Member Info for Hounddog10

The RMT Network Rail people have apparently “overwhelmingly” just agreed a pay offer. The CWU may start being a bit isolated.

$200m was the number I have always had in the back of my mind - but I do not know enough about the industry. However, I have never been able to reconcile it with the $40m Singida cost. On a 2:1 debt to equity ratio that implies $70m of equity. I agree with Ant that at the current gold price Shanta will generate about $20-30m per annum so a decent portion could be financed internally. (That excludes any historic VAT refund which I never been optimistic about). Certainly, the most probable situation is that Shanta is taken out but I think the cost of WK will be an important element of any such move, which is why it is helpful to gain an indication of size. They have said in the past that WK could take only 15 months to build and be up and running in 2025. I have always thought 2026 more likely, as a significant constraint is getting the buy in of the politicians who will, no doubt, be looking to see how they can gain from it.

This raises the good question of what a WK mine will cost and how much equity is needed. The current estimated cost of the WK mine is $161m. However, that is an old plan and inflation will have impacted it. Going the other way Shanta seems to have hinted at doing a quicker, simpler mine at Ramula as a starting point. From memory I think they have anticipated that WK will do about 70-90,000 oz per year. So roughly 2-3 times Singida. Singida has cost them under $40m and I would assume that most of the enhanced production at WK will be due to much higher grades - possibly as much as 5x Singida (?) - which does not increase mine build cost. It would be interesting if anyone with deep mining experience (Viable?) could comment on the likely mine cost and financing structure. I understand a 2:1 debt to equity ratio is the norm (although Eric is, rightly, rather cautious about too much debt). Absent a T/O, farm-in this seems to me to be the major internal factor for Shanta in 2023. Unless the gold price crashes they should start pumping out a good deal of cash next year.

They are going to have to show some progress as I think they are finally exhausting everyone’s patience. Based on H1 £3m revenue (£2.7m d2w, £0.3m d2p) and the projections in their interim results a guess at H2 revenue is:

d2w - £3.0-3.5m (uptick in Middle East sales and a bit elsewhere)
d2p(bread) - £1.0m (nearly all Bimbo which seems to be £2.0m p.a.)
d2p(anti insect) -£0.6m (as stated in interims, nearly all Rivulis and mostly already received)
d2p(other) - £0.4m (bits and pieces)
gloves - nothing (no authorisation)

So £5.0 -5.5m revenue for H2. That should be around breakeven and will, if built upon, allow them to get to their £14m run rate they are looking for at 30 June next year.

India on top of this - difficult to know how much.

FT reports HSBC closing a quarter (114) of branches taking them down to 327. By my reckoning LBG still has around 1,300 branches across Lloyds, Halifax and BoS brands. Bit difficult to know as they are rather coy about disclosing numbers. Have had in the past to patiently add them up on their websites. I suspect Lloyds will being doing another round of closures soon. I have never really understood why they have not combined Halifax and Lloyds branches, so often in the same location, but perhaps they are anticipating virtual elimination of nearly all branches.

Isleworth

I was merely reading this paragraph in the interims.

“National roll out of dedicated parcel hubs: We are deploying dedicated parcel routes from c.350 hubs for the delivery of larger and next day parcels. c.60 hubs have already been deployed with the remainder to be completed by the end of this financial year. As part of our efficiency initiatives we are exploring the utilisation of a number of Parcelforce Worldwide locations as hubs for both Royal Mail and Parcelforce Worldwide parcels.”

Of course they may not achieve this in the timeline but when putting out any statement in an RNS they have to have a decent expectation it will come true. They will be asked by analysts at the year end where they have got to on this. It is quite crucial.

Newdealz

Yes, they certainly have made preparations for splitting off GLS if necessary although I don’t think that they would deliberately try and put back RM to the government. There Is a lot of value in RM if it can be turned around - but it is clear that they are not going to use GLS to cross subsidise it and they will use the stick of spin off/non subsidy to bash the unions and the government for change (working practices/USO).

I had thought they were highly likely to spin off GLS but have rather changed my view now. I think the reason the share price went up on the interims was because amid the dire numbers for RM (which were known) there was a lot of good news eg despite the strikes still no.1 on net promoter score for deliveries, parcel automation touching 70%, 60 out of the 350 DOs designated to take the new parcel delivery format up and running and remainder by end March 2023 etc. So there is a good deal of hope that RM will get sorted out.

The other aspect of the renaming is that I think it is increasingly wrong to see GLS as the sideshow and RM the main business. GLS is now really the core business. This is what they say in the interims about its prospects:

“GLS Accelerate4 targets (€500 million operating profit and €1 billion accumulated free cash flow4 in FY 2024-25) delayed by c.18-24 months given current worse than anticipated macro-economic backdrop.”

OK a delay out to 2026/7 but £1bn a year free cash flow in a year. IDS has 1bn shares in issue so that implies free cash flow per share of £1 per share each year. That is very attractive for shareholders.

I think all the negativity about RM is obscuring how cash generative GLS will be (and is).

There could be a buyout of GLS. Of course, at any time, IDS could sell GLS or someone could offer to buy GLS. RM would remain a listed company.

And there could be a straight buyout of IDS and then it would be delisted. I think this is what you are suggesting. The valuation on that would likely be mainly driven by what GLS is worth.

Scamp

If GLS was to be demerged then you would get shares in GLS based on your holding in IDS. It would not necessarily be 50% but would depend on the respective valuations at the time of GLS and RM as standalone businesses. You would get your fair share of the overall pie.

GLS would not be demerged as a private company - only as a public one listed on a stock market, either London or maybe Amsterdam or both. If on Amsterdam they would create a cheap trading facility for those who might want to sell out of a non-UK listed stock (they might also do it if listed in London).

At the moment an imminent demerger seems to me less likely as I think the CWU looks as though it will lose and lose badly. However, things could easily change.

If GLS was demerged it would be worth a good deal more than what IDS is valued at at the moment. That is what is backstopping the IDS price.

Theosus

Thanks for the 2020 PwC Pension Funding link. However, PwC seem to have rather changed their tune since then. In their most recent publication (October 2022) they are saying, somewhat remarkably, that all UK schemes are in funding surplus and are ready for buyout. If this the case there is no longer a funding deficit in the Lloyds schemes and I would imagine Lloyds will be doing their best to negotiate with the regulator in advance of the 31 December 2022 triennial valuation not to put more money in next year - particularly as they have already, in prior years, posted £13bn collateral against the scheme (last valuation of the scheme’s liabilities was £34bn at 30 June 2022).

We shall have to see but hopefully they will say something at the final results in February next year.

https://www.pwc.co.uk/press-room/press-releases/uk-pension-schemes-still-reach-record-collective-funding-level.html

Theosus

2006 was obviously a long time ago and crucially before the banking crash when rock bottom interest rates came in and massively increased pension liabilities so forcing much higher deficit payments. We are in a rather different world now with rates going up albeit inflation high. Like many pension schemes the Lloyds schemes are now highly mature. Closed to new entrants and even those still in and accruing benefits are leaving the schemes at a fair clip as they exit Lloyds’ employment or retire. The schemes are also heavily (but not entirely) hedged as to interest rate rate movements and, increasingly (as you point out on longevity) other assumptions. So overall exiting deficits should not change that much but be closed down progressively with deficit cash contributions. Having said that there does seem to be some downward ACCOUNTING remeasurement of the Lloyds schemes in recent results this year but it is quite possible for that to go into a different direction to what the actuaries calculate for funding (which is what matters). Pension accounting is hopelessly unhelpful and on an accounting basis Lloyds has a surplus.

Overall, the UK defined benefit pension fund deficit issue is disappearing. The latest figures from the pension fund protection (lifeboat) scheme estimate that for ALL UK pension funds that are in deficit the TOTAL deficit amounts to only £5.8bn. They produce those figures on an actuarial basis albeit assuming that those that are not yet receiving a pension would get a 10% cut in pension if it was to be forced into the scheme. However, the direction of travel is what is most interesting - radically reduced deficits this year. It seems pension deficits are rapidly disappearing as a problem.

https://www.ppf.co.uk/ppf-7800-index

There is a lot of comment in articles on how much profit Lloyds will make and how that will turn into dividends. That is unsurprising. However, I think it is important also to look at how Lloyds is using its profits. This year it will “spend”, roughly, £1.6bn on dividends, £2.0bn on buyback and almost £2.0bn towards curing the pension deficit. This will be matched out by £5.5bn of after tax earnings (£4.0bn to end Q3 and say £1.5bn in Q4).

The £2.0bn into the pension is a big number and could more than double the dividend. So the question is when will this cash cost end. Well, the pension deficit was calculated at £7.0bn at 31 December 2019 and since then £3bn of cash has gone in and at the beginning of this year it seems a further £1bn might have been knocked off due to changes in actuarial assumptions. So perhaps £3bn left to clear.

The next triennial actuarial review (and determination of the deficit) is to be done based on the 31 December 2022 position and Lloyds has to agree this with the pensions regulator by 31 March 2024. It is difficult to know where this will land but it might reasonably be assumed that strongly rising interest rates (good for reducing pension liabilities) might outweigh rising inflation (bad as increases pensioner payments and so the deficit). Both are long term assumptions. It is therefore conceivable that some or all of the deficit could simply be reduced by revised assumptions - although looking at the accounting pension numbers (unhelpfully done on a different actuarial basis to the actuaries’ actuarial basis) things may be going the other way. Difficult to understand why if so.

Agreement on a revised deficit and funding is unlikely to happen before Lloyds have put in another £2bn next year but it could be that in 2024 there is little or no pension deficit left to fund. Whatever the outcome the position on the pension fund is crucial to dividends as when the deficit disappears the £2bn avoided will, I think, mainly go into dividend payments - and it will be a big hike.

One of Michael Stephen’s recent columns sets out what is happening in Wales on single use plastics. Among banning certain single use plastic products Wales are also trying to ban “oxo degradable” plastic. SYM is trying to make sure that this does not include oxo BIOdegradable plastics such as those with d2w. What is interesting is that an amendment has now been tabled to require that single use plastics should be made with oxo biodegradable plastic (so rather a reverse to the original thrust of the proposed law). I am a bit doubtful that this will get through but reading through the background it seems to me that the politicians are beginning to understand much better how to deal with the plastic problem and are coming closer to SYM’s view. In particular they are now realising that compostable plastics (SYM’s arch enemy) does nothing to solve the plastic litter problem because they only degrade at speed in industrial composting facilities and even then not very well.

The result in Wales will probably be quite influential to the rest of the UK and might open up new opportunities for SYM.

https://bioplasticsnews.com/2022/11/07/michael-stephen-time-ban-compostable-plastics-wales-scotland/

This is the CWU’s problem. From the interims:

“The impact of the three days of industrial action in the first half of the year on adjusted operating profit was estimated to be c.£70 million. In October1 there were an additional five days of industrial action, which we estimate had an additional c.£30 million impact on adjusted operating profit.”

Royal Mail have got the cost of the strikes down to £6m a day (from over £20m). They can weather that. By contrast the posties cannot weather the continual loss of pay.

It wasn’t totally clear as to the current position. What it did say is that Thompson approached the government in May about ditching Saturday deliveries. This seemed to be firmly rejected by Kwarteng, then business secretary. And now Thompson is now having another go based on the lousy interim results and that Schapps is now business Secretary.

Sorry net borrowings should have been £0.7m not £0.5m.

At 30 June 2022 cash of £0.5m and borrowings of £1.2m. So net borrowings of £0.5m. However, after 30June 2022 they had £1m of cash in from a placing. The borrowings are under an £1.5m invoice discounting facility provided by HSBC so there will have only been £0.3m undrawn.

Cash outflow in the first half of 2022 was £0.8m on sales of £3.0m.

Rosterman appears to be an old colonial era mine which is on the edge of the “Kakamega camp” which is one of Shanta’s main drilling areas (and contains Bushiangala and Isulu target deposits). See their latest presentation on their website. Rosterman/Kakamega at top right.

Anger

IFRS 16 is a new accounting standard on leases that came in around three or four years ago. Prior to that leases were classified as either “financial” or “operational”. Financial leases were included on the balance sheet as a liability but operating leases were merely disclosed in the notes to the accounts. Companies don’t like showing debt and so preferred the off balance sheet operating leases and indeed gamesmanship developed in the banking sector to try and make sure leases could be structured to be classified for accounting purposes as operating rather than financial. At the same time analysts analysing capex heavy companies would routinely uses the notes to “bring back” into the balance sheet operating leases in their assessments of a company’s net debt. The logic being that there wasn’t really any difference between using a (on balance sheet) borrowing to buy an asset (or using cash) or taking out an operating lease where there was an off balance sheet liability to pay.

The accounting standards people saw this and eventually got agreed IFR16 which (with minor exceptions) says that ALL leases should be on the balance sheet. So the right number is the higher number ie including the IFRS 16 accounted for leases (which would previously have been off balance sheet operating leases). It is not particularly surprising to have quite heavy debt given the modernisation.

The reason IDS show a number that excludes the IFRS16 accounted for leases is that the c£900m undrawn debt facility they have was agreed in a pre IFRS 16 era and it’s covenants were set on that basis. They want to give people that number so that they can see how close to that covenant IDS is. The facility was agreed in a “covenant lite” era and is a bit of history and if taken out now would, I am sure, in no way be so generous.

On a related note I have felt for a while that the debt facility may not be available to IDS when needed (although in the £1.7bn available liquidity number they have assumed it will be). I think they could easily fall foul of one of the EBITDA covenants. It certainly needs GLS to get them there. Indeed in the going concern note IDS describes their ability to comply with the covenants in this facility as “marginal”.

There is quite a lot to unpack here and the outlook is rather mixed. However, some key points are (which others have mentioned). In no particular order:
(1). No interim dividend but they may consider a year end one out of GLS profits. I had wondered if they might do something like that. Some institutional investors cannot, under their mandate, hold non dividend stocks so would otherwise need to sell out.
(2). Potential USO change. Craftily slipped in as a single sentence but probably underpins most of their financial projections.
(3). Projected £350 -450m loss for the year for RM side. They also said October (presumably normally a good month) was loss making. Future VR payments on top of that.
(4). There does seem to be an underlying assumption that GLS would not be spun off (I have thought otherwise). This is particularly so when you look at going concern assumptions and the fact that they may consider a year end “GLS dividend”.
(5). Group cash is down from £1.1bn to £800m. This is mainly due to RM operating losses, final dividend and capex (presumably on Daventry, parcel machines and software). Offset by GLS operating cash in flows.

The going concern assumptions are particularly worth a look. As might be expected they are clearly thinking about how the Euro 500m Eurobond maturing in July 2024 will be repaid.