A spotlight on three of the key companies we've met during the past quarter
John Royden, Head of Research
Michael Bray, Research Analyst
Maude Holloway, Trainee Research Analyst
We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.
52 week high-low £33.52 – £27.45
Net Yield 2.2%
Hist/Pros PER 15.8 – 30.2 E
Equity Market Cap £3,479m
Paul Williams, CEO and Damian Wisniewski, FD
Derwent is a specialist property regenerator and investor in London offices, with a particular focus on the West End and areas bordering the City of London. It is well known for its design-led philosophy and houses tenants from a broad range of business sectors. It’s investment portfolio currently totals c.5.7 million sq. ft. and is worth c.£5.4 billion.
Since the Brexit referendum in June 2016 London office property prices and rental growth have stagnated. This has led to sentiment turning against the sector and has caused Derwent’s share price to perform poorly.
Derwent however remain positive on the London office market. They say that since the referendum over three hundred thousand jobs have been created in the capital and that they have not had a single Brexit related tenancy change. Their vacancy rate has continued to fall, and is now just 1.6%, and demand for their pre-lets has been robust; Derwent’s Kings Cross Brunel building was 98% pre-let before its recent completion. They also say that an increasing amount of businesses are moving back into central London from the outskirts. Property related costs as a percentage of businesses’ overhead costs has reduced substantially over the past few decades and businesses are increasingly trying to attract and retain skilled workers who prefer a central London location. Diageo was given as such an example with its planned HQ move from Uxbridge to Soho.
Management feel that the slowdown in London office rental growth is out of kilter with the rest of Europe which has continued to grow strongly since the referendum, presenting an attractive investment opportunity. They do however concede that not much will change until a clear Brexit outcome is determined.
52 week high-low £49.77 – £32.74
Net Yield 6.4%
Hist/Pros PER 6.5 – 8.0
Equity Market Cap £71,372m
Metals & Mining
John Smelt, Head of IR
We met with Rio Tinto (Rio) following their half yearly results, which were financially strong, driven by the highest EBITDA margins in several years but suffered some operational disappointments.
Our main focus was the Mongolian copper mine Oyu Tolgoi (OT), a vast mine in the Gobi desert close to the Chinese border. It is being developed from an open cast to a block caving mine, which involves tunnelling beneath the ore body to form a cave and then letting the roof collapse. Recently Rio announced requirements for additional capital expenditure (CAPEX) of $1.6bn on top of an original $5.3bn, and a delay of at least a further two years. The issue at OT is that the rock is softer than expected and is likely to collapse too quickly on the horizontal shaft. Rio stressed there is no problem with the resource but that they do need the correct engineering solution.
The question of where this additional CAPEX will come from is not straightforward. OT is 66% owned by Canadian company Turquoise Hill (itself 51% owned by Rio). The remaining 34% is owned by the Mongolian Government who are eager to increase their share and prevent any further delays to receiving their dividend. John stated that it is up to Turquoise Hill to plan for how this money will be raised, which raises questions around how long the process will take to correct.
The agreement with the Mongolian government continues to be a source of debate but the complexity of the mining process is in Rio’s favour. Time will tell if Rio is able to pull this development off.
Royal Dutch Shell
52 week high-low £27.26 – £22.27
Net Yield 6.7%
Hist/Pros PER 11.2 – 11.5
Equity Market Cap £180,829m
Oil and Gas
Ben Van Beurden, CEO and Jessica Uhl, CFO
What colour do you associate with Shell? “Yellow” I hope is the answer. Well that’s what I would have said until this meeting and the colour that now springs to mind is closer to green than yellow.
On an annual basis, maintenance capex for Upstream (exploration and production of oil and gas) will be $11 billion from a total Upstream capex budget of $12 billion. So there is $1 billion of growth capex for Upstream.
Downstream’s maintenance capex (distribution) is $9 billion but they plan on spending an extra $6 billion on growth capex. Shell say the justification is a ROCE, or return on capital employed, of 12% as against the current ROCE of 10%. The uplift comes from efficiencies ranging from using AI, robots, autonomous subsea drilling units and digitalising the company. Ben also mentioned moving oil rig operators around to benchmark performance, as well as using forecourt sales data to enhance their retail offering to the 52 million customers registered on their loyalty scheme. That is what is driving Jessica’s guidance for $50 billion of annual pre-capex free-cash flow, rising up to $60 billion over the next year or so.
Ben also said that $2.5 billion of growth capex is going towards renewable energy investment as Shell tries to dilute rather than reduce its carbon production. Shell calls its renewables “Emerging Power Themes.” Shell is not on its own. Large European oil companies collectively plan to plough $130 billion into renewables between now and 2030. We may soon be asked to choose between oil companies that are trying to morph into a hydrocarbonfree world or those that are unapologetic and focussed on their business of drilling for oil.
BASF, Johnson Matthey, RioTinto, Victrex
Intercontinental Hotels Group, Young & Co's Brewery
Bank of America, Derwent London
Alpha Financial Markets, Halma
OIL AND GAS
Royal Dutch Shell
National Grid, Pennon Group, United Utilities Group