income is falling in real terms. This will no doubt anger people who purchased what they hoped would be an inflationproofedHowever,income.most people (historically at least) have bought annuities with no inflation protection, meaning they risk being brutally exposed to surging prices. In the 2020/21 tax year
Currently, the basic state pension is worth £141.85 per week (£7,376.20 per year), while the new state pension pays £185.15 per week (£9,627.80 per year). If inflation in September hits 13%, this implies the basic state pension would rise by £18.45 to £160.30 per week (£8,335.60 per year), while the new state pension would rise by £24.10 to £209.25 per week (£10,881 per year).
WHAT ABOUT THE STATE PENSION?
Defined benefit pensions provide a guaranteed income for life similar to annuities, except this time the promise is underwritten by the employer. In the case of public sector pensions, that employer is the state, meaning pensions are essentially underwritten by taxpayers. It means former public sector employees can expect to see their pension income rise by as much as 13% next year, depending on September’s inflation figure.
PRIVATE SECTOR DEFINED BENEFIT PENSIONS
The impact of inflation on private sector defined benefit pensions will depend on the rules underpinning the scheme. Often these rules will place a cap on inflation protection, meaning they won’t enjoy the same increases as their peers who worked in the public sector.This pension apartheid will rankle former private sector workers that see their spending power diminished. Some schemes still use RPI as the measure of inflation against which to uprate pension payments. As things stand RPI is a whopping 12.3%, and typically runs higher than CPI. It could have meant private sector defined benefit scheme members received an incredible CPI-busting increase, but that will be quashed if schemes apply the 5% and 2.5% caps available to them.
THE PENSION PROTECTION FUND When private sector defined benefit schemes go bust, the Pension Protection Fund is responsible for paying out members’ pensions. If the UK enters recession, it is likely more schemes and their members will join the PPF if the parent company is forced under. The inflation protection you might receive from the PPF varies depending on the period during which you built up the benefits. In most cases payments relating to pensionable service from 6 April 1997 onward will rise in line with inflation each year, but subject to a cap of 2.5% a year. At current inflation rates that means PPF members will be experiencing significant real terms cuts in their benefits.
PUBLIC SECTOR DEFINED BENEFIT PENSIONS
DISCLAIMER: AJ Bell referenced in this article is the owner and publisher of Shares magazine. The author (Tom Selby) and editor (Daniel Coatsworth) own shares in AJ Bell.
Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.
around 85% of the 60,000 annuities purchased were ‘level-only’, meaning they had no inflation protection at all. Just 15% of annuities bought were ‘escalating’, meaning they rise with inflation.
32 | SHARES | 25 August 2022 DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?
There is a broad cost control mechanism that could see public sector pensions tightened in other areas – for example by raising retirement age or increasing contribution rates – to avoid the burden on taxpayers spiralling completely out of control.
Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.
Most people think income tax is charged at 20% for basic-rate payers, 40% for those earning over £50,270 and 45% for those on more than £150,000 (except those living in Scotland where different rates apply). However, there is a little-known tax quirk that kicks in when you earn £100,000 that means you end up paying an effective tax rate of 60%.
A sneaky quirk to the tax system means that some people pay a 60% tax rate on a portion of their income, but there is a way to beat it.
HOW DOES IT WORK IN PRACTICE?
Let’s look at an example: someone who earns £100,000 a year will get their full entitlement to the personal allowance, so will get the first £12,570 of their earnings tax-free. On the next £37,700 of their earnings, they will be charged 20% tax, and then the rest of their earnings above £50,270 will be taxed at 40%. On top of that they will be charged National Insurance. However, a pay rise of £20,000 (admittedly a very decent pay rise, but a good one for this example) means they lose £10,000 of their personal allowance, reducing their tax-free allowance to This£2,570.means they get £2,570 tax-free, then the next £37,700 of their earnings will be charged 20% tax, as before. But the amount above £40,270 will be taxed at 40% – which is now much higher, resulting in a bigger tax bill. In total it means of their £20,000 pay rise, £12,000 is taken in extra tax – amounting to 60%. On top of this, their National Insurance bill is also higher, as their income has grown.
HOW TO BEAT THE SYSTEM
How to use your pension to beat the sneaky 60% tax rate
PERSONAL FINANCE 25 August 2022 | SHARES | 33
At £100,000 you start to lose your tax-free personal allowance. You lose it at a rate of £1 of your tax-free allowance for every £2 you earn over the threshold, which means that by the time you earn £125,140 your personal allowance is zero. What this means is income in the £100,000 to £125,140 bracket is not only subject to 40% tax, but effectively half of it again is moved from being tax-free to being taxed at 40% as the personal allowance is removed on a £1: £2 basis. It means a 60% effective tax rate on that portion of yourOnceearnings.yourpersonal allowance is wiped out (when you earn £125,140 or more) your tax level drops back down to the usual 40% before rising to 45% once you hit earnings of £150,000 or more.
It’s a complicated and confusing tax quirk that catches many people out and means that tax rates in most of the UK are really 20%, rising to 40% before jumping up to 60%, then falling to 40% and ultimately rising to 45% again.
But there is a way to beat it – pension contributions. The earnings figure that HMRC counts for personal allowance taper purposes is called your ‘adjusted net income’. It’s confusing Government terminology but it means all your If you’re earning £100,000 or more, you need to know these clever tips
WHY DOES IT HAPPEN?
The principal is the same in Scotland, where the personal allowance is lost in the same way, but the impact is even higher due to the different bands and higher tax rates – 61.5%.
Income
The example in the table shows that making a £5,000 pension contribution costs you far less once accounted for the higher tax you would be paying on that money if you took it as income. Your take-home pay is only £1,838 lower by making that £5,000 contribution, and you’ve got an extra £5,000 in your pension. This also doesn’t account for any boost that money might be given if your employer matches pension contributions and you haven’t already exhausted that benefit. a £20,000 payrise costs you £12,000 in extra tax £100,000 £120,000 £20,000 £12,570 £2,570 £7,540 £7,540 £19,892 £31,892 £12,000 £6,612 £7,262
Take-home pay £65,957 £73,307 Tax rate on increase - - 60% Old salary New salary Increasesalary/taxin How pension contributions can save you tax Income £105,000 £100,000 Pension contribution £0 £5,000 Personal allowance £10,070 £12,570 Tax @ 20% £7,540 £7,540 Tax @ 40% £22,892 £19,892 National Insurance £6,774 £6,611 Take-home pay £67,794 £65,957 £1,838 Difference in take-home pay Table: Shares magazine
Tax @ 20%
HOW DOES THIS WORK IN PRACTICE?
Tax @ 40%
AJ
Personal Finance
Head
Personal allowance
National Insurance
What this means in practice is that if a pay rise tips you over the £100,000 limit, you could make pension contributions to bring you under it. For example, if you earn £105,000 but make £5,000 of pension contributions, your ‘adjusted net income’ will be £100,000 and you won’t be subject to the personal allowance taper – meaning no 60% taxItrate.relies on you being able to spare the money to pay into your pension, but the cost of that pension contribution is lower when you compare it to just taking the income and paying higher tax.
PERSONAL FINANCE 34 | SHARES | 25 August 2022 income, including earnings, pensions, savings interest and investment dividends, minus any pension contributions or Gift Aid donations.
By Laura Suter Bell of
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36 | SHARES | 25 August 2022
The company owns and operates the UK’s critical energy infrastructure
Because gas and electricity are essentials for businesses and consumers, National Grid’s activities are tightly regulated – a role performed by Ofgem in the UK.
Unlike energy producers, the profitability of its core operations is not heavily tied to price of energy, or the volumes used. It can grow its profit by investing in new pylons and pipelines and thereby increasing the size of its regulated asset base.
NATIONAL GRID’S STORY
National Grid came into being as a result of the privatisation of the electricity industry in 1990, when it was formed as a business and owned by 12 regional electricity companies. It subsequently listed on the London Stock Exchange in 1995. In 2022 the company owns and maintains gas and electricity grids in the UK and US. The £42.7 billion business also acts as system operator, ensuring supply and demand are balanced in realtime and facilitating the connection of assets to the transmission system.
HOW IT MAKES MONEY
As reward for keeping the network up to date and in working order, National Grid is allowed to charge its customers, the energy suppliers, a fair price. This is linked to inflation and there is the potential to earn more if it exceeds the targets set by the regulator. This ensures it has enough cash to invest in its assets, pay interest on any debts and reward shareholders with regular dividends. Its policy is to grow the dividend in line with the CPIH (Consumer Prices Index including owner occupiers’ housing costs) measure of inflation.
National Grid (p) 2018 2019 2020 2021 20221,2001,000800600Chart: Shares magazine • Source: Refinitiv
How National Grid makes its money and the big regulatory challenges it faces
T here are genuine fears about keeping the lights on this winter as the threat of Russia shutting off gas exports to Europe looms large. FTSE 100 constituent National Grid (NG.) will have a central role in this story. At £11.70 its shares have handily outperformed the market year-todate with double-digit gains and it is widely held by investors for its income appeal with a measure of inflation protection built in. In this article we explain what the company does, how it makes money and discuss the short and long-term prospects for the share price.
Balancing this out, National Grid also has inflation-linked payments on its borrowings.
NATIONAL GRID GAS: Owns and operates the gas transmission network across Great Britain (it is in the process of selling a 60% stake).
25 August 2022 | SHARES | 37
NATIONAL GRID ELECTRICITY SYSTEM OPERATOR: Ensuring the supply and demand of electricity is balanced out across Great Britain.
NATIONAL GRID ELECTRICITY TRANSMISSION: Owns and operates the high-voltage electricity transmission network in England and Wales.
NATIONAL GRID’S STRUCTURE
The company has six different divisions: National Grid North America, National Grid Gas, National Grid Electricity Transmission, National Grid Electricity System Operator, Western Power Distribution and National Grid Ventures (and other activities).
NATIONAL GRID NORTH AMERICA: Owns and operates electricity and gas transmission and distribution facilities in Northeastern US.
NATIONAL GRID VENTURES (and other activities): Separate from the core regulated units, this is a portfolio of assets across the UK, including liquefied natural gas storage and regasification facilities, renewable energy generation and electricity interconnectors (highvoltage cables connecting electricity systems of neighbouring countries). Other activities primarily relate to the National Grid Partners venture capital arm which invests in innovative start-ups in the energy space.
National Grid - divisional breakdown of underlying operating profit, financial year ending March 2022
WESTERN POWER DISTRIBUTION: Owns and operates electricity distribution networks for the Midlands, the south-west and south Wales.
National Grid Electricity System Operator (1%) National Grid Ventures (and other activities) (8%) Western Power Distribution (22%) National Grid Electricity Transmission (29%) National Grid North America (40%) Chart: Shares magazine • Source: National Grid
SHIFT TOWARDS
Berenberg explains how the inflation protection afforded the company works. ‘In the UK, inflation increases the value of the group’s regulated asset base (on which the group earns a real allowed rate of return). For example, a 100 basis-point increase in inflation would lead to a £230 million increase in the value of the group’s £23 billion UK regulated asset base (UK electricity transmission and UK electricity distribution) compared to a £40 million equivalent increase in index-linked debt costs.
In recent years
National Grid - historic and forecast dividends Dividend per share (p) 60.0040.0020.00 49.1649.16 550 50.9797 551 51.6565 552 52.9494 2021 2022 2023E 2024E Chart: Shares magazine • Source: National Grid, Berenberg • Note: Year end is 31 March
National Grid takes this high voltage ‘raw’ electricity and high-pressure gas from the producers and carries it around the country on a network of cables, pipes, pylons and wires, while it also balances out supply and demand for electricity as the system operator. To make it safe for use, a network of local operators helps to lower voltage and pressure before feeding it down their own pipes and cables to homes and businesses.
HOW THE ELECTRICITY AND GAS NETWORK WORKS IN THE UK
‘In New York and New England, the group’s price controls have various elements of forwardlooking inflation forecasts or annual price increase mechanisms in place.’ ELECTRICITY
38 | SHARES | 25 August 2022
National Grid has been repositioning the business to have greater exposure to electricity as it prepares for a net zero future. The proportion of electricity assets is expected to grow from 60% to 70% of the group total as part of this strategy.
Low borrowing costs have helped the business to increase investment, make more money and pay out more generous dividends. It expects to invest £30 billion to £35 billion across its energy networks and adjacent businesses, in the UK and US, over the five-year period to 2025/26 and thereby grow the asset base between 6% and 8% per year.
Electricity is generated from solar, hydro, wind, nuclear, fossil fuels and natural gas produced from deep underground and turned into energy by producers such as Centrica (CNA).
By Tom Sieber Deputy Editor
Reports in The Telegraph suggest the UK Government is investigating the proposed sale of the majority stake in the gas transmission business amid concerns over energy security which, at the very least, could delay the deal.
In 2021
A more existential threat is the prospect of renationalisation. There is already a plan for the system operator part of the business to return to public ownership from 2024. However, this contributed just 1% of group operating profit in the 12-month period to 31 March 2022.
DEBT CONCERNS
There are some serious challenges facing the business, particularly in terms of regulation.
In Shares’ view the key reasons for owning the shares are the built-in inflation protection and the dividend yield, which stands at 4.7% according to Stockopedia. Existing and prospective investors must recognise the risks to justify holding the shares as there is often a misconception that National Grid is a risk-free investment.
A wider nationalisation of the network looks unlikely given the costs of compensating shareholders, but the current energy crisis means it could remain a live political issue and thereby have an impact on stock market sentiment towards the company.
the company acquired Western Power Distribution (WPD for short) – the distribution network operator for south Wales, the Midlands and the south-west of England. To help fund the WPD deal it has agreed to sell a 60% interest in its UK gas transmission and metering business to a consortium of infrastructure investors including Australian bank Macquarie for £2.2 billion. The company also has an option agreement in place which could see the consortium return for the remaining 40%.
25 August 2022 | SHARES | 39
Due to the timing of different transactions National Grid is sitting on elevated levels of debt.
Total net debt stood at £42.8 billion as of 31 March and this includes more expensive bridge loans used to fund the WPD deal.
Ofgem agrees a multi-year framework of investment and allowed returns – the latest of which covers the period 2021 to 2026. Dubbed RIIO-T2 it proved a nasty shock to National Grid as it effectively cut the level of return from 7% in the previous five-year period to 4.3% for electricity transmission and 4.6% for gas transmission. In its role as an electricity distributor, it could be exposed to similar cuts under new price controls coming in early 2023.
In addition, National Grid sold its 50% stake in a joint venture with housebuilder Berkeley (BKG) for £412.5 million and its Rhode Island business for $5.3 billion.
If the sale of the gas arm doesn’t go through it could, in theory, see debt levels stay higher than expected. That implies more of the company’s cash could disappear on interest costs and potentially threaten the commitment to inflation-linked growth in the dividend.
In the long-term National Grid should have a central role to play in the energy transition as Berenberg notes: ‘We see significant opportunities for a number of years ahead from new connections and grid reinforcement and digitalisation that will be essential for growth in renewables, security of supply and increased electrification (across homes, industry and transportation).’
REGULATORY CHALLENGES
Copper’s one-third plunge to barely $7,000 a tonne from north of $10,000 this summer fits with the view that a recession is coming but the metal is now back above $8,000. Further gains would help to reaffirm investors’ faith in the equity market rally, while further weakness would raise fears of an economic slowdown and a recession, or even stagflation.
Five key tests of the markets’ tone for investors to monitor
2. Small caps. Market minnows are an excellent indicator of risk appetite – they tend to outperform when investors are bullish and fall faster than the broader market when they are bearish. The UK’s FTSE Small Cap and AIM indices are among the worst performing global indices in 2022 and America’s Russell 2000 is still in bear market territory, even after a one-fifth gain from its June nadir.
40 | SHARES | 25 August 2022 RUSS MOULD AJ Bell Investment Director
T he summertime blues are nowhere to be seen. Share and bond prices are advancing, and oil and commodity prices are ebbing to help take the edge off inflationary concerns and permit markets to convince themselves that central banks are planning a policy pivot, in the form of interest rate cuts, sometime in 2023. This all seems at odds with a world where inflation still stands at 40-year highs, economic data is softening quickly, consumer confidence is flat on its back, companies are flagging margin pressure, governments’ scope to provide fiscal support is limited owing their impecunious state and geopolitical tensions remain elevated in Eastern Europe, the Middle East and South-East Asia.Bulls will counter these are no longer new ‘news’ items as they dominate the media every day. Bears will assert summer’s surge is no more than a classic bear-market rally, a trap waiting to spring shut on the unwary, especially as the farrago involving Bed Bath and Beyond (BBBY:NASDAQ), the launch of a leveraged, single-stock exchangetraded fund that tracks the share price of Tesla (TSLA:NASDAQ) and a renewed surge in meme stocks such as AMC (AMC:NASDAQ) do not feel like the sort of activity that usually calls a market bottom.Regular readers will know this column has five tried-and-trusted ways of testing market sentiment. Intriguingly, all of them look delicately poised right now so they could prove a useful guide to where markets go during the autumn and beyond. Why it is worth keeping tabs on copper, small caps, transport indices, junk bonds and volatility
3. The transportation indices. The old theory goes that if the transports are not performing, the industrials cannot do so either, as if nothing is being
Copper is looking a bit brighter
FAMOUS FIVE 1. Copper. The industrial metal is so called because its malleability, ductility and use in everything from cars to housing to domestic appliances make it a great barometer for global economic health.
Source: Refinitiv data
4. Junk bonds. High-yield bonds lie at the riskier end of the fixed-income spectrum as their more pejorative name of ‘junk’ bonds would suggest. The issuers have creaky balance sheets, volatile cash flows or both, and they need to pay a higher coupon as a result to attract buyers of the paper. They can trade a bit like equity, such is their risk profile, so bulls of stock markets will want to see the US-listed iShares iBoxx High Yield Corporate Bond ETF (HYG:NYSE) performing well. The bad news is the tracker fund is trading below the $80 level. Prior dives below that threshold signalled wider market volatility in 2008, 2015, 2020 and early 2022 so a recovery here is a matter of some urgency.
25 August 2022 | SHARES | 41
Source: Refinitiv data
Source: Refinitiv data
Junk bonds have yet to stage a convincing rally
The VIX index is creeping lower
Source: Refinitiv data
RUSS MOULD AJ Bell Investment Director shipped, nothing is being sold. It may therefore be of some relief to bulls that America’s Dow Jones Transports index is 14% above its lows and trying to steam higher but if that benchmark starts to sink again then there could be trouble ahead.
5. Volatility can be the friend of the investor –it can provide chances to sell stock expensively or buy it cheaply – but history shows that stock indices progress best when they make serene progress and a series of modest gains, and tend to fare less well when trading is choppy and there are big swings up and down. America’s VIX, the so-called ‘fear index,’ stands just above its lifetime average of 19. That suggests sentiment is still bullish, especially as the reading is creeping down, and fits neatly with the advances in copper, small caps and transport stocks. However, junk bonds’ struggles may suggest that something could yet test the latest risk-asset rally. After all, markets are often at their most dangerous just when making money looks easiest.
US small caps are trying to forge a recovery
Transport stocks may be getting back on track
Source: Refinitiv data
The economics team at Berenberg forecast a mild recession across the developed world, which is likely to negatively affect spending on advertising and marketing. Although advertising agencies will be affected by this event, internet-only media companies may fare worse.
Varos looked at data from By Mark Gardner Senior Reporter
Digital-focused advertising agency S4 Capital (SFOR) has seen its share price fall by 75% so far in 2022, not helped by a savage profit warning in July.
Two of the more traditional advertising agencies have also seen share price weakness despite either confirming or upgrading their earnings forecasts for the year. These are WPP (WPP) which is down by 30% and Publicis (PUB:EPA) which has declined by 16%.
42 | SHARES | 25 August 2022 Share prices are already falling but might it get worse from here?
PAY CLOSE ATTENTION TO ONLINE ADVERTISING
Over the course of the last decade, advertising agencies’ growth rate has decoupled from global advertising expenditure. This reflects their concentration on large corporates, while small and medium-sized enterprises have been the driving force behind advertising expansion during the last decade. This is in part because smaller companies tend to be more reliant on online advertisements to attract new customers. Recently, lower levels of consumer demand coupled with privacy changes implemented by Apple (APPL:NASDAQ) have forced smaller companies to reduce their marketing spend to conserve cash.
Last year, Apple released an update for iPhones that let users decide if they wanted to allow apps on their device to target them for advertisements. Most users decided to opt-out which has essentially made mobile advertising less effective forAnalyticscompanies.platform
Investors worry recession will hurt companies’advertisingearnings
T
he threat of a recession is prompting companies to cut back on their promotions and investors are increasingly wary of buying shares in the advertising sector. This is understandable given the strong correlation between global economic growth and nominal spending on advertising.
Both the MSCI European Media and Entertainment index and the MSCI World Media and Entertainment index have fallen year-to-date by 19.4% and 31.1% respectively.
For UK advertising agency WPP results for the six months to 30 June reflected a ‘strong first half’ featuring ‘sustained demand from clients’, according to the company. An estimated total of $3.4 billion of net new business was secured during the period including Mars, Sky, Audi and Danone (BN:EURONEXT) WPP’s forward guidance is for organic revenue growth of 6% to 7% for 2022 coupled with a 50-basis point uplift in the operating margin.
WPP’s current full year dividend forecast is 35.5p. This equates to a 4.3% yield, rising to 4.7% in 2023. While some potential bad news has already been priced into Publicis and WPP’s shares, the key risk is that negative market sentiment towards the broader advertising market will continue to weigh on these stocks.
The message from both Publicis and WPP management teams has been consistent. Currently they do not see any sign of the downturn that the market is now anticipating. Following a major restructuring and repositioning of the business, growth appears to be returning for Publicis, particularly in the key US market. It continues to generate substantial cash flow, which allowed it to invest nearly €3 billion in buying Sapient (a business focused on digital transformation) in 2015, de-lever by the end of 2018 and subsequently buy Epsilon for $4.4 billion in 2019. Epsilon provides marketers with proprietary data resources to supplement audience profiles and measure customer engagement across channels.Publicis views its CORE ID solution, which has 250 million profiles in the US alone, as a key asset that differentiates it from peers, and is one of the drivers behind it winning accounts with McDonald’s (MCD:NYSE) and Walmart (WMT:NYSE)
25 August 2022 | SHARES | 43 1,300 small businesses and found their revenue declines had accelerated each month in the second quarter of 2022, according to a report in the Financial Times. Varos’ study also highlighted the cost of acquiring new customers through online advertising was ‘significantly higher’ this year than last, and that overall advertising spend on Meta Platforms’ (META:NASDAQ) Facebook network in 2022 was materially lower versus 2021. According to data group Lotame, difficulties facing small business have impacted the giants of the online advertising world including Snap (SNAP:NYSE), Alphabet (GOOG:NASDAQ)-owned YouTube and Twitter (TWTR:NYSE) to the tune of $18 billion in revenues this year. WILL WPP AND PUBLICIS BE NEXT TO WARN?
According to Berenberg estimates, Publicis is trading on a 2022 price earnings multiple of 8.3. Earnings per share are forecast to fall by 2.9% from 2022 to 2023, before rebounding by 3.7% in 2024. The current 5.4% dividend yield is forecast to rise to 5.5% in 2023.
This focus on identity comes alongside management’s comments that the forthcoming depreciation of third-party cookies is likely to have a bigger impact on marketers and publishers than investors currently understand. Google is to stop using third-party cookies in its Chrome internet browser from 2024. Cookies enable advertisers to track users across multiple websites and serve more targeted advertisements.
According to recently updated Shore Capital earnings and dividend forecasts WPP is currently trading on a price to earnings multiple of nine, which falls to eight times in 2023.
44 | SHARES | 25 August 2022 WHICH UK STOCKS ARE RELEVANT TO THE ADVERTISING THEME?
There is a wide variety of stocks on the UK market whose fortunes are linked to advertising activities.Asidefrom the big advertising agencies WPP and S4 Capital, there is polling business YouGov (YOU:AIM), whose data is heavily used by companies when targeting consumers. Publisher Future (FUTR) generates a good chunk of its earnings from carrying advertising on its websites and in its magazines. Bidstack (BIDS:AIM) helps video game developers to earn more money by arranging for advertising to appear in their games. Dianomi (DNM:AIM) is a specialist in contextual advertising and helps brands to place adverts alongside relevant news topics. Next CommunicationsFifteen (NFC:AIM) is trying to acquire M&C Saatchi (SAA:AIM). Having initially recommended a bid in May, Saatchi withdrew its support after a big fall in Next Fifteen’s market valuation reduced the value of the part of the deal being satisfied by shares. A meeting slated for 19 August aimed at resolving the situation was delayed until early in the fourth quarter of 2022. have last
How UK advertising-related stocks
performed over the
12 months Bidstack 27.5 61.6% M&C Saatchi 192.6 20.2% Next Fifteen Communications 945.9 1.2% Ebiquity 62.6 −1.8% YouGov 1308.6 −8.9% WPP 8834.9 −16.2% The Mission 53.7 −23.4% Pebble Group 170.0 −31.2% Dianomi 49.5 −50.3% Tremor International 522.3 −54.6% Future 2081.7 −55.1% S4 Capital 822.0 −79.2% Mirriad Advertising 17.4 −81.5% Company Market cap (£ million) performanceOne-year(%) Table: Shares magazine • Source: SharePad, data to 19 August 2022
INDEX 25 August 2022 | SHARES | 45 KEY OVERANNOUNCEMENTSTHENEXTWEEK Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852. All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor. EDITOR: @Dan_CoatsworthCoatsworthDaniel EDITOR:DEPUTY Tom @SharesMagTomSieber EDITOR:NEWS Steven @SharesMagSteveFrazer WHO WE ARE PRODUCTION Head of Design Darren Rapley Designers Rebecca Bodi Kevin Sharpe ADVERTISING Senior Sales Executive Nick Frankland 020 7378 nick.frankland@sharesmagazine.co.uk4592 CONTACT US: support@sharesmagazine.co.ukWebsite:sharesmagazine.co.ukTwitter:@sharesmag FUNDS INVESTMENTANDTRUSTSEDITOR: James @SharesMagJamesCrux COMPANIES EDITOR Ian @SharesMagIanConway EDUCATION EDITOR Martin@ChilliggGamble SENIOR REPORTER: Mark Gardner CONTRIBUTORS Danni Hewson Laith Khalaf Russ Mould Tom LauraSelbySuter Full-year results: 30 August: Braemar Shipping Services. 31 August: ECO Animal Health. 1 September: Omega Diagnostics. 2 September: Ashmore, Time Finance. Half-year results: 30 August: Centralnic, Old Mutual, Uniphar. 31 August: Bank of Cyprus, BBGI Global Infrastructure, Chesnara, Flowtech Fluidpower. 1 September: Alfa Financial Software, Eurocell, Gem Diamonds, Gulf Keystone Petroleum, PPHE Hotel. Funds Evenlode Global Income 25 Evenlode Income 25 Fidelity Index World 5 AIM Artisanal Spirits 9 Bidstack 44 Dianomi 44 Everyman Media 8 FRP Advisory 14 Joules 6 M&C Saatchi 44 Next CommunicationsFifteen 44 Velocys 13 YouGov 44 Main Market Abrdn 25 Barratt Developments 20 Berkeley 19,39 Centrica 38 Cineworld 8 Darktrace 12 Diploma 26 Experian 26 Future 44 ConsolidatedInternational Airlines 13 Intertek 26 Made.com 6 National Grid 36 Persimmon 25 Relx 25 Rio Tinto 25 S4 Capital 42 Vistry 21 WPP 42 Overseas shares Adidas 26 Alphabet 12,43 Amazon 12 AMC Entertainment 408, Apple 42 Bed Bath & Beyond 40 Cloudflare 12 CyberArk 12 Danone 43 IBM 12 LVMH 25 McDonald's 43 Meta Platforms 42 Microsoft 12,25 Nestle 26 Netflix 7 Peloton 7 PepsiCo 25 Publicis 42 SGS 26 Snap 43 Southwest Airlines 13 Splunk 12 Tesla 40 Trend Micro 12 Twitter 43 Walmart 43 Zoom Communications 7 Zscaler 7 ETFs Global X Cybersecurity ETF 11 iShares iBoxx High Yield Corporate Bond ETF 41 L&G Cyber Security ETF 11 CybersecurityWisdomTree ETF 11 Investment Trusts Brunner Investment Trust 9 Global Opportunities Trust 9 Martin Currie Global Portfolio 9 Scottish Mortgage 9 Templeton Emerging Markets Investment Trust 29
2019MAY THIS WEEK: 11 PAGES OF BONUS CONTENT INCLUDES COMPANY PROFILES, COMMENT AND ANALYSIS ISSN 2632-5748 CENTRALNICANGLETINYBUILD 2022AUGUST
Shares Spotlight AUGUST 2022
Introduction
Members of staff may hold shares in some of the securities written about in this publication. This could create a conflict of interest. Where such a conflict exists, it will be disclosed. This publication contains information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments in this publication must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. This publication, its staff and AJ Bell Media do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.
W Welcome to Spotlight, a bonus report which is distributed eight times a year alongside your digital copy of Shares. It provides small caps with a platform to tell their stories in their own words. The company profiles are written by the businesses themselves rather than by Shares journalists. They pay a fee to get their message across to both existing shareholders and prospective investors.Theseprofiles are paidfor promotions and are not 02
Some of the firms profiled in Spotlight will appear at our investor webinars and in-person events where you get to hear from management first hand. Click here for details of upcoming webinars and events how to register for free tickets.
DISCLAIMER IMPORTANT independent comment. As such, they cannot be considered unbiased. Equally, you are getting the inside track from the people who should best know the company and its strategy.
Previous issues of Spotlight are available on our website. 02
Shares Spotlight is a mix of articles, written by Shares magazine’s team of journalists, and company profiles. The latter are commercial presentations and, as such, are written by the companies in question and reproduced in good faith.
What is software-as-aservice and why does it continue to grow 03
Shares Spotlight AUGUST 2022
Selling IT services through the cloud is proving an increasingly popular approach (SaaS)Software-as-a-serviceisasubscription to IT services via the cloud and is available on the internet. SaaS has been around since 2000, but still has high growth potential, as not all companies have made the switch yet while new applications are continuously in development.SaaSsolutions are among the fastest-growing segments within the IT sector and, according to Gartner, they were still the largest public cloud services market segment in 2021, representing 37% of the market, or $152 billion.
The transition to the cloud has accelerated over the past two years due to the Covid-19 pandemic, as businesses have adapted to the new way of doing business and social dynamics.Another effect of the pandemic is that now 70–80% of B2B decision makers prefer remote human interactions or digital self-service over face-to-face interactions (source: McKinsey). More companies are expected to adopt SaaS solutions for an increasing variety of business functions. According to Gartner, the high growth of public cloud services easily outpaces the expected growth in worldwide IT spending of 4% in 2022 and 5.5% in 2023.Asurvey by BetterCloud also confirms the ongoing adoption of SaaS, as companies continue their digital consistsrepresentsintothejourneys.transformationThesurveydividesmarketofSaaSusersthreegroups.Thefirst15%ofthetotalandofSaaS-powered
Gartner expects end-user spending on public cloud services to increase 20% in 2022 to $495 billion, followed by growth of 21% in 2023 towards $600 billion.
WHY TRANSITION TO SAAS? SaaS is replacing the perpetual software licence contract, which includes an ongoing maintenance contract. Perpetual licensing results in a lumpsum payment to acquire the licence, followed by implementation fees and ongoing maintenanceannualcosts.Nowthemarkethas largely shifted to the subscription SaaS model, revenues are more evenly spread, as subscription fees are paid monthly or annually. Although already going on for many years, we expect the transformation from a perpetual licence model to SaaS to continue, driven by benefits to the customer such as lower upfront costs, higher security levels, upto-date software and ease of use. What are the key features of SaaS?
The key features of SaaS software are: Multi-tenant: all customers use the same software solution. It is not customised, but can be personalised and configured by individual users. The benefit of this to the software developer is that only one version of the software needs to be maintained and software upgrades can be undertaken on an ad-hoc basis. Each upgrade is then made available to all users simultaneously. For the customer, this means more frequent small upgrades, rather than the disruption of larger upgrade projects.
04 Shares Spotlight AUGUST 2022 workplaces, which are already almost entirely running on SaaS.These organisations are now 93% SaaS based and this is expected to increase to 97% by 2025. The second group are the workplaces in transition, representing 70% of the total, which use a mix of SaaS and on-premises software.Theseorganisations are 55% SaaS based and this is expected to increase towards 78% by 2025. The third group are the traditional workplaces, representing 15% of the total, which are still primarily using on-premises tools. These organisations are only 8% SaaS based, but this is expected to increase to 27% by 2025. Many (smaller) organisations are still in the early stages of their SaaS adoption journey, but are expected to also switch to a digital workplace in due course.
Subscription licensing: rather than buying a perpetual licence upfront with an ongoing maintenance contract, the customer signs up to use the software for a minimum period. For SaaS solutions, this is typically three years, after which the customer can choose to stop using the software. The subscription fee includes the provision of upgrades and support on an ongoing basis. While SaaS companies highlight the high recurring revenues this business model provides (typically 80%+), this also requires the provision of high levels of ongoing customer service to ensure customer retention. For companies used to the perpetual licence model, this can represent a significant mind shift and the customer service ethos needs to run through the entire company. Operational rather than capital cost for customers: as customers do not need to sign up for large perpetual licences and potentially complex installation projects, the decision to use SaaS software shifts from a capital expenditure project to an operational expenditure. Small numbers of employees can sign up to trials before extending to a wider base, if deemed suitable. This can make it easier to sign up new customers, although it also reduces the barriers to entry for competitors.
Cloud-based: the software is accessed via browsers or mobile apps, with all data stored in the cloud. This means users can access the software from anywhere, a key benefit for deskless workers and those working from home.
BUSINESS MODEL OF SAAS
HOW TO SUCCESSFULLY GROW A SAAS BUSINESS
Successful SaaS software businesses typically focus on growing the number of subscribers as fast as possible, which requires a significant investment in sales and marketing headcount. At the same time, product development is a key investment area, so that software remains competitive and adapts to customer demand for new functionality.Themainfocus of SaaS providers is to encourage the adoption of their platform, both signing up new customers and expanding usage within its existing customer base. This will increase the scale of the company at relatively low additional costs.
TYPICAL SAAS VALUATION
The typical growth path for US SaaS companies appears to involve investing heavily in sales and marketing to gain market share as fast as possible, with little focus on achieving profitability in the short term, whereas European companies seem to focus more on balanced growth in revenues and profits.
5 05 Shares Spotlight AUGUST 2022
Scale is very important in the SaaS environment and this seems the most logical explanation for the difference in valuation between the SaaS players. This article is based on a report produced by Edison Investment Research, other Edison Explains and thematic research is available here.
SaaS has a subscription business model. Contracts are typically for three years with monthly or annual subscription payments. In some cases, SaaS providers earn additional transactional income, based on the volumes processed by their platforms. This can provide additional revenues for the software provider, boosting scaleIFRSbenefits.15leaves companies some freedom to interpret how they recognise SaaS revenues. Typically, these revenues will be spread out over the contract period, rather than reported in one year, although in some cases the contractual arrangement may lead to the entire subscription amount being recognised upfront. Part of the consultancy revenues (mainly related services) may also be categorised as SaaS revenues. The application of IFRS 15 has affected, for example, the level of SaaS revenues as a percentage of total revenues. This can influence the valuations of companies, which tend to be higher with a higher proportion of SaaS revenues.
In contrast to the ‘lumpy’ licence model, cloudbased SaaS leads to higher levels of recurring revenue. With a typical three-year subscription contract, the software supplier has a guaranteed income stream for the contract period, enhancing the predictability of its future results. Well-run SaaS companies typically have recurring revenues of more than 80%, low churn rates and derive EBITDA (earnings before interest, tax, depreciation and amortisation) margins of on average 15–20% or even higher, depending on the scale of the business. As there are also many start-ups in the market, with large investments in their business suppressing profitability, earnings multiples are not the best valuation metric for SaaS players, leaving sales multiples and DCF (discounted cash flow) as the most suitable valuation methods.Looking at enterprise value to sales multiples, there is a wide range in valuation from 1.5 times to around 30 times. There seems to be a difference in valuation between US and European players.
Content
Shares Spotlight tinyBuild www.tinybuild.com 06 Shares Spotlight AUGUST 2022
AIM-quoted tinyBuild (TBLD:AIM) is a leading video games publisher and developer with global operations. It has a growing portfolio of premium console and PC titles across the horror, action, simulation, and survival genres.Co-founders Alex Nichiporchik (CEO) and Luke Burtis (COO) still hold a combined 45% of the capital and are fully aligned with investors for long term value creation.Overthe past 10 years, tinyBuild has grown from a team of two to more than 400 staff and a portfolio of more than 70 games. More recently, tinyBuild has released source high-potential IP and work with talented developers in strategic geographies.
TINYBUILD HAS A UNIQUE STRATEGY FOR LOW-RISK GROWTH tinyBuild focuses on three ways to drive organic growth. First, the Company leverages existing partnerships and in-house developer. Second, tinyBuild follows a multigame and ‘Game as a Service’ franchise model expansion. Third, tinyBuild works on its IP portfolio to pursue multimedia opportunities such as books, graphic novels, merchandise, and TV series Its organic growth strategy is supported by an evolving critically-acclaimed titles such as Not for Broadcast, a dystopian, darkly comedic TV propaganda simulator and top-selling titles such as Potion Craft, a relaxing and engaging alchemist simulator. Looking at the future, the company now has the largest and the highest quality pipeline of new games it has ever had. Upcoming games include Hello Neighbor 2, the highly anticipated sequel, as well as SpiderHeck, Tinykin, The Fridge is Red, Rawmen, Asterigos, Nitro Kid, and I am Future Headquartered in the US, tinyBuild now has operations stretching across the Americas and Europe. Its global footprint enables the company to is king –in the future of
Invest
entertainment THIS IS AN ADVERTISING PROMOTION
Shares Spotlight tinyBuild M&A strategy which reflects tinyBuild’s growing success and ambitions to scale and diversify the business. Since 2013, tinyBuild has completed a number of acquisitions, expanding its own-IP portfolio to include Streets of Rogue (June 2021), Rawmen (August 2021) and Deadside (September 2021), among others.Thecompany will continue to balance organic investment with M&A to opportunitiescaptureasthey arise and to diversify the business. tinyBuild will evaluate larger transactions as it looks to scale the business and accelerate growth.Forexample, in November 2021, tinyBuild acquired USbased Versus Evil, the video game publisher of criticallyacclaimed titles such as The Banner Saga and Pillars of Ethernity II.
LOOKING AHEAD WITH EXCITEMENT With a diverse portfolio of own IP titles, tinyBuild continues to benefit from platform competition and it is well positioned to benefit from the growth of subscription services such as Xbox Game Pass. tinyBuild recently announced a record number of new titles for release, yearthatmanagement’sunderpinningconfidenceitcandeliverstrongfullresults.tinyBuildrecentlyupdated the market to reaffirm its guidance of delivering ‘at least in line with expectations’, continuing a track record that saw the company meeting and beating consensus forecasts at every results since the IPO. Watch this space.
STRONG FINANCIAL TRACK RECORD Since its IPO, tinyBuild’s strategy has delivered a sustained ofofdemonstratingoveroldercatalogue,andby(earningsprofitmillionincreasedmillion).towithperformedperformance.financialtinyBuildstronglyin2021revenuegrowthof39%$52.2million(2020:$37.7Operatingprofitby64%to$12.5(2020:$7.7million),withbeforetaxandbasicEPSpershare)growingasimilaramountto$12.5m4.3c,respectively.Thecompany’sbackrevenuesfromtitles,typicallyrepresents70%ofitsannualrevenue,thelongevityitsIPandgivingvisibilityrevenues.Own-IP,titlesfor which the company owns the intellectual property, accounted for over 80% of revenue in 2021, explaining the industryleading margins.
07 Shares Spotlight AUGUST 2022 THIS IS AN ADVERTISING PROMOTION tinyBuild (p) 2021Oct 2022Jan Apr JulChart:2001000 Shares magazine • Source: Refinitiv
TINYBUILD ENJOYS ONE OF THE LOWEST LEVELS OF STAFF TURNOVER IN THE INDUSTRY Finding and retaining talented people who can deliver successful games is critical to the strategy. Especially when the market for talent is so competitive. tinyBuild enjoys one of the lowest levels of staff turnover in the sector: low single-digit compared to an estimated 15.5.% at an industry level according to specialist publication Wired This is because of the policies it has adopted and the culture that has been created, including trialling unlimited paid leave and giving staff extra holidays in appreciation of their hard work. The company is now planning to open its fourth permanent studio in Europe to support growth.
A CLEAR PATH TO SUCCESS ANGLE has a clear, fourpronged strategy for achieving widespread adoption of the Parsortix system:
THIS IS AN ADVERTISING PROMOTION
In May 2022, ANGLE received US Food and Drug Administration (FDA) clearance for its Parsortix PC1 system. This is the first ever FDA product clearance for a device to harvest CTCs from metastatic breast cancer patient blood samples for subsequent, user-validated analysis.FDAproduct clearance, the global gold standard for medical devices, gives ANGLE first mover advantage for intact cancer cell analysis in the global liquid biopsy market, which is estimated will grow to over US$100 billion per annum in the US alone.
ANGLE (AGL:AIM) is a world-leading liquid biopsy company that has developed the Parsortix system for harvesting intact circulating tumour cells (CTCs) from a patient’s blood sample for subsequent analysis.
• Regulatory approval
LIQUID BIOPSYHELPING HEALTHCARE SYSTEMS MANAGE THE REPERCUSSIONS OF COVID-19 Across the globe Covid-19 continues to disrupt cancer services, slowing diagnoses diagnostic tool for clinicians. By enabling minimallyinvasive, repeat liquid biopsies from a simple blood test to assess cancer status, the Parsortix system has the potential to deliver profound improvements in clinical and health economic outcomes in the diagnosis and treatment of cancer.
The FDA De Novo Class II classification means that an entirely new medical device and delaying treatment, creating a backlog that could take more than a decade to clear. Cancer remains a leading cause of death in most developed nations with an estimated 90% of deaths due to metastasis. As such, early diagnosis and care optimisation remain a priority. Given the dynamic nature of cancer, selecting the appropriate treatment requires access to the most up-to-date status of a patient’s disease and will be an urgent priority movingANGLEforward.believes its Parsortix liquid biopsy system can help to meet that need. CTCs as a liquid biopsy, have significant potential as a prognostic and ANGLE achieves world first with FDA clearance for its Parsortix PC1 clinical system
Shares Spotlight ANGLE www.angleplc.com 08 Shares Spotlight AUGUST 2022
Shares Spotlight
• Published evidence Leading independent cancer centres continue to publish positive results on their use of the Parsortix system with 66 peer-reviewed publications as of July 2022, across 24 different cancer types. The Parsortix system has enabled breakthrough research into cancer metastasis and its treatment. It was recently used in a remarkable study published in Nature, demonstrating that in breast cancer patients CTCs are shed at a higher rate during sleep and that these CTCs have greater metastatic potential.
The recent FDA clearance of ANGLE’s Parsortix PC1 system, renewal of a substantial contract with a significant pharma services customer, involvement with large, critical clinical studies, the increasing rate of publications utilising the Parsortix system combined with a recent successful fundraise (£20 million in July 2022), demonstrates that ANGLE is gaining momentum in an expanding, large scaleANGLEmarket.has the potential to positively impact cancer diagnosis, treatment, and monitoring for the millions of people whose lives are impacted by this disease every day. In the words of ANGLE’s chief executive officer, Andrew Newland, ‘the effective execution of ANGLE’s strategy has the potential to deliver significant financial returns for ANGLE’s shareholders, profoundly improve the outcome for cancer patients, and reduce healthcare costs’.
• Pharma services
ANGLE classification has been granted by the FDA for the Parsortix PC1 system. The credibility associated with medical device FDA product clearance cannot be overestimated and we anticipate that this will turbocharge all aspects of commercialisation of the Parsortix system.
In March 2021, ANGLE opened new clinical service laboratories ahead of schedule in the UK and US (under its new ‘Onc-ADaPT Labs’ brand) with the first four biopharma customers now onboarded. In April 2021, ANGLE secured its first large-scale sample processing services contract with an oncology focused pharmaceutical company, valued at up to $1.2 million. In June 2022, ANGLE secured an additional contract, again worth $1.2 million, with the same pharma services customer demonstrating market confidence in both ANGLE and the solutions it offers. The customer, a pharma company with revenues exceeding $1 billion per annum, has selected the Parsortix system to undertake longitudinal monitoring of patients in its clinical trials, including a large, multi-centre, late stage trial in prostate cancer.
ANGLE has signed a master clinical study agreement with Solaris Health Holdings LLC and its affiliate MidLantic Urology LLC, to collaborate and conduct clinical studies in prostate cancer and as a potential route to market in the US. Together with MidLantic Urology, ANGLE will initiate clinical studies aimed at investigating the use of the Parsortix system for the detection of prostate cancer and prediction of its severity in patients.Assuming results are positive, the prostate cancer test, and other tests developed by ANGLE, will be offered from its clinical laboratories, which are currently undergoing CLIA and UKAS accreditation to enable use of Parsortix based tests for patient management.
09 Shares Spotlight AUGUST 2022 THIS IS AN ADVERTISING PROMOTION Angle (p) 2021Oct 2022Jan Apr JulChart:1000 Shares magazine • Source: Refinitiv
•
Clinical Studies
FDA CLEARANCE PROVIDES ANGLE WITH A MAJOR OPPORTUNITY IN AN EMERGING AND GROWING GLOBAL MARKET
The highlight of CentralNic’s growth is that 99% of its earnings are recurring or utility-style rolling contract
CentralNic (CNIC:AIM) is a London-based AIM-quoted company which helps to drive the growth of the global digital economy by developing and managing online marketplaces. This allows businesses globally to buy subscriptions to domain names for websites and email, monetise their websites, and acquire customers online. CentralNic creates these marketplaces by acquiring and merging highly cashgenerative recurring revenue businesses in its market, each with different customers and suppliers, and then integrating them together to create an accelerated growth network effect. This strategy has resulted in organic growth at a massive rate of 62% over the past 12 months.
The company’s most recent market update, released in July 2022, showed further growth acceleration in the first six months of the year with revenue up 92% to c.$335 million and adjusted EBITDA up 85% c.$38 million, compared to the same period in 2021. Year-on-year organic growth for the trailing twelve months has risen to a record 62%.
THIS IS AN ADVERTISING PROMOTION
While many other companies are suffering from recessionary forces, CentralNic has provided investors with increasing, sustainable growth during the period of COVID, further accelerating in 2022. CentralNic has notched up six upgrades to market forecasts since the start of 2021. It delivered a strong financial performance in 2021, with revenue of $410.5 million, a 71% increase on the previous CentralNic is powering the growth of the digital economy
Ben Crawford, CEO of CentralNic
Shares Spotlight CentralNic www.centralnicgroup.com 10 Shares Spotlight AUGUST 2022
year, gross profits increased by 58% to $118.5 million and EBITDA (earnings before interest, tax, depreciation and amortisation) was up by 57% to $46.3 million.
BUCKING THE TREND WITH STRONG, ACCELERATING GROWTH CentralNic is listed in the FT’s 1000 list of Europe’s fastestgrowing companies, and from June 2022 has now been included in FTSE AIM 100 and AIM UK 50 indices.
11 Shares Spotlight AUGUST 2022 CentralNic (p) 2021Oct 2022Jan Apr JulChart:140120100 Shares magazine • Source: Refinitiv
CentralNic made four acquisitions in 2021 and has already made a further three in 2022, all of which have added scale and capabilities. This includes the leading product comparison website business VGL, the Company’s largest acquisition to date, which was funded by an oversubscribed equity placing and tap bond issue.
STRATEGIC ACQUISITIONS
This extraordinary growth is being driven by CentralNic’s online marketing division, which has quickly overtaken the company’s traditional domain name sales business as its largest source of revenues.Thecore reason for CentralNic’s success is that, unlike most online marketing businesses, its technology helps companies acquire customers on the internet without using third party cookies or capturing personal data, making it, in the words of CEO Ben Crawford, ‘a new, better kind of tech company’. Instead of traditional, invasive methods of marketing, CentralNic uses anonymous web traffic data, using Artificial Intelligence to analyse these datasets to identify the best websites on which to place advertisements and to optimise its own websites to obtain the most relevant customers for an advertiser client at the most affordable price.
Known as contextual advertising, this is becoming ever more sought after by advertisers as restrictions grow on the collection and sale of personal data online and individuals become increasingly privacy conscious.
Ben Crawford, CEO of CentralNic
SUSTAINABLE OPPORTUNITYMARKET
CentralNic has continued to deliver sustainable growth thanks to its privacy safe solutions and the enormous scale of the yearsgrowthdirector’sandnewmarkets.presencethedigittoisgrowthfar,marketinatoftheCentralNicthird-partyonhaveincludingopportunitiesmarketitisaddressing.GlobaladvertisingplatformsGoogleandAmazonincreasedtheirspendacquiringcustomersfromproviderslikeeachyear,withcombinedtotalspendthesetwocompanieswellover$100billion2022.AsCentralNic’sshareofthisisunderc.0.4%sothescopeforcontinuedoverthenextfewyearsimmense.CentralNic’sambitioniscontinueitshighdoublegrowthratetobecomepreferredproviderofwebservicesinitscoreItsconstantinfluxofcustomers,newservicesnewacquisitionswill,thebelieve,guaranteeatthatrateformanytocome.
CentralNic’s meteoric rise in organic revenue growth to 62% yoy proves the desirability of our privacy safe online marketing solutions. Despite this, we have currently penetrated less than 0.5% of the total addressable market. Our longer-term ambition is to be a $10bn revenue business which, with current organic growth, complemented by our ongoing successful M&A strategy, is eminently achievable.
CentralNic serves customers in almost every country in the world THIS IS AN ADVERTISING PROMOTION
ONLINE MARKETING…WITH A DIFFERENCE
CentralNic’s record organic growth has been achieved without the company stepping back from its core strategy of making earnings accretive acquisitions of high cash conversion, recurring revenue businesses that have annuity revenue streams and exposure to growth markets.
“ “
Shares Spotlight CentralNic revenues, and CentralNic’s cash conversion has remained at over 100% since it listed on the market in 2013.
