IC — PureTech Health, Bunzl, Thomas Cook

Buy: PureTech Health (PRTC)

The group’s deconsolidation gains demonstrate its ability to drive growth within its portfolio, writes Tom Dines.

PureTech Health develops treatments through both its internal pipeline and a broad portfolio of affiliate companies. Both strands made good progress in the first half of 2019. The parent company’s collaboration agreement with Boehringer Ingelheim makes it eligible for up to $26m (£21m) in upfront payments and more than $200m in milestone payments, while affiliate company Follica announced positive interim data for its male hair-loss treatment and expects to initiate a “pivotal” study of a potential androgenic alopecia treatment later this year.

New license agreements in the internal pipeline led contract revenues to more than double in the first half of the year, reaching close to $4m. However, this was accompanied by a sharp drop in grant revenues, leading overall sales to come in below the same period last year.

Profits aren’t a given in early-stage pharmaceutical companies such as PureTech, but the group made considerable gains by deconsolidating two of its affiliated companies — Azheimer’s and schizophrenia drug developer Karuna, and cell therapy company Vor — alongside some of its other investments, pushing it to an $11m pre-tax profit.

A number of Puretech’s portfolio companies, such as resTORbio and Karuna, have listed on the Nasdaq stock exchange, and last month management announced it was exploring a potential listing itself, which would see new common shares issued on to the US-based exchange in addition to its existing listing on the UK market.

Broker Peel Hunt is forecasting adjusted pre-tax losses of $136m for the 2019 full year, making a loss per share of 21.6 cents. This is down from a loss of $75.5m and earnings per share of 15.9 cents in 2018.

Hold: Bunzl (BNZL)

The group may point to a “resilient” performance, but it cannot outrun the global economy forever, writes Nilushi Karunaratne.

Bunzl had forewarned investors back in April that challenging macroeconomic and market conditions were dampening underlying revenue growth. Compared with the 1.5 per cent recorded for the first quarter of 2019, organic revenue growth of 0.8 per cent for the six months to 30 June implies the group experienced a significant slowdown in the second quarter.

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This comes as the largest market, North America, saw sales growth slow to 0.7 per cent to £2.6bn. With product specification changes and price deflation triggering lower revenue from a large grocery customer, organic growth dropped from 1 per cent during the first quarter to just 0.1 per cent. In expectation of further deterioration, JPMorgan Cazenove forecasts a swing to negative 0.7 per cent for the full year.

Bolt-on additions have aided top-line growth in the past, but the group has only committed £98m on two acquisitions so far this year, a reduction of over a quarter from the same point in 2018. Looking to kick-start growth in the second half, the group is in “active discussions with a number of acquisition targets”.

JPMorgan Cazenove anticipates adjusted pre-tax profit of £576m and earnings per share of 131p for the full year, rising to £598m and 135p in 2020.

Sell: Thomas Cook (TCG)

The group exited its March half year in negative equity, with net debt representing 6.5 times its market capitalisation, writes Mark Robinson.

Thomas Cook’s shareholders were dumping their stock in the beleaguered travel group after it announced details of a bailout with its largest shareholder, China’s Fosun Tourism Group, its core lending banks, and most of the 2022 and 2023 senior noteholders.

The agreement entails a £450m cash injection from Fosun in return for 75 per cent of the tour business (subject to the receipt of antitrust approvals) and 25 per cent of Thomas Cook’s airline. The core lending banks and noteholders have pledged another £450m in exchange for the residual 25 per cent and 75 per cent stakes in those businesses.

Management reiterated that other shareholders would be given the opportunity to participate in the recapitalisation by way of a parallel investment and/or conversion of senior creditors “on terms to be agreed”. But the bottom line is that existing shareholders will be subject to a significant dilution of their holdings. Thomas Cook is looking to get the deal rubber-stamped by October, with agreement required by all parties to the recapitalisation and other key stakeholders.

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Chris Dillow: Doubts over profit-led growth

Which is best for promoting economic growth: policies and institutions that favour capital, or ones that favour labour? This old question lies behind the debate about whether the US is heading for recession or not.

In theory, either can do so under the right conditions. For example, after the second world war, many western countries had pro (ish)-worker policies: lowish inequality, powerful trade unions and a policy commitment to full employment. And in the 1950s and1960s, these economies grew well.

High wages encouraged companies to raise productivity by investing in new equipment, while the assurance of full employment also encouraged such investment. And because capital utilisation was high, profit rates were good, which further stimulated investment. We had a successful wage-led regime.

But it broke down in the 1970s and — especially in the US and UK — was replaced by pro-capital policies and institutions such as weakened trade unions and heightened inequality. In the US — although not UK — these have led to a rising share in gross domestic product of profits and a falling share for workers.

This can foster economic growth — and indeed it has — if the assurance of high profit margins and a quiescent workforce encourages capital spending.

But herein lies our problem. This is now in doubt. Profit-led growth requires certain conditions to be in place — but perhaps they no longer are.

One of these is that companies heavily reinvest their profits. But this is no longer happening. Non-residential capital spending fell slightly in the second quarter. Another is that workers respond to wage restraint by running down savings or increasing borrowing to maintain aggregate demand. While this occurred in the 1980s and 1990s it is no longer doing so: the savings ratio has actually risen since 2016. Yet another is that management has the ability or incentive to increase productivity. But this is faltering; in the past five years it has grown only 1.2 per cent a year, whereas in the 50 years up to 2007 it grew by 2.2 per cent a year.

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None of this means a recession is a sure thing. It means something bigger — that the stakes here are high. A recession would be more than merely the ordinary working of the business cycle. It would throw into question the viability of the profit-led regime we have seen since the 1980s.

You can be forgiven for thinking equity investors needn’t worry about this. After all, the stock market did very well during the wage-led regime of the 1950s and 1960s.

I fear, though, that this is too complacent. The profit-led regime since the 1980s has been fantastic for shareholders. Sydney Ludvigson at New York University and colleagues have shown that most of the rise in the stock market since 1989 is due not to economic growth or to lower interest rates but to the rise in the profit share. Anything that brings this into jeopardy would therefore unsettle investors. This is one justification for why share prices are so sensitive to even the slightest hint of recession. One thing we learnt in the 1970s is that the transition from one regime to the other — even if it ultimately proves successful — can see share prices fall a lot.

Chris Dillow is an economics commentator for Investors Chronicle

The Financial Times and its journalism, including Investors Chronicle content, are subject to a self-regulation regime under the FT Editorial Code of Practice: FT.com/editorialcode



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