A real mix today – airlines, healthcare property, and structured products. Three investment niches few would expect to be bunched together in one blog!
The two-sector observations are both courtesy of Morgan Stanley analysts. They both speak to interesting broader stories namely cyclical recovery and boring, defensive income ideas.
Let’s start with airlines.
It’s becoming increasingly clear that the get out of jail card that was the summer holiday season is not going to happen in quite the way we expected. Not quite summer cancelled but not a mad rush to the beaches either.
I still think we’ll see notable relaxation by April with schools back before then and some offices maybe heading back in May. But I think borders are going to remain troublesome all the way through to Autumn.
On a side note, I can’t quite see why the UK government isn’t going all the way and using the hotel quarantine policy for all flights. The suggested virus hotspot idea seems a slightly half baked half way house. Sure, the travel sector will complain but let’s be honest, it’s a vote winner and I thought Boris has a nose for this stuff.
Not one person I have talked has disagreed with the idea of full quarantine and we all think in retrospect we should have been more aggressive on border policy last year. More pertinently we all think that this halfway house will end up turning into the full deal (full quarantine) once the newspaper headlines about errant travellers start dribbling out in the spring and the summer.
Anyway, back to airlines.
Its going to be grim this summer. How does that leave the main airlines?
The key point is that concerns about liquidity are going to return with a vengeance.
According to MS analysts:
“We see Wizz and Ryanair as having enough liquidity resources to fund a weak summer season. Air France-KLM’s consolidated liquidity is not too tight, but due to its high leverage, we would expect investors to focus on management plans in relation to the issuance of equity and quasiequity instruments, which they guided to decide by May 2021. We see easyJet, IAG and Lufthansa with the tightest liquidity of the peer group, with a need to raise further liquidity in case of weak forward bookings and summer 2021 demand…..
“Ryanair is our preferred play, trading at a 19% discount to historical EV/EBITDA on normalised earnings, while having a lower risk of dilutive balance sheet repair. Wizz has already issued €500mn in bonds at the start of the year, boosting its liquidity reserves for the year. Given current levels of uncertainty, we see them both offering better risk rewards than peers.”
That fits with my own view – buy Ryanair for the cyclical rebound at some point in 2021.
The table below adds some flesh to the bones of that liquidity argument.
Next up healthcare property. This very specialized segment has had an amazing decade and most of the funds in this space in the UK trade at a huge premium. I’ve been highly skeptical but clearly, I was wrong. Investors love these funds. And I don’t see the logic for buying them going away anytime soon.
This brings us to the second Morgan Stanley observation. They suggest that there are some European peers that are worth looking at. Notably, Aedifica and Cofinimmo which both boast solid return profiles.
Can’t say I’ve heard of either but here’s some more detail on both:
“These companies’ healthcare portfolios are valued off relatively conservative yields that are around 100bp above the average for our coverage universe, and therefore, in combination with inflation-linked rental growth, they tend to generate compelling unlevered returns approaching 7%. Moreover, these companies’ willingness to use above average leverage (40-45% LTV, or around 5-10pp above our universe’s average), while adding to returns with some development activity, should drive total NAV based returns of closer to 10-11% (even after some near- to medium-term yield compression).
“ Reliable compounders. Lease indexation offers an inflation hedge; the demographic trend of an ageing population provides a structural demand tailwind; while the long-duration nature of their lease structure (often more than 20 years) provides comfort on repeatability.
“Valuation has caught up in part, but a premium should be sustained, supported by external growth. Neither screens as cheap trading at NAV premiums. The good news is that they are using their ROE generation advantage versus peers and the resulting valuation premium to raise capital, expand and consolidate what remains a fragmented healthcare investment market with many often suboptimally funded players, which is creating a virtuous circle, boosting returns.”
The table below gives some more colour.
Last but by no means least structured products.
This week saw the release of the latest Structured Products Annual Performance Review 2021, produced by the excellent Lowes Financial Management. This is the latest comprehensive study conducted over many years into absolute returns from the whole of market.
The big story of the last decade is that the vast majority of structured products (SPs) have delivered what they said they would. This, I hope, will contribute towards a mainstreaming of these alternative investments.
What happened in 2020?
Well, as we could have expected, there have been some ‘challenges’ but nothing which remotely undermines what I think is a very interesting story of redemption and renewal for structured products generally.
Here are some of the key headline stats:
- Market turmoil resulted in 16 among 235 structured product maturities in 2020 realising a capital loss. This compares against four loss-making maturities among 334 maturities in 2019. Average annualised returns for all 2020 maturities, including deposits were 3.52% against 5.73% in 2019 and 6.37% in 2018.
- Almost 70% of all products maturing last year generated positive returns for investors; fewer than 7% returned a loss. The rest simply returned investor capital, having protected it from the fall in the market.”
- During 2020 there were 11 plans that matured realising an annual return greater than 10%. More than half the rest delivered an average annualised return of more than 4%, easily beating inflation.
- Half of all maturities in 2020 were linked solely to the FTSE 100 Index. Of these the deposit and capital protected structures returned an average annualised return of 1.82% over an average duration of 5.35 years and the capital at risk plans returned an average of 5.68% over an average duration of 4.24 years.
Best and worst performers were high-risk plans:
- The best performing plan was the Hilbert Investment Solutions Kick Out Series: 3 Stock Defensive Autocall Issue 1, which matured returning investors’ original capital in addition to a gain of more than 10% after just six months.
- The worst performing plan was Meteor’s Crude Oil Kick Out Supertracker Plan March 2015. This plan matured at the end of five years with an annual capital loss of 74.89%, making an annualised loss of 24.12%.
A copy of the Annual Performance Review can be found by clicking here: https://www.lowes.co.uk/SPReview2021
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