Business is booming.

Investors’ Chronicle: Future Group, Pennon, Greencore


BUY: Future Group (FUTR)

Increasing revenue has helped the magazine publisher benefit from economies of scale, writes Arthur Sants.

The benefit of Future’s specialist corner of the media market is that it focuses on people’s passions. Each magazine may not have a huge readership, but they have an enthusiastic following and relatively little competition, unlike the large traditional newspapers.

This upside is borne out by the strong audience growth figures. In the past year, the overall audience has grown 10 per cent to 394m, while online users are up 8 per cent to 282m. On a two-year basis, average organic revenue growth for the business was 15 per cent thanks to a 25 per cent growth in media revenues.

Media revenue includes digital advertising, which was up 21 per cent on average over the past two years. Improved data analytics has helped the company target readers more efficiently and improved the yield on advertising spend. With increased competition in ecommerce during the past year, demand for online advertising space should only continue rising.

The company benefits from economies of scale because adding users doesn’t require an equivalent increase in spending. This effect has improved the operating margin by four percentage points to 32 per cent.

Future expects this to drive further margin expansion across the business and now expects adjusted results for 2022 to be “materially above current expectations”. Peel Hunt has increased its adjusted earnings per share forecast for 2022 by 8 per cent to 142.7p.

At a forward price/earnings ratio of 21.4, Future looks affordable given its strong growth, widening margins and loyal readership.

HOLD: Pennon (PNN)

The water utility felt the heat from the staycation trend, with water and waste infrastructure in the south-west of England feeling the added use over the summer, writes Alex Hamer.

While visitors to south-west England clogged up narrow country lanes with their Range Rovers over the summer, water utility Pennon was also worried about blockages: the South West Water and Bristol Water owner said it had to “mitigate surges” in the network that came from “significant levels of tourism seen in 2021”, to avoid flooding and wastewater issues.

The company said it managed this successfully, with flooding incidents and sewer collapses down on last year. Less appetising for those living in (or just visiting) the south-west was the data on river health. Pennon said just a fifth of rivers and waterways in the region “meet good ecological standards”, although this is better than the English average of 16 per cent.

The company’s sales and industry metrics, such as the “outcome delivery initiative” (ODI), based on Ofwat targets, and shareholder returns as a percentage of regulated equity (RORE), showed improvement for the six months to 30 September, although the ODI was still knocked by pollution levels.

Non-household water revenue was up almost a quarter on last year to £93m as business demand increased, and new acquisition Bristol Water contributed revenue of £42m. This is the first full set of interim numbers without Viridor, which Pennon sold to private equity fund KKR last year for £4.2bn, £1.5bn of which was handed to shareholders as a special dividend.

Its post-tax profit — similar to Severn Trent and United Utilities — was much lower than the year before on the basis of a corporate tax treatment, although last year also had a helpful £1.7bn benefit from the Viridor sale.

Consensus estimates compiled by FactSet see full-year earnings per share up by a quarter compared with last year, to 53p, but not yet getting back to the 2020 financial year level of above 60p until 2025. Even with heavy debt, regulated income and essential services with steady dividends look like a solid bet right now, even if the Viridor-linked payout bonanza is over. However, short of any further one-off largesse, the implied yield does not justify a buy call.

SELL: Greencore (GNC)

Momentum grew in the second half with new contracts for the convenience food manufacturer, writes Christopher Akers.

Greencore returned to profit on the back of “food to go” growth and new business penetration. The Dublin-headquartered group, which sells to supermarkets and retailers, jumped back into the black as demand grew post-lockdowns, but labour challenges remain a concern.

Food to go revenue — from products such as sandwiches and salads — was up by 38 per cent in the fourth quarter to reach £842m for the year. New business delivered over a third of the quarter’s growth, and chief financial officer Emma Hynes said new business “was a bridge to building back these revenues” after demand suffered during lockdowns.

Meanwhile, a mixture of debt and equity actions helped shore up the balance sheet. A share placing at the tail-end of last year brought in net proceeds of £87m. Debt agreement updates included the refinancing of short-term debt, which lowers interest charges.

Labour issues have been acute for the food industry, and Greencore is no exception. The group utilised the government’s job retention scheme until July 2021. Hynes noted that retention was proving challenging at plants, but that progress is being made.

Analysts at house broker Shore Capital expect revenue for this fiscal year to exceed pre-pandemic levels. However, they also forecast negative free cash flow yield for the same period and that adjusted profit before tax will continue to lag fiscal year 2019 for the foreseeable future.

With revenue up, net debt down, and Hynes confirming the hope of returning cash to shareholders in some form in fiscal year 2022, Greencore is making positive noises. But, on current projections we are not yet ready for a recommendation upgrade.

Chris Dillow: Is the era of easy money over?

Very simple portfolios held up well during the slump in share prices caused by the pandemic. But how have they done since? The answer is: just fine.

Let’s consider the portfolio I proposed in early 2020 — one comprising 50 per cent in a fund that tracks MSCI’s world index, 20 per cent in gilts and 10 per cent each in UK cash, gold and US dollars. In the past 12 months, it has risen 11.7 per cent as big gains on equities have outweighed small losses on gilts and gold.

In fact, though, this isn’t terribly impressive. It is lower than the returns on dozens of funds in Trustnet’s database of mixed investment unit trusts — largely because many of these had bigger equity weightings.

What’s more impressive is the longer-term performance of this portfolio. In the past 10 years it would have more than doubled your money. Only 32 of the 203 funds in the mixed investment 40-85 per cent equity category have done better.

And these returns have come with relatively little risk. In monthly data, this portfolio has seen only one annual loss (before inflation) since 2009 — and that of only 0.7 per cent in the 12 months to March 2018. This is largely because gilts and equities have been negatively correlated for much of this time, but also because sterling has sometimes fallen when equities have fallen, giving us profits on US dollars and gold to offset equity losses.

This is all the more remarkable when you consider what this portfolio does not do. It doesn’t use any selling rule such as selling when prices are below their 10-month average or “sell in May” even though both would have improved returns. It doesn’t use any optimisation: the portfolio weights were chosen as no more than reasonable round numbers.

Despite renouncing almost all the conventional asset allocation tools, this portfolio has done well.

The precise numbers for my portfolio’s returns are based on rebalancing it every month to maintain those 50-20-10-10-10 weightings. For retail investors this is impractical. But this doesn’t much matter. Less regular rebalancing would result in similar performance — and sometimes better when markets are momentum-driven. And there’s nothing special anyway about these weights. Similar ones would also have done well.

The fact is that rough diversification does well. The precise numbers on particular portfolios are merely illustrations of this important general fact.

Sadly, however, just because simple diversification has worked in the past does not mean it will continue to work.

The past three decades have been very kind to asset managers. Not only have we had long bull markets in global equities and bonds, but we’ve also had low short-term correlations between the two. Any fool could deliver decent risk-adjusted returns in these conditions.

But this might change, and not just because the bull markets in equities and bonds might be over.

When UK and US interest rates rise we could see equities and gilts sell off together — and gold as well, because it is sensitive to changes in bond yields.

There’s another danger. The tendency for sterling to fall when stock markets do badly might not continue. If we see a deflation in US equity valuations we could also see the dollar fall as well, as part of a decline in demand for US assets generally. In such an event, sterling-based investors would see losses not just on global equities but also on dollars and perhaps gold, too.

It’s quite simple to protect ourselves from these risks: we can hold more cash and fewer US equities.

But that’s not the point. The point is that it has for decades been child’s play to run a balanced portfolio. But it might not remain so — in which case fund managers will finally have to earn their money.

Chris Dillow is an economics commentator for Investors’ Chronicle

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