Investors’ Chronicle: CVS, Impact Healthcare Reit, Gulf Keystone


BUY: CVS (CVSG)

The listed animal sector is benefiting from a surge in demand for pets, however, the short-term boom is also set to generate long-term demand for pet care and veterinary services, writes Oliver Telling.

Caring for a pet is for life, not just for lockdown. Not everyone who rushed to buy one over the past year may have considered that; as pet sales boomed, the Dogs Trust warned that up to 40,000 canines were at risk of eventually being abandoned.

How long people remain committed to caring for their new puppies once lockdown is over may be debatable, but one of the immediate beneficiaries of the pet frenzy has been the animal care sector.

Vet operator CVS reported a rise in adjusted pre-tax profits of more than a third during the six months to December. 

Similarly, veterinary equipment provider Animalcare said that sales rose 3 per cent in the final half of 2020, to £36m. Revenues for the full year were down 1 per cent, largely due to the closure of veterinary practices during the early stages of the pandemic, although the company swung to its first pre-tax profit in three years as it slashed expenses.

Shares in both CVS and Animalcare have surged over the past year, as investors bet the pet boom is here to stay. But can the listed animal sector really continue to roar once lockdown ends?

CVS has to be wary of more than just fickle pet owners. The veterinary sector is particularly dependent on European workers; in 2017/18, 48 per cent of new UK vets came from EU schools. In November, the British Veterinary Association warned that the industry could face a shortage of workers after Brexit.

CVS chief executive Richard Fairman said the company has recently been focusing on recruitment. The vacancy rate for vets had fallen to 7.5 per cent at the end of December, from 12.5 per cent in 2018. The group said increasing the proportion of full-time staff has also lifted profit margins, as it is now less dependent on higher-cost freelancers.

Animalcare, meanwhile, is still dogged by the fallout from an unpopular acquisition in 2017. The takeover immediately sent its share price tumbling, as investors doubted the benefits of the high-cost move; its share price remains almost half the level at its peak. Yet since then, the company has been cutting debt and increasing the amount of cash it generates from operations. Net debt stood at just 1.1 times adjusted cash profits at the end of last year. 

Despite concerns about new dog owners abandoning their lockdown companions, most people will also probably continue to care for their pets over the coming decade. Continued homeworking may sustain demand for furry friends and as CVS points out, there will only be more need for its services as these puppies get older. A valuation of 44 times earnings seems pricey, but our long-term view remains optimistic.

BUY: Impact Healthcare Reit (IHR)

Rent cover dips due to fall in occupancy in the pandemic, yet the target dividend for 2021 has increased, writes Emma Powell.

The rollout of the vaccine has brought hope that the worst challenges facing the care sector are behind it. In addition to protecting vulnerable residents, care home operators have also faced greater financial strain. Yet judging by Impact Healthcare Reit’s full-year figures, some have proven remarkably resilient.

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However, an increase in deaths and restrictions among new residents entering homes mean occupancy across the portfolio did decline an average 10 per cent during the three months from March last year. Since then it has remained stable at about 80 per cent.

Rent cover — defined as tenants’ pre-tax and pre-rent profitability divided by the amount of rent due on its homes — declined to a multiple of — 1.68 at the end of the second quarter before recovering to 1.89 by the end of September. However, tenants were partially insulated against the decline in occupancy by an increase in the level of fees charged and government support measures, which rose an average 14 per cent across the portfolio. 

That meant the landlord collected 100 per cent of rent owed during the year. Net rental income rose by around a quarter, partially due to inflationary-linked rent increases and acquisitions.

However, the latter was subdued during the year. In March, the landlord put the “foot brake and the hand brake on” acquisitions as the difficulties associated with visiting care homes prevented it carrying out due diligence on potential deals. No distress has yet emerged, said Andrew Cowley, managing partner at the Reit’s investment adviser Impact Health Partners. “If anything yields might tighten up and we need to get in front of that,” he said.

An increase in the dividend last year — which was covered 1.15 times by earnings — has been followed by management declaring a target payment of 6.41p this year, which leaves the shares offering a potential yield of 5.7 per cent. Last year’s generous dividends contributed to a total return of 8.5 per cent. Since the shares were listed in 2017, the Reit has delivered a total return of 35 per cent, versus the 11 per cent generated by the FTSE All-Share. 

Perhaps unsurprisingly, the shares are trading at a near all-time high, or a marginal discount to consensus forecast NAV of 115p a share at the end of this year. That seems good value for the income on offer. 

HOLD: Gulf Keystone (GKP)

The oil price crash and unpaid invoices in Kurdistan knocked the oil production group into loss territory, writes Alex Hamer.

Gulf Keystone came into 2020 “set for another 12 months of successful, safe, production growth”, in the words of chair Jaap Huijskes. The company managed production growth of just over 10 per cent on 2019, but had to postpone its 55,000 barrels of oil per day (bopd) goal for around 18 months, to the first quarter of 2022.

Even with the higher production, earnings suffered from the oil price crash. Adjusted cash profits more than halved to $57m (£41m), even with solid cost decreases and capital spending falling by half from the $90m spent in 2019.

Gulf Keystone is also still chasing the Kurdistan regional government for more than $70m in unpaid invoices, although it said the authority had started to repay this in March.

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Despite this, Gulf Keystone has stayed in net cash territory and has also announced a $25m dividend this year, equal to just under 12 cents a share.

Broker Peel Hunt forecasts adjusted earnings per share of 10¢ this year, rising to 51 cents in 2022.

Last year we said Gulf Keystone was struggling to overcome the oil crash. Since then, its share price has more than doubled thanks to the oil price getting back over $60 per barrel. We will wait for the expansion in the Shaikan region or Kurdistan coming on stream and the fabled 55,000 bopd target being hit before getting more bullish.

Chris Dillow: Equities for the old

Many of you still think that you should de-risk your portfolios as you get older by holding fewer equities. You should ditch this idea, because for many of us it is plain wrong.

One reason it is claimed that older people should own fewer equities is that they have fewer years ahead of them in which to recoup any stock market losses.

But this is false, and not just because many older people plan on leaving shares to their children and so have longer time horizons.

It’s also false because it is not the mere passage of time that erases losses but rather the market’s ability to bounce back. And in the past, this ability has been predicted simply by the dividend yield. Since 1985 anybody who had bought when the yield on the All-Share index was over 4.5 per cent would have made an average total real return in the following five years of over 75 per cent. But they would have lost an average of 14.5 per cent if they had bought when the yield was under 2.5 per cent.

The rule “buy when yields are high” has worked better than buying just because you were the right age. If you are in equities for the long-term, you’ll be in when valuations are high and when equities subsequently lose you money. It’s better to be in shares for a short time at the right time than for the long term.

You might object here, reasonably, that the future might not resemble the past and that perhaps valuations will no longer predict returns.

Even if this is the case, though, it doesn’t follow that equities are better for younger people. If shares aren’t going to rise in the first five years after they have been cheap, why should they rise thereafter?

In fact, history offers several examples of older shorter-term investors doing better than young long-term ones. The old man who bought Russian equities in 1907 and died before 1917 would have seen better returns than the younger man who held on for the long run. Ditto the Japanese investor who bought in the 1980s before the Nikkei began its long slump.

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We can’t rule out a repeat of this. It’s quite possible that, after a post-Covid bounce, western economies will revert to their pre-pandemic pattern of weak growth. That means greater risk of earnings disappointments and crises. That’s an environment which favours shorter-term investors. The young Japanese investor who had bought the Nikkei 225 at 36,000 in 1989 has grown old waiting in vain to recoup his money. There’s a danger of the same thing happening here.

There is, however, one good reason why some of us should cut our equity holdings as we age.

It’s that while we are working we have a way of spreading equity risk. If the market falls we can top up our wealth by working longer or by saving more of our salary. Our human capital then diversifies our equity holdings. But if you are in retirement (or close to it) you don’t have this diversifier, so shares are riskier for you. Which means you should hold less of them.

This is certainly true for some people. But not all. If you work in banking or a cyclical industry like construction you risk losing your job or bonus when equities do badly. For you, shares compound the risks you already face. Which means it’s safer to own them after you retire.

This is especially the case if you retire on a big final salary pension. This gives you, in effect, a huge bond-like asset. That’s safer than many people’s jobs. And this cushion enables you to take lots of equity risk.

For some people, therefore, it makes sense to actually own more equities as you age, not less.

We should, therefore, forget talk that equities are less suitable for us as we age. How much of your wealth you put into shares depends upon many things, such as valuations, your appetite for risk and the other risks you face. How many miles you have on the clock is not one of these things. In investing — if not alas in life — age — doesn’t matter.

But — here’s another point here. Nothing I’ve said here is new or original. It was all said a quarter of a century ago by Ravi Jagannathan and Narayana Kocherlakota, two distinguished US economists. The fact that people still believe the myth today shows that bad financial advice can live on long after it has been debunked. Which poses the question: what other old ideas might we be clinging on to after they have been refuted?

Chris Dillow is an economics commentator for Investors’ Chronicle



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