Home Commodities Investors Chronicle: Redrow, Royal Dutch Shell, Petropavlovsk

Investors Chronicle: Redrow, Royal Dutch Shell, Petropavlovsk

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BUY: Redrow (RDW)

At 411p, the shares are trading at just 0.8 times consensus forecast book value at June 2021, a discount to mid-cap peers, writes Emma Powell.

Redrow plans to scale back from London and focus on its higher-returning regional sites as homebuyers search increasingly for greater indoor and outdoor space in the wake of the pandemic.

However, provisions for retreating from the capital — to just Colindale Gardens — will result in profits for the year to the end of June being substantially below 2019. Peel Hunt forecasts that the cost will be about £30m and analysts cut forecasts for 2020 pre-tax profits by more than half and by 46 per cent for 2021. 

In the five weeks since reopening sales offices, the net sales rate per outlet per week was 0.56, down only slightly on 0.59 the same time last year, reflecting strong pent-up demand, especially from buyers using the Help to Buy scheme. Executive chairman John Tutte urged the government to extend the scheme in its current form beyond March next year, when regional price caps are set to be introduced, to help boost the housing market’s recovery. 

The housebuilder is back at work on almost all of its sales and construction sites. But their closure during lockdown, in a year where completions were intended to be second-half weighed, also meant that volumes were down more than a third and turnover should be £1.34bn, down from £2.11bn in 2019. 

Lockdown also meant last year’s net cash balance of £124m has switched to a net debt position of £126m by the end of June. However, Mr Tutte said efforts to protect cashflow meant it had decided to return all payments received under the government’s Job Retention Scheme and was unlikely to draw on the £300m secured under the Covid Corporate Financing Facility.

Redrow has a solid track record of improving cash generation, in part due to tight control on costs and pre-pandemic efforts to scale back site openings, which could stand it in good stead for the tougher housing market conditions. Free cashflow has improved for the past five consecutive years, with the group generating a free cashflow yield of 14.8 per cent at June last year. 

Housebuilders have the ability to be highly cash generative but the debate has been whether to use that cash to fund growth or pay out large dividends, said Peel Hunt deputy head of research Clyde Lewis. Redrow has opted for the former in recent years. 

HOLD: Royal Dutch Shell (RDSB)

We maintain a hold recommendation because balance sheet prudence could pay off in the longer-term, writes Alex Hamer

Royal Dutch Shell has followed BP and dropped its oil price forecasts for the next few years, leading to a $15bn-$22bn (£12bn-18bn) writedown in its June quarter results. A more bearish shift has also taken place in its refining margin estimates, which the company said would be down 30 per cent in the longer term. 

The impairment comes from the change in assumptions for the medium term. Shell had previously set its balance sheet price forecasts at $60 a barrel (bbl) for 2020, 2021 and 2022. These have now dropped down to $35/bbl, $40/bbl and $50/bbl. Its gas forecasts have also come down for 2020 and 2021. 

On top of the oil and gas price revisions, Shell said the $3bn-$7bn cut to the value of its refining assets had come from its “strategy to reshape and focus its refining portfolio to support the decarbonisation of its energy product mix”. The company announced it would aim for net zero carbon emissions by 2050 in April. 

Shell said gearing could climb by 3 percentage points after impairments plus pension re-evaluations. As of March 31, gearing was at 29 per cent. It acted dramatically in April in response to the oil price crash, cutting the dividend for the first time in 70 years, taking its yield to under 4 per cent, and reducing spending by $5bn. 

Beyond the impairment, the new forecasts raise the spectre of Shell pausing project development and existing assets falling out of profitability. The major impairment in the integrated gas division came from projects that were commissioned at $100/bbl, according to Jefferies analyst Jason Gammel. 

Last month, BP said its 30 per cent oil price forecast cut had partly come from the assumption that governments and investors would look to green recovery strategies post-Covid-19. 

Shell guided to higher production in gas and oil for the June quarter, with 2.3-2.4m barrels of oil equivalent per day (boepd) production for the upstream segment and 880-910,000boepd for integrated gas. The company said the higher oil production would have little impact on earnings because of the weak oil and gas prices.

SELL: Petropavlovsk (POG)

While its operations are doing well and gold is not far off its all-time high, we’ve had enough of the shenanigans, writes Alex Hamer.

Gold miner Petropavlovsk’s board has been voted out by new major shareholder UGC. 

Chief executive Pavel Maslovskiy and chairman Sir Roderic Lyne will be ousted, they have said, as the AGM had low enough voting levels due to Covid-19 arrangements for 22 per cent shareholder UGC, combined 12 per cent shareholders Everest Alliance and Slevin and another 4.6 per cent holder to move in their own people. 

The proxy votes were counted before Tuesday’s AGM. 

Petropavlovsk has called another meeting to reinstate the current board, while appointing the UGC-backed directors. Petropavlovsk also wants to appoint current deputy chief executive Alya Samokhvalova to the top job on an interim basis as well as fellow founder Peter Hambro as interim chairman. 

The company has called in the Takeover Panel to look into the move, alleging UGC’s nominee director Maxim Kharin worked with the Everest and Slevin representative to avoid a proper takeover move. 

Mr Hambro was kicked off the board in 2017 but brought back into the group in 2018 alongside Dr Maslovskiy. That time, the mysterious Everest Alliance and Slevin joined with the former owner of UGC’s stake, Kenges Rakishev, to bring back the old board. According to Petropavlovsk, Mr Kharin had indicated that UGC, a private Russian mining company, would support the board in the AGM vote. 

Sir Roderic said it was a “stealth[y]” move that was against the wishes of the majority of shareholders.

This month, Dr Maslovskiy told The Daily Telegraph a merger with UGC could happen, but the company quickly said no formal talks were taking place. 

Chris Dillow: Why invest overseas?

Investors should spread their equity investments around the world — but not perhaps for the reason you might think.

International diversification is no way to spread short-term equity risk. In March, for example, the All-Share index fell more than 13 per cent as the pandemic struck. But emerging markets fell as much, and US and continental European markets fell more than 10 per cent in sterling terms — falls that were cushioned by the drop in the pound. Wherever you had invested, you lost money quickly.

Such co-movement is typical. If we look at monthly price moves in sterling terms since 1997 the correlation between UK and US stocks has been 0.79 and that between UK stocks and MSCI’s Europe ex UK index has been 0.87. Such big numbers tell us that major stock markets rise and fall together in the short term. You cannot therefore reduce short-term equity risk much by spreading your investments overseas. If you want protection against such risks, you need non-equity assets such as cash, bonds, gold or foreign currency.

All this, however, is true only for short-term moves. If we look at longer-term returns, we find a case for international diversification.

Take the past 10 years. In this time, the All-Share index has risen barely 10 per cent (although it has done much better if you had reinvested dividends). But continental European and Japanese stocks have risen more than 60 per cent and the S&P has tripled in sterling terms.

And the past 10 years are not terribly unusual in seeing large differences in returns. In the 10 years to 2010 UK and US equities fell, but emerging markets tripled. And in the 10 years to 2007, European stocks outperformed the UK and US by 60 percentage points.

International diversification thus protects us from the risk that the UK (or any other market) will hugely underperform over the long run. And this risk is significant.

But what causes it? It’s not always differences in economic growth. In the past 10 years the UK’s real GDP has actually grown by more than Japan’s or the eurozone’s. But this didn’t stop the UK market underperforming. Which reminds us that there’s little correlation across countries between long-term growth and long-term equity returns, as MSCI economists and the University of Florida’s Jay Ritter have shown.

That said, there is a danger that we could see both a weak economy and poor equity returns over the long run, as we saw in Japan in the 1990s. This is an especial reason for younger people to diversify internationally. Doing so protects you from the danger that you’ll suffer both poor investment returns and bad career prospects. You might think this is a slim chance. But investors must always be on guard against low-probability/high-cost risks. Given that there is a danger of ongoing stagnation in western economies generally, this is perhaps the strongest reason for longer-term investors to look to emerging markets.

There are other reasons why returns differ over the long run.

One is that national stock markets have different sector weightings. One reason for the UK’s underperformance is that it is light in sectors that have had a good decade, such as technology, but heavily exposed to ones that have done badly such as oil companies, miners and banks.

Also, there are cross-country differences in changes in the balance of class power: New York University’s Sydney Ludvigson has shown that these matter enormously for long-term returns. One reason why the US has done so well in recent years has been the rise of monopoly power for some firms at the expense of workers. In the same way, the UK outperformed the US in the late 1970s and early 1980s as trades union power declined and profit margins recovered.

And then there are valuations, which can influence returns even over long periods. One reason for the US’s lacklustre performance in the 2000s was that the tech bubble had left the market overvalued and it took years for this to be corrected.

Which brings us to a reason not to neglect the UK entirely. A decade of underperformance has left the All-Share index looking cheap. Sure, there are good reasons for such cheapness. A disproportionate share of the market is in companies that might have gone ex-growth: if the world economy does shift towards greener growth, oil and mining companies are in for a rough time. And it’s possible that post-Brexit trade barriers will depress the earnings of domestically-oriented stocks for a long time. But it could be — indeed should be if markets are nearly efficient — that these prospects are already in the price.

Yes, we must diversify internationally. But in doing so we must not neglect the merits of dear old Blighty entirely. 

Chris Dillow is an economics commentator for Investors Chronicle

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