Morning Note: Market news and updates from Shell, Marriott, and Vonovia.
Market News
Jerome Powell said a rate cut could come as soon as September, unless inflation progress stalls, citing risks of further labor-market weakening. Powell’s remarks put tomorrow’s jobs report in focus. Swaps are fully priced in for a quarter-point cut in September — and total reduction of almost 70 bps this year. The 10-year Treasury yield moved down to 4.06%. Gold rallied to $2,442 an ounce, while Brent Crude rose to $81.60 a barrel on tensions in the Middle East.
US equities rallied – S&P 500 (+1.6%); Nasdaq (+2.6%) – driven by tech stocks. Meta jumped 7.2% postmarket as revenue topped estimates on ad growth. ARM fell after maintaining a tepid annual forecast.
In Asia this morning, the Nikkei 225 fell by 2.5% as the yen continued to strengthen, trading below 150 to the dollar. Other markets fell slightly: Hang Seng (-0.2%); Shanghai Composite (-0.2%).
The FTSE 100 is currently little changed at 8,378. Companies trading ex-dividend this morning include Lloyds (1.78%), Reckitt Benckiser (1.92%), and RELX (0.5%).
Donald Trump now trails Kamala Harris in the presidential race, PredictIt showed. His odds briefly dropped to just under 50% — they reached 70% at one stage — with Harris ahead at 53%. The rapid reversal should see a further unwind for any Trump trades that remain, according to MLIV.
The Bank of England is expected to lower rates for the first time since the start of the pandemic. Consensus is for a 25-bp reduction to 5%, though investors and economists say today’s meeting is a close call. Sterling trades at $1.2793 and €1.1841, while 10-year gilts now yield below 4%.
Source: Bloomberg
Company News
Shell has this morning released Q2 results which were 5% above market estimates, driven by ongoing structural cost reductions. The balance sheet remains strong, and the group announced another $3.5bn share buyback. In response, the shares are up 2% in early trading.
Shell is a global integrated energy company with expertise in the exploration, production, refining, and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. The group is also allocating capital to low and zero carbon products and services including wind, solar, advanced biofuels, EV charging, hydrogen, and carbon capture & storage. According to Brand Finance Global 500, Shell is the most valuable brand in the industry, valued at around $50bn.
The business is divided into five segments:
· Upstream (i.e. E&P) explores for and extracts crude oil, natural gas and natural gas liquids. Shell has best-in-class deepwater assets complemented by resilient conventional assets in the Gulf of Mexico, Brazil, Nigeria, UK, Kazakhstan, Oman, Brunei, and Malaysia.
· Integrated Gas includes liquefied natural gas (LNG), conversion of natural gas into gas-to-liquids (GTL) fuels, and other products. Shell is the global leader in LNG (achieved through the 2016 acquisition of BG), a critical fuel for the energy transition, with a business that spans upstream, liquefaction, shipping, marketing, optimising, and trading.
· Chemicals & Products is made up of a focused set of assets – there are currently five energy and chemicals parks (i.e. integrated refining and chemicals sites) and seven chemicals-only sites.
· Marketing includes mobility, lubricants, and decarbonisation. In addition to the service stations with their EV charging footprint, Shell is the global number one lubricants supplier and operator of assets is renewable natural gas, sugar cane ethanol, and biofuels.
· Renewables & Energy Solutions includes Shell’s production and marketing of hydrogen, integrated power activities (solar and wind), carbon capture & storage, and nature-based projects. The assets are helping to reduce the carbon intensity of the group’s hydrocarbon product sites.
The group’s strategy (Powering Progress) is to invest in providing secure supplies of energy, while actively working to reduce carbon emissions at a time of macroeconomic and geopolitical uncertainty.
The focus is on ‘value over volume’ – the group will take advantage of opportunities where it has competitive strengths, existing adjacencies, a track record, strong customer demand, and clear regulatory support from governments.
In the period to the end of 2025 (known as the First Sprint), the company is seeking to:
· Improve performance and increase efficiency, with annual operating costs reducing by $2bn-$3bn by the end 2025, of which $1bn was achieved in 2023. We believe this could prove to be prudent.
· Increase investment discipline – capital investment (organic spend and M&A) will reduce to $22bn-$25bn p.a. over 2024 and 2025, with around a quarter for low carbon solutions.
· Simplify the portfolio through the sale of high-cost and lower-return businesses.
· Generate free cash flow per share growth of 10% p.a. through to 2025 and free cash flow growth on an absolute basis more than 6% p.a. between now and 2030.
In the three months to 30 June, adjusted earnings rose by 24% to $6.3bn, 5% above the market forecast of $6.0bn. Compared to the previous quarter, earnings fell 19%, reflecting lower LNG trading and optimisation margins, lower refining margins, lower margins from crude and oil products trading and optimisation, and lower Integrated Gas and Upstream volumes, partly offset by higher Marketing margins and volumes. Oil and gas production was up 3.1% to 2.8m boe/d, while underlying operating expenses fell by 10%.
The group spent $4.7bn on capital expenditure and generated $10.2bn of free cash flow. The balance sheet is strong and the company targets AA credit metrics through the cycle. At the end of the June quarter, net debt stood at $38.3bn, with gearing at a comfortable 17.0%.
Shell’s current policy is to return 30%-40% of cash flow from operations (CFFO) to shareholders through the cycle through a combination of dividends and share buybacks. The group’s dividend breakeven is around $40 per barrel (vs. $81 currently) and the group is targetting 4% growth annually.
With today’s results, a Q2 dividend of 34.4c a share was declared, 3.9% above the same quarter last year. At that rate, the full-year yield would be 3.7%.
At $50 a barrel, share buybacks will be undertaken as a priority to debt reduction as management believe the shares are undervalued. The latest $3.5bn programme was recently completed and a new $3.5bn programme has been announced today which will run to the end of October. Total shareholder returns are expected to amount to more than 10% of the current market cap.
We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.
In common with all the oil majors, Shell is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. The shares remain on an undemanding valuation (PE 9x), both in absolute terms and relative to its US majors, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.
Source: Bloomberg
Yesterday afternoon, Marriott International released its Q2 results. Although earnings were slightly above market expectations, the group trimmed its full-year guidance. The company’s updated outlook includes a narrowing of the RevPAR growth range for full year 2024, primarily as a result of a weaker operating environment in Greater China, as well as marginally softer expectations in the North America. In response to yesterday’s update, the shares were marked down by 5%. Industry peer IHG, which reports next week, fell by 4%.
Marriott is the world’s largest hotel company, with nearly 9,000 properties in 141 countries and territories. The company is a fee-driven, asset-light operator with a focus on franchising and management contracts. The group’s 30 leading brands are skewed toward the mid-scale to luxury end of the market, and include: Ritz-Carlton, Marriott, St Regis, Le Meridien, Sheraton, MGM Collection, and City Express. At the end of June, the company had more than 1.66m rooms, around a 7% global market share. The group’s travel and loyalty programme, Marriott Bonvoy, now boasts 210m global members.
In the three months to 30 June, global revenue per available room (RevPAR) – the key measure of industry performance – grew by 4.9% in constant currency, at the top end of the group’s 4%-5% guidance range. Occupancy grew by 1.6 percentage points to 73.1% and average daily rate (ADR) was up 2.6% to $185.
In the US & Canada, RevPAR grew by 3.9%, an acceleration from the 1.5% growth in the previous quarter. All customer segments grew, with Group business particularly strong (+10%). International markets RevPAR rose by 7.4%, driven by 13% growth in the Asia Pacific ex-China region. China fell by 4.2%.
The group continued to expand its estate, adding around 15,500 rooms in the quarter. Net room growth was 6%, with conversion accounting for 37% of additions. The pipeline was 559,000 rooms, including roughly 33,000 pipeline rooms approved, but not yet subject to signed contracts. 57% of rooms in the quarter-end pipeline are in international markets. Around 37% of the pipeline was under construction at the end of the quarter.
Q1 revenue was up by 6% to $6.44bn, versus the market forecast of $6.48bn. The adjusted operating income margin rose from 64% to 65%. Adjusted EPS grew by 10.6% to $2.50, above the top end of the company’s guidance range of $2.43-$2.48 and the market expectation of $2.47.
During the quarter, net debt rose from $12.3bn to $12.8bn. The group continued to buy back its shares, with $1.0bn repurchased in the quarter. Including dividends, the group returned $2.8bn to shareholders in the year to date
The company's updated outlook includes a narrowing of the Worldwide RevPAR growth range for full year, from 3%-5% to 3%-4%, primarily as a result of a weaker operating environment in Greater China, as well as marginally softer expectations in the US and Canada. The company has also trimmed its earnings guidance to $9.23-$9.40, versus $9.31-$9.65 previously, a 1.7% downgrade at the mid-point of the range. Net room growth is still expected to growth by 5.5% to 6.0%, while the group is committed to return $4.3bn to shareholders.
In the current quarter, RevPAR is expected to grow by 3%-4%, with EPS of $2.27-$2.33.
In the medium to long term, we believe the industry has attractive long-term growth potential, and with its scale and strong brands, Marriott should benefit from a ‘survival of the fittest’ bias as many smaller competitors continue to exit the market.
Source: Bloomberg
Property News
Vonovia has today released a robust set of first-half results. The second quarter saw higher volumes of property transactions and a stabilisation of property values. The group is now half- way through its 2024 disposal programme and is confident of hitting its €3bn target. Full-year growth for rent and earnings is now expected to be at the upper end of the previous guidance range. Ahead of this afternoon’s analysts’ call, the shares are 3% in early trading, leaving them on a 34% discount to H1 NAV, which was 5% lower than at the start of the year.
Vonovia is Europe’s largest residential real estate company. The group owns around 543k units worth around €82.5bn across Germany (c. 84%), Sweden, and Austria. The group also manages a further 72k units owned by others. Despite its size, in Germany Vonovia still only owns 2% of a highly fragmented market. The focus is on multi-family housing for low- and medium- income tenants in metropolitan areas. The aim is to benefit from residential megatrends such as urbanisation, energy efficiency, and demographic change.
In the first half of 2024, adjusted earnings before tax (EBT) – the group’s preferred profit metric – fell by 6.2% to €887.2m. However, the trend in the second quarter was considerably more positive than at the beginning of the year. Operating free cash flow (OFCF) – the key figure for internal financing and thus liquidity management – rose by 4.7% to €800.3m.
The core rental segment grew revenue by 2.0%, despite disposals. The vacancy rate remains very low (2.2%) and highlights the ongoing mismatch between supply and demand. The trend towards higher rents continued, while the collection rate was 99.6%. This includes all ancillary and energy costs, which management see as a strong sign of affordability. The organic increase in rent was 3.8%, with new construction accounting for 0.3%. Like-for-like rental growth of 3.5% was driven by market-related factors (2.2%) and investment in existing buildings (1.3%). The monthly rent per square metre increased by 3.7% to €7.86. Going forward, under the regulatory system, rent growth is expected to follow inflation higher over time albeit with a lag. For the 2024 full-year, the group now expects organic rental growth at the upper end of the 3.8%-4.1% range. The expected run-rate going forward is around 4%.
Revenue from other business streams came from the development (+34.8%), recurring sales (+15.9%), and value-add (+2.5%).
Cost savings of €105m from the Deutsche Wohnen merger integration are being realised as planned. They are fully expected by the end of 2024, with a further €35m from 2025. Over the long term, Vonovia has enjoyed increased benefits of increased scale, with its adjusted EBITDA margin up 20 percentage points and cost per unit down by two thirds over the last 10 years.
Vonovia continued to sell properties of inferior quality or in non-core regions, with Q2 seeing higher volumes of transactions. The volume of recurring sales was 47% higher (at 921), although the fair value step-up, at 24.2%, was below last year. Outside of the recurring sales segment, 2,948 non-core units were sold, at a 0% value step-up, as the group focuses on liquidity to get deals done.
The company is targetting €3bn in gross disposals in 2024 as it looks to offload care homes and commercial properties, while holding on to residential properties where the outlook for rental growth is positive. So far, the group has achieved €1.5bn of its target, including €300m for a portfolio of 1,970 apartments in Frankfurt and the Rhine-Main region at the beginning of the second half for slightly above book value. Another €185m was generated from the sale of smaller units across all sales categories. Overall, management has ‘high confidence’ of achieving its €3bn target.
Capital is being partly re-allocated toward the construction of new properties and the improvement of the existing portfolio to comply with environmental demands which can drive higher rents. In H1, the group spent €673.8m (-4.6%), with spend on maintenance up 6%, modernisation down 4.4%, and new construction spend down 29%. Despite higher construction costs, Vonovia completed 1,655 new buildings in H1 (+39%), 38% to hold to rent and 62% for sale. For now, the focus remains on completing existing projects rather than constructing new projects. This is a theme across the sector and clearly exacerbates the current supply/demand imbalance.
The group’s loan-to-value (LTV) fell from 47.3% to 48.2%, still above the 40%-45% target range. Including potential proceeds from announced transactions, the pro-forma LTV is 47.3%. As a result of monetary tightening, the cost of issuing new debt has increased substantially, albeit off the high of last year. However, the group’s long-term and well-balanced debt maturity profile provides a hedge against increasing financing costs: weighted average maturity (6.7 years); average cost of debt (1.8% vs. 1.7% at the end of 2023); fixed/hedged (99%); and no more than 12% of debt maturing annually. Overall, the group has said that marginal debt costs have come in lower than feared.
The strategy is to roll over secured debt and repay unsecured bonds with disposal proceeds. Vonovia has now covered all unsecured liabilities up to the end of Q3 2025. Fitch rated Vonovia for the first time in March, giving the company a BBB+ rating with stable outlook, in line with S&P’s unchanged rating announced earlier this month.
In June, the group paid a 2023 dividend of €0.90 per share, 6% higher than last year, equal to a yield of 3.5%. Looking forward, the group has changed its dividend policy – the plan is to pay out 50% of earnings plus surplus liquidity from operating free cash flow.
In the first half of the year, the market value of the portfolio only fell by 1.7% to €82.5bn. The company believes the market has now bottomed out, and that stabilisation is “now on the home straight”. The net asset value (known as EPRA NTA) per share was down 5.0% at €44.48. The standing portfolio is now valued at 23.6x in-place rent equalling 4.2% on a gross basis and 3.4% on a net initial yield basis.
Following a 23% gross value decline in the portfolio since the June 2022 peak, the company now estimates that fair values would have to drop a further 24% for the LTV to cross 60% covenant threshold. This excludes any positive impact from further rent growth and deleveraging from disposals. The company believes it doesn’t need to raise new equity for deleveraging and will only do so to fund growth.
Guidance for full-year adjusted earnings before tax has been confirmed at the upper end of the range of €1.7bn-€1.8bn.
The shares, which are listed in Germany, fell heavily in 2021 and 2022 on the back of rising government bund yields, to which they are negatively correlated, and the knock-on effect on earnings and property values. Over the last year or so, however, they have recovered somewhat but still trade at a 34% discount to EPRA NTA.
Greater visibility over the outlook for interest rates (and the marginal cost of new debt), the extent of further valuation declines, and progress on disposals will be required for the shares to move substantially higher. In the meantime, we are comforted by the ongoing substantial mismatch between Vonovia’s equity value (€2,269/sqm), the valuation in the direct real estate market (€3,360/sqm, as evidenced by recent market transactions), and the cost of newly constructed properties (€5,300/sqm, which are rising due to input price inflation).
Source: Bloomberg