Member Info for Hounddog10

JTB, Anger, Oligarch - thanks. My posts were probably a bit too detailed for most but there is quite a lot to say.

Oligarch - you are right to say that I incorrectly assumed GLS cash inflows could help stem the cash outflows in RM. They have said they will not cross fund and I think, for the moment, they will largely hold to that (except I think on repaying the £400m 2024 Eurobond where I believe the proceeds probably originally went into GLS). If they are serious about that position they need to start saying how much cash is in RM (not just at the group level) and talking about how RM cash is getting run down (without recourse to GLS).

I think the group cash level in the interims will be OK. Conceivably may even have gone up a bit - but it is next year if losses continue to accelerate that the problems will come through. It will not be difficult to burn through even a billion of cash.

Anger - sure, happy to comment but I am sure others will have equally valid views. However, I do kind of feel it is anyone’s guess at the moment how the RM side business will perform. I am not even sure management has much of a clue. I would say this in advance:

As you say a great deal revolves around cash which at 31 March 2022 was £1.1bn (for the group). I think that might not be that much depleted in the interim results or perhaps even at the year end. The reason being, as you know, the p&l for the RM side includes a heavy non-cash depreciation charge (of currently around £400m for a full year). So, say, if they lose £400m this financial year when you add back depreciation at the OPERATING cash flow level they are flat. However, operating cash flow does not include capex cash out flows (currently running at £450m a year) and capital lease payments (£200m a year). So on that the Royal Mail side would be £650m cash down by 31 March 2023. However, I would expect GLS cash inflows to offset a good deal of that. So they might end up being only about £200-300m down on group cash by 31 March 2023.

The real problem I see them having is if the RM side losses start going to around £1bn a year which from the CFO note someone posted it seems some analysts think possible for this year (my view is not this financial year but quite possibly the next) cash really starts to run down. That would mean the RM side next year would be about £600m cash down (£1bn but add back £400m depreciation). But they still have heavy capex until Daventry and all the parcel machines are in which would probably be an extra £200-400m cash out and then also add on the capital lease payments (£200m per year). So the Royal Mail side would be back up to over £1bn of cash out for the next financial year. So even if the GLS side can pull in £500m of net cash inflow the group is £500m down. So by 31 March 2024 nearly all the £1.1bn cash is gone (they need a couple of hundred million just for day to day needs).

Then there is the £400m Eurobond due in July 2024. My view is that will have to be funded by GLS cash flows and quite possibly some property sales. So even if GLS is spun out next year they will leave enough of its cash in IDS to help fund that repayment. I think that is the only bit of cross funding they will tolerate.

They are also various bits of non operating cash that can go in and out eg VR payments (£50-100m?), release of pension escrow cash (£200m in), some deferred property sale proceeds (£100m in). Quite a few moving parts.

Anger. It is a rather surprising figure. Here is how I guesstimated it:

(1). Non current assets of GLS at 31 March 2022 were £1,703m (page 177 of the group accounts). This will be land, buildings and equipment.
(2). From the group accounts I assumed that GLS along with RM would have roughly flat net current assets/liabilities.
(3). For the non current liabilities the only ones to really worry about for GLS are borrowings and long term lease liabilities. The pension liability (on the third pension scheme) and nearly all provisions are in Royal Mail. There is no consolidated sub group for GLS (only it’s solo holding company accounts of RMGLS Holdco Limited) so the way I estimated the non current liabilities for GLS was to take the group amounts and deduct those in the Royal Mail subgroup. The holdco for the Royal Mail subgroup is Royal Mail Group Limited (RMGL). These accounts are also unconsolidated but seem to have nearly all Royal Mail activity in them. So:
(I). The two Eurobond borrowings were pushed down into RMGL (note 18 page 61) so cannot be in GLS.
(Ii) To estimate the long term leases in GLS I took the group figure of £959m and deducted the £702m in RMGL. Note these are the 2021 figures because RMGL has only filed accounts up to 2021 (still has some time for 2022). So say £250m+ of long term leases in GLS.

So GLS NAV is probably a bit lower than £1.5bn - say £1.3-1.4bn. If I have erred I don’t think it is on the asset side but on not recognising a liability. I suspect the £1.7bn infrastructure amount (a clearly disclosed figure) is high because GLS is widely geographically dispersed and its machinery is much newer than Royal Mail and not so heavily depreciated.

The subgroup holdco accounts can of course be found in Companies House with a quick free search.

The IPO prospectus does not seem to state a valuation for the properties (it does not have to) but it does say that Royal Mail had about 2,000 real estate sites about half of which were owned. As Dowsie has said things will have changed somewhat since but 2,000 sites is way too many as a starting point. I can imagine at IPO the analysts were trying to put a valuation figure on the properties and so that may be where the £1bn figure comes from.

It is worth noting that the £5.3bn net assets figure is for the whole group. Although not specifically disclosed it seems GLS has about £1.5bn of net assets. So the Royal Mail side would then be worth £5.3bn - £1.5bn (GLS) - £0.9bn (goodwill and intangibles) - £2.7bn (pension fund surplus). So £0.2bn NAV for Royal Mail or more or less nil. But this is book value so add on the £1.5bn excess property value which will be based on land (land only has a carrying value of £124m in the Royal Mail side of the Group) to get to Royal Mail being worth around £1.5bn. This seems to be how Ian Lance sees it.

There does not seem to be anything wrong with the balance sheet. It is just that by accounting standards they are compelled to put some rather odd assets on it which are not related to hard cash.

The balance sheet needs to be read much more carefully than the £5.3bn of net assets. Included within this are:
(1). Around £900m of “assets” that are goodwill and intangibles. These are usually ignored as soft assets.
(2) £2.7bn of net asset for two (RMPP and RMSEPP) of the three pension plans. Within the £2.7bn RMSEPP (the plan for executives) is effectively valued at nil because the amounts it owes to current/future pensioners is covered by an almost exactly matching insurance policy that has been recently purchased. This pension scheme is to be bought out by an insurance company this financial year. This then leaves the main workers scheme, RMPP, having the net value (surplus) of £2.7bn. However, this is the accounting value of the scheme and not the actuarial one. For rather complicated reasons they can be very different. The actuarial valuation is what matters and is only a £500m surplus. Even this “asset” is misleading because Royal Mail cannot get their hands on it very easily, if at all. As the accounts say of the (accounting) surplus “This is a technical adjustment made on an accounting basis and there is no cash benefit from the surplus.” The same applies to the £500m actuarial surplus. At some stage it is almost certain that the RMPP scheme will be subject to buy out by an insurance company and any surplus will disappear at that point as it will be used to fund that buyout. So ignore the £2.7bn.
(3). Going the other way is that RM has £279m of land on its books. This is almost certainly at very outdated cost and is worth much more. I think Anger mentioned a figure of £1.5bn by one analyst. Impossible for the private investor to work out from the accounts as needs detailed knowledge.
(4). Royal Mail carries a provision of around £250m for unused stamps in circulation. When a stamp is sold (and cash received) it is not immediately recognised as revenue - only when it is deemed used. So they have to estimate this float of unused stamps and do so conservatively. However, a good many of these stamps will never be used - lost, forgotten about, in stamp albums etc. With the switchover to digital stamps (originally 31 March 2023) this provision will no longer be needed (and will be released as a “profit” to p&l) as the old stamps will be invalid and unusable. However, inevitably, the Daily Mail have got their claws into this, protesting that pensioners have not had enough time to switchover and I think the deadline has gone back six months.

Also remember that if Royal Mail starts to make big losses that can chew through the balance sheet very quickly.

(1). As others have said there is no concept in the Takeover Code of an offeror having to pay fair value for a company. The offeror can bid whatever it wants and thinks shareholders will accept. The exception is if the offeror has bought shares for cash in the last twelve months in which case it is bound to offer at least the highest amount paid.
(2) Once at 30% of shareholding a shareholder is obliged to bid for the company and that is for the WHOLE remaining shares of the company it does not own. So it cannot calibrate an offer to say take its stake to 51%. It will end up with whatever shares other shareholders will sell it at the offer price.
(3). In takeover situations, if a bid is successful, then all the shareholders in a target company are normally bought out (any non-accepting shareholders that represent 10% or less can be compulsorily bought out under squeeze out provisions) and the company is delisted.
(4). It is possible to have a listed company that is majority owned by a single investor. However, there are provisions in the Listing Rules eg appointment of directors by all shareholders not just the majority owner, that require that the company be managed and operate on an independent basis for the benefit of all shareholders. This is rather awkward for a majority shareholder who might want to have their own way and so it is not something that is normally entered into.

The result of this is that if Kretinsky launches a bid for the company it will be for the whole lot and he will be want to do it at a point (post January 2023) when as Anger has pointed out the £4+ mark has dropped away. The bid would be in cash rather than shares. I don’t think his VESA fund is listed and in any event most would not want to have their IDS shares replaced by VESA shares (different beast). I cannot see how he could easily structure a part cash/part GLS spin out option as at the point of making the cash offer he doesn’t have the ownership of the GLS asset to do it. I suppose it might just be possible but I have never seen it and I can imagine all sort of legal, regulatory and T/O Panel hurdles.

I don’t think Kretinsky wants to bid for the whole company. It is becoming ever clearer that sorting out RM is going to be a world of pain and take a number of years - running out of money (very fast), new financing needed (where from?), unions, unhappy workforce, getting the Superhubs to work properly, USO reform, political interference etc.

So in my view he will sit in the background and pressure for a GLS spin off. Where he might bid is if he sees political action - particularly the risk of a Labour government which seemingly could compel GLS to finance RM or renationalise. The risk of renationalisation is one of those things that may be low probability but if it were to happen catastrophic for Kretinsky so he has to take it seriously.

Like others I don’t read too much into the fact that one of the Chinese has dropped out. China is not going to compete against China in essentially a B&R initiative. In fact it may be a tactic to drop the price. The Chinese will have no regard for the niceties of the Takeover Rules.

Interestingly Chaarat has not formally withdrawn yet although it is puzzling they are still in given they are embroiled in a RTO. Anyway, they will be offering shares which is not at all attractive given the state of development of their own assets.

We are still due a WK drilling upgrade this week.

Reading in The Times today Labour’s position is that they are opposed to any breakup of IDS as it would impact the USO (although I think the real reason is union job losses). I suspect this will speed up a spin off of GLS. Normal to do it off full year numbers ie mid next year but they could do it early next year off back of interim numbers. No movement in value so state of share price irrelevant. They would probably leave enough GLS cash in the rump IDS business to pay off the ~£400m of Eurobond due in July 2024 (that would be about one year of GLS cash inflows) but no more. RM would then have to make its own way.

USO change is the way out of it - probably initially to four days a week, perhaps even three but that will mean a lot more job losses.

I think the problem is that the CWU can’t or won’t acknowledge that management has very limited room for manoeuvre (and it is getting worse by the day) - which may make ACAS negotiations more difficult as that is predicated on compromise from initial positions.

Peaky. I think on the 90% you might be thinking of the squeeze out provisions. If Kretinsky makes a bid he has got to get 75% of shareholders to vote for it (that is 75% of shareholders who vote on the resolution not 75% of shareholders).

I have always thought that Kretinsky would rather not bid for IDS but his preferred solution would be to pressure management to sort things out. With his current stake he could have a seat on the board but has chosen not to. However, a bid now looks more likely. It is interesting that the Govt does not appear to have placed any limitations on him - particularly that he must not break up IDS and spin out or sell off GLS.

If he does bid he won’t have it his own way. GLS is too valuable to be sold for IDS’s current share price - particularly if the Govt is signalling it could be allowed to be taken out of the Group. There will be institutional and hedge funds etc on the share that will demand a higher price and other bidders could come in. So it might be a protracted battle.

The problem for the business is that if a bid does happen it is another massive distraction. It is difficult to see any resolution on IA this side of Xmas. Then into 2023 pay talks. The headcount reductions will further impact service and even if efficiencies are agreed realistically how can they be quickly pushed through a decentralised workforce (I assume most work in the 800? or so delivery offices). Even with goodwill (and there is none of that) it is incredibly difficult to get fast change through a big business. All the time RM is burning through around £300m of cash per half year. Out of cash at that rate by early 2024.

I think it is worth remembering that 3 years ago (I think I am right on date) institutional investors put $40m into Shanta at 16p primarily for the WK drilling campaign but also other capex. I would assume most would have been taking a long term view and so might see 16p as an absolute floor.

We are a little tight on cash and they said in the RNS that they are minimising exploration activities for 5 months to ensure funding for Singida. However, there is still $14m of liquidity, $4m of undrawn facility and about $10m per quarter run rate EBITDA to fund the remaining $12m for Singida completion.

Buried in the RNS is the comment that a new drilling update on WK is to come through in the next ten days ie by 5 November. The bidders may feel they want to wait for that.

The RNS is a Rule 8 disclosure statement of Opening Position Disclosure ie those with greater than 1% of Shanta. It has to be made within 10 days of the start of the offer period (which starts when an offer or possible offer for a company has been made). So does not mean that there will be an offer tomorrow - but then again does not mean there won’t be.

https://www.thetakeoverpanel.org.uk/wp-content/uploads/2022/04/Summary-of-provision-of-Rule-8-July-2021189117.3.pdf?v=21May2018

A lot of focus on the increase in impairments (bad debts) provision. However, if the increase is netted against the increase in net interest income (NII) it was “only” £250m. Obviously as interest rates go up so will NII and so (generally) will impairments. However, there is a slight quirk in the accounting. On NII banks only get the benefit of interest rate rises that have happened to date and they have managed to pass on. In calculating loan loss provisions banks are obliged to look into the future (over next two years I think) and estimate (ie guess) what loan losses will happen. In other words loan losses are front loaded ahead of NII increases. The benefit of NII increases has only started and will really kick in during 2023. Even for 2022 Lloyds has raised its guidance on capital generation for the whole of 2022 from 200bps at the half year to 225 - 250bps now - a big leap in three months. I can only imagine they think that Q4 will be strong even though it is the quarter that suffers the banking levy. It was probably also opportune to have a high Q3 impairment to give Jeremy something to think about for his November statement.

The other factor in the results versus the previous quarter is that “volatility and other items” was (£199m) versus £100m previously. A £300m negative swing. This is a line that tends to swing back and forwards between quarters. If it is good one quarter it will be bad the next and vice versa.

Good, as expected really, update. More interesting bits:
- production for year to be at lower end of 68,000 -76,000 guidance;
- specific month now (March) for Singida opening;
- “The West Kenya Project Feasibility Study workstream is currently underway and led by a Shanta owners team, with the development of a Ramula Mine conceptual model expected to be completed in Q4.” So they seem to be going for the Ramula option which I seem to remember they thought cheaper and quicker.

The £23.2m/£1.6m are figures based on the 31 December 2017 triennial actuarial valuation. The £32m figure I quoted was the accounting figure which is more up to date being at 31 December 2020 (all figures on page 45 of the annual return - notes 25/26 of the fin statements). The actuarial figure is the one that really matters but it should be an up to date one and it would be expected (indeed required) that a new triennial valuation would have been done and agreed with the pension regulator based on the 31 December 2020 position. So for a press release to refer back to the 2017 numbers is a little puzzling.

The CWU is certainly not in danger of imminent collapse. In fact it made a £6m surplus in 2020 - but only because COVID curtailed activities but the problem that they continually worry about in their annual reports (seemingly no longer online) is declining membership. With most of it at RM and BT, both of which are cutting jobs a 10% decline in the 190,000 members is £3m of income lost. The CWU has said in the past it is difficult to raise membership rates and they have done as much cost cutting as they think they can.

It is indeed very true that they are moving out of Wimbledon because it is too big for them (most organisations have too much office space). Also I suspect it is because any office space connected to malls is declining quicker in value than regular office spaces. However, I also suspect they have to plug the pension hole. The pension funds have £11m of security over the HQ and once sold that will be lost - so I would expect them to demand for a good part of the sales proceeds to go sort out the deficit (or they would want additional security - not clear where that would be from).

It is a bit difficult to see what is going on as the figures are so out of date. The 2021 return appears not be filed and is late.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1056019/743_2020.pdf

Alvescot sold in May 2020 for £1.75m.

£32m hole in the pension funds. Pension funds have security over HQ in case of insolvency. Doubt the CWU is bust yet but cannot see how the pension funds’ hole would be fixed by ongoing contributions so asset sale no surprise. Dave & co don’t want their pension funds in the hands of the Pension Protection Fund that will reduce pensions as part of taking it over.

CWU in a very difficult financial position itself - as others have posted. I expect they will have to amalgamate with another union.

Scamp. It is worth looking at the polls and odds for the next GE. Firmly in favour of Labour and some even predicting a Tory wipeout. I don’t think it will be as bad as that for the Tories but they look exhausted at the moment.

Yes Labour is going to be hemmed in because there is no money and it is almost certain there will be no general nationalisation policy but if I was to pick one candidate it would be RM. Argument would go that it is an asset, badly managed/asset stripped in the private sector and will bloom in public ownership. Of course it won’t but there are powerful voices for re nationalisation of utilities. The FT for example runs endless bad news stories on the water companies with the undertone that they would be much better in public hands.