It’s been almost six months since Tempus looked at Aberforth Smaller Companies Trust (Greig Cameron writes). Back then, Tempus thought that concerns over how its portfolio might fare post-Brexit and a poor long-term performance meant it was one to avoid. At the time in November, the trust’s shares stood at £11, a trade deal with the European Union had still to be agreed and Britain was not far from entering a long winter of coronavirus lockdowns and disruptions.
Yesterday the shares rose 10p, or 0.6 per cent, to £15.40 — about the same level as they were towards the end of 2019, before more than halving in value in March last year.
The trust is managed by a team of eight at Aberforth Partners, a boutique in Edinburgh running about £2.2 billion of funds. They follow a value-based philosophy and hunt for smaller listed companies (those with market capitalisations of up to £1.5 billion) that are being sold for less than the managers think they are worth. Typically, it holds a portfolio of about 80 companies in a range of sectors and its aim is to outperform the Numis Smaller Companies Index, excluding investment companies, over the long term.
The last time we cast an eye over Aberforth, it was behind its benchmark over one, three and five-year measures. However, its resurgent share price means that it now outperforms over those same three time scales.
The portfolio is diverse, although is overweight in consumer discretionary spending and industrials compared with its benchmark. More of its picks are in the FTSE SmallCap index.
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Reach, the media conglomerate that owns the Daily Mirror newspaper among other titles, is the single largest holding, followed by Wincanton, the logistics company, and FirstGroup, the transport operator. First shares soared last week after it agreed to sell its yellow bus business in the United States for £3.3 billion. Mitchells and Butler, the pubs owner and the trust’s fifth largest holding, is another pick that has been on a good run this year, with its shares up about 50 per cent.
As with all portfolios, not every choice will be a winner. Provident Financial, the sub-prime lender, has regained some of the ground it lost in March, but is under the microscope over compensation for past mis-selling.
The dividend drought last year meant that the trust dipped into its reserves to support the 33.3p payout for 2020. Thirty-four of its portfolio companies cut their dividend to zero and 20 others reduced the payment. The trust had dividend cover of 1.7 times at the end of last year, so appears to be able to increase its ordinary payment in 2021, particularly as some of its picks are showing good signs of recovery. A proposed return of capital by FirstGroup worth 30p per share certainly won’t harm Aberforth’s dividend prospects.
In December, the trust’s managers predicted that the aggregate underlying profit of its portfolio companies would outperform its benchmark through to 2024. Part of that involves an expectation of an economic rebound out of the pandemic as vaccine deployment reduces the need for further restrictions. That would be likely to help any consumer-facing businesses, with Aberforth holdings including STV, the broadcaster, and Future, the publisher, as well as general retailers such as DFS Furniture, Halfords and Card Factory. Investors will be hoping that those predictions come true and that the trust’s performance can continue its recent upwards trajectory.
ADVICE Hold
WHY There’s uncertainty over how the UK economy will recover, but the trust’s value style may benefit from that and the dividend is appealing
Intercontinental Hotels Group
When Intercontinental Hotels Group reports on its first-quarter trading next Friday, the likelihood is that its revenue per available room — the much talked-about revpar, a key industry metric — will show a year-on-year decline of about 35 per cent (Dominic Walsh writes). That doesn’t sound too bad, except that the first quarter of last year was only partially affected by the pandemic.
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Comparing the first quarter of this year with the Covid-free first quarter of 2019 is expected to show a revpar decline of 51 per cent. Which begs the question: why is the IHG share price up 55 per cent on this time last year?
The answer seems straightforward enough: expectations of a recovery as the global vaccination rollout continues and optimism over pent-up demand. In a research note, Morgan Stanley notes a “pretty solid recovery” in the market data for both America and China, key markets for IHG, with revpar down 30 per cent and 8 per cent, respectively, against 2019 comparatives.
Yet the wider picture is by no means as clear, as the terrible scenes in India have shown. While half the British population has been vaccinated, other countries are nowhere near so well advanced. Though the group’s Americas region is enjoying a recovery, albeit driven more by lower-margin leisure business than corporate bookings, its Europe, Middle East, Africa and Asia region remains weak. For this year as a whole, analysts have pencilled in revpar growth of 46 per cent, still down 31 per cent on 2019.
Revpar isn’t the only story. The other part of the equation is new hotels and Morgan Stanley reckons that IHG will report another full year of flat supply.
All that being said and while the share price recovery may have got ahead of the trading recovery (and the stock was up again yesterday, 84p, or 1.6 per cent, to £52.66), this is an impressive business. Its asset-light model — most of its 6,000 hotels in 100 countries are franchises or management contracts — is more resilient in downturns, while it has an impressive stable from luxury brands such as Six Senses and Kimpton through Crowne Plaza to Holiday Inn Express.
ADVICE Hold
WHY A recovery is built into the share price
