Investor Chronicle: Rentokil Initial, ITV, Royal Dutch Shell

Buy: Rentokil Initial (RTO)

Driven by its strong free cash flow performance, the group made a six-month acquisition, wrote Arthur Sands.

Rentokil Initial is an innovative opportunist. Last year, its disinfectant business benefited from concerns that Covid-19 might be infected on uncleaned surfaces. Its semi-annual results show that because the scientific community believes that the virus is more of an airborne threat, the demand has gradually decreased in the second quarter.

The Viruskiller air purification device launched in the first half of this year is timely, and it is hoped that it can offset the impact of some disinfectant reductions in the second half of the year.

Most of the growth in the first half of the year came from its core pest control division, which saw revenue growth of 18.7%, including 8.5% organic growth. More enlighteningly, this means that without Covid in the first half of 2019, revenue increased by 20%. Last year, the interruption of the pandemic stalled progress in the sector.

Although the pandemic has caused some further problems, Rentokil Initial continues to implement its ambitious acquisition strategy, completing 24 transactions so far this year. These include 21 pest control and two sanitation measures, distributed in 13 countries/regions in all its regions. The actual cash used for acquisitions in the first half of the year was 261 million pounds and is expected to increase to 450 million to 500 million pounds by the end of this year. This acquisition strategy benefits from a very strong free cash flow performance. Although capital expenditures increased by 9.1%, the group still generated 222 million pounds, an increase of 78.5%.

The robust performance during the pandemic confirmed the belief that the key services provided by Rentokil Initial could well withstand broader economic shocks.

Viruskiller may have generated only £3.2 million in revenue in the first half of 2020, which is not a game changer, but it proves that an innovative company is willing to act quickly to discover opportunities.

The stock price is getting higher and higher, rising 4% on the morning of the results announcement, so it is now 10% higher than the price when we reviewed the investment case in April. For some people, the expected price-to-earnings ratio of 32x is too high, but compared to competitors Rollins and Terminix, it is favorable, and we expect growth opportunities in major US markets to accelerate.

Keep: ITV (ITV)

The broadcaster provided reliable data in the second half of the year, although the annual comparator will be more difficult in the second half of the year. Mark Robinson wrote.

ITV CEO Carolyn McCall ended speculation about the broadcaster’s desire to acquire shares in BT Sport, but declined to comment on whether it will bid for Channel 4, which is also the subject of media speculation.

The update is because the team revealed Half-year profitability The increase in advertising volume, the restoration of production and tightening controls on working capital drove this growth, resulting in a savings of 21 million pounds.

Due to the postponement of the European Cup in 2020 and the return of widespread popularity, the group’s advertising revenue in June hit a record high. Love island series. Covid-19 locked viewers until 2020, so the total ratings dropped by 6% during this period, but the number of registered users on the ITV Hub increased by 7% to 34.6 million.

In fact, in the first half of the year, I watched the most drama stream in history on ITV Hub. The organization also revealed that despite the relaxation of the lock limit in the second quarter, the number of subscribers to BritBox UK continued to increase, from 500,000 in January to approximately 555,000 on June 30, 2021, an increase of more than 10%.

However, management is trying to lower its relative expectations for the rest of the year because the comparators in the second half of the year are more difficult, although it predicts that advertising revenue in July will grow by 68% and by 20% in 2017. August. Therefore, although the half-year data has provided incentives to shareholders and the stock price is priced at 10 times the market’s generally expected price-to-earnings ratio, as advertising regulations continue to tighten and competition intensifies, the trading background remains uncertain.

Sale: Royal Dutch Shell (RDSB)

As Shell fights a Dutch court’s decision to change the company, dividends will increase substantially and pay 2 billion U.S. dollars. Alex Hammer wrote.

After “exiting” its net debt target of 65 billion US dollars (47 billion pounds) this month, Royal Dutch Shell set Dividend speaker is loud, Especially when oil prices remain above US$70 per barrel.

In addition to the $2 billion repurchase that will be completed in the second half of the year, it has already delivered, increasing quarterly spending by 38% to 24 cents. The situation turned for the better last year when oil prices plummeted and Shell laid off thousands of employees worldwide. Brent crude oil It rebounded to over US$50/barrel throughout the year. Despite concerns that the Delta variant of Covid-19 will hit demand, the recent OPEC increase has kept prices high.

Shell’s adjusted profit for the June-March quarter of this year increased by 71%, which was 10% higher than the US$5.5 billion expected by analysts.

Chief Executive Officer Ben Van Burden Said that the company’s “operations and financial delivery and strengthened balance sheet” caused the board to adjust its dividend to 24 cents per quarter.Management is facing a rollback struggle Strict emission targets Set by the Dutch courts this year, it mainly needs to sell assets to satisfy.

The chief executive said that Shell is “making progress” towards its net zero goal, which is weaker than those of other companies in the industry. This week, the company announced its final investment decision for the 100,000 barrels per day oil Whale project in the Gulf of Mexico.

Basic cash profit for the quarter based on the current cost of supply (CCS)-Shell’s preferred profit metric-climbed by nearly one-fifth to $13.5 billion. In the first half of the year, it rose by a quarter, showing the improvement of last year. The upstream sector drove this strong performance, and its adjusted earnings of $2.5 billion exceeded expectations.

Although Shell said it would cancel the $65 billion goal of increasing shareholder distribution, the company is very close. As of June 30, net debt was $65.7 billion.

Although oil and natural gas production will decline in the September quarter and upstream production guidance is set at 210-2.25 million barrels of oil equivalent per day (boepd), as long as oil prices continue to rise, earnings for the rest of the year may remain strong compared to the June quarter’s 2.26 Compared with mboepd output.

There is a broad view that in view of the bizarre behavior of the government forcing individual companies to make changes, the Dutch court ruling that Shell must reduce its emissions by 45% by 2030 will be watered down on appeal, but it raises some important questions The role of emission management and the increasing intervention of the courts. If Shell’s appeal fails, the answer will become clearer.

The industry is in a state of constant change, but investors are reaping returns from the oil rebound. However, in the long run, we are still bearish on Shell.

Cristillo: The threat of inflation to stocks

To what extent is the past a guide for the future?This question is the key to whether stock investors should worry Higher inflation.

Recent history shows that we have nothing to fear. For example, for most of 2005-07 and 2012-13, the CPI inflation rate was higher than its 2% target, but the stock price performed well at the time—much better than 2015-16 when the inflation rate was close to zero . This tells us that inflation above the target is not necessarily bad for the stock market.

For the entire period after 1995, the correlation between annual CPI inflation and the annual change of the All-Share Index was only 0.14, which means that above-average inflation is slightly better for the market than nothing. The correlation of oil and engineering stocks is higher than this value, but the correlation of several important industries such as banks, retailers, technology stocks and utilities is close to zero. And no sector is significantly negatively correlated with inflation. This shows that stock investors can almost ignore inflation because it has little impact on the overall market and most industries.

This should not be surprising. To some extent, inflation is predictable, which means it should be discounted by investors in advance. The data shows that this is roughly the case.

But what about inflation surprises? One of the measures is how inflation expectations change. We can measure such expectations by looking at the break-even inflation rate, the difference between the yields of traditional Treasury bonds and their index-linked yields. When we do this, we see that higher inflation expectations in recent years are good for the stock market. Their rise in 2010-11, 2016-17 and the past 12 months have been accompanied by a rise in stock prices.

Well, the evidence seems clear. Stock investors should not worry about rising inflation. If anything, this is good for the market.

However, such evidence can be very misleading. In recent years, inflation expectations have largely been a measure of economic conditions: they fell during downturns and rose during recovery. Of course, stocks have the same pattern. This is why cyclical stocks such as construction and industry correlate better with inflation expectations than defensive stocks such as utilities and tobacco.

But this need not continue. Inflation may rise sharply or stay high for a long time, causing interest rates to rise sharply. In this case, investors may have reason to worry that tightening monetary policy will harm economic activity and thus sell stocks, especially cyclical stocks. If this happens, the link between higher inflation expectations and higher stock prices will break.

There is a precedent for this, although we have to go back to 1994 to find it. At that time, as investors worried about rising interest rates, inflation expectations rose sharply and the stock market fell.

That episode is typical of the 1980s and 1990s. In 1989-90, as inflation expectations rose, stocks also fell. Similarly, during most of the 1980s and 1990s, the decline in inflation expectations was accompanied by the rise in stock prices because investors believed that interest rates would fall, thereby prolonging the economic upturn.

Therefore, from today’s level, it is conceivable that higher inflation expectations will hurt stocks.Believing that stocks will not be affected by inflation is a promise Recency error — Tend to place too much emphasis on recent evidence and discard relevant evidence from earlier periods.

In fact, the damage caused by rising interest rates may now be greater than history has shown. If interest rates that have been near zero for years have caused people to turn to stocks simply because they are desperate for cash returns, then these increases in returns could have a disproportionately harmful effect on the market.

My view is that higher inflation is only temporary—the result of the base effect (e.g. last year’s Hotel industry tax cuts Withdrawal numbers) and short-lived local shortages, market forces should eventually correct these shortages. However, we must not just base our investment strategy on forecasts. We must consider the range of possible outcomes, and high inflation is within this range: otherwise we will be overconfident in our predictive power.

Risk is sometimes defined as probability multiplied by impact. I suspect that those who are worried about large inflation have misunderstood its possibility. However, they may not be very wrong about its impact.

Chris Dillow is an economics commentator on “Investor Chronicle”

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