Update Wednesday, 1st July, 2020

March Investments Now Up Over 50% and 25%: Dividends to Come

Ever asked a favour, or called one in — and then discovered something? That the relationship wasn’t strong enough? The person didn’t take your call? Or didn’t show up? Or brushed you off?

When you migrate to a new country — as I did when we moved to Europe some years back — you’re starting again. You don’t have established relationships there. People who will readily help you. You’re building new relationships.

Until you do, the help you’ll get, you’ll pay for. Or you’ll be dependent on the kindness of strangers.

Often, when you ask someone for help, you’re testing the strength of the underlying relationship. I know people who will help me without question. And I would do the same for them.

But that was not the case in Europe. Strangers are less kindly. And but for one old friend — we knew nobody.

I provide this illustration because that is how the market feels right now.

There seems little strength supporting it. And the press has made it jittery. More on that in a moment…

The market continues to swing wildly

On one hand, there is stimulus from governments around the world, encouraging cash into assets. And share prices could be a lot weaker without that.

But there is also a plethora of risk events on the horizon. Far more than the happy bull market of February.

• Flattening coronavirus curves are now at risk of blipping upward again due to reinfection outbreaks.
• As pent-up demand from the lockdown works through the system and remaining cash moves into assets, this leaves a longer-run vacuum of lower employment, activity, trade, and a global recession.
• Brexit looks harder than it did in January. EU president David Sassoli suggests the British are unwilling to compromise to achieve a free-trade agreement. Given COVID delays and the limitations of Zoom meetings, he thinks an extension may be required. But Boris Johnson has said he will not extend the transition period.
• The stock market is wary of a Joe Biden win in the US. Remember: some of the big boost in cash flow and hiring came about due to the Trump tax cuts. Here’s what Biden had to say about them: ‘I’m going to get rid of the bulk of Trump’s $2 trillion tax cut and a lot of you may not like that…’
• Despite all this, resilient America is showing signs of growing business confidence again. Boeing [NYSE:BA] bounced up some 14% the other day on announcements that it’s back to testing 737 Max jets again. Unemployment seems to be easing off. And key charts like home purchases (back to January levels) and restaurant bookings (turning up sharply) are defying corona-gloom.

The left-wishing media forgets that free-market economies may get hit the hardest from dynamic events, but they can also bounce back the strongest. You can throw a lot at them. They’re designed to flex and respond.

Less so for socialist states.

The biggest and most ongoing threat to the market is the news media

Accuracy has given way to peddling drama gift-wrapped in fear. Information is instantaneously available online. That’s the upside. The downside is the quality of that journalism and information seems far worse than the days of print-focused newspapers.

And can you blame the industry for that? Media is no longer profitable. It attracts more than a few self-righteous, politicised individuals who forego a reasonable living to grind their axes.

The media needs to find a better way to properly pay professionals.

Here at Wealth Morning, we are first investors and market analysts. We get paid via our subscription and fund-management services. So the information we provide has only one focus. To find the truth for our clients. To find financial opportunities beyond the radar.

So, I’ve developed a process to deal with the flood of media reports that hit my desk every day:

• I prioritise news from our portfolio companies. These are where we see value and hold wealth. We want to know as much as possible how they’re going.
• We then look at sector and industry news for our portfolio businesses. For example, residential and commercial property markets in Australia, where we have a couple of key picks.
• There is then ‘market noise’. All the fear and greed stories that hit the market on a daily basis. For each of these stories, I run a simple test: What is the likely impact on our businesses? Sometimes the reality is not what you might think. Coronavirus is fuelling our gold-mining exposure. And revealing property-based opportunities not usually available.
• Follow the money. News media may tell you the economy is under threat. Actually, recessions affect some areas much more than others. Watch the actual numbers that are coming through and make judgments from those rather than sensationalist fear. For example, the fact that US home purchases are back to January levels suggest there is future confidence.

This week, there’s been plenty of news from our portfolio companies. I wanted to take a moment to run through these and discuss the opportunities.

Portfolio update

Source: Bloomberg

Crest Nicholson [LSE:CRST] announced their half-year results as of 30 April. They were the first UK homebuilder to show devastating effects from COVID-19.

You can view the key details here. Meanwhile, here are what I see as the most important numbers:

• Revenue is down this half year 52.2% to £240m (HY19 £502m).
• Factoring in exceptional items from COVID-19 — primarily asset value write-downs of £43m — the business HY20 loss is –£51.2m (HY19 £64.4m).
• Dividends have been suspended to preserve cash, and costs are being cut where possible.
• The business has added borrowings of £215m and shows a cash position as at 30 April of £255m. It has also qualified for £300m from the Bank of England CCFF commercial paper (bond buying) programme, though has not drawn on that.
• The balance sheet is not looking too bad. Total assets are £1,656m. Total liabilities £848m. Long-term debt-to-equity looks to have climbed to 62% (from 46% in 2019).
• Finance is in place for recovery. The recovery now depends on demand restoring and the risk environment.

How are things looking for Crest?

It pays to keep in mind some 75% of Crest’s workforce was furloughed over the long UK lockdown. Demand for new homes dried up. The risk event changed the business materially in March and April.

Yet 12 weeks before the lockdown, the business had its best sales for the rolling 12-month period.

Since 18 May (after this half year report ending 30 April), the company has been able to reopen building sites.

Management is now seeing reservation rates heading back up to where they were before lockdown.

Crucially, they see the next half year delivering much better results. And have provided full financial year (FY20) guidance of a before-tax profit range of £35-45m.

The market went into a shock a bit seeing revenues plunge 52% this half year (compared to last). It is also factoring in uncertain Brexit talks and fear of reinfection plunging all or parts of the country back into lockdown.

Crest’s stock price is down heavily. Could that be oversold? Insiders seem to be using the chance to top up their positions.

We are comfortable with demand for Crest’s product. There is a housing shortage. And pent-up demand for homes.

The financing in place also provides some short run security.

Whether you want to buy-up or not depends on your appetite for risk. There is heightened risk facing all home builders. Especially in the UK.

Another lockdown and a breakdown of Brexit talks could push this business into further difficulty. Whereas post-COVID economic recovery and Brexit resolution could see strong profits (and dividends) resume, making a share purchase now reveal great value.

As I’ve said many times before, every business carries risk and opportunity. When you buy a business, you buy into both.

Green Cross Health [NZX:GXH] was another portfolio business to announce financial results — this time, full financial year to 31 March 2020.

The market punished the stock price a little for suspending dividends during this uncertain time. Yet the actual business results are reasonable — suggesting the concern is really around the lockdown period after the financial year finished.

You can view a full presentation on the results here.

Here are my key takeaways:

• Total revenue was up 0.2% to $568.5m
• Pharmacy revenue was down 1% to $336.4m. Operating profit down $4.8m to $22.5m.
• Medical centre (‘The Doctors’) revenue was up 8.5% to $76.5m. Operating profit up $3.6m to $8m.
• The board made a precautionary decision not to declare a full-year dividend. Hopes to restore the dividend in November.
• Operating profit was up 5.5% to $31m.
• But net profit was down 16.2% to $13.5m after considering goodwill/intangible write-downs.
• The balance sheet has changed around long-term debt since a new approach to accounting for leases came into force. Some leases have been added as a liability — ‘finance leases’.
• Net debt is $10m less than last year, at $22.6m (owed on long-term borrowings less cash).

These results are not exciting. But they are solid. We had expected a much greater impact on profits due to growing competition from Chemist Warehouse. And more supermarkets moving into the pharmacy space.

Actually, most Green Cross pharmacies have held their own. Reflecting our original view that these pharmacies are part of a community convenience network.

Decline in pharmacy operating profit has also been made up for by strong increase in the medical centre revenue.

It seems there remains an opportunity for Green Cross in acquiring or developing more medical centres. And developing synergies between these and their leading pharmacy network.

But the market is not impressed. It still seems to factor in little future growth. The market capitalisation of $146m is now less than 5x the operating profit.

Our view is the business needs a little more time to prove a strategy, show some more growth and restore the dividend. Unfortunately, neither the board nor management has been that forthcoming on a strong strategy.

Yet on the positive, the business has pretty well held its own. It has not had to raise capital and dilute existing positions. With the right strategy it could post some growth in the next financial year.

For now, we’re reducing our ‘Buy Up To’ guidance and continuing our monitoring.

Anglo Asian Mining [LSE:AAZ] is up since we recommended. Gold miners will have a choppy time ahead. But gold remains a good hedge against coronavirus reinfection, recession, and trade tension woes.

The company’s mines also contain copper. To date, copper prices — a bellwether for the economy — have not fared well.

But this could all change. Analysts see the copper price bouncing back. Clean energy, electric vehicles, increasing digitisation, and infrastructure products all need copper.

So, with Anglo Asian, we have both the promise of cash-generative gold, with further upside for copper extraction.

For FY20, the company forecast gold production of between 65,000 and 67,000 ounces. Copper production of between 2,200 and 2,400 tonnes.

Charter Hall Social Infrastructure Fund [ASX:CQE] has also been a strong recent pick. It has delivered excellent growth, with childcare bouncing back, aided by government support. It also continues to pay distributions.

This quarter’s distribution has been impacted by COVID-19 and resulting rent-relief agreements. Yet it still provides good yield overall. Total yield at the current share price now sits at around 7%.

The distribution for the quarter ending 30 June 2020 is 3.475 cents per unit, resulting in an annual distribution for the year of 16.0 cents per unit.

Ex-distribution Date: 29 June 2020

Record Date: 30 June 2020

Payment Date: 21 July 2020

Warehouse REIT [LSE:WHR] also has a dividend pending for payment. 1.6p per share with ex-dividend date of 11 June 2020 and payment 3 July 2020.

Stobart Group [LSE:STOB] — owner of Southend Airport near London — is one on our watch list we have been watching more intently. It reached the sub-40p price we were looking for.

But we’re not ready to commence monitoring yet. The retail share placement plan was only half taken up. And the airport sector remains very uncertain.

There’s plenty of potential. But we can’t adequately determine the risk profile right now.

Here is our latest portfolio and guidance:

 Current as of 30 June 2020 at 10pm GMT.

When you’re putting your money into something, the key question is how strong is this? Just like relationships — ask what it is built on. Where is the foundation?

There will always be ups and downs in the market. Sometimes sudden and sharp. But in my experience, those who are comfortable in their holdings are more likely to make the right investing decisions. Even through volatility.

Regards,

Simon Angelo
Editor, Lifetime Wealth Investor

PS: I’m travelling downcountry next week. You will be in the capable hands of John Ling for next week’s market update. But I’ll be watching. My trading desk goes with me. And so do our companies.