2017 Recommendations

2017…here we go

2017 has started well, as investors remain calm ahead of the 20th January Presidential Inauguration. Better brains than mine, (Bill Gates etc) say Donald Trump must be “given a chance”. I concur. Trump must develop into the Presidential role and away from persistent Twitter rants, threats, snarls and barbs. But a very unlikely person has become the leader of the free world. The closest historical parallel I can find is when Claudius became Emperor of Rome. We are in the dark about the “Trump age”.

2016 proved there remains significant political uncertainty and potential for upheaval. Public confidence in government policy has eroded. There are generational problems that manifest themselves via polarized opinions, shifts in voting patterns, societal conflicts of interest and disunity. The social tolerance and centrist policies that globalization delivered in the Nineties and Noughties has gone.

As President Obama signs off, he does so with the USA generating c.150k-200k jobs per month. When he came to office, America was losing 500k-600k jobs a month. There appears zero appreciation from the voting public, who have returned Republicans all over the country, a harsh verdict on Obama. Voters were seduced by Trump’s Federal income tax bribe and distrustful of “coastal elites” and Washington DC reflecting the significant wealth disparities and opportunity deficits across the United States. The paradox is the election of an individual with zero connection to the average voter and a policy agenda that is out of the blue.

The global ZIRP (“zero interest rate policy”) medicine to the 2008 financial crisis boosted the wealthy and stabilized the world economy, encouraging employment helping everyone. That was then. It is now clear that ZIRP as an economic palliative is past its “sell by” date. It is disenfranchising large portions of society creating strata levels and needs to end over the next 24 months. The challenge is creating a more inclusive society. It is far from clear if this is the flight path. What seems to be happening is a project designed to remove inexpensive competitive labour.

The 2017 calendar is full with political events, EU elections and the Article 50 trigger in March 2017. The EU does not need more destabilizing elections. The PM appears to have accepted the EU will not allow the UK to “cherry pick” anymore, “we cannot hang onto bits of the EU” post the 2019 exit. It seems the UK must find its own path, without the crutch of the EU that is the true “Brexit” meaning.

For investors, the UK’s continued access to the EU single market remains a critical point on which not just UK prosperity and the pound rests. Equally important is the UK’s credibility. The UK is on the road of being marginalized on the global stage. Will the PM be prepared to sacrifice EU single market access i.e. “hard Brexit” just to achieve control over immigration? That appears a critical factor, on which there is no clarity. A very weak local currency looks likely for 2017.

Mindful that the UK equity market valuations are looking stretched, the recommendations are a diverse group but linked to established long term growth trends, such as hospital products for the elderly, demand for leisure travel, global payments systems.

ConvaTec – UK100 – BUY

ConvaTec was founded in 1978, and operates in over 100 countries. It provides products and specialist treatments for managing chronic conditions, wound care, ostomy care and infusion devices for diabetes. ConvaTec is a former subsidiary of US pharmaceutical giant Bristol Myers Squibb, who divested the business to Nordic Capital and Avista in 2008 for $4.1bn.

Between 2015 and 2025 the population of those 60+ is expected to grow by 36% from 895m to 1.2bn and double by 2050. There is a strong correlation between age and demand for wound care, ostomy and infusion products provided by ConvaTec.

Last October, ConvaTec listed on the Official List raising £1.47bn via the sale of 659.7m shares at 225p per share. Its market capitalization of £4.39bn on admission qualified ConvaTec for inclusion in the UK100. Post IPO its private equity owners, Nordic Capital are retaining 45.15% and Avista Capital are keeping c 18.7%.

Consensus profit estimates; ConvaTec
Year End Revenue (£bn) Net Income adj(£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Dec-15 1,650 114.0 5 47.8 239
Dec-16 1,690 189.1 10 23.9
Dec-17 1,750 363.5 19 6 12.6 2.51

Source: Bloomberg

The consensus forecasts envisage rapid EPS growth over FY17. ConvaTec is likely to build its institutional coverage in the next twelve months which would result in changes to the forecasts.

Company ConvaTec

Key Catalysts

Recent consumer facing initiatives will diversify the client list. We expect an update on the margin improvement programme over Fy17.

IPO proceeds will cut interest expenses due to lower debt load estimated at $2bn. The board should cut debt further in the next two years enabling a maiden dividend in Fy19.

ConvaTec has advised of adverse pricing pressures, possibly lowering unit prices by 1%. This issue appears priced in.

Share Price 239p
Target Price 325p
52 Week Hi/Low 255p/225p
Shares O/S 1.95bn
Market Capitalisation £4.6bn
Avg. Daily Volume 0.98m
Dividend Yield 0%

Source: Bloomberg

Key Risks to Price Target

  1. Private equity holders could reduce stake, depressing share price
  2. Limited track record as a listed company
  3. Net debt is 3.5x profit or £1.66bn
  4. Control of ConvaTec remains with Nordic Capital

Millennium & Copthorne Hotels – UK250 – BUY

Millennium & Copthorne Hotels is UK listed hotelier with an owner/ operator ethos offering primarily business and leisure travellers hotel accommodation in the world’s leading “gateway” cities including London, New York, Paris, Singapore and Tokyo. Millennium & Copthorne is 65.3% owned by Singapore listed City Developments and should be considered a listed subsidiary of City Developments.

The board reported that during Q1-Q3 2016 weak sterling added £43m to revenues and £7m to profit before tax. For the Q1-Q3 period Millennium reported a profit before tax of £102m on revenues of £665m. Millennium is highly dependent on the performance of about 10 of its larger hotels.

Consensus profit estimates; Millennium & Copthorne Hotels
Year End Revenue (£m) Net Income (£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Dec-16 901.6 84.8 25 8 18.4 1.74 460
Dec-17 947.4 85.2 25 9 18.4 1.95
Dec-18 1,060.0 93.1 27 9 17.0 1.95

Source: Bloomberg

Despite its 42.5% discount to net assets (803.7p) UK institutional holders are concerned at Millennium’s asset heavy strategy and resistance to hotel sales, even of the weaker properties. Millennium has continued to buy/build hotels notwithstanding lower trading profits. The available free float has declined, primarily due to the small purchases by City Developments which reduced liquidity.

Company Millennium & Cop.

Key Catalysts

We view an acquisition of the minorities by City Developments as opportune, given sterling at near 31year lows and the shares at a 42.3% discount to net assets. In recent years, City Development has undertaken a “creep” exercise lifting its stake in small amounts.

Ahead of preliminary results on 20th February we are hopeful of new initiatives to revive the New York/ Singapore operation. The existing CEO is stepping down on 28th February and we expect a new arrival to introduce measures to improve return on equity.

Share Price 462p
Target Price 600p
52 Week Hi/Low 483p/366p
Shares O/S 324.74mn
Market Capitalisation £1.5bn
Avg. Daily Volume 45k
Dividend Yield 1.73%

Source: Bloomberg

Key Risks to Price Target

  1. Board insistence on hotel ownership has generally absorbed cash and lowered return on equity
  2. Board needs to address weak profitability in New York and Singapore
  3. Increasing reliance on internet retailing partners which pressures margins
  4. Airbnb has emerged as a competitor for mid-tier leisure travelers.

Soco International – UK250 – BUY

SOCO International is a mid-cap oil explorer and producer with principal assets in Vietnam, Congo and Angola. SOCO have significant cash levels ($91m) and debt free. The board plan to spend $45m over 2017 on capital investment relating to fields in Vietnam ($15m) and Africa ($30m).

Oil production from Block16-1 TGT field averaged 10.8k bbls/day in H1, in line with 2016 expectations of 10k-11.5k.

The board have demonstrated a real commitment to shareholder returns, providing shareholders with total payments (share buybacks, capital returns and cash dividends) equivalent to 76p per share since 2013. This reflects the asset spread, in areas with attractive fiscal terms, SOCO operating cost per barrel averages approx. $10/ bbl.

Consensus profit estimates; Soco International
Year End Total Income (£m) PBT (£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Dec-16 154.5 -11.6 -5 5 3.2 156
Dec-17 218.1 16.6 6 6 26.0 3.8
Dec-18 268.2 34.1 11 10 14.2 6.4

Source: Bloomberg

The consensus forecasts envisage rapid EPS and dividend growth over FY17 and FY18. Reported results will be dependent on the prices realized for oil production (current prices of c$53/bbl are ahead of $40.89 H1 2016).

Company SOCO

Key Catalysts

SOCO is awaiting payment of $42.7m (10.5p ps) from Daquing Oilfield Ltd relating to the 2005 sale of its Mongolian assets, this receivable item has not yet been provisioned against, suggesting SOCO is confident of payment. We concur.

Blocks 125/126 offshore in the Phu Khanh Basin look strong prospects for further evaluation.

SOCO’s high cash balances are a key positive enabling both shareholder payments and oilfield investment.

Share Price 156p
Target Price 220p
52 Week Hi/Low 175p/116p
Shares O/S 331.9m
Market Capitalisation £517m
Avg. Daily Volume 184k
Dividend Yield 2.56%

Source: Bloomberg

Key Risks to Price Target

  1. Risk of non- payment of $42.7m receivable from Daquing Oilfield.
  2. Sensitive to movements in global oil prices, normal oilfield operating and exploration risks and reserve
  3. SOCO needs to acquire /develop oil producing assets to boost production

Wizz Air – UK250 – BUY

Wizz Air is a budget airline primarily to central and eastern Europe destinations. Wizz is headquartered in Hungary but listed in London and a constituent of the UK250. Wizz reported interim revenues of €921.5m to 30 September 2016 with underlying profit after tax of €231.6m. Wizz Air listed in London via an IPO in February 2015 at 1250p per share.

Wizz Air reported in December 2015 it had expanded capacity to 2.15m seats (+20.3%) with booked passengers of 1.877m (+23.3%) hence a load factor of 87.3%. Wizz won the 2016 Low Cost Airline of the Year award from the Centre of Aviation. The board is highly regarded and competently managed the post “Brexit” environment, Wizz redeployed capacity to non-UK routes and confirmed it still expected to meet €250m net profit for FY17.

Consensus profit estimates; Wizz Air Group
Year End Revenue (£m) Net Income (£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Mar-16 1,430 224.0 177 10.1 1798
Mar-17 1,580 252.3 196 9.2
Mar-18 1,820 260.5 204 8.8

Source: Bloomberg

The consensus forecasts envisage Wizz Air continuing EPS growth over FY17 and FY18. We note the low level of forward PE at 9.3x seems to underrate Wizz strong track record of EPS growth and likely continued revenue/ net profit improvement.

Company WIZZ Air

Key Catalysts

Wizz is working hard to arrest the recent drop in average customer revenue (€73.20 v €78.50 H1 2015). We expect a positive update at Q3 on 1st February 2017.

Recent capacity expansion (over 20 new Airbus A321neo’s will be added by 2018) should boost revenues over Fy17/FY18.

Recent network expansion, a four year concession between Budapest to Macedonia, Montenegro, Albania, Kosovo and Bosnia is helpful for new fleet deployment.

Share Price 1829p
Target Price 2250p
52 Week Hi/Low 1995p/1415p
Shares O/S 57.36m
Market Capitalisation £1.04bn
Avg. Daily Volume 0.14m
Dividend Yield 0%

Source: Bloomberg

Key Risks to Price Target

  1. Competitive conditions in EU budget airlines, possibly will intensify in 2017 as Ryanair moves to capture more market share in central EU
  2. €113m law suit from Carpatair, Wizz has not yet made a provision relating to this lawsuit/ potential liabilities for legal settlements
  3. Sensitive to movements in sterling/ Euro, oil prices, terrorist activity

Worldpay – UK100 – BUY

Worldpay provides IT payments functions at its client merchants connecting them to global payments networks (Visa, Mastercard, China Union Pay), whether the sales are in-store, online or on smartphone devices. In 2015 the Worldpay Group processed over 13bn transactions a growth rate of 14%. These are delivered by Global eCom and WorldpayUK.

Worldpay invested over £1bn over 2010-2015 creating a platform for processing multi-currency, cross border payments via a merchant network. The total transaction value in 11 key payment markets using these systems (75% of global transactions) worth £22trn in 2015 is estimated to grow to £27trn in 2019. Going forward IT capital spend should moderate.

Consensus profit estimates; Worldpay Group
Year End Total Income (£m) PBT (£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Dec-16 1,120 235.4 12 2 23.8 0.7 286
Dec-17 1,240 267.2 13 3 22.0 1.0
Dec-18 1,360 317.5 16 4 17.9 1.4

Source: Bloomberg

The consensus forecasts envisage EPS growth over FY16 to FY18 however the high forward PE suggests this growth is discounted. The UK fintech/ payments sector has underperformed global peers since the Brexit vote as growth forecasts have been trimmed. A September share placing by Ship Global 2 (300m at 282p) has reduced the Worldpay share overhang to just 10.7%.

Company Worldpay

Key Catalysts

The extensive Worldpay network covering 146 countries and 300 payment methods – there is a significant growth opportunity in China both in alternative payment and fraud management tools.

Worldpay USA is experiencing strong growth in its SME network (109k customers) a key EPS driver in FY17.

Ship Global 2 (10.7% shareholder) is through its 90 day lock-up (7th Dec 2016) hence is able to exit entirely. A quick disposal would remove the overhang and be positive.

Share Price 285p
Target Price 350p
52 Week Hi/Low 316p/256p
Shares O/S 2bn
Market Capitalisation £5.7bn
Avg. Daily Volume 6.3m
Dividend Yield 0.69%

Source: Bloomberg

Key Risks to Price Target

  1. Both Global eCom and Worldpay US might require further capital investment.
  2. Sensitive to moderating revenue growth expected at 9%-11% over the medium term.
  3. High overseas revenues hence a sterling rebound would hit Worldpay

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