VOL 21 / ISSUE 01 / 10 JANUARY 2019 / £4.49

USING TRIED AND TESTED METRICS TO SPOT MARKET BARGAINS

TOP SLICED: BOARDROOM RETIREMENT THE MANAGER BATTLE: ISSUES: WHO SOLD QUEST FOR YOUR PENSION APPLE BEFORE CONTROL OF QUESTIONS THE WARNING SMALL CAP TRUST ANSWERED EDITOR’S VIEW Have the markets become too negative? We look at the prospects for a turnaround in fortunes for equities

mid the relief rally which followed US three elements required for an upgrade to its Federal Reserve chief Jerome Powell’s market view were in place. Aconciliatory comments on interest rates They note that valuation ‘has been improving (4 Jan), one thing Powell said seemed somewhat rapidly’ with equities as an asset class looking curious. cheaper after the correction, with the forward He observed that markets were ‘well ahead earnings multiple for global stocks now below of the data’ in pricing in downside risks. While in 13-times. one sense this was worthy of note, given he was Further they observe that sentiment is ‘cautious,

speaking in the aftermath of a very strong US jobs but not extreme’ adding that net bullishness of US report, in another he need hardly have pointed that retail investors is the lowest since 2009, something out, given markets are always ‘ahead of the data’. they describe as a good sign.

After all, ‘the markets’ are made up of a The only sticking point is fundamentals or in multitude of trades by countless individual other words what’s happening in the real world. investors all of which are taking a view on how the They comment: ‘Cheaper prices and more bearish future will pan out. investors raise the chance of a bounce. But any It is crucial that every investor understands“ this sustainable rally will need fundamental support. point as it is how a business is likely to perform And here is where the challenges remain most in the future, not how it has performed in the serious. past, which will dictate the future direction of its ‘Investors aren’t cautious without reason; share price. there are serious problems that have carried over from 2018 to 2019, some of which are still Investors aren’t cautious underestimated on Morgan Stanley forecasts.’ without reason Still, the team believe a number of things could happen to change the fundamental picture and provide a catalyst for shares. Another thing to bear in mind is that markets are These include: compromises in the face of not always 100% efficient and will often overshoot market weakness from the Trump administration on “both the upside and the downside. We discuss on government funding and trade; a more market- the value opportunities this can create for investors friendly approach from the US Federal Reserve; in this week’s main feature. stimulus from China; only a modest reduction in This tendency to overshoot creates the possibility US growth; ‘ok’ fourth quarter earnings; and the that market sentiment has become too depressed UK avoiding no-deal Brexit while European growth through a period which on Christmas Eve saw rebounds. every sector but one (the traditionally defensive They see a chance of at least some of these consumer staples space) on the S&P 500 trade in occurring by the end of the first quarter and Shares ‘technical’ bear market territory. This is defined as will itself be keeping close tabs on all of these areas being more than 20% down on their most recent in the weeks ahead. high.

TIME FOR AN UPGRADE? By Tom Sieber Deputy Editor A recent report from the strategists at investment bank Morgan Stanley suggested that two of the

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BIG IAG / Sky – STV deal / Athelney / Dunelm / 06 NEWS Gear4Music / / Vectura

GREAT New: Henderson High Income Trust / Eland Oil & Gas 10 IDEAS Updates: Codemasters / Next TALKING 16 POINT How worried should you be about China? 18 ASK TOM ‘Will there be a cap on tax-free withdrawals from pensions?’ MAIN 21 FEATURE 6 of the best UK value stocks

INVESTMENT Technology fund expert who’d been slicing Apple long 30 TRUSTS before the warning

32 FUNDS Where European stocks stand two decades after the euro’s launch

34 FEATURE Everything you need to know about impact investing

36 AEQUITAS How to measure the earnings power of corporate America SECTOR 39 REPORT Can you make money from investing in pub companies? 42 INDEX Shares, funds, ETFs and investment trusts in this issue

securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor DISCLAIMER agrees that the reporter can write about the interest, it should be disclosed to Index of companies and funds in this issue readers at the end of the story. Holdings by third parties including families, trusts, IMPORTANT self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. 2. Reporters will inform the editor on any occasion that they transact shares, Comments published in Shares must not be relied upon by readers when they derivatives or spread betting positions. This will overcome situations when the make their investment decisions. Investors who require advice should consult a interests they are considering might conflict with reports by other writers in the properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited magazine. This notification should be confirmed by e-mail. do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it 4. A reporter should not have made a transaction of shares, derivatives or spread will be disclosed. Shares adheres to a strict code of conduct for reporters, as betting positions for seven working days before the publication of an article that set out below. mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the 1. In keeping with the existing practice, reporters who intend to write about any on-sale date of the magazine.

4 | SHARES | 10 January 2019 Growth and Innovation

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EXHIBITING COMPANIES AT THE EVENT INCLUDE: • AJ Bell • Manolete Partners • ATTRAQT • Mercia Technologies • CloudCall • OPG Power Ventures • Corero Network Security • Plastics Capital • Creo Medical • Seeing Machines • Duke Royalty • Shares • FairFX Group • Shield Therapeutics • Gresham House • Trackwise Designs • Hardide + more to be announced soon • Jaywing GUEST SPEAKERS: Daniel Coatsworth, Editor – Shares Steven Frazer, News Editor – Shares Richard Penny, Fund Manager – CRUX Asset Management Gervais Williams, Senior Executive Director – Miton Group www.sharesmagazine.co.uk/events Contact: [email protected] For directions click here In partnership with Associate sponsors BIG NEWS Is IAG putting dividend at risk with Norwegian Air pursuit? Citi is worried that Norwegian’s debt pile could result in bad news for investors

nvestors attracted to British Airways-owner IAG: ANNUAL DIVIDENDS International Consolidated Airlines (IAG)for its Inear-5% dividend yield could face a dividend cut if its acquisition of Norwegian Air goes through. Analysis by investment bank Citi says the ratio of free cash flow compared to the dividend would fall from approximately 2.3-times to below 1.0 times if 34.6c

a takeover occurred. A free cash flow-to-dividend 32.8c ratio of less than one would, if the dividend is maintained, imply debt is being used to prop up 30.2c payments. 27.0c International Consolidated Airlines has a history of steady dividend growth over recent years so any 23.5c

cut in the payout may come as a nasty surprise and 20.0c could put the shares under pressure. In 2018, the airline was rebuffed twice by Norwegian, but could return with another bid. If it cannot acquire Norwegian, the company says 2015 2016 2017 2018E 2019E 2020E it will sell its stake of 4%. As we write it is yet to Source: SharePad, 8 January 2019 offload the shares. after money has been factored in for operational Norwegian sells competitively priced seats on needs. long-haul routes, which could help International According to analysts’ data from Refinitiv, free Consolidated Airlines offer cheaper fares, cash flow in 2017 of around €2bn easily covered a particularly to the US. total outlay on dividends of €512m payout in the The takeover attempts have been branded as year to 31 December 2017. opportunistic and undervaluing Norwegian, which While free cash flow is forecast to nearly halve reportedly faces bid interest from other rivals, to €1.23bn in 2018, this still comfortably covers an including German carrier Lufthansa. estimated €558.1m to be paid out in dividends in While International Consolidated Airlines is in 2018. reasonably robust shape, loss-making Norwegian is Looking ahead to 2019 and 2020, free cash flow not. It is struggling with sector-wide issues such as is forecast to remain steady at €1.2bn while annual Brexit, volatile oil prices and spiralling costs, which dividends are forecast to increase to €624m. have pushed the business further into the red. International Consolidated Airlines is scheduled to report its 2018 results on 28 February 2019. IS THE DIVIDEND CURRENTLY SAFE? On a free cash flow basis, International Consolidated Airlines currently looks to have the By Lisa-Marie Janes Reporter dividend reasonably well covered. Free cash flow is vital to look at as it focuses purely on leftover cash

6 | SHARES | 10 January 2019 BIGBIG NEWSNEWS Sky-STV deal throws spotlight on potential ITV profit boost All eyes on the media sector as re-transmission deals hit the headlines

t the start of this week STV (STVG) and Sky announced a five-year deal giving A Sky customers in Scotland access to STV’s programming in full HD for the first time. This has direct relevance to ITV (ITV), as we now explain. STV shows will also be available on catch-up using STV Player on Sky Q and Sky+ set-top boxes and mobile streaming from the second half of this year. Programmes include flagship ITV1 shows such as Britain’s Got Talent, Coronation Street and I’m a Celebrity. The news went down well with investors who sent STV shares up 8% on 7 January, giving the company a market value of £145m. The STV-Sky agreement is a re-transmission deal in all but name. Sky and Virgin Media have insisted in the past that they won’t pay to re-transmit ITV1 so there is no direct reference to it in the STV announcement but it seems to be implicit from the programming. ITV agreed a transmission deal with Virgin Media market with a 48% share. last year and is due to renegotiate its agreement In its third quarter 2018 trading update in with Sky this year. November ITV warned that overall advertising On the basis of the deal with Virgin, analyst Ian revenue was likely to be down 3-4% in the final Whittaker at broking firm Liberum estimates that a quarter as Brexit uncertainty continued. new Sky deal could bring ITV an additional £120m That would mean advertising revenue for the of revenue per year. full year to December would be flat compared That may not seem much given 2017 turnover with a rise of 6% in the first nine months. of £3.1bn but as with the Virgin deal there is no In the last fortnight ITV shares have been trading additional cost so the extra revenue translates at 125p valuing the firm at just under 12 times directly into profit. 2018 forecast earnings and under 11 times 2019 ITV’s pre-tax profit was £500m in 2017 with forecast earnings. Liberum forecasting profit of £777m for 2018, then £858m for 2019 and £1bn for 2020 excluding the Disclaimer: The author owns shares in ITV uplift from the Sky deal. Despite the rise of pay-tv and streaming video services ITV’s family of channels still had the By Ian Conway Senior Reporter highest total share of viewing in 2017 with 22% of the market. It also led the television advertising

10 January 2019 | SHARES | 7 BIG NEWS Founder wants back in at Athelney investment trust Robin Boyle bids to wrest back control of small cap trust

eteran investor Robin Boyle, the founder shares),’ continues Boyle, stressing his EGM vote and former managing director of small will be counted. Vcap focused Athelney Trust (ATY), wants In the official shareholder meeting release, back in at the trust he founded in 1994. he also complains: ‘I do not see how Athelney’s Boyle has called a shareholder meeting (22 investment strategy can be carried out by Jan) to restructure the board and restore him someone who spends the majority of his time to his former roles as managing director and some 10,000 miles away in a different time zone investment director of Athelney. as is the case currently.’ In response, Athelney is consulting This reference is to Athelney Trust’s managing shareholders over a possible tender offer for director, fund manager and significant those who want an exit, alongside the issuing of shareholder Manny Pohl. new shares for potential new investors. As for the Athelney Trust board, it comments: ‘On succession planning, in September 2018 CLOSE-RUN THING it had been amicably agreed between the ‘It’ll be a damn close-run thing, but I think I’m then directors (Robin Boyle, Manny Pohl and just the favourite,’ Boyle informs Shares. Simon Moore) that there would be a smooth The dispute between the City mainstay and handover from Robin Boyle as fund manager and the current board arose over his continuing role managing director of Athelney Trust to Manny in the company after Boyle stepped aside from Pohl over a period of two to three years. his executive roles. ‘So the sudden resignation of Mr Boyle was Boyle understood he was to stay on as a non- extremely surprising. It is regrettable that a executive director for a period of time. He insists distinguished track record, with 15 years of the original draft of the official announcement uninterrupted annual dividend increases, has to the London Stock Exchange (LSE) declared come to this. he was staying on as a non-executive director, ‘The board have been working to ensure yet the line was removed from the version business as usual for shareholders. Shareholders eventually published. should feel confident in the ability of the current board and that the new fund manager SOLVING THE SUCCESSION ISSUE will be able to deliver on Athelney Trust’s A substantial shareholder, Boyle proposes to objectives of long term growth in both work with Gresham House (GHE:AIM), the c a p i t a l a n d d i v i d e n d s f r o m a p o r tf o l i o o f U K asset manager with an excellent network in the smaller companies. UK small cap investment space, to grow the ‘The board wants to grow the company trust’s size, reduce costs and provide long term so shareholders can benefit from greater succession planning. economies of scale. Dr Pohl has also agreed to a The 74-year-old explains he’ll be teaching reduction in the annual management fee from Gresham House investment manager 1% to 0.75%.’ Laurence Hulse ‘everything I know about small cap value and income’, which means ‘the management succession problem is solved at By James Crux a stroke’. Funds and Investment Trusts Editor ‘My daughter and I have 20.8% (of the

8 | SHARES | 10 January 2019 BIGBIG NEWSNEWS Dunelm, Gear4Music, Morrisons and more news from the past week We examine some of the key announcements and the market reaction to them

he amount of corporate news has been Pharmaceutical business Vectura (VEC) got fairly limited since the Christmas break as the thumbs-up from the market with its full year Tinvestors await festive trading updates with trading update (3 Jan). Despite revenue guidance some trepidation. So far Next (NXT) and Dunelm being left unchanged the company said earnings (DNLM) have been particularly well received by would be ‘materially ahead’ of expectations. investors and Gear4Music (G4M:AIM) has been Improvements in margin performance, the biggest shocker. progress on productivity and a better mix of Homewares retailer Dunelm saw its shares business all contributed to the beat. soar on 7 January after reporting 9% growth In the groceries space Morrisons (MRW) was in second quarter revenue growth. Its like-for- first in its sector with a Christmas update on 8 like store revenue rose 5.7% to £246.4m, while January and ultimately disappointed the market. comparable online sales shot up by a forecast- Chief executive David Potts faced a tough busting 38% to £36.1m. The company also task after a bumper festive period the previous announced plans to launch a new, more flexible time round and like-for-like retail growth of just web platform to build on the strong contribution 0.6% seemed to be the main sticking point for from internet-based sales. investors. This figure was down from the 1.3% Online musical instruments firm Gear4Music reported in the third quarter and 2.1% growth was heavily out of favour on 4 January with its from a year earlier. shares at one stage losing more than 50% of their value after a major profit warning. In some respects Gear4Music is a victim of its Morrison’s retail own success. Sales growth of 41% in the final four months of 2018 was impressive. Yet it hit like-for-like capacity constraints and will now have to invest sales growth to get up to speed. Earnings for the year to 28 was just February 2019 will subsequently come in below 0.6% the previous year’s result.

Gear4Music’s shares fell more than 50% By Tom Sieber Deputy Editor

10 January 2019 | SHARES | 9 6500 NEXT 6000 5500 5000 4500 4000 3500 J F M A M J J A S O N D J

280 260 CODEMASTERS GREAT IDEAS 240 220 200 180 160 140 120 Fortify yourJUN JUL AUGdefences SEP OCT NOV DEC with 5.8% yielding Henderson High Income Trust

Prudently well-spread trust should140 appeal to the risk-averse as volatility returns 130 isk-averse investors 120 According to the latest unnerved by the return 110 factsheet, Henderson High XXXXHENDERSON100  BUY HIGH of volatility, not to (xxx)90 xxxp Income’s top holdings include INCOME TRUSTELAND OIL & GAS BUY mention slowing global (HHI)Stop80 loss: 161.5p xxp dividend paying stalwarts Diageo economic growth and European 70 (DGE), Royal Dutch Shell (RDSB) R StopJ loss: F M 110pA M J J A S O N D J political uncertainties, might Market value: xxx and HSBC (HSBA). view share price weakness at Total assets: £272m This reassuringly well- the Henderson High Income diversified portfolio focuses on Trust (HHI) as a compelling 195 three types of stocks: ‘stable HENDERSON HIGH INCOME entry point. 190 growth’ names such as publisher 185 We believe the outlook 180 RELX (REL) and pork-to-cooked for income from this highly 175 poultry processor Cranswick diversified portfolio is robust. 170 (CWK); ‘quality cyclicals’ 165 Moreover, the historic dividend 160 including packaging outfit DS yield of 5.8% is attractive and 155 Smith (SMDS) and chemicals we are confident the dividend J F M A M J J A S O N D J concern (VCT); and high will be maintained or increased The investment trust offers yielders such as tobacco giant in future, a facet of the trust investors exposure to a high and Imperial Brands (IMB) and fixed that should entice patient growing income stream. The line telecoms specialist Manx portfolio builders. dividend for the 2017 calendar Telecom (MANX:AIM). Managed by David Smith since year was increased by 2.7% to 2014, Henderson High Income 9.4p and given the trust’s ample aims to provide a high dividend revenue reserves, dividend income with the prospect of growth looks sustainable in what capital growth by investing in a may prove to be more difficult One of the trust’s new prudently diversified selection years ahead. holdings is Coca-Cola HBC of well-known and smaller It uses debt to enhance both (CCH), the soft drinks bottling companies alike. income and capital returns for business which has scope for Smith scours the market shareholders. This includes margin improvements and a for overlooked, lower valued investing in shares and bonds, strong balance sheet, giving companies with solid cash with the significant fixed interest management the flexibility generative business models. portion of the portfolio providing to deploy capital to accretive Launched in 1989, Henderson secure income and boosting the acquisitions or return more High Income has a strong long trust’s overall yield. cash to shareholders. term performance record, Fund manager Smith has an having generated annualised unwavering focus on income By James Crux 10-year price and net asset value sustainability, ever determined Funds and Investment returns of 11.79% and 11.54% to avoid dividend cuts and Trusts Editor respectively. value traps.

10 | SHARES | 10 January 2019 THIS IS AN ADVERTISING PROMOTION

THE CHANGES IN HOW HEALTHCARE IS MANAGED, DELIVERED AND PAID FOR The fast-changing landscape

The structural changes we are seeing in the healthcare What we need to do as a result is consider the types of industry will benefit an ageing population that both needs company we want to invest given how they are adapting and demands better healthcare provision. However, while to the changes going on around them and exploiting these demands are driving up costs, the challenge for the new market opportunities. We need to look at not society is to provide better healthcare to more people for just innovation within the small companies but also less money. innovation and transformation driven by the larger Given this backdrop, there are two clear investment companies. trends emerging: the first is innovation in the form of new Our expertise is in healthcare though we are fully drugs and medical devices; the second is a transformation cognisant of external market factors such as interest in how healthcare is being managed and delivered. rates and inflation as well as political factors such as Traditionally, it has been the smaller companies with Brexit – we spend a lot of time thinking about politics, more nimble, dynamic business structures that have particularly in the US. The companies we invest in have been credited with innovation. We feel the tide is turning solid balance sheets, sustainable and growing cash flow, and it is now the larger companies that are transforming manageable debt levels and, ultimately, what that means healthcare. Over the next decade, it is they who will for investors is compounding returns. We think those more heavily influence the way healthcare is managed, large companies that are transforming healthcare look to delivered and paid for. be well positioned for growth next year. That is where our The first of these trends is already happening thanks portfolio is focused. to a move from a fee-for-service model where a hospital or doctor is paid for everything they do, that rewards Dan Mahony and Jamie Douglas, Fund Managers utilisation, to value-based reimbursement which rewards Polar Capital Global Healthcare Trust medical outcomes. This move, plus aligned incentives, will 4 January 2019 reward those healthcare systems focussed on outcomes, which should ultimately lead to an improvement in the quality of care provided. We live in a world where consumer expectation of any service has been forever changed by the likes of Amazon and Netflix. People expect everything on demand at the push of a button and access to care is no exception. Instead of having to typically wait at least a week to see a doctor, today’s technology allows the consumer to instantly book an appointment online for the following day, or have a video call with a GP allowing a same-day consultation. The final piece is ‘democratised health’ where the individual takes more responsibility for their own health. Dan Mahony, manager of the Polar Capital Healthcare A good example of this is the Apple Watch. The latest Trust, explained what he sees as the future landscape version includes an electrocardiogram (ECG) that, while for healthcare at the AJ Bell Retirement Conference it does not give any diagnosis, will indicate whether or last December. not you need further tests with your GP. This is a new market that is set to develop hugely in the future, with To watch him explain these in more detail, please click different types of wearable and different types of clinical the image. measurement possible beyond an ECG.

All opinions and estimates in this report constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. The information provided does not constitute an offer or solicitation of an offer to make an investment into any fund or company managed by Polar Capital. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Global Healthcare Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. The information contained in this document is not a financial promotion. Past performance is not indicative of future results. A list of all recommendations made within the immediately preceding 12 months is available upon request. Polar Capital is not rendering legal or accounting advice through this material; readers should contact their legal and accounting professionals for such information.

Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority and registered as an investment adviser with the US Securities & Exchange Commission. A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD GREAT IDEAS This cash-generative oil play has big potential Eland Oil & Gas is poised to deliver material increases in output in 2019

he potential for significant production ELAND OIL & GAS  BUY growth and exploration (ELA:AIM) 105.5p success at Nigerian Stop loss: 84.4p Toil producer Eland Oil & Gas Market value: £233m (ELA:AIM) in 2019 makes 6500 this a must-have share for NEXT investors with an appetite for 6000 high-risk stocks. 5500 We previously flagged Eland 5000 as a Great Idea in April 2017 4500 4000 and the shares are now trading 3500 at nearly twice the 57p level at J F M A M J J A S O N D J which we first highlighted the anomalous valuation and one and 2017, Eland found an scope for upside. which could move upwards alternative route to market by 280 The advance in the shares through the course of the year260 shipping its oil in smallCODEMASTERS tankers. has been matched by as Eland delivers on its work 240 It is also worth bearing in mind operational progress on its OML programme. 220 that a company of Eland’s size 200 40 licence. It has seen robust Central to this programme is180 would probably not be able to output expansion with 13,500 development drilling on 160 secure an interest in assets of 140 barrels of oil per day coming the Gbetiokun field. This is 120 this scale and quality in more from the Opuama field on expected to deliver gross JUNstable JULoperating AUG environments. SEP OCT NOV DEC the licence. production of 15,000 barrels In the third quarter of 2019 the As such, we view Eland as of oil per day from an early company plans to drill a well on much more than a speculative production system and the its Amo-1 prospect targeting up oil play as it is a genuinely cash company says it could ultimately to 78m barrels of oil equivalent, generative business, and one deliver output of 45,000 barrels providing a further catalyst for which house broker Peel Hunt of oil per day. the share price. forecasts could be sitting on Although it boasts a long net cash of $125.3m by the history of oil production and 140 end of the year. has well established fiscal terms 130 there are clear challenges, 120 ANOMALOUS VALUATION particularly around security 110 100 Peel Hunt’s forecasts imply an in Nigeria. 90 ELAND OIL & GAS EV/EBITDA (enterprise value- Investors can take some 80 to-earnings before interest, tax, reassurance from the fact the 70 depreciation and amortisation) company has demonstrated its J F M A M J J A S O N D J ratio of 0.6-times. ability to deal with these issues. While oil price volatility and For example, when the Forcados the possibility of delays leaves oil terminal, which currently By Tom Sieber 195 DeputyHENDERSON Editor HIGH INCOME forecast earnings open to takes its crude, was shut down 190 revision, this still seems like an due to militant attacks in 2016 185 180 175 12 | SHARES | 10 January 2019 170 165 160 155 J F M A M J J A S O N D J MONEY MARKETS

A good investor keeps their ear to the ground. That’s LISTEN TO OUR why Shares and AJ Bell have launched a new weekly podcast – so you can stay up to speed with everything investing. Whether you listen on your commute or at your WEEKLY PODCAST computer, ‘AJ Bell Money & Markets’ is a handy way to find out what’s been happening in the financial world, &so you can stay one step ahead. In each episode you’ll get our thoughts on topical financial issues – from pensions to pocket money, from stock markets to savings. The podcast is presented by Shares’ editor Daniel Coatsworth and AJ Bell’s personal finance analyst Laura Suter. They are joined each week by special guests including various Shares journalists and other investment experts. How to listen You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes Podcast Store, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean. Or you can listen to each episode on our website by clicking here. GREAT IDEAS UPDATES

CODEMASTERS NEXT FANTASTIC (CDM:AIM) 180.5p (NXT) £48.65 STOCKS Loss to date: 1.1% Gain to date: 16.1% FOR 2019 Original entry point: Original entry point: Buy at 182.5p, 22 November 2018 Buy at £41.91, 20 December 2018 A DEAL TO make a new mobile game with WE ARE OFF to a flying start after last Chinese group NetEase triggered a 12% rise in month flagging retailer Next (NXT) Codemasters’ (CDM:AIM) shares on 8 January. as one of top picks for 2019. The company Codemasters will receive at least $8m in reported robust festive trading in an update revenue over the next three years, of which $4m (3 Jan) which reignited market interest in is expected to come in the current financial year. the stock. That prompted the company to guide for its Against very downbeat expectations and earnings in the period ending 31 March 2019 to despite a difficult November, the high street beat previous expectations. stalwart managed to increase full price sales ‘In addition to the apparent cash benefits, between 28 October and 29 December by 1.5% we believe the deal also highlights the value year-on-year which was exactly in line with the and monetization potential of Codemaster’s guidance given in September. proprietary technology and IP assets, validating Online business did a lot of the heavy the company’s position as a leading specialist in lifting with web-based sales up 15.2% through racing titles,’ says Jefferies analyst Ken Rumph. the period. Investors were well prepared for The other bit of good news for investors to note the 9.2% decline in sales achieved in is Chinese regulators lifting a suspension on new physical stores given the pressures on the high games in late December 2018. Rumph says this street and so this figure didn’t cause widespread is a positive development for Codemasters as its concern. DiRT Rally 2 title is expected to launch next month The market was even prepared to look past

6500and will be published by NetEase in China. a small downgrade in guidance for the year to NEXT 6000 Codemasters formed a partnership deal with January 2019 from £727m to £723m. 5500NetEase last November whereby the latter Shore Capital analyst Greg Lawless says Next 5000would be the exclusive publisher for three of has a ‘strong track record of under promising and 4500the UK company’s upcoming PC titles in China, over delivering’. He adds: ‘The company exerts 4000which is the world’s biggest gaming market. strong cost and stock control and is highly cash 3500 AddingJ Fa mobile M A game M J therefore J A strengthens S O N D the J generative, evidenced in the recurring £300m relationship between the two parties. share buy-back programme.’

280 6500 NEXT 260 CODEMASTERS 6000 240 5500 220 200 5000 180 4500 160 140 4000 120 3500 JUN JUL AUG SEP OCT NOV DEC J F M A M J J A S O N D J

SHARES SAYS:  SHARES SAYS:  280 These developments should hopefully help to win We260 continue to back chief executiveCODEMASTERS Simon Wolfson’s back the market’s support following a patchy time ability240 to steer Next through a difficult backdrop. 220 for the share price. Keep buying. Still200 a buy. 180 160 140 140 120 14 | SHARES | 10 January 2019 JUN JUL AUG SEP OCT NOV DEC 130 120 110 100 90 ELAND OIL & GAS 80 70 J F M A M J J A S O N D J

140 130 195 120 HENDERSON HIGH INCOME 190 110 185 100 180 90 175 ELAND OIL & GAS 80 170 165 70 J F M A M J J A S O N D J 160 155 J F M A M J J A S O N D J

195 HENDERSON HIGH INCOME 190 185 180 175 170 165 160 155 J F M A M J J A S O N D J Low-cost pension

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TALKING POINT Our views on topical issues

How worried should you be about China? We look at some of the key worries for the market and the stocks and funds “ which might be affected

2 January warning from Apple that sales and A earnings for the three Last year however the stock market lost months to December were hurt 25% of value meaning that $2tn of ‘wealth’ by weak Chinese demand sent has disappeared from investors’ pockets a shockwave through world markets, so does this mean we should be worried about China? According to chief executive Tim Cook, Apple was wrong- footed by ‘the magnitude of the economic deceleration in Greater China’, blaming it for ‘most of our revenue shortfall Moreover in the quarter to However Chinese exports to our guidance and over 100% the end of September, Chinese overall have grown this year of our year-over-year worldwide GDP growth was 6.5% which was with November’s trade surplus revenue decline’. below estimates and the lowest hitting nearly $45bn, the largest Analysts and journalists have level since the financial crisis. level since December 2017 and suggested that Apple’s selling Sensing a slowdown, well above the market forecast prices are too high, especially commodity investors have been of $34bn. for the iPhone, but could falling piling out of copper, where China China’s trade surplus with the handset sales be a sign that is the world’s largest consumer, US, its largest export market, Chinese consumers no longer and into gold and silver. hit a record high of $35.5bn in feel like spending? As a result copper prices October as exports outpaced are now at 18-month lows imports suggesting that Trump’s MANUFACTURING SURVEYS while gold prices are at six- tariffs may actually be hurting US SUGGEST ECONOMY IS month highs. firms more than Chinese firms. SLOWING US manufacturers are hardly Last week the privately- ARE TRADE TARIFFS TO dancing in the streets, with sponsored Caixin manufacturing BLAME? the much-followed Institute of purchasing managers index It is hard to gauge the extent to Supply Management’s PMI index (PMI) surprisingly fell below the which a slowdown in Chinese of factory activity suffering its key 50 level for the first time demand is due to trade tariffs. biggest drop last month since since May 2017. The 25% tariffs slapped on October 2008, sending tremors A reading above 50 signals Chinese steel imported into the through US stocks. expansion while a number below US from March last year have Trump’s reaction has been to 50 usually signals contraction. effectively stopped exports call a 90-day truce in the tariff This was just days after the dead in their tracks. That war, while US and Chinese trade official government-sponsored has meant a surplus of steel negotiators are due to meet in PMI fell to its lowest level since on world markets which has Beijing this week in a bid to avert February 2016. depressed prices. further trade tensions.

16 | SHARES | 10 January 2019 Our views on topical issues TALKING POINT

CHINESE SHARES BATTERED 3800 (SHANGHAI STOCK EXCHANGE) 3600 3400

3200

3000 2800

2600 2400 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN

Source: Datastream, 7 January 2019

IS THE DOMESTIC ECONOMY Last year however the (ANTO) losing 4% and Glencore SLOWING? stock market lost 25% of (GLEN) losing 4%. Consumption accounts for a value meaning that $2tn of Meanwhile clothing firm steadily growing share of the ‘wealth’ has disappeared from Burberry (BRBY) dropped 6% Chinese economy but in a investors’ pockets. and in Paris shares in luxury worrying sign retail sales growth Also property values, which conglomerates LVMH and Kering hit its lowest level in 15 years have been rising for many years, lost 4% and 5% respectively. last month. have levelled out with new home Lagonda (AML) Car sales have actually gone prices in Beijing and Shanghai saw its shares fall 3% as most of into reverse falling 18% in more or less flat over the its growth this year has come November, the sixth consecutive last year. from China. month of declines. The government is doing what In terms of smaller-ticket The total number of vehicles it can to stimulate the economy, consumer spending, drinks sold last year will be down on reducing business taxes and makers Diageo (DGE) and Remy 2017, the first annual fall since cutting its reserve requirement so Cointreau generate significant the early 1990s. China is the that the banks can keep lending, sales in China and consumer world’s largest passenger-car but investors seem unconvinced. health giant Reckitt Benckiser market. (RB.) has large exposure through Part of the reason for lower WHICH STOCKS COULD BE its infant formula business. sales is a government crackdown AFFECTED? In the investment trust world on non-bank lending such as Plenty of UK stocks have Edinburgh Dragon Trust (EFM) peer-to-peer platforms, which is exposure to China but miners is a pure play on China and part of a wider policy of reining in and luxury stocks look to be the therefore worth monitoring. easy credit. most exposed in terms of sales Another part is that Chinese and profits. consumers have tended to On the day that Apple warned, rely on the stock market and mining stocks were instantly By Ian Conway property prices to generate marked down with BHP Group Senior Reporter surplus income. (BHP) losing 2%, Antofagasta

10 January 2019 | SHARES | 17 ASK TOM Your retirement questions answered ‘Will there be a cap on tax-free withdrawals from pensions?’ AJ Bell expert Tom Selby a trio of questions in this week’s column

To kick off 2019 we’ve got a automatically, although this will bumper edition of ‘Ask Tom’, depend on the type of scheme with resident AJ Bell pensions you were in. expert Tom Selby answering If you do think you have three of the questions sent in missed out on tax relief it’s over the festive period. worth writing to HMRC to set out your case. You can find details on how to do this here. By Tom Selby However, even if you are AJ Bell Senior Analyst eligible to reclaim tax relief this will based on the value of your Question 1 Anonymous original contribution only, so My pension closed at age 60 and below the personal allowance won’t take into account any I transferred what monies were at the time you made your investment growth your fund in it (£4,000) into a SIPP. I did contribution. has enjoyed since. not claim any tax relief on it. It is If it was a ‘relief at source’ now with another provider and DC scheme then your provider Question 2 Clive, 59 I still do not claim any tax relief should have added on tax I have consolidated all of my on it, even though its value has relief at the basic-rate (20%), defined contribution pensions increased. regardless of how much you into a SIPP, but I also have a Can I claim tax relief or not? were earning at the time. You small defined benefit pension would then be able to claim which is due to start paying out The way pension tax relief is back an extra 20% or 25% if in 3 months’ time. added to your fund depends you were a higher or additional- Will this affect my ability to on that type of scheme you rate taxpayer through your put the full amount into my saved in. If you were in a tax return. SIPP? If so, I’m guessing I would defined benefit (DB) scheme So it’s likely you’ll have need to defer my DB pension then tax relief will have been received some or all of the payout (not including added automatically, so it will tax relief you were entitled to tax-free amount). be included in any money you transferred to a SIPP. DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? If it was a ‘net pay’ defined contribution (DC) pension – Send an email to [email protected] with the words where your contribution is ‘Retirement question’ in the subject line. We’ll do our best to Shares taken from your salary before respond in a future edition of . Please note, we only provide guidance and we do not provide any tax has been paid - then financial advice. If you’re unsure please consult a suitably your tax relief should also have qualified financial adviser. We cannot comment on individual been added automatically, investment portfolios. unless you were earning

18 | SHARES | 10 January 2019 your retirement questions answered ASK TOM

impact on your ability to save in a DC vehicle such as a SIPP. Similarly, if you purchased a non-flexible annuity – a product which provides a guaranteed income for life – this should not impact your annual allowance.

Question 3 Brian I’ve read stories suggesting the Government is going to cap the amount you can take tax-free from your pension at £40,000. Is this true, and if so should I take my tax-free cash now while I still can?

No, it’s not true. While clearly you can never rule anything in or out categorically when it comes to political decisions such as this, there are no current plans to alter pension tax relief or reduce the amount you can withdraw tax-free. I suspect the story you have read was reporting on proposals from a think-tank called the Resolution Foundation, which As you have alluded to in your called the ‘Money Purchase has put forward a number of question, the amount you can Annual Allowance’ (MPAA). This ideas designed to save money save in a UK pension scheme kicks in when you access your and make the tax system “fairer”. each year is determined by the fund using the pension freedoms Even if there were to be annual allowance. introduced in April 2015. any changes in this area – Slightly confusingly, there are In order for the MPAA to and it should be noted that different annual allowances take effect two conditions despite constant rumours the depending on your earnings or must be met. entitlement to 25% tax-free cash how you have accessed your Firstly, the income you has remained unaltered – it is pension savings. withdraw must be taxable (i.e. likely some sort of transitional For most people, the annual taking a tax-free lump sum won’t arrangements would be put allowance is £40,000 (including affect your annual allowance). in place. Anything less than tax relief). However, those with Secondly, it must be a flexible this would risk fundamentally total earnings above £150,000 withdrawal from a defined undermining trust in pensions. could be subject to the annual contribution pension from More broadly, it’s rarely a allowance ‘taper’, which age 55. good idea to make decisions gradually reduces the amount Provided you do not meet which could affect your financial you can save in a pension each both of these conditions the future based on speculation year to a minimum of £10,000. MPAA shouldn’t affect you. So which may or may not be There is also a third version receiving a DB pension shouldn’t grounded in fact.

10 January 2019 | SHARES | 19 FEB

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arren Buffett once Fear is not in short supply the debate rages on and said that as an right now. the pound remains in the Winvestor, it is wise There are rising concerns doghouse. to be ‘fearful when others over the state of the US are greedy and greedy economy, and whether after DIAMONDS when others are fearful’. a number of relative boom IN THE ROUGH years, slowing growth might Many investment experts lead to a recession. believe equity markets, and Interest rates are rising, the UK in particular, are Shares’ best value ideas inflation is emerging and littered with very attractive there is the not insignificant opportunities, made more • Aviva matter of an ongoing trade so by the constant talking • EasyJet dispute between the US and down of stock market • Imperial Brands China, as the world’s two prospects. • Inchcape largest economies slug it out. In this article we reveal • Melrose Industries The UK backcloth six of the best value • TUI continues to be dominated opportunities in the FTSE by the Brexit quagmire as 350 index, identified using

10 January 2019 | SHARES | 21 three tried and trusted valuation metrics. ‘The unfolding cyclical downturn coupled with the fall-out from the trade conflict between America and China should provide a compelling opportunity to build longer-term positions,’ says Philip Saunders, ’s co-head of multi- asset growth. early days of 2019. Others go further. ‘The Since peaking at a record unrelenting negativity that 7,877.45 on 22 May 2018 the investors are demonstrating FTSE 100 index has chalked towards UK equities is up a 16%-plus decline at its making me feel more and lowest ebb in late December. more positive on their That makes it among the prospects for 2019,’ says worst performing major Alex Wright, fund manager stock markets anywhere in at Fidelity Special Situations the world over the past six to (B4566K2) and Fidelity 12 months, but also now one Special Values (FSV). He is of the cheapest. a natural contrarian investor who feels comfortable going UK AT A GLOBAL against the grain. DISCOUNT ‘It might be At roughly 6,750 (at time counterintuitive to think of writing) the FTSE 100 is that the UK market could be trading on a next 12 months SIMPLE VALUATION among the top performers price to earnings (PE) MEASURES globally in the year that multiple of 11.2. That’s down In this feature we have run we leave the EU (if indeed from 11.6 in November. the numbers with the aim we do). But markets have It probably doesn’t need of highlighting examples of a way of confounding saying that this represents stocks that may be getting expectations and surprising a significant discount to an unfair bashing. We have the consensus,’ he adds. the major US markets, yet kept things fairly simple, As Wright points out it is also trading below looking for stocks that look the negativity has been the Eurostoxx 600 and like they may offer attractive unrelenting of late. UK Australia’s ASX and India’s value using metrics that will stocks had a very difficult Sensex. Even Japan’s Topix be familiar to many investors. 2018 and the mood has index in on par with the UK’s First, we have drawn barely lightened in the main index. together a list of interesting Yet out of adversity comes investment ideas based opportunity. ‘Price is what on the price-to-earnings World’s top indices by PE you pay, value is what you (PE) ratio, an easy-to-use get,’ to paraphrase another favourite of investors. • NASDAQ 17.2 of Buffett’s nuggets of We have also tapped • S&P 500 14.4 wisdom. Or in other words, into the extra power implied • DOW JONES 13.7 while the herd power of by the price-to-earnings • EUROSTOXX 600 12.8 market sentiment cannot be growth (PEG) measure, • FTSE 100 11.2 ignored, it is often only short first popularised in the • TOPIX 11.2 term. Valuation drives share 1970s by private investor prices in the long run. guru Jim Slater.

22 | SHARES | 10 January 2019 HOW TO WORK OUT PE AND PEG

• Earnings per share (EPS) ÷ share price = price-to- earnings (PE) ratio • PE ratio ÷ annual EPS growth = price-to-earnings growth (PEG) multiple

The PEG is used to determine a stock’s value while also taking the company’s earnings growth potential into account. This gives a more rounded picture of a stock’s relative value than the PE ratio alone. It can be applied to historic There are plenty of earnings but, given the alternative valuation metrics forward-looking nature of that can be used – such stock markets, is arguably as dividend yield or the better suited to forecasts more complex discounted of future earnings. cash flow (DCF) – but we Lastly, we have accounted see merit in keeping it for the relative balance simple and using our own sheet strength or risks of knowledge to identify the highly cashed-up or heavily- best ideas from the list. indebted companies by We also publish in full a list using enterprise value (EV). of top 40 stocks in each We have measured this category to support your against the most common own idea generation. profitability metric of The widespread decline earnings before interest, in share prices over recent tax, depreciation and months has understandably amortisation, or EBITDA made investors nervous for short. about remaining invested in EV is calculated by taking the stock market. But rather a company’s market value, than ripping up portfolios then adding any net debt, entirely and donning tin hats, or subtracting net cash. It’s we believe investors can a neat way of seeing what make subtle shifts to provide the market thinks the whole extra portfolio protection. business is worth. This could involve increasing stakes in reliable income-bearing stocks, funds HOW TO WORK OUT EV and trusts that will help improve diversification. • Market cap plus net debt (or And we also think select minus net cash) = enterprise oversold stocks may offer value significant upside over the medium-term.

10 January 2019 | SHARES | 23 LOW PE IDEAS Imperial brands (IMB) £23.76 Forward PE: 8.1 FTSE 350 - Cheapest PEs top 40 single digit PE ratio implies Imperial Company Forward PE* Brands (IMB) has Barclays 6.7 A run out of growth puff, Lloyds Banking 6.9 yet the market may be Persimmon 6.9 too pessimistic about the Paragon Banking 7.0 Davidoff, Gauloises Blondes Petrofac 7.0 and JPS maker’s long-term Superdry 7.0 prospects. Tobacco twosome Mitchells & Butlers 7.1 Imperial and British 7.2 American Tobacco (BATS) Phoenix 7.4 languish on historically low 7.5 ratings due to concerns over DS Smith 7.6 declining cigarette volumes, Kingfisher 7.7 the economics of Next Intu Properties 7.7 Generation Products (NGPs) evidence its investments and regulatory crackdown in e-vapour brand blu are Saga 7.7 fears. Though it is worth earning a profit, as well as Royal Bank of Scotland 7.8 noting that British American growing investor appetite Bovis Homes 7.8 has greater exposure to a for Imperial’s strong Investec 7.8 potential ban on menthol dividend growth. For the John Laing 7.8 cigarettes across the pond. year to September 2019, RHI Magnesita 7.8 Imperial is successfully UBS forecasts a hike from British American Tobacco 7.9 trimming its brand portfolio 187.8p to 206.6p, though the Legal & General 7.9 (a divestment programme implied prospective dividend Imperial Brands 8.1 on track to deliver up to yield of 8.7% suggests Stagecoach 8.1 £2bn of proceeds) and investors should be cautious migrating niche brands to over a potential reduction in 8.2 Smurfit Kappa global brands with scale, a the dividend. As the smallest TUI AG 8.2 strategy designed to deliver of four global tobacco giants, EI Group 8.2 better growth and enhanced Imperial Brands is also 8.2 margins. Re-rating catalysts likeliest takeout candidate, WPP 8.3 include a continuation although any takeover would Glencore 8.3 of Imperial’s improving likely be a complicated market share performance, consortium bid. RPC 8.3 EasyJet 8.4 Greene King 8.4 Numerous housebuilding and financial stocks populate our top 40 of Ashtead 8.5 FTSE 350 stocks on the lowest price-to-earnings ratios. This reflects Prudential 8.6 two issues. First, these companies are often not assessed on earnings 8.6 multiples but instead on how their market valuation stacks up against ITV 8.7 the value of their assets. Second, both sectors have been badly hit by Man 8.7 Brexit fears thanks to their UK domestic bias. The next few months, with a range of possible outcomes for the UK’s future relationship with Europe, Halfords 8.7 could be decisive in determining whether investors are attracted by the Inchcape 8.7 apparent value on offer from the sectors. International 8.8 Source: SharePad, 2 January 2019

24 | SHARES | 10 January 2019 LOW PE IDEAS Inchcape (INCH) 547p Forward PE: 8.7

screeching share UK and Australia had been price reverse at slower than anticipated. AInchcape (INCH), However, potential catalysts reflecting margin pressure of the share price include and currency headwind an easing of retail margin concerns, leaves the pressures into 2019 as well as shares languishing on an the organic and acquisitive inexpensive price to earnings growth of the distribution ratio. That should interest arm. As Numis Securities value-seekers, since Inchcape explains, ‘the value in a is an automotive distributor professional, well-invested and retailer with truly and experienced partner is global scale, operating in growing for manufacturers’, 32 markets. Partnering with meaning Inchcape is well- leading high-end car brands, placed to continue winning BMW, Jaguar Land Rover, new distribution contracts. Aston Martin and Mercedes- A strong balance sheet Benz among them, Inchcape and robust cash generation has a cash generative, should enable Inchcape to defensive and higher margin execute on a healthy M&A distribution business at its pipeline whilst funding core. The company’s third of £2.28bn and with CEO a progressive dividend, quarter update (8 Nov) Stefan Bomhard also the shareholder reward drove earnings downgrades, conceding the easing of increased by a healthy 12.7% revealing flat group revenue retail margin pressure in the to 8.9p at the interim stage.

10 January 2019 | SHARES | 25 LOW PEG IDEAS Aviva (AV.) 375p FTSE 350 cheapest Forward PEG: 0.7 PEGs top 40 viva (AV.) is the UK’s Forward PEG* Company largest insurance 0.5 Acompany with around Holding 0.5 half of sales coming from its Sports Direct International 0.5 home market and half from Wood (John) 0.5 France, Holland and Poland. Rolls-Royce 0.5 Most of its sales come Royal Bank of Scotland 0.5 from life insurance where Amigo 0.5 customers and premiums Bovis Homes 0.6 tend to be ‘stickier’ than in household or car insurance. Man 0.6 2018 was a busy year for Weir 0.6 Aviva. In April it incurred IP Group 0.6 the wrath of shareholders Investec 0.6 when it said it would cancel TI Fluid Systems 0.7 £450m of preference International Consolidated 0.7 shares which carry a higher Airlines dividend than the ordinary Kingfisher 0.7 shares. In May it raised Ashtead 0.7 eyebrows by buying almost Drax 0.7 £1bn of pension liabilities Restaurant Group 0.7 from embattled retailer M&S Micro Focus International 0.7 in its largest ‘bulk annuity’ 0.7 deal to date. In October SIG 0.7 the chief executive stepped Oil & Gas 0.7 down leaving the company McCarthy & Stone 0.7 leaderless just as the UK the consensus forecasts are financial regulator and the correct, Aviva will deliver at Paragon Banking 0.7 competition watchdog least some growth this year Aviva 0.7 started looking into the despite its lowly earnings Barclays 0.7 home and car insurance multiple. And analysts are Prudential 0.7 markets. The current almost unanimous in backing Redrow 0.8 concerns are Aviva’s high the stock. Their consensus TP ICAP 0.8 debt levels compared with its price target of 550p Vodafone 0.8 peers and its perceived lack implies close to 50% Melrose Industries 0.8 of earnings growth. But if upside from here. CRH 0.8 Saga 0.8 The table shows a diverse set of companies from the FTSE 350 which Tesco 0.8 look cheap relative to their forecast earnings growth. Some of the oil- Ibstock 0.8 related stocks may have made the list because the market is increasingly Hastings 0.8 sceptical forecasts will be hit after the big decline in oil prices in the SSE 0.8 latter part of 2018. The presence of Tesco and Rolls-Royce (RR.) 0.8 would suggest their ongoing recovery stories are yet to fully convince the market. Respective chief executives Dave Lewis and Warren East are 0.8 highly regarded in the world of business. B&M European Value Retail 0.8 Source: SharePad, 2 January 2019

26 | SHARES | 10 January 2019 LOW PEG IDEAS Melrose Industries (MRO) 157.3p Forward PEG: 0.8

he strategy behind the businesses previously engineering acquired by Melrose. A lack Tplay Melrose (MRO) of any hidden problems at is relatively straightforward. GKN when the company It buys poorly managed but reported its half year results good quality manufacturing on 6 September 2018 businesses which are was reassuring but media suffering from a lack of speculation that a planned investment. It looks to drive sale of the group’s powder operational improvements metallurgy unit had attracted and boost cash generation a lower than anticipated before selling the firms for price hit investor sentiment a healthy profit. This has, in November. Melrose has according to figures quoted also been affected by by the company, helped concerns over a possible deliver a total shareholder global slowdown which return of 3,019% since joining might hit demand for GKN’s the stock market in October automotive and aerospace 2003. The controversial £8bn operations. However, if the purchase of UK industrial company can demonstrate margin performance, then engineer GKN in 2018 material progress in its investors should respond represented a big step up turnaround of GKN in 2019, to the value opportunity compared with the scale of particularly in terms of in the shares.

10 January 2019 | SHARES | 27 LOW EV/EBITDA IDEAS EasyJet (EZJ) £10.95 FTSE 350 cheapest Forward EV/EVITDA: 4.7 EV/EBITDA top 40 hares in EasyJet (EZJ) Forward PEG* Company appear undervalued Galliford Try 3.1 with investors Playtech 3.1 S overlooking a strong balance FirstGroup 3.3 sheet that will help the airline Royal Mail 3.6 weather potential volatility 3.6 as the UK’s exit from the EU TI Fluid Systems 3.9 fast approaches. International Consolidated EasyJet is confident it can 3.9 Airlines continue operating flights KAZ Minerals 4.0 across the EU ‘regardless of Acacia Mining 4.0 the Brexit outcome’ via the 4.0 creation of EasyJet Europe 4.0 with headquarters in Vienna. 4.2 Unlike embattled rival , EasyJet 4.2 Ryanair (RYA) has been able to drive Barratt Developments 4.2 profitability higher with its Kingfisher 4.2 impressive pricing power and BP 4.2 passenger growth despite Wizz Air 4.2 widespread strike disruption. Redrow 4.3 EasyJet is currently on a Capita 4.3 cheap 4.7 times enterprise to sweep up its European 4.4 value/earnings before rivals. The airline’s robust Persimmon 4.4 interest, tax, depreciation financial position should help and amortisation, reflecting EasyJet navigate several Tullow Oil 4.4 in part the strength of short-term factors, including 4.5 its balance sheet. Cantor a potential softening of Glencore 4.5 Fitzgerald analyst Robin demand in Europe, an Rank Group 4.5 Byde argues EasyJet is one expected decline in unit ContourGlobal 4.5 of the leading airlines revenues and the impact Sainsbury (J) 4.5 and is in a prime position of fuel costs if prices rise. Evraz 4.6 Taylor Wimpey 4.6 Companies with little debt or lots of cash can sometimes have a low EV/ 4.6 EBITDA (enterprise value-to-earnings before interest, tax, depreciation Stagecoach 4.7 and amortisation) multiple which helps explain why many mining stocks EasyJet 4.7 make the list. Mining firms have slashed their debt and stockpiled cash Ashtead 4.7 in recent years following a crash in commodity prices. However, they Mondi 4.7 are still vulnerable to volatility in resources markets and wobbles in the TUI 4.8 global economy so being cheap doesn’t necessarily make them low- Anglo American 4.8 risk. This situation also means earnings can be tricky to forecast. When 4.8 companies want to make acquisitions, they often look at the EV/EBITDA Royal Dutch Shell 4.9 multiple of the target as it includes debt which other metrics based purely on market valuation like price-to-earnings do not. As such, the Antofagasta 4.9 accompanying list could include potential takeover targets. Marks & Spencer 5.0 Source: SharePad, 2 January 2019

28 | SHARES | 10 January 2019 LOW EV/EBITDA IDEAS TUI (TUI) £11.51 Forward EV/EBITDA: 4.8

ravel operator TUI (TUI) is overly pessimistic on is setting itself apart the company’s cruise and Tfrom the competition hotel divisions. He forecasts by tapping into demand for a €25m year-on-year experiences. TUI generates improvement in earnings over 70% of its earnings in the hotel and resorts from its holiday experiences division, driven by new comprising hotels, cruises, openings and a recovery in excursions and destination Eastern European markets. activities. A raft of profit Strong demand and warnings from rival Thomas the launch of three new Cook (TCG) has somewhat ships this year is expected overshadowed TUI’s robust to deliver further strong performance, which is to 30 September 2020. growth in the cruises expected to continue into Future catalysts for division with earnings set 2019. TUI currently trades growth include an extensive to soar by €55m to €379m on 4.8 times enterprise pipeline of hotel openings in in 2019. value to earnings before popular destinations such as interest, tax, depreciation Greece and Turkey, as well By Steven Frazer, James Crux, and amortisation, despite as new cruise ships this year. Ian Conway, Tom Sieber targeting at least 10% Berenberg analyst Stuart and Lisa-Marie Janes earnings growth every year Gordon argues the market

10 January 2019 | SHARES | 29 INVESTMENT TRUSTS Technology fund expert who’d been slicing Apple long before the warning Polar Capital Technology’s Ben Rogoff has used stock selection flexibility to out-do benchmark

eading technology fund Today the stake is 5.4%. That manager Ben Rogoff had remains sizeable (Apple is still L been cutting back on his Polar Capital’s third biggest appetite for Apple long before investment) yet our back of note the consumer electronics giant’s book calculations suggest that shock profit warning (2 Jan). more than £17m of net assets The respected manager of the have been funnelled out of Apple Polar Capital Technology Trust and into other investments (PCT) has become increasingly during that 17 month spell. wary of potential threats to the Critics might say that this still Cupertino giant’s iPhone sales leaves the trust with egg on its volumes against a backcloth face. A 5.4% net assets stake in of aggressive trade rhetoric Apple implies that something from both the US and Chinese close to £9m of the trust’s value governments. was eaten away by the Apple

Apple chief executive Tim warning. Cook has tried various ploys Rogoff sees Apple’s cast iron to patch potential leaks from balance sheet as a major positive his company’s earnings from Asia, particularly in China, for the for the company going forward,

global smartphone saturation. adjustment, but the share price backed by a $237.1bn cash pile This has included schemes tanked, losing about 10% of their (as of 1 November 2018) that will like launching an array of new value to $144.04. and more expensive handsets, Adding to Rogoff’s concern cranking up its services revenues was Apple’s controversial from streaming music, apps and decision last year to stop telling “ much else, plus enormous share investors how many iPhone units buybacks, for example. were shipped, seen by many A 5.4% net assets stake commentators as a slap in the in Apple implies that ALARM BELLS RING face for transparency. something close to This came to a head just two Being seemingly ahead of the £9m of the trust’s value days into 2019, the company curve should be, at least partially, reporting the grim news that its satisfying for Polar Capital was eaten away by the revenue and earnings numbers investors. Back in August 2017 Apple warning would be lower than it had Apple ranked as the investment “ forecast at the last quarterly trust’s second largest holding, earnings report in November. with 7% of its funds tied up in Apple blamed faltering sales in the smartphones designer.

30 | SHARES | 10 January 2019 INVESTMENT TRUSTS

continue to fuel share buybacks. 100 P CP CN S But the manager also remains N CN S S S ‘benchmark aware’ to its Dow 1200 Jones World Technology Index, 1000 which means some very large technology stocks simply must 800 be owned. 00

WILLING TO LOOK BEYOND 00 THE BENCHMARK 200 But it is encouraging that Rogoff 0 shows a distinct willingness to 200 2010 2011 2012 2013 201 201 201 201 2018 look beyond the benchmark in his stock selection when he can It is a strategy that stands an extreme spell of volatility to gain access to the very best up to performance scrutiny. across technology markets long-term growth opportunities, Overweight holdings (meaning Ben Rogoff remains as chipper as any active fund manager they are a higher proportion of about the long-run prospects should look to do. the trust than in the benchmark) for select technology themes as such as chip maker Advanced ever, flagging cloud computing, Micro Devices and software software-as-a-service, Polar Capital stocks like Alteryx, Twilio, New digital marketing, complex Technology’s largest Relic and Hubspot joined better- microchips and robotics/ known names (Amazon, Dropbox, a u to m ati o n a s s o m e o f h i s holdings ServiceNow) to significantly pet favourites. % OF bolster the half year performance ‘Ben Rogoff makes a HOLDING PORTFOLIO to 31 October 2018. compelling case for the Alphabet 9.0% During that six-month trading continuing emergence of the Microsoft 9.0% period Polar Capital saw its next technology cycle and Apple 5.4% net asset value (NAV) increase the disruptive effect that it is 8.5%, about a fifth better than having on many of the sector’s Facebook 3.3% the 7% of the Dow Jones World existing large cap incumbents,’ Tencent 3.3% Technology Index. points out Emma Bird, analyst at Alibaba 3.3% Yet the trust’s share price has, Winterflood. Amazon.com 3.0% perhaps understandably given It has certainly worked in the Taiwan concerns for global stock markets past. Over the last 10 years the Semiconductors 2.3% and growth, continued to fund has delivered a NAV total Salesforce.com 1.9% struggle, falling about 17% since return of 551%, smashing the Adobe Systems 1.9% ‘Red October’s’ sell-off kick-in. 423% return of the Dow Jones Total 42.4% That leaves the stock changing World Technology benchmark. hands now at £11.10. The share That’s also modestly better Source: Polar Capital, as at 30 November 2018 price discount to NAV had than its closest UK–listed widened to 6.5% at 31 October, peer, the Walter Price-run although it has since narrowed (ATT) again to about 3%, more in line at 534%. with its 10-year average of 3.8%, according to Winterflood data.

NEXT DISRUPTIVE TECH By Steven Frazer CYCLE News Editor While recent months have seen

10 January 2019 | SHARES | 31 FUNDS Where European stocks stand two decades after the euro’s launch We talk to fund managers about the prospects for the single currency and Eurozone shares

his month marks two decades since the T introduction of the euro, when 12 European nations cast aside their own currencies to unite under a single coin. As the euro launched in 1999, investors saw spreads between core nations such as Germany and France tighten with those of peripheral members such as Greece and Portugal. Ian Ormiston, manager of the Merian Europe ex UK Smaller Companies (BRTNQ88) fund, explains: ‘The cost of capital populist political parties has REGION FACING SEVERAL tumbled for peripheral equity sparked concerns that more HEADWINDS markets and their perceived risk countries could try to leave the In 2018, Europe had to cope premium collapsed.’ union or its currency. with myriad headwinds, Thomas Brown, co-manager of including trade war concerns, SPREADS HAVE WIDENED Miton European Opportunities political uncertainty in Italy AGAIN (BZ2K2M8), says: ‘The euro, and the UK, and monetary Today, however, Italian like Facebook, was supposed tightening in the US. Growth government bonds are trading to bring us all together. But it in Europe was just 0.2% in the around their widest spread in has had the opposite effect; three months to November – five years compared to German driving substantial divergences its lowest level in more than bunds. At the start of 2019, in Eurozone economies, which four years – and ECB President Italy’s budget is one of the key currently appear insoluble. Mario Draghi has said the base issues facing the eurozone. It’s Currency union without federal rate is unlikely to rise before the just one of many clouds over union looks doomed to fail.’ summer. the investment outlook for Indeed, the union has faced a Despite that, many fund the region. number of unprecedented issues managers remain optimistic The value of the euro is over the past decade, as the about the year ahead. A holding steady against other European Central Bank has tried recent rout has seen company major currencies, but its future to manage its way out of a global valuations fall, but Edward remains in doubt. The UK’s financial crisis with member Greaves, co-manager of decision to leave the European states at varying states of boom the JPM European Smaller Union along with the rise of and bust. Companies (JESC) trust, points

32 | SHARES | 10 January 2019 FUNDS

out that earnings growth for been possible to find companies VOLATILITY SET TO PICK UP many smaller firms on the unaffected by their local bond Two decades on from the continent is forecast to be close market woes. Germany’s launch of the euro, the outlook to 10% this year. domestic market has never for the region is by no means He is particularly upbeat been so strong, as its export a simple one to navigate. about the outlook for sector has been hampered Brown thinks growth - both businesses in the healthcare by the relentless rise of the economic and earnings - will be and technology sectors. He has Deutsche Mark. Even in Italy, we lower this year, while volatility investments in Swiss firm Vifor are able to find manufacturers is likely to pick up. His fund, Pharma and French consultancy that have benefitted from the which has returned 50.3% over company Altran Technologies. crushing of domestic inflation.’ three years, invests in names The trust has returned 17.3% Some 7.2% of his fund’s including Ferrari, Finecobank over three years. assets are in Italian equities and Netherlands eyecare retailer Chris Hiorns, manager of with other investments in GrandVision. EdenTree Amity European German, French and Dutch While fears abound about (0844833), thinks the European stocks. Top holdings include potential recession, trade wars, economy as a whole looks Belgian manufacturer Ontex rising rates and political crises, it to be in much better shape Group and Norwegian retailer is important to remember that than it has been for the past Europris. The fund has returned a country’s stock market often decade. The introduction of new 16% over three years. has little to do with its political emissions controls has hurt the James Sym, manager of or economic environment. So automotive sector, but he thinks Schroder European Alpha much uncertainty often creates it’s a temporary issue, which (B6S00Y7), is looking for opportunities for stock pickers could provide an investment companies that are likely who can cut through the noise. opportunity. to benefit if inflation picks Miton man Brown adds: ‘Our up. This includes sectors approach is not to spend time FOCUS ON LOWLY VALUED such as telecoms, where the second-guessing the macro- CYCLICAL STOCKS infrastructure needed to supply economic environment, but Hiorns is focusing on cyclical services already exists so capital to focus on owning the few stocks trading on low valuations, expenditure isn’t too high, and great world leading-companies yielding 4% or more. Among rising wages mean customers in Europe that we think will the constituents of the portfolio can bear price rises. continue to perform well are tyre manufacturer Michelin, He also likes financial firms, whatever the economic weather.’ recruitment firm Randstad, and which are able to increase building materials company St their rates on loans and other Gobain. The fund has returned products as inflation creeps up, 25% over three years. helping to boost revenue. The By Holly Black Merian manager Orimston fund has returned 20.8% over says: ‘As a stock picker, it has three years.

10 January 2019 | SHARES | 33 FEATURE Everything you need to know about impact investing We look at how certain types of investment look to actively do good with your money

slows and stock markets struggle this year money will continue to flow into impact funds. For now the market is led by development-finance institutions and specialist asset managers but a growing number of investors are looking for ways to generate benefits for society alongside healthy financial returns. Once impact investing ‘tips’ into the institutional market, where assets under management are over $100tn, growth could really take off as the investment style gets adopted by the mainstream. Already fund management New Year is typically a environmental harm, impact firms have lent their support time to make resolutions investing directs investment to The Big Exchange, an impact A and beyond self- towards those that have a investing platform backed by The improvement many of us will be positive influence. Big Issue magazine which aims to considering ways we can make Impact investing also means raise £3bn of assets over the next a positive contribution to the generating a positive financial five years. world around us. return, which although it sounds The investment industry is obvious hasn’t always been a KEY DRIVERS ARE GLOBAL responding to this aspiration priority with ethical investing. CHALLENGES with vehicles which look to do The main drivers behind impact good with your money as well as A LARGE AND GROWING investing are the big issues generating a healthy return. MARKET facing all of us: a growing At first glance ‘impact By 2017 the amount of money global population, rising living investing’ doesn’t seem that devoted to impact investing standards, natural resource different from ethical investing stood at $228bn making it a constraints and above all which has been around for distinct, specialised investment climate change. decades. class in its own right. As consumers we are The main difference is that According to the World becoming increasingly aware where ethical investing is about Economic Forum the market of the need to conserve natural directing investment away from grew five-fold from 2013 to 2017 resources and above all not to companies that do social or and even if the world economy pollute the environment.

34 | SHARES | 10 January 2019 FEATURE

The public support for the campaign to ban single-use plastic following the BBC’s Blue Planet II series and the success of the ban on ‘disposable’ plastic carrier bags are examples of ‘people power’. Some of the key investment areas for impact funds are low-carbon power generation such as wind and solar plants, water supply and treatment and improved healthcare in developing countries. In these areas solutions are already available but they need funding to enable them to scale up over the coming decades. However there are still major and environmental goals. management were £12.5bn, issues to solve such as how This spring it aims to finalise an increase of 72% thanks to tackle air pollution, how to these principles and sign up both to new inflows and to improve nutrition in poorer some of the world’s most the acquisition of Pax World regions without impacting the influential investors, academics Management. environment and of course how and politicians. Impax’s funds themselves we can avert a serious change in had a good year, with the Impax the global climate. TWO DECADES OF Global Opportunities Fund EXPERIENCE (BSXNJK4) generating almost SETTING OUT PRINCIPLES One of the pioneers in the field double the return of the MSCI AND ACHIEVABLE TARGETS is Impax Asset management World Index. One of the drawbacks of (IPX:AIM) which has been A new arrival on the scene is impact investing is that despite investing for social and the Global Sustainability Trust the increase in interest there environmental change for which aims to invest in private are still no clear, established 20 years. markets along the lines of the guidelines which means it can Over that time sustainable UN’s SDG goals. be hard to distinguish between investing has grown from a niche Open to applications until 28 impact and other forms of industry with a focus on micro- January and due to commence responsible investing. and small-cap environmental trading on 31 January, the trust Most impact investors have technology stocks to a business will be managed by Aberdeen adopted the United Nations’ worth hundreds of billions of Standard Investments, part of Sustainable Development pounds invested in companies Standard Life Aberdeen (SLA). Goals to define the relationship of all types and sizes across It is targeting £200m of capital between their investments and global markets. in its first round of fund raising their goals. Impax’s investment teams with a net return to investors of Also the International Finance run a range of strategies 6-8% per year after fees. Corporation, part of the World covering resource efficiency, Bank and one of the earliest environmental markets, food backers of sustainable investing, and agriculture, and water recently set out eight principles infrastructure. By Ian Conway which it hopes will help In the year to the end of Senior Reporter managers set measurable social September assets under

10 January 2019 | SHARES | 35 AEQUITAS Insightful commentary on market issues How to measure the earnings power of corporate America Looking at the market context as quarterly updates start to trickle in

sour trading update from Apple leaves those investors who have exposure to US equities A – and technology stocks in particular – with a few questions to answer. Although disappointing demand in China grabbed most of the headlines, Apple’s chief executive officer, Tim Cook, also blamed weaker growth across emerging markets more generally, a stronger dollar and a slower-than-expected product upgrade cycle in the West – all issues which could affect not just Apple but any US-based multi- national. • Bulls will argue that a 9% increase is perfectly This is why the forthcoming quarterly reporting achievable, especially with the US economy season in America will be a particularly important primed to rack up GDP growth of 2.5% to 3.5% one, as investors try to get a read on whether the for 2019. Throw in that 9% earnings increase, second-half sell-off suffered across US equities in some multiple expansion from that 14.3 times 2018 was merited or not. level if confidence returns – and a dividend yield of around 2.1% - and you can see how VALUE CASE forecasts of double-digit returns from US According to research from Standard & Poor’s the equities for 2019 may easily add up. pull-back leaves the US stock market on 14.3 times forward earnings per share estimates of $171 for • Bears will challenge that 9% growth estimate by the S&P 500 in aggregate for 2019. pointing out that the forecast 2018 earnings per share figure for the S&P 500 of $157 already S&P 500 ANNUAL represents a record high. With corporate profit EARNINGS PER SHARE margins of 12.1% in Q3 2018 also a record high, it seems legitimate to ask how US corporate earnings can keep on growing, as the benefits of the Trump tax cuts fade and higher wages, higher interest bills (thanks to the Federal Reserve’s four interest rate increases last year) and the stronger dollar make their presence felt.

EARLY TEST Hopes for a trade settlement between America and China, a softer approach from the US Federal Reserve and the announcement of both fiscal and Source: Standard & Poor’s monetary stimulus by Beijing’s President Xi Jinping

36 | SHARES | 10 January 2019

Insightful commentary on market issues AEQUITAS have given markets a boost but the imminent “ fourth-quarter results season will be good early test for the US equity market – especially as Apple, silicon chip maker Micron (which gave out a profit All issues which could affect warning just before Christmas) and Delta Airlines not just Apple but any US- have got it off to a bad start. based multi-national Around 30 of the S&P 500 index’s members report quarterly results in the coming week. Most of them are financial stocks, including megabanks Citigroup, JPMorgan Chase, Wells Fargo, Bank of MARGIN FOR ERROR America, Goldman Sachs and Morgan Stanley. The second-half“ retreat in US equities to around Investors will be looking for strong numbers here the 2,500 mark on the S&P 500 at the time of as the banks sector was a terrible stock market writing leaves the headline index some 14% below performer the world over in 2018 – and if there its September all-time high. And the fact that US is one sector that all portfolio-builders would like stocks are now 14% cheaper than they were makes to know is healthy some ten years after the Great them more interesting. Financial Crisis then surely it is the banks. However, tempting as that 14.3-times forward multiple may be, there may be still little room for HOW THE BANKS HAVE PERFORMED disappointment when it comes to the quarterly reporting season. The 10% hammering handed out to Apple on the day of its warning suggests as much, as does the work of Professor Robert Shiller. His cyclically-adjusted price/earnings ratio (CAPE) calculation, which is based on inflation-adjusted historic earnings on a ten-year rolling basis, still argues that US stocks may be overvalued, at 29 times forward earnings. The S&P 500 reached a CAPE rating of around 30 times on two prior occasions, in 1929 and Source: Refintiv data 1998-2000, and both of those episodes ultimately ended badly. Overall, Standard & Poor’s is looking for 26% earnings per share growth, helped by the Trump tax S&P 500 CAPE RATING cuts for the final time – the beneficial comparative effect will drop out from the first-quarter results that will be released in April and May. S&P 500 QUARTERLY EARNINGS PER SHARE

Source: http://www.econ.yale.edu/~shiller/data.htm

By Russ Mould AJ Bell Investment Director Source: Standard & Poor’s

10 January 2019 | SHARES | 37 Only SHARES magazine subscribers benefi t from an investment INVESTMENTtoolkit that gives them the edge and helps them make the very FACTS.Do you have best investing decisions. WHO CAN YOU TRUST? the SHARES • Live share prices • Customisable live watch list In uncertain times, when the • Portfolio manager economyadvantage? is buffeted by change, • Fund selector and prices it can be hard to know who to • Intraday and historic charts trust when investing. • Latest broker forecasts with alerts • Latest director deals with alerts Shares magazine is produced by our expert editorial team, offering 24/7 coverage and insight into today’s vibrant • Fundamentals and investor tools investment markets. • Online discussion forum A subscription to Shares gives you access to the SHARES • Priority booking for investor digital investment hub and a host of benefits including: events > Your weekly digital magazine brimming full • Educational and company videos of investment ideas • …and of course, the weekly > Market news and company updates digital Shares magazine with the > Exclusive investor tools including live share prices latest news and views from the Shares experts Try it now for just £1 for the 1st month and then just £12 a month*. £

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* The £1 for 1 month and then £12 a month offer is only available to new subscribers. Your fi rst payment will be £1 and thereafter subscriptions will automatically continued, billed at £12 per *month The £1 unless for 1 monthcancelled. and thenSubscriptions £12 a month can offer be cancelled is only available at any time to new by callingsubscribers. 020 7378 Your 4424 first between payment 8am will - be4.30pm £1 and on thereafter Monday tosubscriptions Friday. No refunds will automatically are offered duringcontinued, the cancellationsbilled at £12 per monthperiod unlessbut all cancelled.outstanding Subscriptions issues and services can be cancelled will be fulfi at lled.any time For enquiresby calling contact 0207 378 us 4424 at [email protected] between 8am - 4.30pm on Monday to Friday. No refunds are offered during the cancellations period but all outstanding issues and services will be fulfilled. For enquires contact us at [email protected]  SECTOR REPORT PUBS Can you make money from investing in pub companies? The pubs sector experienced mixed fortunes in 2018 as changing trends and higher costs hit trading

ritain is a nation that PUB STOCKS TOTAL RETURN SINCE 1 JAN 2018 loves a pint of beer or a Bglass of wine, yet younger generations aren’t as enamoured with alcohol. More under-65s were not drinking at all in 2017 compared FULLER, EI SMITH & -4% to 2005 according to the Office 34% GROUP TURNER -3% for National Statistics. While this trend may be MITCHELL welcomed by the overburdened CITY PUB -9% 10% & -4% NHS, pub operators may COMPANY BUTLER’S understandably feel differently as a reduction in demand for -10% alcoholic drinks could weigh on 9% GREENE MARSTON’S -7% their earnings and growth. KING Should investors go teetotal with their portfolios and YOUNG’S WETHER ditch pubs entirely? We think -1% -11% that’s a bit extreme as pubs & CO SPOON have historically been decent investments and they remain an important part of everyday life, despite some shifting trends. Source: SharePad. Data to 7 Jan 2019 In a year where most addition to reduced alcohol Investors should expect stock markets fell around the interest among younger adults. returns to come from a rising world, three UK-listed pub But in the long term we still think share price with EI as it is not companies would have delivered there may be opportunities for expected to pay dividends in the shareholders with a positive select companies in the sector. near-term. total return (share price gains We like EI Group as We like Young’s & Co and dividends) since the start of management seem focused (YNGA:AIM) for its premium 2018. These are City Pub Group on the operations once again, estate and a proven dividend (CPC:AIM), EI Group (EIG) and having previously been distracted growth track record, although Greene King (GNK). by years of non-stop questions we recognise the shares aren’t Yes, the sector is battling about the group’s large debts. cheap. They are trading on 18.6 various cost pressures and a Net debt has been reduced to times forecast earnings for the mixed appetite from consumers £2bn which equates to a 56% year to March 2020. Although towards casual spending, in loan-to-value. the prospective yield is only

10 January 2019 | SHARES | 39 SECTOR REPORT PUBS

there was also a short-term boost as people flocked to pubs to enjoy the World Cup. Perhaps surprisingly given the societal decline in drinking, wet-led pubs performed better through 2018, while pubs with more exposure to food sales struggled as customers were spoilt for choice thanks to an over-saturated casual dining market.

EI TAKES THE CROWN The UK’s largest pub operator EI delivered the best returns for shareholders in 2018, driven Young’s Burger Shack is one of the fresh initiatives from Young’s & Co by progress on rebuilding its business following years of being 1.6%, this is a great stock for WHY DID SOME PUBS weighed down by significant reinvesting a growing stream STRUGGLE IN 2018? debt. It was also in the right part of dividends so as to enjoy Investors may not be surprised of the market with its drinks-led compounding benefits. by the list of headwinds dragging proposition – food was less of a Panmure Gordon analyst on the sector as pub operators driver for the sector compared to Matthew Webb argues that have struggled with the weather- previous years. Young’s premium rating is related impacts, higher labour Investors may be also have warranted thanks to its ‘far costs and more competition for been bidding up the shares superior estate, exceptional like- dining out. ahead of a potential catalyst as for-like record and conservative The depressed high street EI plans to sell its portfolio of balance sheet’. environment is another factor, commercial properties to shore Greene King’s shares are but some observers believe up its balance sheet and possibly considerably cheaper than the pubs are faring a good deal reward shareholders with a Young’s, trading on 8.6 times better than their counterparts in special dividend. forecast earnings for the year the retail sector. Canaccord Genuity analyst to April 2020. There is a good Canaccord Genuity’s leisure Nigel Parson says the bids reason why its rating is low: analyst team says: ‘In contrast are estimated to be valued at earnings are forecast to stay flat to the retail sector which between £320m to £350m, until at least the 2021 financial had an abysmal end to 2018, but the final price could be up year. Analysts have pushed circumstances appear more to £400m. through numerous earnings upbeat for the eating and downgrades over the past few drinking out sector. EXPANSION STRATEGY years and the business seems to ‘Christmas Day continues PAYING OFF have lost its way. to grow in importance to the City Pub Group is newest Chief executive Rooney Anand pub companies as families company among the UK-listed is seen as an old-school operator increasingly prefer the treat pub stocks, growing from a with traditional values. He of a pub event to the effort of start-up in 2011 to an estate leaves the company later this cooking a feast at home. Greene of 42 pubs, which are mainly year and investors may hope King reported that Christmas drinks-led. that a more modern-thinking bookings were well ahead of last In the six months to 1 July, nine replacement breathes new life year at its interims.’ new pubs have been opened. into the business. Over the scorching summer, City Pub Group is ambitious in

40 | SHARES | 10 January 2019  SECTOR REPORT PUBS

With a 14.4% share price decline over the last year, Marston’s has been struggling with falling food sales at its pubs. Many investors are drawn to Marston’s (and Greene King) for generous dividends, yet the former failed to lift its dividend at the latest full-year results, reported in November. The company is taking a cautious view of life in 2019 and will reduce its normal capital expenditure plans by £30m including a reduction in the number of new pub, bars and lodgings. The company is also hoping to reduce debt and slash pension contributions to improve cash Investors would have lost money in Marston’s in 2018 flow and its balance sheet. its growth strategy as it wants to with local ingredients. We SPENDING MONEY TO MAKE double in size by 2021. don’t think there is anything to MONEY With modern bars and worry about, as Young’s has a Adjusted pre-tax profit fell by 1% restaurants in affluent areas in good track record of delivering in Fuller’s latest half-year results England and Wales, including earnings growth which is the to £23.6m. Chief executive a contemporary pub near ultimate driver for the share Simon Emeny said the business Brighton’s i360 tower, City Pub price. had decided to ‘front-load’ its arguably has more unique assets Over the summer, its pub investment programme, buying than its rivals. gardens attracted thirsty drinkers new pubs and investing in its It also has the financial with Young’s posting double-digit brewing and IT operations. firepower to hit its acquisition growth in drink sales in the 26 Peel Hunt analyst Douglas target of between eight and weeks to 1 October. Jack is confident Fuller’s is 10 new pubs, and even pursue Sales and profitability have making the right decisions even further openings. been on the rise thanks to if it is impacting profitability, Liberum analyst Anna investment in its premium flagging further expansions Barnfather argues Brexit estate. Young’s is generous with and refurbishments are in uncertainty and revised business its dividend policy, delivering its the pipeline. rates may work in the company’s 22nd consecutive year-on-year As we enter 2019, there are favour as it faces less competition interim dividend hike, leaving the little signs that the pressures for sites at potentially cheaper payout at 9.9p per share. facing the pub sector will let market prices. up so Fuller’s attempt to get is WHO ARE THE SECTOR estate in the best possible shape PREMIUM BENEFITS LAGGARDS? looks a prudent strategy. Shares in Young’s failed to take Investors would have lost money off despite a robust performance in 2018 investing in Marston’s at its pubs, which boast strong (MARS), Mitchells & Butlers By Lisa-Marie Janes interior design, many riverside (MAB), Fuller, Smith & Turner Reporter locations and fresh food made (FSTA) among others.

10 January 2019 | SHARES | 41 INDEX

KEY Gear4Music (G4M:AIM) 9 Reckitt Benckiser 17 Schroder European 33 (RB.) Alpha (B6S00Y7) • Main Market Glencore (GLEN) 17 • AIM RELX (REL) 10 Standard Life 35 Global Sustainability 35 Aberdeen (SLA) • I nvestment Trust Trust Rolls-Royce (RR.) 26 • Fund STV (STVG) 7 Greene King (GNK) 39 Royal Dutch Shell 10 • IPO coming soon (RDSB) Tesco (TSCO) 26 Thomas Cook (TCG) 29 TUI (TUI) 29 Allianz Technology 31 Trust (ATT) Vectura (VEC) 9 Antofagasta (ANTO) 17 Young’s & Co 39 (YNGA:AIM) Aston Martin Lagonda 17 (AML) Athelney Trust (ATY) 8 Gresham House 8 (GHE:AIM) Aviva (AV.) 26 Henderson High 10 BHP Group (BHP) 17 Income (HHI) KEY ANNOUNCEMENTS British American 24 HSBC (HSBA) 10 OVER THE NEXT Tobacco (BATS) Impax Asset 35 SEVEN DAYS Burberry (BRBY) 17 management Interims City Pub Group 39 (IPX:AIM) (CPC:AIM) Impax Global 35 15 Jan: . 16 Jan: The Works Coca-Cola HBC (CCH) 10 Opportunities Fund (BSXNJK4) Codemasters 14 Trading Statements (CDM:AIM) Imperial Brands (IMB) 10, 24 Cranswick (CWK) 10 11 Jan: AO World, Grafton. 14 Dec: JD Sports Fashion, Inchcape (INCH) 25 PageGroup, Revolutions Bars. 15 Jan: Ashmore, The Diageo (DGE) 10, 17 International 6 Gym Group, Hays, Provident Financial, Persimmon. Consolidated Airlines 16 Jan: Diploma, Headlam. 17 Dec: Associated British DS Smith (SMDS) 10 (IAG) Foods, DP Eurasia, Rio Tinto, SSP Group, Workspace, Dunelm (DNLM) 9 ITV (ITV) 7 Whitbread, Experian. EasyJet (EZJ) 28 JPM European Smaller 32 Companies (JESC) London Stock 8 Exchange (LSE) WHO WE ARE

Manx Telecom 10 EDITOR: DEPUTY NEWS (MANX:AIM) Daniel EDITOR: EDITOR: Coatsworth Tom Sieber Steven Frazer Marston’s (MARS) 41 @SharesMagDan @SharesMagTom @SharesMagSteve Melrose (MRO) 27 FUNDS AND SENIOR REPORTER CONTRIBUTORS INVESTMENT TRUSTS Ian Conway Holly Black EdenTree Amity 33 Merian Europe ex UK 32 EDITOR: Russ Mould European (0844833) James Crux REPORTER: Tom Selby Smaller Companies @SharesMagJames Lisa-Marie Janes Edinburgh Dragon 17 (BRTNQ88) @SharesMagLisaMJ Trust (EFM) Mitchells & Butlers 41 EI Group (EIG) 39 (MAB) ADVERTISING PRODUCTION Senior Sales Executive Head of Design Designer Eland Oil & Gas 12 Miton European 32 Nick Frankland Darren Rapley Matt Ely Opportunities 020 7378 4592 (ELA:AIM) [email protected] (BZ2K2M8) Shares magazine is published weekly every Fidelity Special 22 Thursday (50 times per year) by Morrisons (MRW) 9 CONTACT US: AJ Bell Media Limited, 49 Southwark Bridge Road, Situations (B4566K2) [email protected] London, SE1 9HH. Next (NXT) 9, 14 Company Registration No: 3733852. 22 All Shares material is copyright. (FSV) Polar Capital 30 All charts’ data sourced by Refinitiv Repro­duction in whole or part is not permitted unless otherwise stated Fuller, Smith & Turner 41 Technology Trust without written permission from the editor. (FSTA) (PCT)

42 | SHARES | 10 January 2019