Thoughts for the Week Ahead

20 February 2023

Manchester United gets a bidding war

Sheikh Jassim bin Hamad Al Thani, the son of Qatar’s former PM, put in a bid for Manchester United (MANU) rumored to be in excess of £5B. We first recommended the stock at $22.00 and now see the opportunity for an acquisition price to look around $30.00 per share (ahead of our initial $29.00 target price). We added 2% to our MANU position in the US model portfolio, bringing the position to 3% – in our view the merger arbitrage becomes more likely as i) MANU’s current owners, the Glazers, want to sell ii) the deep-pocketed Qataris have pushed up initial bidder Jim Ratcliffe’s bid significantly and iii) the likelihood of the Saudis entering the bidding war (their historical competitiveness with Qatar is an element here) could push the price up further. A £5B offer still represents a 38% premium, even at today’s price of $26.33. 

Stock in Focus: QBE Insurance (QBE.ASX)

QBE stock jumped +7.4% after a strong result for the 2022 financial year; earnings came in at $847m, well ahead of expectations. The result was driven by top-line growth help by gross premium growth and strong investment income (helped by higher interest rate environment). NPAT beat by ~15-21% on the back of stronger investment income & a new reinsurance deal with Enstar which sees the company’s reserve risk reduce significantly.

QBE has been a key holding in our ASX portfolio, and is performing well, given the positive earnings outlook, and better risk management (compared to other Australasian based Insurnace Companies) we maintain our BUY rating on QBE. We see potential for a re-rate from QBE’s fwd p/e of 8.5x to move to 11-12x earnings

Is the market overheated? 

We’re seeing money managers (see above) become quite dovish on the market – net % of managers expecting higher CPI is down and net % expecting rate cuts is up. The reality is the opposite. CPI continues to be elevated (this stuff compounds, and the risk is 4-5% inflation for a sustained period) and the Fed continues to be hawkish. Pricing in rate cuts for 2023 is hardly certain. Goldman Sachs and BoA have hiked their peak funds rate expectation by 25bps, to 5.25-5.5%, which would imply at least two rate hikes before the end of the year. We’re not out of the woods yet. Preference given to buying high quality stocks which can endure a high-interest-rate environment (QBE) and opportunities as they occur (MANU)

Ryman 

Much has been said of Ryman’s capital raise last week. Our preference is Oceania (trades at a fat 38% discount) and Summerset (high quality management, franchise, not over-leveraged). A lot of this disappointment comes from Ryman’s oblique USPP debt (US private placement). Ryman raised two tranches of debt – the second carries a 5.24-5.54% interest rate, which was only disclosed in Ryman’s latest half yearly – it wasn’t disclosed earlier on the grounds of “commercial sensitivity”.  The bigger problem is that the company waited much too long to raise capital and relied on (once cheap) debt. That trick only works for so long. We’re avoiding Ryman & retain buy on Oceania and Summerset. 

Fade AI, Meta & More

Facebook parent Meta is launching a paid verified service at $11.99 (it will be trialing it in NZ and Aus). We’re not convinced. The key premise of Instagram is to share photos and videos with your friends; Facebook these days acts mostly as an events page + marketplace. Verification isn’t a user’s top concern; so who’s going to pay $11.99 for it? We recently wrote a negative report of Meta and we’ll reiterate why: even though the quantity of ads are going up, the price per ad is going down at about the same rate (23% vs 22%). Meta’s buying “performance” but the key problem remains: privacy laws & Apple’s privacy changes effectively neuters Meta’s once all-powerful advertising technology. See our chart below for more insight into Meta’s less-than-good quarter. 

The biggest story in tech in the last week is ChatGPT, the AI bot that Microsoft has recently incorporated into Bing. We’re agnostic on the MSFT vs. GOOG war – our model portfolio owns positions in both. The biggest story is that AI is likely becoming the latest “bubble” (think NFTs a year ago, and the blockchain before then). There’s going to be a lot of know-nothing companies with inflated valuations, and billions dollars of capital will likely flow into the sector. MSFT has already committed $10B to ChatGPT. GOOG is going to have to invest the same to keep up. The read-through is margin decline across tech — AI isn’t cheap. Amazon’s AWS likely to benefit as companies pay for cloud compute. (When there’s a goldrush, sell pickaxes). 

What Markets will be watching this week

Monday

A2 Milk Earnings

Freightways Earnings

oOh! Media Earnings

Tuesday

BHP Earnings

Coles Earnings

Costa Group Earnings

Mercury Energy Earnings

PGG Wrightson Earnings

Wednesday 

RBNZ OCR decision

Rio Tinto Earnings

WiseTech Global Earnings

EBOS Group Earnings

Spark Earnings

Thursday 

Next DC Earnings

Qantas Earnings

TPG Telecom Earnings

Auckland International Airport Earnings

Air NZ Earnings

Heartland Group Earnings

Precinct Properties Earnings

Scales Earnings

Sky TV Earnings

Tourism Holdings Earnings

Friday

Lynas Rare Earths Earnings

Harvey Norman Earnings

Channel Infrastructure Earnings

Delegat Group Earnings

Summerset Group Earnings

QBE delivers a stellar result and soars; Manchester United's bidding war gets serious, and more.

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