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Investors’ Chronicle: Porvair, NWF, Shell

BUY: Porvair (PRV)

Aerospace opportunities are expected to grow through 2022 as air travel picks up, writes Madeleine Taylor.

Shares in Porvair reversed their downward trajectory as the filtration and environmental technology specialist announced a return to pre-pandemic profitability in its full-year results, while growth in the laboratory segment, which makes equipment for Covid-19 PCR testing, helped push Porvair’s overall revenues up by 8 per cent.

Laboratory now accounts for more than a third of Porvair’s overall revenues, having grown 24 per cent on a constant currency basis over the past year.

Statutory profits were also heading in the right direction, despite the ongoing slump in Porvair’s aerospace and industrial business.

Sales of coolant and fuel filters for commercial aircraft fell by 10 per cent in the full year, as international travel continued to be hindered by the pandemic. Porvair’s management expects aerospace to recover in 2022 as air travel picks up. However, there are likely to be lower laboratory sales, as pandemic-related demand drops.

Meanwhile, appetite for molten metal filters continues to grow steadily, with sales up 14 per cent thanks to rising demand for aluminium in both green transportation and recyclable packaging. This should allow the company to continue its run of growth over the next year.

In addition, Porvair improved its financial position, ending the year with £10.2mn net cash, excluding lease liabilities, which should help it weather ongoing supply chain dislocation and inflation concerns.

House broker Peel Hunt reiterated its “buy” view with a target price of 750p, reflecting the “excellent record of growth the management has built up over many years”. Another broker, Shore Capital, noted the company’s tendency to give conservative financial guidance, as the firm has seen 29 forecast upgrades over the past 11 years, against only two downgrades.


The agricultural feeds company fell to a statutory loss after an impairment review lowered the value of assets in its feeds division, writes Christopher Akers.

NWF was undone by its feeds division in its half-year results. The fuel, food, and feed distributor tumbled into loss, driven by £8mn of goodwill and fixed asset impairment against feeds’ assets, despite total revenue rising by almost a third.

The business was pushed to perform an impairment review of feeds, after the division posted an operating loss of £400,000 for the period. Volumes were down 8 per cent to 242,000 tonnes, as retail business struggled and a client was lost to an acquisition. This, combined with “time lags in realising price increases to cover commodity and other inflationary cost increases”, made it a challenging period for the segment. Feeds revenue was, despite this, still up by 11 per cent to £85mn as it enjoyed the benefits of increased commodity and market prices.

This top-line performance was part of an impressive wider revenue growth picture for the half. The fuels division, which dominates NWF’s revenue, was up 39 per cent to £287mn on the back of higher oil prices and better volumes. The group’s smallest segment, food, chalked up growth of 14 per cent to hit £31mn in sales as efficiencies and higher costs were well managed.

Progress was also made in improving the company’s debt position. Net debt (excluding lease liabilities) fell by over half to £7mn, as borrowings — “floating rate invoice discounting advances” — were reduced by £5mn against the comparative.

Peel Hunt analysts forecast that NWF will have to wait until financial year 2024 to surpass last year’s adjusted pre-tax profit of £11.9mn. The house broker also expects a fall in earnings per share between financial year 2022 and 2024, from 18.5p to 18.1p. While revenue growth this half was impressive, and the picture will look cheerier if problems in the feeds division can be overcome, we downgrade our view on the current evidence.

SELL: Shell (SHEL)

The energy group enters 2022 with strong cash flow and planned uptick in investor payouts, as conditions deliver an easy start to revamped investment plans, writes Alex Hamer.

Shell has roared back to strong profitability in 2021, with the December quarter’s adjusted earnings eclipsing the whole of 2020.

After a year of major changes, including a new unified share structure and the $9.5bn (£7bn) sale of its Permian assets, the company has delivered a major profit increase in the fourth quarter and will now ramp up the buyback programme, while raising the pay rate for the first quarter of 2022 by 4 per cent to 25 cents a share. The $8.5bn buyback goal for the six months to June 30 means the quarterly spend will be $1.5bn outside of the remaining $5.5bn to be handed back from the Permian sale.

Shell joins US giants ExxonMobil and Chevron in increasing investor payouts amid the oil and gas resurgence from this year.

Shell boss Ben van Beurden said the company was still focused on cutting its emissions despite the resurgence of oil and gas prices. “We delivered very strong financial performance in 2021, and our financial strength and discipline underpin the transformation of our company,” he said.

Adjusted earnings for 2021 were $19.3bn, compared with $4.8bn in 2020, while in the December quarter the company hit adjusted earnings of $6.4bn, a 55 per cent increase on the previous quarter. Shell also announced a much-reduced debt pile compared to a year ago, with net debt down almost a third to $52.6bn.

Integrated gas earnings were, unsurprisingly, the largest contributor, given the rise in realised gas prices to $9.80 per thousand cubic feet (mscf) from $4.33/mscf a year ago. The division reported $4bn in adjusted earnings, compared to $1.1bn a year ago.

Shell’s cash flow from operations before working capital adjustments beat analyst expectations by 5 per cent despite a $2.7bn hit from derivatives contracts. Jefferies analyst Giacomo Romeo called the December quarter numbers a “strong delivery on all fronts”. 

Spending was at the low end of expectations in 2021, at $20bn, while the company said it would aim to do the same this year, within the range of $23bn-$27bn. 

For investors, the green energy space has come off the boil in recent months but for Shell and its energy cohort projects remain expensive: last month’s winning bid for 5 gigawatts of offshore wind development rights were estimated in the hundreds of millions of pounds, even before the billions of pounds needed to build new floating wind farms.

But it is gas that remains a focus, both for consumers and producers. Prices remain high, despite warmer weather in Europe, partly due to geopolitical tensions around Russia, although supply has improved since the dark days of late last year.

Rystad Energy analyst Kaushal Ramesh said that given almost half of the continent’s recent LNG imports had come from the US, which is now experiencing a cold snap, supply remained a question even as an “overdue bearish” sentiment had arrived.

Looking to the rest of 2022, RBC Capital Markets analyst Biraj Borkhataria said the $8.5bn buyback announcement made his $11.5bn full-year forecast look “conservative”, given the high cash flow and continuing divestment programme.

Shell is certainly appealing on a shareholder returns front: the question is where it is going after this current sugar rush.

Chris Dillow: What bond threat to Nasdaq?

With the Fed expected to raise its funds rate in March, the big question is: what would rising interest rates and bond yields (assuming we get them) mean for the growth stocks that have done so well in recent years? The answer is: perhaps not much, because there are bigger dangers to them.

Theory is ambiguous here. On the one hand, rising bond yields are bad for growth stocks. They increase the discount rate applied to future cash flows, thus reducing the present value of those cash flows. And because growth stocks by definition offer more future cash flows than other stocks, it follows that they should underperform when yields rise.

On the other hand, though, bond yields are a measure of appetite for risk; an increase in them is a sign that investors are dumping safer assets in favour of riskier ones. Traditionally, when this happens many growth stocks do well because they are risky assets.

All this suggests that, for investment purposes, we cannot rely upon there being any link between bond yields and the Nasdaq. Both theory and evidence suggest the connection varies too much.

That said, there are reasons to suspect that, right now, rising bond yields would be bad for growth stocks, because these are not what they used to be.

Traditionally, growth stocks have been small and unfamiliar and so perceived as risky. This meant that their prices sometimes rose when bond yields rose because the appetite for risk mechanism outweighed the discount rate mechanism. Today, however, many growth stocks — and especially those that have a big weight in indices and funds — are household names such as Amazon, Tesla and Netflix. Such familiarity makes them seem less risky. So if bond yields rise they will benefit less from increased appetite for risk, but suffer from a greater discounting of future cash flows.

What’s more, bigger growth stocks have benefited more than other stocks from low and falling bond yields, because they gain from a falling cost of low-risk capital and can expand faster than other companies. This poses the danger that as bond yields rise these superstar companies will suffer more than others.

It’s plausible, therefore, that rising bond yields would be bad for growth stocks this year even if they’ve not always been so in the past.

But not very bad. In the past the sensitivity of the Nasdaq to changes in yields has been small. Last year, for example, five-year yields rose by 0.9 percentage points, but the Nasdaq underperformed the S&P by only three percentage points. By contrast, during the tech crash from February 2000 to August 2002 it underperformed by an annualised 28.5 percentage points.

This tells us that the main dangers to growth stocks come from elsewhere. In the past few days we’ve seen big falls in Netflix and Peloton’s share prices not because of rising bond yields, but because demand has fallen short of expectations. Earnings disappointments and high valuations are a nasty combination.

And herein lies the biggest danger to growth stocks. The truth is that long-term earnings growth is largely unpredictable.

Worrying about bond yields is therefore a distraction from a much bigger problem for highly valued stocks — the fact that the basis for those valuations is uncertain simply because we are inherently ignorant of the future. Investors don’t like it, but they must face up to William Goldman’s famous saying: “Nobody knows anything.”

Chris Dillow is an economics commentator for Investors’ Chronicle

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