UK Edition
Questor: more positive news from OneSavings but we need to watch Renew closely
Two of our Income Portfolio holdings announced significant developments this week. Reactions from the stock market were mixed, however: shares in OneSavings Bank rose by 2.2pc on Wednesday after an upbeat trading statement, but Renew Holdings suffered a share price fall of 8pc the same day, partially reversed yesterday, after it announced an acquisition.
Also noteworthy this week were share price milestones reached by two of our holdings. Royal Mail shares closed at 611.4p last night, a whisker off their record high of 615p reached in January 2014 in the euphoric aftermath of their flotation. We bought at 455p.
Shares in Next gained 6.1pc yesterday to £55.68 after an upbeat trading statement. They have now recovered to levels not seen since September 2016, shortly before our purchase at £40.89.
Update: OneSavings Bank
Buy-to-let specialist OneSavings Bank issued a brief trading statement on Wednesday. It said its loan book had grown by 5.5pc to £7.7bn in the first three months of 2018 and that it had made “organic originations” of £689m, at “attractive” margins.
Ian Gordon, banking analyst at Investec, the broker, said: “We think that OneSavings’ market updates are reassuringly predictable and regard its management statement this week as very strong.”
He pointed out that organic new business originations hit a new record for the first quarter, even eclipsing the “unique” volumes seen in the same period of 2016, which benefited from a rush ahead of the stamp duty change on April 1 of that year.
Gordon said growth in net lending of £368m triggered “yet another” upgrade to volume guidance; “we seem to get one every quarter from OneSavings”.
“Its operational performance over the past 12 months has been quite outstanding, yet this has not been reflected at all in share price performance,” he said. The bank’s former owner also sold almost all its remaining stake this week. Anticipation of this large sale had held the share price back.
Gordon added that the bank’s shares traded at a “mere” 7.4 times estimated earnings for 2018. “We look for a market-driven [rise in the earnings multiple],” he said. “Should this fail to materialise, we suspect M&A [a merger or acquisition of the bank] will fix the valuation anomaly.”
Either way, in other words, there is plenty of reason to expect the share price to rise. Meanwhile, Gordon said the shares should yield 5.6pc by 2020 if bought at the current price. Bought at 322p in November 2016, the shares remain a hold for the Income Portfolio.
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Update: Renew Holdings
Wednesday also saw the announcement from Renew Holdings, the specialist engineering group, that it was to acquire a rail maintenance specialist called QTS for £80m.
Renew, which is worth about £240m, raised £45m of the purchase price by selling new shares at 355p, compared with a market price of 413p at Tuesday’s close. This substantial discount explains the adverse reaction of the share price to the deal. The rest of the money was borrowed from HSBC.
The company said QTS would fit well with the existing business. Renew’s engineering services arm, which operates in the fields of energy, environment and infrastructure, makes much of its money by providing “non-discretionary” services such as those required by regulation. Much the same applies to QTS in the railway sector.
Renew said QTS enjoyed high barriers to entry in its chosen markets. This comes partly through its ownership of a fleet of specialist “RRV” plant – road/rail vehicles, equipped with two sets of wheels so that they can travel both along railways and on the ground – and partly through its accreditation with Network Rail, and the qualifications and relationships of its workforce.
According to Renew, the purchase of QTS will immediately enhance its earnings to a “material” degree. Nevertheless, Questor tends to take a sceptical view of the claimed benefits of large acquisitions and will keep a close eye on progress. We bought at 392p in November 2016 and the shares are a hold for the moment.