Portfolio News

Steve Clayton - Fund Manager

27 February 2017

There was no shortage of news from the portfolio last week, with full year results from Intercontinental Hotels Group (IHG), Relx, British American Tobacco (BATS), Rightmove plus the ongoing reverberations around Unilever.

Rooms at the Inn(tercontinental)

IHG continued their run of good results, delivering 23% underlying earnings growth and perhaps more importantly, backing this up with a $400m special dividend on top of a double-digit increase in the ordinary payout. IHG just seems to keep doing what it does best, opening rooms by the thousands whilst keeping the pipeline topped up through signing up new hotel owners to its brands.

Their capital-lite business model works wonderfully and with a new cloud-based reservations and booking system coming later this year, the transformation of IHG from a bricks and mortar based hotelier to a tech-savvy hospitality brand management business continues apace. In the process, IHG has returned almost $13bn to shareholders, far more than it was worth back in 2003, whilst more than doubling its market capitalisation in the process. Remember past performance is not a guide to future returns.

Volume Drags and Fags

With fewer people burning the killer weed each year, Tobacco companies have a long history of falling volumes, but rising sales, because putting prices up is easy when your customers are addicted to your product. All the same, it’s a headwind to be fought year after year. But BATS reported volume growth of 7.5% for their key Global Drive Brands on Feb 23rd when they released full year results. That limited their overall portfolio volume decline to just 0.8%, rather better than an industry dip of 3%. Profits were up nicely and the dividend rose 10%, helping the shares to rise on the day.

BATS reported good progress with their reduced harm, new generation products, which range from e-cigarettes to tobacco heating (but not burning) products and they seem to be in a good place from which to navigate the industry’s shift toward a lower harm future. The pending acquisition of the remaining 58% of Reynolds American seems on track, with completion expected in Q3.

Dividend Bonanza!

Getting excitement out of Relx, the professional information group formerly known as Reed Elsevier, is challenging at the best of times. But they just hiked the dividend 21%! It’s all about Brexit, and a decent underlying performance. Relx is an Anglo-Dutch business, with one arm listed in London, the other in Holland. Agreements about dividing the profits between the two and the dividends shareholders receive govern the whole arrangement. To pay a dividend in euros that reflects the underlying growth of Relx this year requires a much larger increase to be made to the sterling dividend, to keep the overall value equal for both sets of shareholders, because of sterling’s tumble post the Brexit vote. After that, all looks in-line and perfectly sensible. Relx continues to generate cash aplenty and has little need to invest heavily, which is why we like it. The balance sheet is in good shape too, so all in all we remain very content with the position, which we recently added to. Although, as with all investments there are no guarantees of what the future will hold.

Rightmove – Dominant

Full year results showed another strong performance, with double digit growth in revenues, profits and dividends, the latter up 19% to 51p per share. Rightmove’s position looks secure, with almost the entire residential property market advertised on their site. Profit margins are outrageous, and as a digital business with minimal capital needs, you can set your watch by the cash generation. As a shop window, they are a lot more effective than the agents’ own shop windows and they have also far surpassed the local press as the method of choice for agents to advertise their stock for sale.

The average fees paid by advertisers last year was £842 per month, or £10.1k p.a. an increase of 11.7%. Even with that growth, the average agent is paying only a third of the typical £2,500pcm that they spent on local press advertising a decade ago. Rightmove thus retain fabulous pricing power, for agents are still getting an enormous bang for their buck and Rightmove’s rivals lack the same depth and breadth of market coverage.

We were sorry to see Chief Exec Nick McKittrick announce his retirement, and the market shared the sentiment, pushing the shares down, despite very strong results. But Rightmove are so well dug in to their dominant market position that we doubt that Mr McKittrick’s departure will rock the boat for long. And it highlights how all investments can fall as well as rise so investors could get back less than invested.

Unilever – the story so far

We’ve written in more detail about this in a separate blog, but if you missed it, here is the condensed version.

Kraft Heinz approach Unilever with $143bn of used notes and shares. News leaks, shares jump. Unilever peruse the cash briefly and very politely tell them all to get packing. The Americans go home. Stock market reacts in dismay when it realises the money is now fast disappearing beneath the setting sun.

A few days later, possibly after some careful contemplation of their shareholders’ body language ever since the money left town, Unilever announces a wide ranging review and then, barely an hour after that, raises its guidance about margins.

We’re glad Unilever opted for independence; we view them as a long- term part of the portfolio. But there is no ignoring the fact that Kraft Heinz could see potential to raise margins at Unilever. The company now has no choice but to try to realise much of that potential by itself. And that’s a good thing, because had KH done it, shareholders would have only been left with 40% of their former investment, in the form of the KH shares paid in part consideration. So most of any value created would have headed west across the pond. If Unilever do the work themselves, their shareholders (i.e. you) get 100% of the benefit. This story will run and run, and the permutations of outcomes are endless. We’ll keep you informed.