Babcock Price Fall, Segro Placing, TR Property and EKF Diagnostics Virtual AGM

I said in a previous blog post “that I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought”.

Indeed that is exactly what happened after I made a recent purchase of Babcock International (BAB). Soon after Shore Capital Markets published a note that said it would be skipping its final dividend. The share price promptly fell by 7% on that day even though they claimed to “retain a buy stance” on the shares.

The last announcement by the company covering the subject of dividends on the 6th April simply said “The Board will consider the final ordinary dividend for this financial year ahead of our full year results announcement [due on the 11th June] taking into account developments over the next two months”. Do Shore Capital have inside information or are they just guessing? Or did they consult the company first? If they were given any relevant steer on this matter, the company should have issued a statement on it. Regardless it’s somewhat annoying even if some moderation of the dividend might make some sense and everyone else is cutting them. I would not be too concerned about the loss of dividend because I never buy shares for dividends alone, but I don’t like to suffer capital losses.

Yesterday property company Segro (SGRO) announced a placing “to take advantage of additional investment opportunities”. There was no open offer but private shareholders could participate via Primary Bid if you were willing to accept the price agreed with institutional holders. The shares issued represented 7% of the existing capital and the placing price turned out to be 820p, a discount of 4.5% to the previous close. I declined to participate, mainly because I have enough of their shares already. One has to ask why they could not have done a proper rights issue as there seemed no great urgency in the matter.

Last night I watched a presentation by Marcus Phayre-Mudge, fund manager for TR Property Investment Trust (TRY), on the internet. This tended to simply confirm my view that this is a well-managed fund which is withstanding the Covid-19 epidemic well. It has avoided many of the property sectors most damaged by the virus. It has a pan-European focus when internet retailing in the rest of Europe is still well behind that in the UK. He said “retailing is in an accelerating structural shift” but he does not “believe the end of the office is nigh”. A very useful and informative presentation via PI World even if he got cut off at the end due to some unknown technical issue. You can see a recording of it here: https://www.piworld.co.uk/

This morning I attended the virtual AGM of EKF Diagnostics (EKF), a medical products manufacturer mainly for diagnostic applications. There were about 12 attendees via a Zoom conference call and it worked quite well. Attendees were asked to register and submit questions in advance, although there was time to ask impromptu questions in the meeting also which were invited at the end.

Voting was done on a poll so the results of that were displayed first. The meeting was chaired by CEO Julian Baines.

I submitted a question about their investment in Renalytix AI (RENX) and its progress, which had been recently listed. I suggested progress was slow but the response was that progress had not been slow at all. However the Covid-19 situation has delayed tests in hospitals in the USA.  Progress on approvals is significant and revenues are expected shortly.

There was a question on the ramp-up of sales in McKesson and the answer was they had slowed significantly. But the company overall was only about 10% down on core products. They had seen business coming back on line in May and June.

Another question related to the Longhorn product which was claimed to be “the world’s safest sample collection product” (very relevant to virus sample collection of course). They are selling millions of these tubes in the USA. There is only one competitor who is allegedly infringing their patents – they are speaking to them “robustly” at present.

There were several other questions and answers of no great significance, but it was certainly a useful meeting and a good example of how any small/medium company could run a virtual AGM very easily. Why do they not do so?

My thanks to EKF for running such an event, which took less than 30 minutes in duration.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Stock Market Turmoil – Don’t Sit There Awaiting a Rebound

The virus epidemic is causing major disruption to businesses and our personal lives. Thank god that we have the internet so we can conduct business and do our shopping without leaving home. But the UK is seen as one of the victims in the world so the pound is falling to parity with the dollar for the first time for many, many years. Meanwhile the Governor of the Bank of England is saying that he will print as much money as needed – unlimited “helicopter” money to lend to businesses to keep them afloat. Will that stop a recession? I doubt it. But to look on the bright side, it may be a short one.

China seems to have stopped the virus from spreading with no new domestic cases and movement restrictions being lifted. There are also some technical developments that might assist particularly in testing for the virus. But the UK is gearing up for a major epidemic and major stress on the NHS.

I am in isolation trying to avoid catching the disease as I certainly don’t wish to have another spell in intensive care as I had a few years ago. I ended up with “intensive care neuropathy” where all your nerves weaken. Had to learn to walk again, rather like Kenneth More playing Douglas Bader in Reach for the Sky. I recovered but it can be a very dangerous syndrome.

The news from my stock market portfolio is mixed based on the latest announcements which every company is now issuing. LoopUp (LOOP) who provide tele-conferencing is up over 40% today after a very long decline, and there are few other rises today, but overall my portfolio is still slightly down. It was not helped by 4Imprint (FOUR) reporting today that sales have declined by 40% over the last 3 days as against the prior year. They sell promotional merchandise and this an example surely of companies cutting back on non-essential marketing spend and events.

The commercial property market is interesting in that yet again a number of open-funded property funds have suspended redemptions. It is interesting to look back at the share price of TR Property Investment Trust (TRY) which I have held for many years. Such trusts have been badly affected by the gloom in the property sector even if the property companies they invest in may hold long leases and not much exposure to retail or other virus sensitive areas. But the share price of TRY is now back to the level it was in 2013. That’s down over 50% from its peak in February. If the recession is short, that will surely be seen as an anomaly.

It’s also worth remembering that valuing companies on short-term results or trading statements gives you a very poor estimate of what a company is really worth. What matters is the discounted future profits over many years. One bad year has relatively little impact. But when investors are panicking and simply reducing their exposure to the market by moving into cash, then valuations can become both unrealistic and extreme.

The Government’s response is probably a sound one. They are betting that the recession will be short and that keeping companies afloat by short-term loans is better than letting them go bust which would create a snowball effect on suppliers and staff employment.

But some sectors are clearly going to be dire in the short-term. Hospitality is one. Accesso (ACSO) who provide technology to visitor attractions published results yesterday. They might benefit from a low pound but their sales relate directly to visitor numbers to their customers’ sites. I cannot imagine US theme parks being very busy this year and solving queuing problems might be seen as irrelevant. They also declared a write off of $53.6 million on past capitalised software costs. With a new CEO this was hardly surprising to me given the shape of the business and the failure to find a buyer for it recently. Investors will need to be in for the long-haul if they wish to stay on board, but many clearly do not given the share price performance of late. The risk is that some buyer will come along and pick up the useful technology and customer contracts at a bargain price.

One aspect of the virus epidemic I am particularly unhappy with is that the market turmoil and declines have generated a lot more work on my portfolio than usual. Unlike some people, I do not simply sit there expecting shares to bounce back up in due course. Some may but others will not. Some companies may go bust or become a shadow of their former selves while other new opportunities arise. The trend to internet shopping and services will be accelerated. For example one of my eighty-year old neighbours has just opened a supermarket web shopping account for the first time. Ocado (OCDO) has had difficulty keeping up with demand and even had to close their App service temporarily. But once people get into the habit of shopping on-line they won’t revert to old ways. The future for the High Street looks ever bleaker.

There is one other aspect to consider. Will a short, sharp recession be quickly forgotten about or will it prompt the definite end of the bull market? Will share investment go out of fashion after many investors realise they have lost a pile of money from this incident? The general economy may quickly recover but the stock market might not. I don’t know the answer to that question but as always I won’t be guessing at it – just following the trend.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Property Companies and TR Property AGM

Yesterday I attended the Annual General Meeting of TR Property Investment Trust (TRY). I have held shares in this company for a long time, and it’s always useful to attend their AGM as you get a useful update on trends in the property market from the fund manager (Marcus Phayre-Mudge of late). As he mentioned, the fact that they hold property directly, as well as holding shares in property companies gives them a unique insight into the state of the market.

Apart from holding TR Property, I also hold some direct property company shares which are British Land, NewRiver, Segro and Tritax Big Box. Not claiming to be a property expert, have I made the right choices there? Answers will be obvious later.

Segro announced their interim results yesterday also. Segro, like Tritax, are focused on large warehouses. They reported adjusted eps up 6.5%, and NAV up 2.6% with the dividend increased by 4%. The share price rose 2.8% on the day and has been in a strong positive trend in the last few months. Marcus was particularly positive about the Segro results and said there was tremendous rental growth in that sector with a 94% retention rate which is remarkably high. So no problems there.

As Marcus made clear, the property market is at present only doing well in certain sectors and certain geographies. TR Property is very well diversified though as it covers the whole of Europe (one might consider it as another of those Brexit hedging stocks with only 36% of holdings in the UK and they have been reducing that). The commercial property market is somewhat cyclical and was expected to decline in the UK, particularly after the Brexit vote. London offices were perceived as being vulnerable. There is also the impact of the internet on large retail stores. They are reducing exposure to retail but not to convenience stores. Shopping habits in the UK are clearly changing substantially, but less quickly in the rest of Europe. Marcus said they have been trying to focus on buying more physical property but the market has been surprisingly strong.

Switzerland, Benelux and Sweden were the worse geographic areas, and one shareholder commented very negatively on the political and social problems of late in Sweden. Rental growth in Paris and Stockholm is taking place and we might even get some in Spain as properties are filling up.

He made it plain that two sectors are performing well in the UK – “big box” warehouses, and convenience stores. So my holdings of Segro, Tritax and NewRiver are in the right place. But TR Property also hold those two big companies of British Land (pedestrian performance of late with asset value declines) and Land Securities (now renamed Landsec – Marcus said he hoped it did not cost them much to change). He has a bigger holding in the latter, but apparently he may not be totally happy as he mentioned he held a meeting with them recently, and it was not just to have a cup of tea.

He was positive about the share buy-back announced by British Land but suggested it was not big enough to make much difference. British Land is currently on a big discount to NAV so it probably makes sense when I am generally opposed to market share buy-backs. The discount discourages me from selling the shares at present.

TR Property managed to achieve a Total NAV Return of 8.0% last year which was very similar to the previous year and ahead of their benchmark. The depreciation of sterling helped the valuation of their European holdings. The share price discount is currently 7.8% which is slightly below their average. The dividend grew by 26% last year due to strong revenue growth, and currently yields 3.0%.

Marcus was positive about the future because capital markets are still good for property with very cheap debt. There has been record bond issuance by property companies – fixed for longer and lower, which they are encouraging.

He is slightly worried about Brexit and our politicians – “not sure they could negotiate themselves out of a paper bag”.

There were about 70 shareholders present at the AGM at a new venue (Marriott Grosvenor on Park Lane) with defective air conditioning. Shareholder votes were overwhelming in support of all resolutions, except that Chairman Hugh Seaborn got 5.9% against on the proxy votes. Not clear why and did not get the opportunity to ask him about that.

In summary, a useful AGM for those interested in the property sector (which I hold to offset my go-go growth stocks as property tends to be relatively defensive in nature, with share prices more driven by asset values and rental yields).

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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