George Salmon & Nicholas Hyett, Equity Analysts 4 July 2019
The second quarter of the year has been a quieter one for our five shares to watch – with none of the acqusitions or management changes that made the first quarter, at times uncomfortably, eventful. It’s also been a pretty strong one in terms of performance – with four of five seeing share price increases.
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The merger with MedicX at the end of last quarter has significantly increased the size of the Primary Health Properties’ (PHP) portfolio.
The group now owns 484 healthcare facilities worth over £2.3bn, with an annual rental roll of £125m a year. However, the overall profile of the underlying assets hasn’t changed all that much.
The average property value remains unchanged at £4.8m, with 90% of rents funded directly or indirectly by the NHS or its Irish counterpart and with 99.5% of the properties occupied. Combined with a slight improvement in the average time until leases need to be renegotiated (13.4 years), we’re pretty comfortable about PHP’s income potential. That should help underpin the prospective dividend yield of 4.1% this year.
It’s worth noting though that the deal does leave PHP with more debt than in the past, and it’s more expensive too. We’ve seen some juggling on the balance sheet to bring down the average cost of debt, but a loan-to-value ratio of 48.1% is higher than we’d like, even with PHP’s stable income stream.
We think PHP remains an attractive option for long term investors seeking an income. But the relatively high level of debt means the target of “pursuing new pipeline acquisition opportunities” could see the company turning to shareholders for extra funding.
First quarter results were ahead of company expectations, and the gaming giant remains on track to meet analyst expectations for the full year. But as is sometimes the way with markets, the shares took a battering nonetheless as second quarter guidance fell behind what had been hoped for.
For our part we remain happy with the business’s underlying performance.
The decision to up investment behind core franchises like Call of Duty, Candy Crush and Overwatch should keep the all-important intellectual property healthy. A strong performance from King, Activision’s mobile business, highlights the advantages of a multi-platform business – offsetting a quieter period for the lumpier, blockbuster-driven Activision console business.
We’ve also seen some good progress from the fledgling eSports operations. The viewership grew strongly in the second season of the Overwatch League, while demand is said to be “enthusiastic” for Call of Duty franchises.
The key things to look out for in the rest of 2019 are the trial launch of mobile versions of Call of Duty and details, including timing, of a new Call of Duty game due for release in 2020. Given the relatively light development pipeline in 2019, good news on either could be key to improved market sentiment.
GVC has continued to recover from the turbulence of the first quarter, helped by a well-received trading update in April, but remains a few percentage points in the red for the year as a whole.
Investors holding the shares on 14 March have also benefitted from the final dividend of 16p per share landing in their accounts. That made for a total payout last year of 32p, a 7.4% increase on 2017/18. Looking ahead to next year, the shares offer a prospective yield of 5.7% this year.
The main themes remain broadly unchanged. Online revenues have continued to move upwards, driven by strong growth from both the gaming and sports betting businesses, while in-shop betting is stalling. We’d expect stakes to fall significantly over the remainder of the year as the new £2 a spin limit kicks in.
The extent of that fall is still largely unknown, but it should be something the group updates on next time it releases numbers. We can also expect an update on the much-anticipated US roll-out, due to start in time for the new NFL season in September. The next date for your results diary is 17 July.
We picked Intertek for its potential to churn out reliable growth against a backdrop of uncertainty. So far it’s done just that, although past performance is not a guide to the future.
The group’s most recent set of numbers, its May trading update, saw it deliver another round of strong numbers and analysts are pencilling in steady profit increases for each of the next three years, although there are no guarantees.
The Products division again delivered another strong showing, with underlying revenue up 5.5%, and management guiding investors to expect further good growth over the remainder of the year.
It’s a similar story elsewhere, with the Trade business ticking over nicely, and management bumping up the outlook for the Resources division from “solid”, to “good” in May’s trading update. While only a subtle change of tone, that’s good news nonetheless.
However, investors should also note that, while another strong six months has seen the share price rise, which has pushed the price to earnings ratio up to 25.8. That’s significantly higher than the 22.5 times expected earnings the shares traded on at the start of the year.
Following Paul Polman’s departure, Alan Jope took over as CEO at Unilever in January 2019. Rather than rip up the strategy of his predecessor and start again, his plans have been very much if it ain’t broke, don’t fix it.
Conditions in some markets remain pretty tough and weakness in ice cream sales, by virtue of a soggy start to the summer in European markets, means sales growth this year is likely to be at the lower end of the longer-term 3-5% range. But on the whole, recent results have vindicated Jope’s decision.
A strong showing in emerging markets has been helping make sure sales continue to trend up, with the group shifting an increased volume of goods at higher prices. Operating margins have nudged higher too, and management remain confident of hitting the 20% by 2020 target.
Improved profitability is one of the factors behind Unilever’s decision to raise the dividend, with the quarterly payout rising 6% to €0.4104 per share.
The authors own shares in GVC and Unilever.
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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
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