Positive news from two wells underpins the estimated valuation of Arrow Exploration Corp (LON: AXL) and makes the shares of the oil and gas producer look attractive. There is money in the bank and next year significant cash will be generated from operations.
Arrow Exploration is traded on the TSX Venture Exchange as well as AIM, which it joined in November 2021 when it raised £8.8m at 6.25p/share. At that time, production was modest, but it has been building up since then and oil prices area also higher, although lower than in 2022. Gas prices are similar to those in 2021.
The main production ...
The M&G Global Emerging Markets Fund should be explored by investors ready to move back into Emerging Markets and lean towards Chinese equities.
Managers of the fund have made material changes to the portfolio’s composition this year and are preparing for the next chapter in the Emerging Markets story.
The M&G Global Emerging Markets Fund has consistently outperformed the benchmark, avoiding the drawdown in 2022 and producing an 8.3% return this year to the most recent quarter – a period in which the benchmark is almost flat.
There is an overarching case for Emerging Markets from a performance perspective relative to US equities.
The outperformance of Emerging Markets versus US equities enjoyed in the noughties has completely unravelled since 2010, and Emerging Markets are now at the lowest level compared to the S&P 500 since 2000 after the US and other developed market equities sucked flows away from Emerging Markets.
Emerging Markets have consistent cycles relative to US stocks, lasting 5 – 10 years. Although past performance is not a guide to future performance, should this cycle repeat itself, Emerging Markets could be in for a period of relative outperformance against US equities.
However, relative performance in itself is not enough to drive equity returns.
Speaking at an event in London this month, Michael Bourke, Fund Manager of the M&G Global Emerging Markets Fund, outlined compelling valuations and favourable growth stories throughout EM.
Highlighting the merits of an active approach to harnessing the opportunity, Bourke explained the dispersion of profitability and price-to-book valuations underpinned the attractiveness of stock picking compared to buying the index.
An Active Approach to Emerging Markets
The argument for employing an active manager over choosing passive alternatives is rarely as strong as in Emerging Markets.
Identifying value and allocating cash to companies with the potential to produce outsized returns is lost in passive investment, where investors are forced to take exposure to broad baskets of companies they may otherwise rather avoid.
M&G’s success in Emerging Markets has come from avoiding many of the underperformers in the space and carefully timing allocation to opportunities they see in both individual companies and countries.
Michael and his team have identified one such opportunity in recent months, the Emerging Markets’ largest constituent country, China.
After being underweight China for nearly seven years, the managers have decided now is the time to bolster exposure to the country.
In 2020, the M&G Global Emerging Markets Fund was underweight China compared to the MSCI Emerging Markets Index by 10.2%. In September 2023, the fund was overweight China to the tune of 2.8%.
The shift lies almost exclusively in the valuation of Chinese equities and the ability of Chinese companies to return cash to shareholders.
China is entrenched in the communist approach to managing the economy, typified by high levels of investment spending to drive the economy. This approach has supported Chinese corporations and their earnings despite damaging COVID restrictions and a property crisis.
There are, of course, concerns about the Chinese property market and Taiwan, but these are arguably priced in and are a reason Chinese equities trade on the lowest Price/Book multiple since the pandemic.
Adding context to the Chinese property crisis and potential fallout across the wider economy, Michael Bourke pointed out the current issues being experienced in the real estate market can not be compared to the West’s 2008 financial crisis because China’s derivatives market is limited compared to the one that blew up the financial system in 08/09.
Bourke suggested the problems in Chinese property represent a realignment of the economy rather than an existential threat.
“The Chinese real estate sector has halved, and it’s not coming back,” he said.
Considering the risks in China and concluding the attraction of equity valuation outweighs the risk in the long term, the fund has carefully picked out Chinese companies with the ability to return cash to shareholders through dividends and share buybacks.
These include JD.com, Alibaba and KE Holdings.
South Korea, India, and Brazil
With a 31% weighting as of the end of October, our focus has justifiably been on the fund’s approach to China
That said, the fund’s approach to South Korea, India, and Brazil is notable.
The managers are heavily overweight South Korea and see value in their larger holdings, including Samsung and Hana Financial.
The orientation of the Brazilian economy towards commodities has earned the country an overweight allocation of assets.
India is interesting in as far as it is the country the fund is most underweight. M&G doesn’t like the composition of the economy in that it relies too heavily on the consumer and lacks the punch of a booming manufacturing sector and extensive infrastructure projects to drive the next leg higher in India stocks.
There is the recognition Modi’s efforts have boosted the economy and driven equity prices higher. But the next phase in India’s growth story is one M&G’s Emerging Markets equity team are less convinced about.
Charles Luke, Investment Manager, Murray Income Trust PLC
At a time when investors can pick up a high income from bonds, the real value of a stock market portfolio is its ability to grow income and capital over time. This growth potential is particularly important when inflation is likely to be structurally higher, and preserving the real value of invested wealth is increasingly difficult.
100 years may be beyond the time horizon of many investors, but Murray Income’s growth since it was founded in Glasgow on 8 June 1923 shows what is possible. The Second Scottish Western Investment Company started with an initial share capital of £500,000 and on 30 June 2023, its net asset value was nearly £1bn. That’s quite some appreciation.
For many of our investors, dividend growth will be every bit as important, and 2023 was the 50th year that Murray Income has grown its dividend. It was an important milestone and that growth has been delivered in a range of market environments – from the oil price shocks of the 1970s, to the international debt crisis of the 1980s, the fall of the Berlin Wall in 1989 and the collapse of the Eastern bloc, onto the technology boom and bust of the 2000s and the Global Financial Crisis and its aftermath in the 2010s.
Finding growth today
Today, we find ourselves in another new environment. After a decade of near-zero interest rates, borrowing costs have risen rapidly in response to mounting inflation. Investors can now get a high and reliable income from both cash and bonds, creating greater competition for dividend-paying equities. The important differentiator for a stock market portfolio today is the growth in income and capital it can generate, and the inflation protection it offers as a result.
Murray Income has grown its payouts to investors by an average of 9.2% per year over the last 50 years. This is well ahead of inflation, which has averaged 5.5% since 1973. One of the key reasons for achieving this dividend growth record is a focus on a diversified portfolio of high quality companies. We have always invested in strong, established companies with a track record of growing their earnings and an ability to pay a rising dividend to shareholders.
We look for certain characteristics: a robust business model that allows a company to protect its competitive advantage, and a strong balance sheet with little debt, that gives a company optionality and defensiveness in a range of market conditions. We like a strong management team, with a commitment to dividend growth, and strong environmental, social and governance performance to show proper risk management.
Once selected, these companies need careful monitoring over time. Even the best companies will go through difficult patches, get taken over, make mistakes. Maintaining a fluidity and agility in portfolio selection helps ensure that companies sustain those traits over time.
Unstoppable trends
Any portfolio with aspirations to deliver reliable income growth over time needs to be aligned to unstoppable long-term trends. Today, those trends include the energy transition and decarbonisation, which leads the trust to TotalEnergies, an energy company with an attractive pipeline of renewable assets and SSE, a utility company, focused on networks and renewables.
Demographics is also a focus, with ageing populations driving demand for areas such as pharmaceuticals (through Astra Zeneca or Novo Nordisk) and medical equipment (through Convatec). While the UK stock market is seen as a technology desert, there are companies benefiting from the digital transformation, including accounting software group Sage and information provider, Relx.
At the same time, there is a rising middle class in many emerging markets. UK companies such as Unilever are firmly plugged into this trend, with established businesses in developing economies.
The latest company to enter the portfolio is a good illustration of the type of company we like. Rotork manages industrial flow control equipment. Its businesses include hydrogen and carbon capture and it has a fast-growing business in the US. It is a mid-cap company, trading below its historic average, which also has compelling ESG characteristics. It has a conservative management team and high margins, plus significant intellectual property.
Beyond the index
This is not how many investors view the UK stock market, preferring to focus on its low growth, old economy stocks. This is why we argue strongly against an index approach, or an approach that focuses only the UK’s largest dividend payers. To target income and capital growth, it is vital to look deeper. The UK has a range of interesting and exciting companies for those willing to look hard enough.
The investment trust structure has also been important in delivering a growing income and we believe it will continue to be so in future. We do not use our revenue reserve often, just eight times over the past 50 years, but at times of financial crisis, or pandemic, the ability to use those reserves has been invaluable. Today, the trust has around half of its annual dividend held in reserve, ready for the next crisis, should it appear.
While investors may be able to get 5% on a gilt, they shouldn’t neglect growth in their income portfolio. That growth will be vitally important to preserve the purchasing power of their income at a time when inflationary pressures are elevated. At various points in the past 100 years, the environment has been every bit as challenging as it is today, but Murray Income’s approach has allowed it to keep improving capital and income growth for shareholders year after year.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Discrete performance (%)
30/06/23
30/06/22
30/06/21
30/06/20
30/06/19
Share Price
4.9
(0.7)
18.5
(5.8)
13.2
Net Asset Value
9.0
(3.5)
20.8
(5.3)
7.9
FTSE All-Share
7.9
1.6
21.5
(13.0)
0.6
Five year dividend table (p)
Financial year
2022
2021
2020
2019
2018
Total dividend (p)
37.50
34.50
34.25
34.00
33.25
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar.
Important information
Risk factors you should consider prior to investing:
The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
The Company may charge expenses to capital which may erode the capital value of the investment.
Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
Hotel Chocolat (LON: HOTC) is recommending a 375p/share bid from Mars, which values the chocolate company at £534m. The share price soared 161.9% to 364p and it has not been this high for 18 months. Mars is keen to help Hotel Chocolat expand into new regions. The track record of the current management when it comes to international expansion has been mixed and it will help to have a larger company with greater resources backing the expansion. Shareholders can accept an alternative offer of one rollover share in the bid vehicle for each share. The value of these shares will be dependent on the performance of the business, and this would be taking a risk.
City Pub Group (LON: CPC) is also the subject of an agreed bid. Young & Co’s Brewery (LON: YNGA) is offering 108.75p in cash and 0.032658 of an A share for each City Pub Group share, valuing it at 145p/share or £162m. The share price jumped 37.4% to 136p. Young’s has been seeking to grow its managed pubs business and believes it is rare to have the opportunity to acquire such an attractive portfolio of pubs. The deal will increase the number of pubs owned by 50 to 279. A significant amount of City Pub Group’s central overheads of £5.6m could be saved by the combined group and there could be other savings. Young’s shares fell 0.45% to 1105p.
Celadon Pharmaceuticals (LON: CEL) has secured a new sales contract with a European medicinal cannabis company that could generate up to £26m over a three-year period. The first delivery will be in the second half of 2024. The cannabis grower and drug developer will supply pharmaceutical-grade cannabis. There are other interested buyers. The share price rose 23.5% to 102.5p.
Great Western Mining (LON: GWMO) has identified a potential copper porphyry system at Huntoon Valley in Nevada. There is visible surface copper oxide mineralisation. The company has staked 19 claims to the west of the area. The hare price is 14.1% ahead at 0.0525p.
FALLERS
Craven House Capital (LON: CRV) investee companies Garimon and Honeydog have ended talks with fully listed shell Amigo Holdings (LON: AMGO) about a reverse takeover. Amigo will continue to wind down its lending assets. Craven House shares slumped 18.2% to 15 cents.
Cleantech company MyCelx Technologies Corporation (LON: MYX) has won a project worth $5.4m to clean up overboard discharge. This will not generate revenues until 2024. However, lower volumes and delays mean that 2023 revenues will be between $11m and $11.8m instead of the $13.5m previously expected. The share price is 6.2% lower at 60.5p.
Arkle Resources (LON: ARK) has raised £215,000 at 0.35p/share to fund lithium exploration at the Aughrim licence block. The share price fell 5.88% to 0.4p. More than two-thirds of the shares were taken up by directors John Teeling and James Finn.
Tatton Asset Management (LON: TAM) continues its impressive growth in assets under management, which have passed £15bn this month. There was a small performance gain in the first half, but the growth has come from net inflows of around £150m/month. The growth has led to improving margins and that more than made up for a dip in profit contribution from the Paradigm mortgage-related business. Earnings grew 6% to 10.52p/share. The dividend is being rebased with a 78% increase in the interim to 8p/share. The share price still dipped 5.74% to 509p, but it is still 11% higher than at the start of the year.
Ex-dividends
DX Group (LON: DX.) is paying a final dividend of 1p/share and the share price increased 3p to 46.5p, following a 47.5p/share bid from HIG European.
Equals (LON: EQLS) is paying a dividend of 0.5p/share and the share price rose 0.5p to 117.5p.
Fonix Media (LON: FNX) is paying a final dividend of 4.89p/share and the share price declined 3.5p to 194p.
James Halstead (LON: JHD) is paying a final dividend of 5.75p/share and the share price slipped 6.75p to 203.25p.
Mincon Group (LON: MCON) is paying an interim dividend of 1.05 cents/share and the share price is unchanged at 55p.
Portmeirion Group (LON: PMP) is paying an interim dividend of 3.5p/share and the share price is unchanged at 236p.
Strix (LON: KETL) is paying an interim dividend of 0.9p/share and the share price fell 1.45p to 69.55p.
Wynnstay Properties (LON: WSP) is paying an interim dividend of 9.5p/share and the share price declined 10p to 715p.
United Utilities, the UK’s North-West-based water supply and treatment company, reported on Thursday that their gross debt pile has increased to over £9,148.6 million.
The company’s debt has risen by 9.1% in this half-year.
United Utilities shares had dipped margianlly by around 0.80% at the time of writing as concerns mounted about the group’s dividend.
According to Aarin Chiekrie, equity analyst at Hargreaves Lansdown, “net debt has increased but the balance sheet remains stable for now, but given the group’s ambitious £13.7bn plans to expand and upgrade its assets between 2025 and 2030, United Utilities needs to raise around £5.2bn of cash. That’ll require issuing new debt and will likely push debt levels towards the top of the group’s target range, potentially putting pressure on the group’s generous dividend yield.”
United Utilities’ half-year underlying revenue rose by 6.8% and underlying operating profit grew by 4.9%, to £271.1 million.
Chiekrie further stated that, “inflationary pressures are having an even larger impact on costs, particularly power, labour and chemical costs, meaning profits are growing at a slightly slower rate.”
However adding that, ” United Utilities is on track to deliver its best-ever year in terms of customer outcome delivery incentives, which are effectively bonuses for delivering above and beyond their committed levels of service to customers, which should help offset some of these higher costs”.
Interim dividends are set at 16.59 pence, an increase on last year’s interim dividend of 15.17 pence.
Overflows and ambitious growth targets
The UK’s growing vulnerability to extreme weather events has also affected the company. United Utilities wrote that higher levels of rainfall and storms caused a rapid decline in sewer flooding performance in the first half of the year.
Spills, leaks, and overflows are the water company’s worst enemy and have led to higher costs.
In the first half-year, the company came up with a detailed leak response programme. The goal is to be able to monitor 100% of overflows, the company states.
The company, whose water-provision-based services reach over 350.000 customers in the North-West, further announced that they will continue to stay on track to reach a 4-star rating from the Environmental Protection Agency (EPA) by the end of 2023.
The company recently announced £13.7 billion total expenditure across 2025-30 to help improve its infrastructure.
Burberry shares were down over 9% at the time of writing on the news the ongoing slowdown in the luxury sector had knocked the group’s sales.
The company’s Q2 report, published on Thursday, highlights that, due to more challenging trading conditions, Burberry now expects revenue for the year to fall short of its prior expectations and profits to be at the lower end of consensus expectations.
Like-for-like sales, however, saw a robust 10% rise in the first half, yet the growth decelerated notably in the second quarter, recording a modest 1% increase.
Despite concerns around sales, dividends were increased to 18.3p per share from 16.5p last year.
Due to tougher trading conditions, Burberry anticipates that annual revenue will be below its previous projections, with profits expected to be in the lower range of consensus expectations.
According to Charlie Huggings, Manager of the Quality Shares Portfolio at Wealth Club, Burberry’s slowdown in growth “is not a great surprise. Having splurged on luxury goods in the wake of the pandemic, wealthier consumers are now tightening their belts, meaning the whole sector is starting to feel the pinch,”, he stated.
The report states that in the second quarter, comparable store sales rose by 1%, driven by a 10% increase in EMEIA, a 2% increase in Asia Pacific, and a 10% decrease in the Americas.
According to Huggings, “this reflects a combination of weaker trading conditions and historically weak operational execution in the region. Improving performance here is a key priority for the new CEO, Jonathan Akeroyd, and it will take time to judge. For now, though, it remains a problem, child.”
Adding that, “while the long-term outlook for the luxury sector remains positive, trading conditions are tough right now and appear to be getting tougher. This means the near-term outlook for Burberry and its peers is murky at best.”
Sophie Lund-Yates from Hargreaves Lansdown shared this opinion by commenting that “Burberry has done pretty much all it can to place itself in a better position, both operationally and creatively. The issue is that while it’s a slicker and bolder beast, Burberry is currently residing in a hostile environment outside of its control.”
Colder weather aided Burberry’s sales, as outerwear sales were up 10% in Q2. Leather item sales were up by 3%.
Hotel Chocolat Group have announced that they have reached an agreement on the terms of a recommended £534m cash acquisition by Mars.
Under the terms of the acquisition, each Hotel Chocolat shareholder will receive 375p in cash.
The Cash Offer represents a bumper premium of approximately 169% to Hotel Chocolat’s share price of 139p yesterday. Hotel Chocolat shares were 162% higher at 365p at the time of writing.
The bid has taken Hotel Chocolat shares back to a level not seen since mid-2022.
Mars said it has long admired Hotel Chocolat’s credentials as a contemporary, premium brand with high-quality products and strong direct-to-consumer capabilities.
Hotel Chocolat recently released full-year results revealing a 10% decline in revenue and a sharp drop in EBITDA.
Mars considers itself well-positioned to support Hotel Chocolat’s next growth phase, providing an enhanced platform for UK and potential international growth. The chocolate giant believes it can provide Hotel Chocolat with better access to long-term capital and a supportive environment to achieve its strategic objectives.
Lazard and Liberum are advising Hotel Chocolat on the deal
Red Rock Resources shares whipsawed on Thursday after the company announced it had begun shipping lithium earlier in the week.
In a release issued on Wednesday, Red Rock said they had begun shipping lithium from Zimbabwe to a port in Mozambique, adding they had 200 tonnes ready to be shipped.
However, the update lacked any major details, and investors dumped shares yesterday, before the stock rebounded on Thursday.
After a 7% fall on Wednesday, Red Rock shares opened 3% lower on Thursday before rebounding.
The company announced the targeting of lithium in Zimbabwe earlier this year and revealed a series of early-stage samples from rock outcrops in the country.
Red Rock has not confirmed any sales value of the lithium currently being shipped.
Red Rock Resources has a broad portfolio of precious and base metals, lithium, and fossil fuels across Africa and Australia.
The company generated zero revenue in the most recently reported half-year and has issued new equity on numerous occasions this year.
Rail optimisation software and services provider Tracsis (LON: TRCS) is on track for another good year, but it will be significantly second half weighted. The latest financial year’s figures were in line with expectations with a substantial opportunity becoming obvious in North America.
In the year to June 2023, revenues improved from £68.7m to £82m, while underlying pre-tax profit rose from £12.3m to £13.7m. Both the rail technology and the data and analytics divisions grew organically.
The business continues to be highly cash generative. Net cash was £15.3m at the end of June 2023. Th...
The FTSE 100 soared on Wednesday as UK investors cheered a material drop in inflation, which may mark the end of the cost-of-living crisis and the interest rate tightening cycle.
UK CPI plunged to 4.6% in October from 6.7% in September. UK inflation is now less than half the 11% peak recorded last year.
The FTSE 100 was up 0.9% in a broad risk-on rally shortly after midday on Wednesday. Gains in London followed a bumper rally in US stocks overnight after US inflation fell to 3.3%.
It is now widely accepted the Bank of England and Federal Reserve are done with their respective rate hiking cycles.
In addition, lower inflation opens the doors to rate cuts, and markets were pricing in 80bps of UK rate cuts next year on Wednesday.
“The FTSE 100 maintained the head of steam it had built up on Tuesday afternoon as UK inflation followed yesterday’s US reading and came in below expectations,” said AJ Bell investment director Russ Mould.
“With confidence there will be no rate increases before the end of the year the market is now looking ahead to the prospect of rate cuts. Whether falls in inflation will stall and whether the Bank of England is as keen as Rishi Sunak to declare mission accomplished in the fight against rising prices remains to seen.
“What will encourage observers in Threadneedle Street is the fall in services inflation – further falls in this area could be the precursor to a pivot towards bringing rates down.
“For now, investors are in the mood to celebrate, and the prospects of a big Santa Rally are building as we head towards December.”
Equity bulls have been out in force over the past 24 hours, but investors should remain cautious about upticks in the inflation rate in the coming months, potentially souring sentiment.
Banks and housebuilders rally
As one would expect, interest rate-sensitive sectors, including housebuilders and banks, rose on Wednesday as gilt yields fell.
Although the two UK-centric sectors displayed signs of optimism on Wednesday, the gains weren’t exuberant, suggesting the drop in inflation had already been priced into stocks.
Taylor Wimpey gained 1.5%, while Barratt Developments added 1%. Banks continued their recovery from a disappointing round of earnings, with Lloyds perking up by 1.5% and Natwest shares 3% to the good.
While interest rates may not rise again in the current hiking cycle, there are still nagging doubts about the economy and the ‘long and variable lags’ of the sharp increase in rates over the past two years. This may cap UK-focused equity gains.
There was strength across the mining sector after China released a relatively upbeat set of industrial and consumer economic indicators.
Glencore and Anglo American were up over 4%.
Experian was the top gainer, rising 6%, after profit before tax on an actual currency basis rose 48%.
