BUY: Plus500 (PLUS)
Operational progress provides cause for optimism with the company in a strong cash position, writes Mark Robinson.
Plus500 made strides towards the completion of its three strategic objectives through 2023, although the pressure on earnings and underlying margins evident at the half-year mark persisted through the reminder of the year.
Management said results were “significantly ahead” of market expectations “despite lower levels of trading activity across global financial markets during the year”. Indeed, the CBOE Volatility Index (VIX), a standard measure for tracking volatility, dropped to four-year lows in December, providing a stark contrast to events in the previous year.
The reduced trading activity translated into a 25 per cent drop in cash profits to $341mn (£271mn) with the underlying margin shrinking by eight percentage points to 47 per cent. Even with product and platform expansion to the fore, the provider of tech-based trading platforms will always be subject to the vagaries of capital markets — matters essentially beyond its control — but shareholders can take solace in the group’s operational performance, along with an additional $100mn in share buybacks and a special dividend of 55.5 cents a share.
Through the year, Plus500 introduced a new share dealing platform, along with futures and options products. A new retail FX OTC trading platform was launched in Japan. And it also expanded its portfolio of global regulatory licences, while achieving a record high average deposit per active customer.
Shareholders are aware that external factors will invariably effect volumes, but the unavoidable ups and downs are set against the $2.1bn that the group has returned to shareholders since its initial public offering in 2013.
Despite a flurry of new investments, the group retains a strong cash position, yet the enterprise/cash profit (EV/Ebitda) multiple of 2.5 times still represents an attractive valuation relative to industry peers and from an historical perspective.
HOLD: Rio Tinto (RIO)
Over-supply in copper and industrial minerals markets has weighed on prices, writes Mark Robinson.
Talk about good timing. Rio Tinto’s difficult years-long expansion of the Oyu Tolgoi copper mine in Mongolia is now delivering tonnes into a constrained copper market, where stronger prices helped the major miner prop up earnings in a year where they would have tumbled otherwise.
Overall underlying earnings, in line with consensus, were down 12 per cent year on year to $11.8bn (£9.36bn). Commodity price reversals resulted in a $1.5bn decline in underlying cash profits compared with 2022, largely in the aluminium division. The copper unit reported underlying Ebitda of $1.9bn, down a quarter on the year before, with Oyu Tolgoi partly balancing out the hit to income from a suspension of smelting at the Kennecott operation in the US.
Iron ore is the key driver of earnings, however, and Rio Tinto benefited from falling energy prices in the year, which damped unit costs at the flagship Pilbara operations. They came in below guidance and fed through to a 7 per cent increase in cash profits at the iron ore unit to $20bn. The benefit of reduced power costs was also evident in the group’s alumina refineries and aluminium smelters.
Looking ahead, costs at Pilbara are expected to tick up due to “persistent labour and parts inflation in Western Australia”. Keeping these costs in check is critical for the company given Rio Tinto’s reliance on iron ore operations for earnings, and they have gone from $13 a tonne to $21.50 a tonne in 2023, and are guided to climb again in 2024.
This is the backdrop for the $1bn being put into the Simandou iron ore project this year, out of a total spend of $5.7bn. Production is expected as early as next year.
This will come alongside further tonnage from Oyu Tolgoi in the copper business, as it is expected to increase to 500,000 tonnes a year by 2028. Chief executive Jakob Stausholm asserts that Rio is “building a portfolio that is fit for the future”, a worthwhile consideration for investors regardless of the vagaries of underlying commodities pricing.
While significant new production is coming on-stream, arguably this is reflected in a forward rating of 8.4 times consensus earnings, compared with, say, five times for Brazilian peer Vale.
HOLD: InterContinental Hotels Group’s (IHG)
The company launched a new share buyback programme and raised its dividend as leisure travel demand remains strong, writes Christopher Akers.
InterContinental Hotels Group’s annual results represented a definitive recovery from the Covid-19 pandemic for the Holiday Inn and Crowne Plaza owner, as it posted an operating profit of more than $1bn (£794mn) for the first time and unveiled robust growth across key metrics.
Operating profit from reportable segments surged 23 per cent to $1.02bn on the back of attractive growth across geographies, despite comparatives getting tougher from the second quarter. The swiftest revenue growth was seen in Greater China, which was no surprise given the pandemic policies of president Xi Jinping, but a 10 per cent uplift in the Americas and a 23 per cent rise in EMEAA demonstrated solid progress across markets.
Revenue per available room (revpar) rose 16 per cent against 2022 and was up 11 per cent on the pre-pandemic 2019 baseline. A pipeline of 297,000 rooms at the year end, meanwhile, shows that the company isn’t resting on its laurels.
The solid performance underpinned a new $800mn share buyback programme, which combined with dividends means the company should return $1bn to investors this year.
Net debt increased by $421mn, affected by an adverse foreign exchange movement as well as shareholder returns. The leverage ratio sat at 2.1 times at the end of 2023, although the company expects this to increase to the lower end of its 2.5-3.0 times target range this year.
The big question now is what happens to the shares as post-recovery growth levels moderate. They have risen by more than 45 per cent over the past year, and are currently well ahead of the mean analyst target price of 6,470p on FactSet. Combine this with a valuation of 24 times forward consensus earnings, which isn’t cheap, and we stay where we are.
Read the full article here