Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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So, I've a few thoughts on the the macro economic conditions and what they might mean for the share price (though not particularly for the business performance):
L&G hold n% of most FTSE shares. Therefore the FTSE stumble since March has impacted the LGIM side of things. L&G share price also tracks the FTSE100 which has dropped, as well as the banking section which has plummeted since March.
But that seems to me not to be representative of business performanc.
Sure, the recent focus on acquiring/building commercial property will be impacted by the pandemic, but the core historical focus of the business: life insurance, assurance, pensions, annuities and the more recent move into retirement-sector house building will not. They continue to pay dividends and new business numbers are particularly impressive.
Even Pensions Reform has not had the sort of impact to the annuities side that one may have expected.
Therefore, I foresee the following:
1) The UK govt and EU reach a trade deal. Probably not by the end of the year, but in early 2021. Despite the posturing and rhetoric, it would be a disaster for both sides not to do so.
2) The US election is decisive and relatively peaceful. Despite the bravado, I don't believe either candidate will want to go down kicking and screaming.
3) A vaccine is authorised for use and production ramp up/major roll-our begins in H1 2021.
The combination of those three macro events could, I believe, (unjustly) send the FTSE100 to all-time highs. There's far more cash sloshing around in the market now that ever in my lifetime and we all have seen the effects of a mad bull run.
Conclusion: February's high of £3.20 could well be surpassed in 6 months time.
Thinking likely bottom is around £1.70 based upon book value so R/R is extremely attractive here.
I will be happily holding (and perhaps buying) until Spring.
ATB ATG
"One thing not mentioned in your (very good) analysis is Brexit. This share is such a fundamentally British share in the same way as Lloyds, Nat West , Barratt etc all are."
Yes it is a British company but it has a very considerable proportion of investment outside the UK. So I hope it can weather Brexit changes and has taken steps to do so. Obviously no sensibly run company would reveal too much in today's political dogfight.
The value of properties to LGEN depends on whether they are in a company backed fund (Eg their rentals back annuities) or whether they are in a policyholder fund in which case LGEN is only exposed to a declining AMC a on a lower AUM.
Their build to rent portfolio may take a hit, but they can increase the social element and have the govt pay the bills to partly mitigate.
They have So many large illiquid assets and each one needs to be assessed individually the valuation and audit fees are going up.
It's possible the price reflects the chance of no deal Brexit?
Yes I just knew I should have bought at 187 but had something else on my mind, WD Klutz
I'm in at 207p so would like a boost in the near future to cut my paper losses, but I'm very confident in the long term outlook so not overly worried. I would buy more now but its already over 20% of my portfolio so don't want to be any more exposed.
One thing not mentioned in your (very good) analysis is Brexit. This share is such a fundamentally British share in the same way as Lloyds, Nat West , Barratt etc all are. No deal could mean another sharp drop, but on the flip side a good deal could give it a nice quick boost.
One other thing I am worried about is the value of some their commercial property assets, especially city centre offices. Surely there will have to be a mark down in their value in the near future?
I bought in at 187.10 this morning. Will be interesting to see where it goes the next few months but think this level is a good entry point for the long term.
Bought a few more, might do the same tomorrow.
Tacly ..thanks for an excellent piece of analysis...this is a share that baffles me because the share price doesn't match the fundamentals and the safe dividends on offer . I think it has more to do with the stock market in general which is in retreat, and an outgoing tide lowers all boats.. The tide will come back in once Covid is conquered...I exited yesterday because I think the share price despite the fundamentals is heading downwards.
Agreed the dividend yield is looking attractive. I'm looking for an entry point for a long term hold but thinking it'll drop into the 180's before it recovers.
My thinking out loud.
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The share price was ~ 220p for about 2 months before the interim result came out. Today it is ~ 194p. So ~12% drop since then.
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Looking at the money, from H1 2020 result https://www.legalandgeneralgroup.com/media/17912/hy20-slide-template-finalcms.pdf:
Page 5 - LG gets its Operating profit from: Retirement (LGR) £721m, Investment Management (LGIM) £196m, Capital (LGC) £123m and Insurance (LGI) £88m. In the result, LGR up, LGIM up, LGC down, LGI down.
Page 15 – The biggest down was LGC (-£50m) due to COVID-19. Estimate pushes this to -£60m.
Page 16 - The next biggest down was LGI (-£46m) due to COVID-19 insurance pay out. CoVID-19 future claims pushes this to -£80m.
Page 13 – LGIM up a bit (+4m).
Page 9 – LGR up (+£66m). LGR comprises Institutional (LRRI – up, +£61m) and Retail (LGRR – up, +£5m). Profit up due to a variety of factors detailed on that page.
Page 8 – Overall H1 2020 Operating profit down -6% compared to H1 2019.
Page 18 - LG said ambition is for a similar performance in H2.
Page 6 - Dividend should be safe given its 1.7x cover.
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Conclusion: Biggest earner LGR (£721m). Biggest winner LGR (+66m). Biggest loser LGI (-£80m). Biggest cause COVID-19.
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My guesses for the next 6 month:
1) If UK housing uncertainty remains (COVID-19 impact unchanged, wet Autumn and icy Winter so less building work)
2) And the mortality rate is worse (death rate in winter is always higher + COVID-19 + mis-management)
3) And LGRI’s new PRT business continues to drop (page 10 – H1 2019 was £6677m, H1 2020 was £3424m) –sale for the biggest earner wasn’t good
4) And no vaccine before March 2021.
Then LGC and LGI may continue down with LGI getting worse. LGIM the same. LGR up a little. LGR profit may balance out LGC and LGI loses but not enough. So end of financial year result may be a down, -6% or worse.
Given that H1 2020 Operating profit is already -6% compared to H1 2019, COVID-19 risks the same or worse, the biggest earner LGR’s H1 2020 sale wasn’t good and that LG said their ambition is for a similar performance in H2, may be the current price of ~194p is a fair price (6% known drop + 6% risk margin)?
So the best the share price may get to short term is the level when the interim result came out i.e. ~220p. The share price many yo-yo between 180p and 220p due to COVID-19, US election, Brexit, bad final result, vaccine...
For me, in the short term, if the share price drops close to 180p, it is a definite buy. Anything between 190p and 220p is a toss-up. In the long term, once the COVID-19 crisis is over, LG should returns to its long term average P/E of 10.8 which, at the current forecast EPS of 26p, the fair price for the share long term should be ~280p. So 194p may be an attractive entry point for the long termers. The dividend yield of 9% at today’s share price is an excellent return while waiting for the share price to recover.
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Wisdom of the crowd, please sh