Morning Note: Market news and updates from Colgate-Palmolive and Tritax Big Box REIT.
Market News
US equity markets ended last week on a muted note – S&P 500 (-0.1%), Nasdaq (-0.4%) – as corporate updates dragged on sentiment. Investors are faced with another busy reporting week with announcements from Diageo, Alphabet (Google), Microsoft, Stryker, GSK, Caterpillar, Shell, and Glencore.
This morning in Asia, markets were mixed – Nikkei 225 (+0.8%); Hang Seng (+0.8%); Shanghai Composite (-0.9%) – after Evergrande was ordered to be liquidated by a Hong Kong court, setting off what’s likely to be a daunting process to carve up the world’s most-indebted property developer. The stock plunged as much as 21% before trading was suspended.
Almost one in five UK-listed companies issued profit warnings last year, exceeding the height of the 2008 financial crisis, according to E&Y. Adzuna said job vacancies fell by the most in more than three years in December. Zoopla found London homes are now the most affordable they’ve been since 2014. Sterling trades at $1.2716 and €1.1721, while the FTSE 100 is currently 0.3% higher at 7,643.
Brent rose to $83.70 a barrel after an attack by Iran-backed militants killed US troops in Jordan and Houthis struck a tanker carrying fuel from Russia in The Red Sea. Gold trades at $2,032 an ounce.
Capital spending by US manufacturers will probably cool in 2024, according to the ISM’s semiannual forecast. Purchasing and supply execs expect outlays to rise almost 12% this year after gaining nearly 15% in 2023.
Francois Villeroy said the ECB will lower rates at any time this year. “Regarding the exact date, not one is excluded,” he told La Tribune Dimanche. Klaas Knot was more reticent, saying officials must have certainty on wages before a move.
Source: Bloomberg
Company News
Last Friday Colgate-Palmolive released results for 2023, which were slightly above market expectations. Although guidance for 2024 sales growth was a little subdued, the shares were marked up by 2% during Friday’s trading session.
Colgate is a globally diversified consumer products company, which owns a focused portfolio of strong brands including Colgate, Palmolive, Sanex, Ajax, and Hills Pet Nutrition. Most notable is Colgate’s leadership of the global toothpaste market (41.1%) and in manual toothbrushes (31.5%). The company generates c. 80% of its sales from outside the US, with emerging markets accounting for half of its sales, leaving the group well placed to benefit from a growing middle class. A strong mix of home-grown products and a culture of innovation contributes to a return on capital meaningfully higher than the peer group. The group’s long-term target is to deliver organic sales growth of 3% to 5%.
Reported worldwide net sales increased 8.5% in the year to $19.5bn, with organic sales also up 8.5% driven by price up 10% and volume down 1.5%. This means that 2023 was the fifth consecutive year the group delivered organic sales growth at or above its long-term targeted range.
Q4 new sales grew by 7.0% to $4.95bn, a touch better that the consensus forecast of $4.90bn. Organic growth was also up 7.0%, with a 7% increase in pricing and flat volume.
The group generated growth in every division and in all four of its categories, despite challenging macroeconomic conditions worldwide. The Oral Care, Personal Care, and Home Care businesses are grouped together and split by geography.
- In North America (20% of annual sales), full-year organic sales grew 3.0% (pricing +7.5%; volume -4.0%)
- In Latin America (24% of sales), organic sales grew 15.5% (pricing +13.0%; volume +2.5%)
- In Europe (14% of sales), organic sales grew 5% (pricing +9.5%; volume -4.5%)
- In Asia Pacific (14% of sales), organic sales grew 2.5% (pricing +6.0%; volume -3.5%)
- In Africa/Eurasia (6% of sales), organic sales grew 17.5% (pricing +13.5%; volume +4.5%)
- Hill’s Pet Nutrition (22% of sales), which is treated as a separate global division, generated organic growth of 10.5% (pricing +11.0%; volume -0.5%)
The gross margin was up 400 basis points in Q4 to 59.6% and by 120 basis points to 58.2% in the full year. The group leveraged its strong margin performance to invest behind building its brands, with a 19% increase in advertising spending in 2023, and expects higher levels of brand investment in 2024.
In Q4, the underlying operating margin fell 100 basis points to 20.3%, with the full-year margin down 180 basis points to 20.5%. On a ‘Base Business’ basis, EPS rose by 9% in the year to $3.23. Q4 EPS grew 13% to 87c, versus the market forecast of 85c.
Free cash flow before dividends was $1.8bn and net debt fell from $7.8bn to $7.4bn. $2.9bn was returned to shareholders through share repurchases and dividends.
The group issued guidance for 2024. It expects 1%-4% net sales growth and organic sales growth within its 3%-5% long-term target range. This was below market expectations as higher prices of its oral and personal care products continue to weigh on volumes. Raw and packaging material costs are expected to increase modestly in 2024, predominantly driven by specialty products. The company also expects gross profit margin expansion, increased advertising investment, and mid to high single-digit EPS growth.
Source: Bloomberg
Property News
Tritax Big Box REIT has this morning released an update on its performance for the financial year ended 31 December 2023. The statement highlights the ongoing strategic delivery and resilient income growth. In response, the shares are little changed in early trading and still trade at a large discount to NAV.
Tritax is a real estate investment trust dedicated to investing in very large logistics warehouse assets, or Big Boxes, in the UK. Over time, the group has evolved from an income-led asset aggregator into an integrated investment and development company. The £5bn portfolio is spread across more than 70 assets and around 50 institutional quality tenants, with a weighted average unexpired lease term of 11.4 years. The largest tenant is Amazon, representing c. 14% of rental income.
Through Tritax Symmetry, the group owns a strategic land portfolio for the development of Big Box assets of more than 40m sq ft (including land options). This provides the opportunity to more than double the company’s existing rent roll over the next decade. The group aims to minimise risk by primarily undertaking developments which are pre-let to a tenant – speculative development is less than 1% of asset value. The company believes these opportunities can be delivered at a yield on cost significantly higher than is currently available from acquisitions of built and let or pre-let forward-funded assets, with a 6%-8% yield target.
We believe the long-term outlook for the UK’s logistics sector remain favourable, supported by the continued growth in e-commerce, the consolidation of logistics networks into fewer, larger, more modern and efficient buildings, the need to build resilience into supply chains, and the increased focus on ESG. Although the investment market has faltered over the last couple of years, occupational demand has remained strong – there were 22.1m sq ft of UK lettings in 2023, with a further 11.1m sq ft under offer at the year-end. 2023 take-up was in-line with the pre-Covid average. Ready to occupy vacant space was 5.1% (vs 2.0% in 2022) but there was further growth in prime headline rents which are up 7.8% in the year. At a time when occupiers need a robust and flexible supply chain, the assets are essential to their business and cannot be easily replicated. We note that property costs are typically as little as 1% of total operational costs for a retailer – more important is having the right location.
In today’s update, the company highlights that the logistics real estate transaction market remains subdued; prime market yields for high quality rack-rented buildings with c.15 year unexpired lease terms and open market reviews are around 5.25%.
Against that backdrop, Tritax continued to crystalise value through asset sales and recycle capital into higher-returning development and investment opportunities. In 2023, £327m of disposals were completed at or above book value, delivering a blended Net Initial Yield of 4.3%, resulting in a £14.1m reduction in contracted rent. £110m of urban logistics investment acquisitions were completed in the year at a blended Net Initial Yield of 4.2%. This provides potential for significant near term rental reversion capture with a blended reversionary yield of 6.3%.
The market is seeing strong and diversified occupier demand, combined with historically low levels of availability, leading to rapid leasing of buildings and rental growth. Tritax’s portfolio vacancy edged up to 2.5%, although this includes one recent lease expiry undergoing refurbishment.
The group’s portfolio offers a secure, growing income – around a third of rent is generated by leases having an unexpired term of more than 15 years and 25% from leases expiring within five years of the period end and which provide near-term asset management opportunities.
Contracted annual rent is stable, with increases from rent reviews, investment, and development activity, largely offset by heightened disposals activity. Tritax has delivered its tenth year of 100% rent collection. There was a 6.9% like-for-like growth in ERV (estimated rental value) in 2023 resulting in a record 23.0% portfolio reversion. The group added £4.9m to its annual contracted rent from rent reviews and asset management initiatives. There was a 9.1% increase in passing rent across 22.5% of the portfolio subject to rent reviews.
Looking forward, there are good prospects for rental growth to exceed inflation over the medium term. Around 30% of the portfolio is subject to rent reviews in 2024. With a blend of inflation-linked (52%), open market (30%), fixed (9%), and hybrid (9%) review types, the group is well placed to capture attractive levels of accelerating rental growth.
The growing rental stream means the group can adopt a progressive dividend policy, with the intention to pay out more than 90% of adjusted earnings. The group will announce its final dividend with its results on 1 March.
On the development front, the group continued to make progress. £7.8m of annual contracted rent was added in 2023 through 0.9m sq ft of development lettings at a 6.7% yield on cost, with a further 0.9m in solicitors’ hands. There was 1.7m sq ft of development starts in 2023 with the potential to add £15.6m p.a. to contracted rent targeting a yield on cost of approximately 7.0%. There group is maintaining its long-term development guidance of 2-3m sq ft per annum (£200m-£250m of capex) at a 6-8% yield on cost.
The group remains financially robust – the LTV stands at 31.6%, within the 30%-35% target range – with substantial covenant headroom. The current weighted average cost of debt is only 2.9%, with 96% of drawn debt hedged, with an average maturity of 5.2 years. The group had available liquidity in excess of £500m at the end of 2023.
A detailed disclosure of EPRA Net Tangible Assets (NTA) per share will be disclosed with the full-year results on 1 March. In today’s update, the group highlights there was a 0.8% reduction in the like-for-like value of investment assets across the year, with second half reductions (-1.7%) offsetting gains in first half. At the H1 stage NTA was 183p.
Following a sharp fall in 2022, the shares have recovered some of their poise on the back of the recent decline in bonds yields. However, they still trade on an 11% discount to historical NTA.
Source: Bloomberg