Anglo American
Price £30.72
52 week high-low £34.29 – £17.16
Net Yield 6.67%
Hist/Pros PER 18/5.4
Equity Market Cap (M) £38,285
Materials
Mark Cutifani, CEO & Paul Galloway, Head of Investor Relations
We began our questioning with iron ore. Despite the emissions profile, Anglo include their iron ore division within their broader energy transition theme due to their higher grade ore producing lower emission steel and steel's use in the energy transition (e.g. wind turbines). As iron ore accounts for the highest proportion of earnings (47% of FY20 underlying EBITDA), it would be glaring if their largest division did not contribute to their long term strategic goals.
In 2021, Anglo spun off and sold all its thermal coal assets, however they continue to mine metallurgical coal. Mark and Paul acknowledged that the mining industry had lost the PR battle on thermal coal but can still see a strong investment thesis for metallurgical coal, while it is still necessary for the steel industry.
More in line with their long term “green” ambitions are their Platinum Group Metals (PGMs), copper and nickel divisions. Copper in particular is the focus of their near term growth projects in Chile and Peru. We discussed the growth in Resource Nationalism that has occurred there. Mark emphasised the close relationship Anglo have cultivated in all their host countries, and that they view community engagement and development as their best defence against this. The close relationship with both local and national governments has also allowed for, for example, tax stability agreements, which Anglo have with Peru until 2023.
Anglo American are well positioned to benefit from the long term trend towards a greener economy. In the short term however we have already begun to see commodity prices decline, which may constrain their ambitious growth plans in copper, PGMs and polyhalite.
De La Rue
Price £1.84
52 week high-low £2.14 – £1.26
Net Yield 0.00%
Hist/Pros PER 54/12.2
Equity Market Cap (M) £364
Industrials
Clive Vacher, CEO & Rob Harding, CFO
De La Rue is best known for its bank note printing operations, which started in 1813 and, sadly, a number of public scandals that pre-date current management. Past misfortunes have mostly been responsible for the share price falling from £10 back in 2012 to the £1.85 we have today. Clive Vacher, the CEO who joined in late 2019, is a self-confessed turn-around specialist and his tenure has been a baptism of fire.
At the time of the 2020 profit warning, with debt hitting banking covenants, he cut the dividend to zero, sold the ID (passport printing etc) division and adjusted the cost base by shutting the Gateshead printing plant to reduce print sites from five to four. The shares troughed at 40p.
Clive is now working on growth areas; its Currency division (75% of revenue) prints bank notes whilst its Authentication division (25% of revenue) supplies products such as the labels used to authenticate the source of cigarette packets and Microsoft software. In the former, paper bank notes are being substituted with polymer ones giving polymer a strong growth opportunity. Clive said he worries little about digital banking’s existential threat to bank note printing - for at least the next 15 years. He is also enthusiastic about Authentication’s growth prospects, pointing out that revenues doubled from 2018 to 2020 and he now hopes to take revenues from £77 million to £100 million by 2022. Key risks are that polymer bank notes, which last longer than paper, drive a slower replacement cycle and that competition erodes prospects for the Authentication division.
Diploma
Price £31.42
52 week high-low £31.66 – £17.02
Net Yield 1.35%
Hist/Pros PER 72/37.5
Equity Market Cap (M) £3,913
Consumer Discretionary
Barbara Gibbes, CFO
Like many industrial distributors, Diploma was initially hit hard by COVID-19. The business has however staged a recovery and the tone of our update call was upbeat. Barbara is increasingly confident in the momentum she is seeing in all divisions (Seals, Controls and Life Sciences) and the ability of the group to utilise its healthy balance sheet to carry out bolt-on M&A, a key tenet of the company’s strategy.
Given rising global costs (freight, commodities etc.) we discussed the impact of inflationary pressures on the business. Diploma is potentially vulnerable to being caught between suppliers who increase their prices and customers who are not willing to budge on price. Barbara is however confident that they can pass through all price rises because of Diploma’s value added proposition. They are not just a distributor that competes on price, they provide best in class distribution, technical and training support for customers. These value added services are why they have a 19% operating margin.
Diploma faces many competitors but say there are no big players like Diploma. Competition is highly localised and most do not offer value added services like them. If they do, Diploma will frequently make them an acquisition target. In the Life sciences division, the competitive pressures are stronger. There is some competition around winning exclusivity contracts from suppliers, but they try to mitigate this by making sure their technical sales team stay on top of the latest technology developments and contact fledging companies earlier than other peers to gain an advantage.
COMMUNICATION SERVICESLinde
CONSUMER STAPLESOcado Group
FINANCIALS
London Stock Exchange Group
Euronext
JP Morgan Chase & Co
HEALTH CAREEdwards Life Sciences
GlaxoSmithKline
Genus
INDUSTRIALSIntertek Group
De La Rue
Alpha Financial Markets Consulting
ITM Power
Diploma
INFORMATION TECHNOLOGYHalma
MaterialsAnglo American
Johnson Matthey
Rio Tinto
Hill & Smith
REAL ESTATELondonMetric Properties
Land Securities
Shaftesbury
Supermarket Income REIT
British Land
UtilitiesSSE
National Grid
Pennon
Henry Birt, Research Assistant
John Royden, Head of Research
Michael Bray, CFA Research Analyst
