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Investors’ Chronicle: Chesnara, Dalata, Braemar Shipping

BUY: Chesnara (CSN)

An extraordinarily resilient income share offers investors a respite from market turmoil, writes Julian Hofmann.

The market and economic turmoil that has affected so many different sectors during the first half left its mark on specialist life insurer Chesnara. The vagaries of solvency accounting mean that revaluations of assets related to economic factors will either deliver large paper profits or conversely steep losses.

On this occasion, Chesnara had to book losses on its assets as market conditions affected valuations across all its business lines. However, it did not really affect the operational performance, or its solvency, which Chesnara has secured by issuing £200mn of subordinated debt. Basically, it has the cash to meet both its long-term obligations and to keep paying a rising dividend, with shareholders again seeing the benefit in these results.

Chesnara’s management clearly sees no need to change the strategy. The company completed several acquisitions in its Dutch business in April, adding Sanlam Life & Pensions and Robein Leven to its portfolio, which are projected to add about £6mn of steady cash generation to the overall group annually. In addition, the acquisition of the insurance assets belonging to Conservatrix will add £8mn of stable cash generation. Overall, Chesnara saw a threefold increase in available cash balances during the half to £155mn. This underpinned the company’s confidence over maintaining the long-term rise in the dividend, as well continuing its acquisition of mature insurance books that are running off cash.

Chesnara is not a flashy or high-profile business, but its income record — 17 years of continuous dividend rises and counting, is almost unique. An ideal income share at a reasonable forward price/earnings valuation of 12, combined with a chunky dividend yield.

HOLD: Dalata Hotel Group (DAL)

Things are looking up for the company as trading surged ahead of pre-Covid levels, but risks remain, writes Christopher Akers.

Dalata Hotel Group stormed back into the black in its first half and on several key metrics is now outperforming pre-pandemic. The Irish hotel operator has expanded its portfolio further, including into continental Europe for the first time, and occupancy rates are on the up — at least for the moment, as consumer spending headwinds start to bite, though management “have not seen any impact on demand” yet.

The situation improved for both revenue per available room (revpar) and occupancy rates as the year went on and we moved further away from pandemic restrictions. Dalata’s post-period trading was encouraging, with like-for-like revpar for July and August around a fifth higher in Dublin, 36 per cent higher in regional Ireland, and 15 per cent higher in the UK, against 2019 levels. Occupancy, meanwhile, hit 89 per cent over the summer.

This compares with revpar of €88.6 for the half, which was only slightly ahead of the 2019 comparative. Reported occupancy was 70 per cent, down from the 80 per cent posted pre-pandemic. But the upwards trend is clear.

Future growth will be helped by a robust rooms pipeline, with the group committing to 1,100 new rooms between 2023 and 2025. Dalata opened six new hotels this year, including entering a lease for a hotel in Düsseldorf.

The outlook for travel and hotel visits is uncertain. The sector could suffer as belts are tightened. And the energy situation is painful — despite the group now hedging its energy costs, it still expects gas and electricity bills to shoot up by €8mn in the second half to €21mn. That’s a big chunk of profit lost. The shares trade on a consensus 17 times forward earnings per FactSet, which looks undemanding against its five-year average of 27 times.

HOLD: Braemar Shipping (BMS)

Transactions are on the rise as Covid-19 effects are generally dissipating, writes Mark Robinson.

Braemar Shipping’s full-year results have been a long time in the making. Delays to the publication schedule, together with a number of restatements, came about due to analysis of the historical accounting linked to the acquisition of Germany ship finance firm Naves in 2017. The review also extended to the classification of certain reserves on Braemar’s balance sheet.

Management and the shipping broker’s auditors are confident that the review is up to muster, but it’s also clear that shareholders are satisfied with the full-year 2022 numbers judging by the rise in the share price on results day. The positive reaction was doubtless triggered by comments from group chair, Nigel Payne, who said that results for the year to February 28 2023 are now anticipated to be “well ahead of the board’s previous expectations”.

The chair believes that conditions in the global shipbroking industry are generally favourable, even taking account of exchange rate volatility, trade sanctions, inflationary effects, and an unstable geopolitical backdrop. On that last point, the conflict in Ukraine is not expected to have “any material effect on trading or cash flows” in full-year 2023.

Financial performance benefited from the increased scale of the shipbroking business, along with strengthening container market volumes, while the group’s physical and securities desks drove revenues on the back of a volatile dry cargo market. Tanker market rates were constricted due to relatively weak oil demand in the year to February, yet the number of transactions performed increased by a fifth, a positive sign given that Covid-19 effects are generally dissipating.

The group revealed a 31 per cent increase in underlying operating profit to £10.1mn, along with an even steeper rise in related cash flows. The order book increased by 15 per cent to $50mn (£43mn), while net debt has been pared back significantly courtesy of the disposal of Cory Brothers, the company’s logistics business.

A flurry of new-build orders, mainly linked to containers and gas transporters, means that capacity at many shipyards is now “unavailable well into 2025”. Therefore, shipowners are increasingly turning to the second-hand market, thereby increasing traffic for Braemar’s sale and purchase desk. Trading volumes continue to build, hence the improvement in current year expectations, helped along by US dollar strength. Management is guiding towards underlying profits of not less than £20mn. With favourable charter rates, Braemar’s forward rating of just seven times Edison’s earnings per share forecast is undemanding, but the potential impact of the global slowdown on shipping volumes is difficult to gauge, keeping us on the sidelines.

Hermione Taylor: Is the Bank of England fit for purpose?

The Bank of England is in hot water: at 10.1 per cent, inflation is way past its 2 per cent target. Business and energy secretary Kwasi Kwarteng was far from alone in concluding this month that “something has clearly gone wrong”.

The BoE has been no stranger to criticism over the past 12 months. But now one of its most vocal critics might soon be prime minister. Liz Truss told an event in Cardiff that she wants “to change the Bank of England’s mandate to make sure in future it matches some of the most effective central banks in the world at controlling inflation”.

By any measure, the Bank’s performance looks disappointing. Its own forecasts project that inflation will remain above 9.5 per cent for the next 12 months. It also expects an accompanying five-quarter recession, and unemployment of up to 6.25 per cent, in the absence of any fiscal policy changes.

A key criticism is that it was too slow to act against the threat of rising inflation.

Economists at Berenberg argue that “had the BoE started to tighten even six months earlier, inflation expectations would have remained better anchored and policymakers would now be much less worried about the second-round inflation effects emanating from the Russian war and renewed Chinese lockdowns”.

The BoE faces more condemnation for failing to roll back quantitative easing after financial conditions eased. Panmure Gordon economists agree there is “some merit to this criticism”, but find that it may have made surprisingly little difference in practice.

Central bank messaging has also faced censure. Governor Andrew Bailey has come under fire for badly-received comments about the need for a “painful” moderation of wage rises and for using of the term “apocalyptic” to describe his take on food prices.

A likely move is to give Parliament increased oversight over the Bank. The BoE has independence in terms of how it carries out its responsibilities, yet interacts frequently with the government. Increasing the influence of the Treasury Committee is a possible route.

We may even find that the inflation target is replaced with an alternative metric – money supply and nominal GDP have both been mooted. But the case isn’t overwhelmingly convincing: Capital Economics’ senior UK economist, Ruth Gregory argues there isn’t any reason to think the BoE would be any more successful in hitting a nominal GDP target than matching the inflation target.

But enthusiasm for central bank reform may yet peter out. Any significant changes would likely begin with a lengthy review The ECB’s recent 18-month long strategy review is an example of how long this process can take.

And 18 months is a very long time in politics. Will the government lose interest? Economists at Panmure Gordon say some of the BoE’s strongest detractors are “the political critics who are largely looking to redistribute some of the ire from voters that they will inevitably face”.

Forecasts also imply that inflation is expected to return to target in two years. So by the time any review concludes, eye-watering price rises may be a thing of the past.

This doesn’t mean the BoE should escape scrutiny. The UK economy has shouldered the impacts of Brexit, the pandemic and soaring energy prices. At the very least, firms and households need reassurance that the central bank fully understands today’s inflationary landscape and is well prepared for the UK’s next economic shock.

Hermione Taylor is an economics writer for Investors’ Chronicle

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