We are just coming to the end of the second quarter reporting season, so I thought this would be a good opportunity to update you on the operational progress of some of the core positions in the CF Woodford Equity Income Fund.
In summary, we are very pleased with the progress being made by our 10 core holdings, with results being reported either in line or slightly ahead of expectations. Below, you will find passages from the results statement of each of the top 10 holdings in the fund as at 31 July, along with the latest dividend (if one has been announced).
The one exception is GlaxoSmithKline, which we highlighted in our July Fund Roundup.
GlaxoSmithKline is currently a very unpopular stock – as contrarian investors, this is one of the reasons we like it, because its unpopularity is reflected in a very low valuation. To put this into context, Bayer recently acquired Merck’s consumer healthcare business for 7x sales. If you were to put Glaxo’s consumer healthcare business (it recently put its consumer healthcare assets into a joint venture with Novartis) on the same multiple, it would be broadly equivalent to half of Glaxo’s market capitalisation.
By combining the potential valuation of the consumer healthcare division with the potential valuation of a world-class vaccines business and VIIV, a leader in HIV treatment, you get the current market value. As such you get a portfolio of existing pharmaceutical products and a strong pipeline of new drugs, in our view – for free! It’s worth mentioning that this division is no minnow with a potential valuation of £33bn, some 50% of the current market cap.
Now, we are not suggesting that a corporate bidder is going to pay that sort of money for Glaxo’s consumer healthcare business any time soon – it’s just an interesting way of looking at the valuation opportunity that exists in the stock currently. The recent earnings disappointment has fuelled the market’s desire to focus on the short-term but, in doing so, it is ignoring a very interesting long-term story. Indeed, we are increasingly positive on that long-term investment case.
Rolls-Royce (3.20% of fund)
Half Year Results, 31 July 2014
“Results for the first six months of 2014 are consistent with our guidance, reflecting the expected reduction in our Defence business and weaker trading in Marine, as well as adverse foreign exchange. We expect significant improvement in profit for the second half driven by higher revenue and cost reduction. While there are challenges, we maintain our full-year guidance for the Group.
The prospects for long-term growth remain outstanding across the Group and in particular in civil large engines where our market share of engines on order is over 50%. However, we will experience growing pains. For example, we are investing in new capacity ahead of delivering our order book and restructuring existing facilities to improve efficiency.”
John Rishton, Chief Executive
Interim Dividend: 9.0p per share, +4.7%
BAe Systems (3.38% of fund)
Half Year Results, 31 July 2014
“Operationally, the Group continues to perform well, benefiting from good programme performance on its large order backlog of almost £40bn. We continue to see a high level of activity in international markets, including from our substantial presence in the Kingdom of Saudi Arabia, while the US and UK environments remain more constrained. Sales are anticipated to be weighted towards the second half of 2014, including the timing of Typhoon aircraft deliveries. We are finalising a further £1.3bn of international orders and are at an advanced stage of negotiations on a further £1bn of UK sole source naval contracts. Excluding the impact of exchange translation, the Group remains on track to deliver earnings in line with our expectations for the full year.”
Ian King, Chief Executive
Dividend: 8.2p per share, +2.5%
Roche (3.61% of fund)
Half Year Results, 24 July 2014
“We had a good first half, driven mainly by our cancer medicines, especially the new breast cancer medicines, Perjeta and Kadcyla, as well as by Diagnostics. We made significant progress in our product pipeline, as the FDA granted Breakthrough Therapy Designation for our cancer immunotherapy candidate anti-PDL1, as well as priority reviews for Avastin in two new indications and fast track designation for a promising new antibiotic. In Diagnostics, we also gained an important FDA approval for use of our HPV test in primary screening for cervical cancer. Based on our half year performance, I am confident that we will meet our full-year targets.”
Severin Schwan, CEO
No dividend announcements (pays annually after full year results)
Reynolds American (3.81% of fund)
Second Quarter Results, 29 July 2014
“Reynolds American turned in an excellent second quarter, with higher earnings and margin reflecting continued strong performance by our reportable business segments. The environment remains very competitive, and I’m particularly pleased to report that all of our companies’ key brands gained market share.”
Susan M. Cameron, president and chief executive officer
Q2 Dividend: $0.67 per share, +6.4%
Capita (4.01% of fund)
Half Year Results, 23 July 2014
“I am pleased to report good financial results for the first 6 months of the year, demonstrating the strength of Capita’s sales offering and operational delivery and the health of the UK customer and business process management market. Our breadth of capability across a diversified and growing market base enables us to move flexibly across sectors and to maintain a high level of selectivity regarding the opportunities that we pursue. We have had an excellent sales period securing £1.3bn of contracts and we are continuing to see a high level of activity across our markets, particularly in the private sector, providing a strong future platform for growth.
As a consequence of our sales and acquisition performance in 2013 and to date in 2014, we have a high level of revenue visibility for 2014. This, together with the strength of our bid and acquisition pipelines, gives us confidence in our full year performance and provides a good platform for growth in 2015 and beyond.”
Andy Parker, Chief Executive
Interim Dividend: 9.6p per share, +10.3%
BT (5.99% of fund)
First Quarter Results, 31 July 2014
“We have made a good start to the year. We have delivered growth in underlying revenue excluding transit and in profit before tax, and free cash flow was strong.
“Our fibre broadband network now covers more than twenty million premises. We are passing over 70,000 additional premises each week and demand is strong with more than three million already signed up. We have announced a further 2,500 new jobs in recent months to support our strategic investments in fibre and customer service.
“I’m excited by the launch of BT One Phone for the business market as well as our other mobility plans. We’ll say more on these later this financial year. The second season of BT Sport is about to start with a great line-up of content and it will continue to be free with BT Broadband. We are building on solid foundations and I am confident we will deliver on our strategy.”
Gavin Patterson, Chief Executive
No dividend announcement (pays twice years following second quarter & final results)
British American Tobacco (6.05% of fund)
Half Year Results, 30 July 2014
“British American Tobacco performed well during the first half of the year but, as expected, results were affected by the strength of sterling. We are consistently increasing our market share, driven by the strong growth of our Global Drive Brands. Tight control of costs resulted in an improved operating margin. We remain confident of high single-digit earnings growth at constant rates of exchange, which we have said we will recognise with an increase in the dividend.”
Richard Burrows, Chairman
Interim dividend: 47.5p per share, +5.6%
Imperial Tobacco (6.15% of fund)
Half Year Results, 7 May 2014
“We continue to drive our strategy to build the quality and sustainability of the business. Our stock optimisation programme has inevitably impacted some of our numbers but I’m pleased with our underlying performance. Our Growth Brands again outperformed the market, with underlying volumes up 4 per cent. Actively managing our cost base is releasing funds to invest in these brands and their development is being further supported by the stock optimisation programme.
Our second half priority is to build on our growth momentum with a particular focus on strengthening our market shares, which are on an improving trend across many territories. Conditions are still tough in some markets but we continue to demonstrate our resilience and remain on course to deliver our full year targets.”
Alison Cooper, Chief Executive
Interim dividend: 38.8p per share, +10.2%
GlaxoSmithKline (6.91% of fund)
Half Year Results, 23 July 2014
“We have made significant strategic progress during the first half of this year, announcing our innovative 3-part transaction with Novartis and progressing the launches of multiple new products in our core therapy areas of Respiratory and HIV.
As we have said previously, synchronisation of new product delivery with managing the impact of competition elsewhere in the portfolio is challenging. However, this is a critical moment to make the right strategic choices, particularly around investment, for the long-term health of the Group and this is reflected in the decisions we have made in the quarter.”
Sir Andrew Witty, Chief Executive Officer
Second quarter dividend: 19.0p per share, +5.6%
AstraZeneca (7.52% of fund)
Half Year Results, 31 July 2014
“We have made significant progress in the first half of the year, with visible momentum across our cardiovascular, diabetes and respiratory franchises as well as strong growth in the emerging markets. This has driven revenue growth for the second consecutive quarter and achieved a 13% increase in Core EPS in the quarter. The pace of execution of our strategy and the underlying performance of our teams give us confidence to raise 2014 guidance for the full year.
The business combination with Almirall will offer strategic long-term value, bringing together the two innovative portfolios to strengthen further our commitment to respiratory disease and contribute to our growth.
We now have one of the most exciting pipelines in the industry with 14 assets in late stage development. Over recent weeks, we have presented compelling data that demonstrate our potential to significantly advance the way patients are treated, including in immuno-oncology. The quality of transformation we are seeing across all core areas of our business further underpins our confidence in AstraZeneca’s longer term prospects.”
Interim dividend: $0.90 per share, unchanged