It has definitely been an interesting week. China aside, there is comforting macro data. There has been a wave of generally very good corporate results. The market reacted tepidly with the companies that reported very good quarterly results and negatively with all the others. We believe this is a stereotypical response to a number of factors that are perceived as indicators of the end of the stock market cycle and represents an opportunity to stretch on undervalued themes during a summer pullback. This is on the basis that we see a very long cycle that will continue even after the demand associated with the end of lock down wears off, driven by an inevitable infrastructure new deal. Debt? As long as interest is sustainable and political support remains, it is not a problem.
We thought this week to offer you just a few words about the companies that have reported and that we have in our portfolio to give a concrete idea of where we are in terms of results, perceptions and above all, valuations.
Glaxo. Upward earnings revision of 10%. The stock trades at 12.5x 2022 earnings and pays a dividend of over 5%. It will spin off its consumer division in a few months. It is one of the top stocks in the NEF SDG fund, in the trendSDG Pandemics and Epidemics (2.4%). The stock was virtually unchanged on the week.
Orange. Results are in line with signs of accelerating growth in almost all markets apart from Spain where they devalue some intangible assets due to a market that will still remain under pressure for 12/18 months. This is due and an accounting act, with no impact on cash. Stock confirms substantial shareholder remuneration and early results from content initiatives. It is one of the top stocks in the NEF SDG fund, in the trendSDG 5G (2.7%). It is also featured in the 5G Niche of the Pharus Asian Niches fund (1.1%).
Stock is down -1% on the week.
Panasonic. Strong positive surprise with results beating net income estimates by 30%. The company very cautiously waits for the next quarter before raising targets for this year. If Panasonic’s battery division for electric cars were worth the operating profit multiples of the Chinese CATL, this division alone would be worth almost three times what Panasonic is worth today. It should be noted that the operating profit Panasonic makes on the battery division is only 20% of the group’s operating profit. The company has exposure to several areas with potentially big future growth: air conditioning, automation, 5G, ADAS, aircraft entertainment systems, IOT. The stock is worth 10x earnings, 4.5x EBITDA, 1.5x tangible equity and is debt-free. It is one of the top stocks in the NEF SDG fund, in the trendSDG Electric Mobility (2.7%). It is one of the top stocks in the Pharus EMN fund, in the Lithium Cells Niche (9.4%).
Panasonic leaves 4% on the ground in the week.
Hitachi. Better results on sales and in line with earnings. Good guidance. The company is now 40% software and services related to digitization. Lumada, the core part of this business, grew 38% over Q1 2020 and the company expects to end the year with more than 40% growth. Hitachi trades at 8x EV/EBIT and 10.5 P/E. Present in the NEF SDG fund, in the trendSDG Infrastructure for Work (1.1%).
Lost over 4% on the week.
BT.Grows in all divisions except global, definitely not central to its strategy and still recoverable. Leaves guidance unchanged. Worth 4.7x EBITDA and 9x earnings. Altice’s patron Patrick Drahi, who invests his own money and understands the industry, recently bought about 12% of the company above these prices. Present in the NEF SDG fund, in the trendSDG 5G (1.7%). It is also present in the 5G Niche of the Pharus Asian Niches fund (1.2%).
BT loses 6% in the week.
RCS – IlSole24Ore. Both report very strong data. Advanced digitalization, reduced costs, stabilization of circulation, recovery of advertising and recognition by the social operator of revenues related to the use of their content. For RCS, the options of selling the Spanish business and monetizing the Giro d’Italia are on the table. A merger between the two companies cannot be ruled out. The companies are on a trajectory that should lead them to trade below 3x the EV/EBITDA next year. RCS is present in the NEF SDG fund, in the trendSDG Transparent Information (0.8%). Both are featured in the Internet Victims Niche of the Pharus Asian Niches fund (0.9% and 1.6%, respectively).
Both, unchanged on the week.
Bangkok Bank. Moving to Thailand, Bangkok Bank, the largest and one of the most solid banking institutions in the country, reports reassuring figures given the country’s economic environment is still tied to Covid. Non-performing loans are lower than expected with 190% coverage. Cost-income ratio is under 50. Stock is at 0.4x tangible equity although it has a sustainable ROTE well above 10%. Thailand at its current pace of vaccinations should fully reopen in October. Featured in the NEF SDG fund, in the trendSDG The Good Bank (0.25%).
The stock is down 2% on the week.
Bank Danamon. Indonesia reported quarterly Bank Danamon, a banking institution controlled by MUFJ, Japan’s top banking group. Thanks to MUFJ’s entry, loans are up and the cost of credit continues to fall (3.9%) and interest margins rise. Non-performing loans stand at 3% and are hedged at 177%. Profit is up 18%, year over year. CAR (capital adequacy ratio) is 26.5%, higher than BCA the largest and most solid Indonesian bank which trades at 3.7x tangible equity, 23x earnings, 1% dividend and cost of credit at 1.5% (so hardly compressible). Bank Danamon trades at 0.5x tangible equity and 8x earnings in this difficult year. Present in the NEF SDG fund, in the trendSDG The Good Bank (0.3%).
The company lost 4% on the week.
Telefonica Deutschland. Revises estimates upward and hints at growth after a long period of decline. The company is worth 4.4x EV/EBITDA, dividend at 8%. Featured in NEF SDG fund, in trendSDG 5G (0.25%).
Lost 7% on the week.
Sumitomo Mitsui. Nice results from one of Japan’s largest banks. The company reports a normalized ROE of 7.8% despite being worth 0.45x tangible equity. Loan to deposit is at 55%. Low cost of credit. Solid capital. Dividend close to 6%. Featured in the NEF SDG fund, in the trendSDG The Good Bank (0.4%).
Stock down 1% on the week.
Sanofi. Results are 10% above consensus. This raises guidance and gives a positive pipeline update. The company is worth 12x 2022 earnings and pays a stable 4% dividend.
The company lost 2% on the week. It is present in the NEF SDG fund, in the trendSDG Pandemics and Epidemics (1.1%).
Nokia. Surprising results from Nokia which reports a significant increase in margins, an increase that is largely maintainable throughout the year. The company may not seem too optically valued at 8x EBITDA with 17x earnings this year. However, if you dig in and if we exclude the division that handles patents, Nokia has a 5% operating margin, which is ridiculous for a technology company that is a leader in many segments essential to the much-discussed digitization. A further increase in margins is likely. Expectations on 5G remain tepid in terms of investment and we believe there is ample room for surprises. Huawei’s exit allows for the return of healthy competitiveness. Finally, one last consideration that may seem out of context, but we make it anyway: a 1.5% change in Apple, a company that sells mostly luxury phones, is equivalent to the loss or gain of market cap greater than the capitalization of all of Nokia, one of the 4 entities that invent, build and maintain the world’s phone hardware and software infrastructure. Makes you wonder… Present in the NEF SDG fund, in the 5G trendSDG (2%). Also featured in the 5G Niche of the Pharus Asian Niches fund (2.2%).
The stock ahead of a 30% margin revision for the year rises 4% on the week.
Takaoka Toko. The company reports very good numbers for the week and excellent guidance. Takaoka Toko is a company that manufactures and maintains electrical equipment. It is 30% owned by Tepco, Japan’s largest electric utility, which is also its largest customer and provides some visibility to revenues. The company also manufactures and maintains fast chargers for EVs and is the market leader in Japan with 30% market share. Takaoka Toko trades at 10x this year’s earnings and about 0.5x tangible equity. It capitalizes about 200 mln USD on the stock exchange and has about 100 mln usd in net cash. It pays about a 4% dividend yield. It is present in the Orphan Companies Niche of the Pharus Asian Niches fund (0.4%).
Down 2% on the week.
Carrefour. Nice results that finally show its first market, France, recovering strongly. More than 1 bln free cash flow in 2021 with stock buyback of 200 mln euros and dividend yield close to 4%. We have been waiting for these signals for over 5 years… The stock trades at 10x earnings and 4.5 EV/EBITDA. Present in the NEF SDG fund, in the trendSDG Responsible Livestock (2%).
The stock is down 3% on the week.
Credit Suisse. Credit Suisse’s results were anything but bad considering the scandals that have plagued them. The company was not able to benefit from the investment banking bonanza in the quarter, but managed, like UBS, to keep its wealth management franchise, its jewel, intact, particularly in Asia and the US, and was able to fully absorb the CHF 5 billion loss related to Archegos. In addition, the company raised its CET1 to 13.7% and its CET1 leverage ratio to 4.1%, thereby drastically lowering its risk profile. Today Credit Suisse manages fee generating assets and total AUM respectively is almost 950 bln CHF and 1.8 trn USD (UBS 1.4 trn and 2.7 trn) and is worth, normalizing the results for the new management, just over 6x earnings (UBS 9x) and 0.55x tangible equity (UBS 1.1x). Present in the NEF SDG fund, the trendSDG The Good Bank (1.6%) and the Internet Victims Niche of the Pharus Asian Niches fund (1.2%).
The company lost 4% on the week.
BNP. Very good results, 26% above consensus, largely stemming from credit quality. All divisions of its diversified business model performed well. CET1 at 12.9%, above expectations. Trades at 0.6x tangible equity for a ROTE of 9%. Dividend yield at 8% and on the rise. Present in the NEF SDG fund, in the trendSDG La Buona Banca (1.2%) and in the Internet Victims Niche of the Pharus Asian Niches fund (0.5%).
On such good results, the stock only managed to rise 2%.
Engie. The company reported good results with EBITDA of 3% above consensus and raised its guidance for the year. Despite dividend and strong investments the economic debt to EBITDA fell. The company trades at 6x EV/EBITDA and 11x earnings this year, with a 6% dividend. Present in the NEF SDG fund, in the trendSDG Renewable Energy (1.7%).
Engie is down 5% on the week.
Natwest. Very good results. Boring and predictable business focused on mortgages and corporate clients. Low cost of risk and costs under control. Story of return of capital to majority shareholder, UK Treasury. CET1 above 18%. Ability to distribute over £8bln, or 1/3 of capitalization by end of 2023 through dividends and buy backs, starting as early as this semester. So, there is value and good technical support for the stock. Present in the NEF SDG fund, in the trendSDG The Good Bank (0.3%).
The stock is up 2% on the week despite the surprise related to the distribution.
Mizuho Financial Group. Japan’s third largest bank also reports nice data, above analysts’ expectations, but cautiously confirms guidance for the year. Low cost of credit and continued decline in personnel costs. Also continues the gradual descent of the huge proprietary equity portfolio, which has halved since 2015 but is still over 1/3 of the company’s capitalization, an element that annoyingly ties the performance of Japanese banks to their benchmark stock market. The company trades at a P/E of 7.6x for this year and 0.45x tangible equity. Featured in the NEF SDG fund, in the trendSDG The Good Bank (0.3%).
The stock lost 4% on the week.
Central Glass. A small Japanese conglomerate that produces electrolytes for lithium batteries participated by Silchester. The stock reports better-than-expected data, up 87% from the same period last year. The company trades just above 10x earnings and at 0.55x tangible equity. The dividend is stable due to the fact that the company has no debt and corresponds to 3.5%. Present in the Pharus EMN fund, in the Electrolytes Niche (1.1%).
The stock lost 1% during the week.
Renault. Operating income triple the forecast with no cash absorption as anticipated by analysts. The company has also given operating margin guidance for the year in line with this glorious first half. Meanwhile, investee Nissan reports well and promises a significant recovery from depressed current levels. Valuing the Nissan stake at market, the company is worth less than 1x operating income and FCF 2022 and 2x 2021. Present in the NEF SDG fund, in the trendSDG Electric Mobility (0.4%). It is the first stock in the Pharus EMN fund, in the Niche Satellite Areas (3%).
The stock after these results gained only 0.3% on the week.
Pfizer. Excellent results from Pfizer, which benefits from Covid vaccines and exceeds analyst consensus by more than 10%. The company is worth 10x earnings with Covid vaccine and 13.5x without. We think it is very likely that a booster will be needed in September or later. If not, we believe the market will still be able to rejoice, although Pfizer will have a more limited and pipeline-dependent upside in that case. 13.5x earnings however would not be an excessive multiple for a company with such a large pipeline. Pfizer pays about a 4% dividend. It is in the NEF SDG fund, in the trendSDG Pandemics and Epidemics (0.7%).
It is up 2% on the week.
Barclays. Excellent data from Barclays that surprises both in terms of profit (+50% vs consensus on lower cost of risk but not only), capital (15.1 CET1), and distribution (£500 mln buy back). The company trades at 0.6x tangible equity vs sustainable ROTE above 9%. Present in the NEF SDG fund, in the trendSDG The Good Bank (0.7%).
The stock is up 4% on the week.
Unicredit. Results +40% above consensus, again with clear improvement on cost of risk, but also on net interest income and fees. Capital is very strong at 15.9% CET1. The company trades at 0.4x tangible equity with ROTE of 4.5%. The opportunity to grow profitability is the Unicredit story and the fastest way is to use the large excess capital to buy the good part of MPS cheaply. While also playing the savior. It pays a 4% dividend. Featured in the NEF SDG fund, in the trendSDG La Buona Banca (0.7%).
Up 5% on the week.
Telecom Italia. Excluding a costly fine that weighed on cash, the company reported slightly better results. After years of wild competition, we believe the market is getting lost inside false fears. Drahi’s Iliad will not start another battle on fixed line. After buying back his company’s minorities at a 60% premium he will run the company to generate cash. Even if it wanted to, the regulator would not allow a reseller to weaken the incumbent that has to invest in networks. Excluding the other businesses, the Italian company is worth almost nothing in the market. Leverage is potentially exceptional and downside limited. Present in the NEF SDG fund, in the trendSDG 5G (1%). It is also present in the Pharus Asian Niche 5G fund (0.4%).
Stock unchanged on the week.
Shinhan Financial Group. Korea’s second largest banking group. Results are 16% above consensus. Cost to income ratio surprises on the positive side reaching 42%. Impaired loans cost only 19bps. The company trades at 0.5x tangible equity despite having a sustainable ROE of 9% and being the strongest bank in Korea (CET1 > 16%). The P/E is below 5X and the dividend above is rising and close to 6%. Featured in the NEF SDG fund, in the trendSDG The Good Bank (0.25%).
The stock is up 2% on the week.
BCP. Good pre-settlement results but provisions related to litigation in Poland is very heavy. A very profitable and well-managed Portuguese bank with a Polish subsidiary that, like other Polish banks, has to set aside a lot of money every quarter for the settlement linked to the long-running affair of mortgages in Swiss francs, greedily subscribed by Polish retailers and then judged void when the Swiss franc started to rise furiously. The settlement was expected in April and has been postponed to the autumn and should resolve the problem and allow the gradual rerating of a bank that trades at 0.3x tangible equity despite having a potential 2-year ROTE of 10%. Featured in the NEF SDG fund, in the trendSDG The Good Bank (0.7%).
The stock is down 3% on the week.
Orange Belgium. EBITDA growth of 6% for Orange Belgium which continues to grow on fixed, gnawing market share from Telenet. The stock pulled back after the end of the minority buyout offer at €22 by Orange, which now has almost 80%. We believe that a much juicier offer may come next year and meanwhile we enjoy a dividend close to 4%. After giving it on offer, on the pullback to 19 euros we bought it back for the NEF SDG fund, trendSDG 5G (0.4%).
The company is up 1% on the week.
Enel Chile. Enel Chile reports the only disappointing results of the week among the stocks we hold in our portfolio. An adverse cyclical hydrological situation led to little hydropower production (the company has 77% renewables base capacity), capacity that was supplemented with purchases on the open spot market affected by high commodity prices. All this, combined with a number of other exceptional elements, led to a poor quarter for Enel Chile. The company trades at 6x earnings, 1.1 tangible equity and has a 7% dividend yield. Present in the NEF SDG fund, in the trendSDG Renewable Energy (1.4%).
The stock is down 3% on the week.Back