Genus
Equity Market Cap (M) £1,285
Health Care
Alison Henriksen – Chief Financial Officer
Genus runs Nucleus farms which produce porcine and bovine semen and piglets (“genetics”) for farmers across the world. This improves the quality of their herds on a range of metrics including milk yield, growth rates, carcass quality and birth rates.
The company has struggled of late in part due to weak hog prices in China which have fallen from RMB30/kg to just RMB17/kg – below the cost of production at RMB19/kg. The Chinese producer market is relatively unconsolidated, meaning the overall herd size (supply) and therefore the hog prices tend to be quite volatile. Alison is hopeful that as the market matures, consolidation will result in larger producers with stronger balance sheets and that Genus will see improved revenue stability from its volume-based royalty contracts.
Investors have been eagerly awaiting Genus’ PRRSV (Porcine Reproductive and Respiratory Syndrome Virus) resistant genetics coming to market. Resistance has been achieved via gene editing as opposed to genetic modification. This produces biologically identical pork that Genus believe will make government approval straightforward. Alison highlighted that PRRSV resistant genetics will add US$2/head to the cost of Genus genetics, which is significant considering they currently charge US$1.5-US$2/head. This may seem expensive, but PRRSV costs farmers US$1bn/year in the US alone and so the cost benefit to the producer is clear. Genus anticipate it will take 5 years to achieve herd immunity and therefore capture the full $2/head value.
I queried whether we should be concerned by consumer pushback on eating gene edited pork, to which Alison clarified that the UK and Europe are very different in terms of acceptance versus the rest of the world. The plan for Genus is to target PRRSV resistant genetics into the US, LatAm and China where early indications are that uptake will be strong.
IMI
Equity Market Cap (M) £4,106
Industrials
Luke Grant, Group Financial Controller
In its simplest terms, IMI makes 170,000 different valves and actuators (machine components that produce force) of all shapes and sizes for a host of end markets. For context, their largest valves, for use in liquefied natural gas terminals, weigh 88 tons, and their smallest, as light as 500 grams, are used in air conditioning units. IMI is somewhat of an ongoing turnaround story: having been relegated to the FTSE 250 in 2014, recent performance has seen IMI return to the UK’s blue-chip FTSE 100 index.
The period 2014-18 under the then CEO Mark Selway was a difficult period for IMI in terms of headline numbers, with a -0.7% underlying revenue growth rate and margin contraction from 17.7% in 2013 to 14% in 2018. Grant pointed out that the trajectory of results after 2014 was a product of underinvestment in preceding years, coupled with a lack of foresight on the trend direction and cyclicality of the product portfolio and their end markets. Selway’s strategy sought to refresh IMI’s product range to drive growth and pricing power and overhaul operations to increase efficiency, providing the foundation for performance under current CEO Roy Twite. Whilst some end markets are still cyclical, IMI have made efforts to spread end market exposure across the business cycle to deliver more consistent growth. This was evident in results for the first half of 2023, where strong performance in process automation and transport more than offset a decline in life sciences to deliver +3% group organic growth.
Despite this, IMI continues to trade at a discount compared to industrial peers with similar financial credentials on a price/ earnings basis. To earn a re-rating it not only needs to deliver on its targets for consistent organic growth and improved margins, but disprove that ‘old habits die hard’ and maintain investment, ensuring those credentials are sustainable over a longer time horizon.
Shell
Equity Market Cap (M) £169,393
Energy
Maarten Tiemstra, Senior Investor Relations Officer
Shell and BP, the UK’s largest oil and gas companies, trade on forward price/ earnings ratios of 8 and 7 – lower than USA listed companies ExxonMobil on 11 x and Chevron on 10 x.
Shell’s new CEO, Wael Sawan, appears to be tackling the valuation gap. Oil companies should have similar growth prospects regardless of whether they are in the UK or the USA (driven by the price of oil) and trade at broadly similar price/earnings ratios.
Under Ben van Beurden, the previous CEO, Shell appeared to proactively react to robust media and political commentary, urging them to take greater steps to reduce hydrocarbon output in the name of combating global warming.
At the same time, Shell increased its aspirations for investment in renewables. Shareholders were worried that the yields from investing in renewables would not be as high as Shell hoped they would be; and that, from a financial perspective, this would damage the share price.
Under the new CEO, the language has changed. 'Culture shift' and 'the realisation that hydrocarbons are here to stay' are part of the new vocabulary. Guidance has also moved from 'declining oil production' to 'stable oil production'. Shell also refers to 'capital discipline' as a goal, which implies being more rigorous with renewable investment. Shell also has a preference for deep water operations, where it has a competitive advantage. Managing deep water is difficult and hard work. Few can do it well. There is also a desire to make Shell’s assets more streamlined, efficient and less risky by locating them in countries with relatively higher scoring political systems, like the USA.
COMMUNICATION SERVICESVodafone
CONSUMER DISCRETIONARYDowlais
Tesl
Tractor Supply
CONSUMER STAPLESOcado
Reckitt Benckiser
Diageo
ENERGYShell
FINANCIALSPrudential
HSBC
Lloyds Banking Group
HEALTH CAREGenus
INDUSTRIALSDiscoverIE
Experian
IMI
Intertek
RELX
Ceres Powe
Spirax Sarco
Smiths Group
Diploma
Exponent
Axon Enterprise
INFORMATION TECHNOLOGYCadence
Nvidia
Advanced Micro Devices
Palo Alto Networks
Fortine
Zscaler
ServiceNow
Microsoft
F5
Salesforce
MATERIALSCroda International
Hill & Smith
Rio Tinto
REAL ESTATEHome REIT
LondonMetric
Prologis
UTILITIESNational Grid
SSE
Pennon
Sir John Royden, Head of Research
Jack Summers, Research Assistant
