Temple Bar posted a decent set of results for 2023. NAV and shareholder returns were 12.3% and 12.5% respectively, both well-ahead of the 7.9% return generated by the All-Share Index. The dividend grew by 2.7% to 9.6p. This was not quite covered by earnings, which were 9.3p, but the company still has over £12m of revenue reserves even after dipping into them a little in 2023.
The discount is around 10% currently. The board bought back 27,209,505 shares to be held in treasury for a total consideration of £63.5m during the year. Since the year end (to 2 April 2024), a further 3,771,869 shares have been bought back for treasury, at a cost of £8.9m. [QD comment: Contrast this with Merchants Trust (see today’s story) which is issuing shares despite turning out lower returns than both Temple Bar and the index and blaming that on following a value style, which Temple Bar also does, maybe investors are backing the wrong horse.]
Extracts from the manager’s report
Despite the depressed starting valuation, the UK equity market was a laggard in 2023, delivering a total return of around 8%, however, the Trust’s portfolio performed well in the year, outpacing the rise in the FTSE All-Share. Temple Bar benefitted from significant rises in the share prices of Marks & Spencer, Centrica and International Distribution Services (the old Royal Mail Group). Each of these three companies added over a per cent to the Trust’s return, with Marks & Spencer more than doubling during the year. The Trust’s portfolio was negatively impacted by a more than 30% fall in the share price of Anglo American.
In 2023, Marks & Spencer continued to perform well from an operational perspective, taking market share in both clothing and food and continuing to make good progress towards its longer-term profitability targets. Although it can’t be quantified, there is little doubt that the company is benefiting from the demise of several competitors during the COVID pandemic, and the company is able to invest capital at high returns in rightsizing and re-orientating its store estate. If achieved, the company’s profitability targets would simply bring the retailer’s profitability in line with its peers and would result in significant growth in shareholder earnings, thereby suggesting that the shares continue to be undervalued.
Centrica announced the results of a strategic review in the summer. The company has a unique place in the energy value chain and can add value as a producer of power, through the provision of energy infrastructure, system optimisation through its Marketing and Trading business and energy retail through British Gas. Having simplified and de-risked the business, management intend to invest in the energy transition and thereby create further value for shareholders. Nevertheless, the company’s profits will continue to be sensitive to the level of energy prices. Even assuming a ‘normalisation’ of commodity prices from today’s elevated levels to pre COVID levels, the company continues to be valued at around nine times its annual profits. The company also has a significant portion of its market capitalisation as net cash on its balance sheet, and this needs to be factored into any consideration of value.
International Distribution Services performed well in 2023 as a new agreement with its unions bedded in well. A successful execution of the agreement will enable the company to release significant unrealised potential in the company’s UK business and thereby drive group profitability higher. Making just modest assumptions about the potential profitability in the company’s UK business, suggests that the company is valued at less than six times its earnings potential. For some time, we have believed that more than 100% of the company’s market capitalisation can be justified by its overseas (parcels only) business alone, suggesting that the stock market is placing a negative valuation on the more challenged UK business. This is even though more than half of the company’s UK revenues are derived from parcels (rather than letters) and it has around a 50% market share in the UK parcels market.
On the negative tack, Anglo American downgraded its production guidance for 2024 and 2025 and as a result 2024 earnings estimates were cut by 20% to 25%. These profit downgrades are unwelcome although the accompanying share price fall has left the shares looking very undervalued. To address balance sheet issues, the company went through a radical restructuring in 2015, halving the number of assets in its portfolio and consequently, the assets that remain are generally of good quality. Anglo American has significant investments in publicly quoted assets and stripping these out, the company’s Copper, Diamond, Metallurgical Coal and Nickel assets are valued at just five times earnings before interest and tax. We would therefore not be surprised to see some corporate activity if the operating performance of the company does not improve. This could take the form of asset disposals to demonstrate value or a bid for all or parts of the group.
Takeovers
So far in 2024, there have been two bids for companies held in the Trust’s portfolio; first Currys and then Direct Line Group. Whilst takeover bids can come at any time, this is perhaps not a surprise as many of the companies in the portfolio carry a stock market valuation which is significantly below a reasonable view of their true value. The UK continues to be an attractive place to invest and given the rock bottom valuations that exist in some parts of the UK market, it is understandable that private equity and corporate buyers would want to take advantage of that.
We have mixed feelings about these takeover approaches. Takeover bids highlight the undervaluation that exists in the target companies and can result in a rapid crystallisation of the upside that we believed existed at the time of a stock’s purchase. However, we must also remember that private equity bidders especially are intent on paying a price which continues to undervalue the company and from which they themselves can make an attractive investment return. They will therefore rarely be prepared to pay what we think the target company is worth. Currys is a case in point. Our view of the company’s fair value was significantly higher than the 67p offered by hedge fund Elliott who have since said that they are not prepared to bid any more.
In 2022, the private equity group, Apollo Capital, made three takeover offers for Pearson, the educational publisher, and last year, First Abu Dhabi Bank approached Standard Chartered. It is reasonable to expect that there will be more bids for companies in the Trust’s portfolio and shareholders should expect to benefit further from that.
TMPL : Temple Bar makes solid progress in 2023