Investors’ Chronicle — Buy: Indivior, BHP; Hold: Glencore
BUY: Indivior (INDV)
Pharma group reports strong profits after an expensive legal battle with the US Department of Justice, writes Jemma Slingo.
Indivior is sometimes dismissed as a single-product company with an image problem. The pharma group, which specialises in the treatment of opioid addiction, was fined $600mn (£442mn) by the Department of Justice in 2020 following a drugs marketing scandal.
Its former chief executive was subsequently sentenced to six months in federal prison, sparking a shareholder revolt over pay. To top it off, the company’s products are vulnerable to competition and extremely difficult to get to market.
However, it is worth reassessing Indivior’s prospects now its legal woes are behind it. After posting a $156mn loss in 2020, it has swung back into profit and expects sales in 2022 to be well ahead of consensus guidance.
The company’s biggest asset is Sublocade, an injectable used to treat opioid addiction. Sublocade generated net revenue of $244mn in 2021 — up 88 per cent on 2020 — and was used to treat almost 50,000 patients.
Demand is likely to remain strong. Indivior predicted long-term US market growth “in the mid to high single-digit percentage range due to increased severity and overall public awareness of the opioid epidemic and approved treatments”. In less sanitised language, the US’s addiction crisis is getting worse, which should boost sales.
Indivior has revealed plans to diversify, however. Perseris, used to treat schizophrenia, generated $17mn of revenue in 2021, up 21 per cent year on year. The company is now expanding its Perseris sales force to achieve US national coverage in 2022. It is also important to note that Indivior is awash with cash, which can be reinvested in the business, or put towards acquisitions. The company is also pondering a US listing, which could improve visibility.
None of this counteracts the fact that the development and approval of Indivior’s products is inherently uncertain and time-consuming. However, the company looks set to continue playing an important part in tackling the US’s opioid problem.
HOLD: Glencore (GLEN)
The mining and trading group expects resolutions to US, UK and Brazilian investigations into potentially corrupt conduct around the world, writes Alex Hamer.
The metals bull market has once again left Glencore with an increased profit and more than enough cash to raise its dividend, announce a share buyback and put more to the side for its various regulatory issues. Thanks to strong coal, copper, cobalt and nickel prices, the company reported a profit of $4.97bn (£3.67bn) for 2021, compared with a $1.9bn loss in 2020.
This was on the back of 43 per cent higher sales, at $203bn, and its adjusted cash profit almost doubled to $21bn. Glencore has set its 2022 dividend level — which it splits between two payments — at $3.4bn, or 26¢ a share. This will be topped up by a $550mn buyback programme.
Chief executive Gary Nagle said this was driven by the company’s “unique combination” of coal and transition-linked metals such as nickel, cobalt and copper. Glencore has stuck with thermal coal, while other major miners have sold off these assets, arguing it is better for a listed company facing investor scrutiny to hold on to coal mines. Both metallurgical coal and thermal coal prices surged in 2021 as countries scrambled for supply.
Overall, the industrial unit — covering Glencore’s mines — saw its adjusted cash profit more than double to $17.1bn, while the trading business increased 11 per cent to $3.7bn on the same metric. The coal contribution to adjusted cash profits went from $1bn in 2021 to $5.6bn, almost all of which came in the second half.
The average Newcastle spot coal price, a benchmark in the Asia-Pacific region, doubled between 2020 and 2021, to $137 a tonne. At current prices and using the 2022 production forecast of around 120mn tonnes, a 20 per cent increase on last year, the coal division would bring in a cash profit of $10bn this year.
The higher commodity prices more than made up for higher costs, with a $11bn increase against $900mn-worth of added costs, including from higher power prices in Europe hitting Glencore’s smelters there, while “general inflation” hit hardest in South Africa and Kazakhstan.
Activist investor Bluebell has called on Glencore to spin off its coal business. Nagle said other investors had come forward to support the company’s holding strategy, and used BlackRock chief executive Larry Fink’s 2022 letter, where he said divestment was the approach, to back up the company’s current strategy.
That’s not to say the portfolio won’t change: Glencore has 27 mining assets up for sale or under consideration. Nagle also talked up the potential for growing the recycling business, turning Glencore into an “urban miner”. The company has signed a deal with Britishvolt to recycle lithium-ion battery ingredients and has targeted this growing industry.
Glencore has put aside $1.5bn as its “best estimate” of the costs of resolving investigations by the US Department of Justice, Serious Fraud Office and the Brazilian Federal Prosecutor’s Office. These involve potentially corrupt conduct in both its trading and mining businesses. Nagle said the company expected to resolve these investigations this year, while those run by Swiss and Dutch authorities are not part of the new provision.
Nagle is right about the company’s portfolio being unique. Glencore’s suite of metals is certainly a great mix for current prices. Additionally, as Fink said, there are questions over divestment as the sole model for increasing a company’s green rating. The decision to hold on to the Cerrejón assets in Colombia looks very smart now, but a bull market makes all investment calls brilliant. In the longer term, we’re not so sure.
BUY: BHP (BHP)
The market is now pushing for mergers and acquisitions as payouts go up and debt comes down, writes Alex Hamer.
The world’s biggest mining company, BHP, has maintained its hefty payout plans even as costs are spiking in the second half of its financial year, resulting in a record $7.6bn (£5.6bn) half-year dividend. This will be the first dividend under the company’s unified corporate structure, which passed a shareholder vote last month, as well as the first results after the decision to sell off petroleum assets to Woodside Petroleum.
Underlying cash profits at the company climbed by a third to $18.5bn and the underlying profit for the half was $10.7bn, a 77 per cent jump from the previous year.
Iron ore, copper and coal prices drove the strong result, even after Covid-19 cases and restrictions made operating in Western Australia tougher in 2021. Iron ore production was flat compared with a year ago, while copper production fell 12 per cent year on year, as the grade fell at the Escondida mine.
Coal alone contributed $2.8bn more in cash profits than last year, at $2.6bn, but management was clear on the continued focus on “future facing commodities”, meaning metals that will contribute to the energy transition like copper and nickel. There is a new net debt goal of $5bn-$15bn, a drop from $12bn-$17bn, and this figure was already at the low end of the range as of 31 December, at $6.1bn.
RBC Capital Markets analyst Tyler Broda said the results left the miner with a “a blank canvas for future M&A or cash returns”.
In December, the miner bought into the Kabanga nickel project in Tanzania with a $40mn investment, giving it a 9 per cent stake in the parent company, this and other recent deals are for pre-production assets, however.
Chief executive Mike Henry said the company had “cast the net wide” in looking for new assets, including teaming up with KoBold Minerals, a Silicon Valley-based company that is using artificial intelligence to beef up exploration capabilities. It has caught the attention of investors outside the mining world, including Bill Gates and Andreessen Horowitz, with its pitch about using tech to find energy transition-linked metals.
Looking ahead, Henry was more bullish on China despite concerns over its economy. “While growth slowed in China more than we anticipated in the second half of calendar year 2021, we see the headwinds easing over the course of 2022,” he said, pointing to improvements in the real estate sector and constraints on heavy industry like steelmaking to be reduced. The Chinese government has slowed steel production in the Beijing region during the Winter Olympics to avoid smog while the world was tuning in.
Analysts see the 2022 financial year as a high point for BHP’s earnings, with consensus forecasts for earnings per share hitting 370¢, a 10 per cent increase on last year (and 106 per cent increase on the year before), before dropping back to 289¢ in 2023.
We’ve asked on many occasions when the major miners would turn back to mergers and acquisitions, and the moment is drawing nearer. Chinese miners have recently dominated the market, happily spending on producing mines while the listed giants focused on cash return. We think BHP can manage dividends, debt management and higher costs, even if it will mean payouts don’t stay this high for long.
Chris Dillow: The absent wage threat
Bank of England governor Andrew Bailey has been widely criticised for calling for wage restraint. And rightly so. The days when we thought inflation could be cured by asking workers to accept low pay should have ended with flared trousers and kipper ties. But it poses the question: is wage inflation really a cause of higher price inflation? The answer is: no, not now.
In theory, there are two mechanisms through which wage growth might fuel inflation. One is that high wage growth will boost consumer spending, allowing companies to raise prices. But this is not operating now. Retail sales volumes in December were only 2.1 per cent higher than two years before. Granted, sales then were depressed by fears of Covid, but even adjusting for this sales growth has been below its long-term average recently.
Demand, then, isn’t so strong as to generate huge inflation. Consistent with this, inflation is largely confined to a few sectors. Just three items — fuel bills, petrol and second-hand cars — account for 1.9 percentage points of the 5.4 per cent CPI inflation we saw in December.
There’s a simple reason for this. Wage growth is not high. In the three months to November, average weekly earnings rose by 4.2 per cent compared with a year ago, and PAYE data show that in the year to December median monthly pay rose 5.3 per cent year-on-year. Both these numbers are below the inflation rate, meaning that real wages are falling. That’s no recipe for an inflationary boom in demand.
Of course, the wage growth we are seeing now reflects decisions made months ago when CPI inflation was low. But more recent wage settlements don’t point to a big increase. According to Incomes Data Services, the median pay settlement is now 3 per cent, up by only one percentage point on 12 months ago.
A second possible mechanism is that simply that rising wages add to companies’ costs which can lead them to raise prices. On their own, however, wages are not the issue. Instead, what matters is wages relative to productivity: a wage rise matched by an efficiency saving or greater output is not inflationary.
We used to have a rule of thumb. Aggregate wage growth of about 4 per cent a year was consistent with inflation being around its 2 per cent target. This was because trend productivity growth was around 2 per cent, so 4 per cent wage growth meant 2 per cent growth in unit wage costs which in turn meant firms could raise prices by 2 per cent and maintain profit margins unless other costs such as of raw materials were rising strongly.
If this rule still held, there would be no alarm about weekly wage growth of 4.2 per cent. But it doesn’t. Productivity growth has slowed since the mid-2000s, which means the nominal wage growth consistent with the inflation target has come down. The pandemic has increased the volatility of productivity, but it’s likely this was only around 2 per cent higher at the end of last year than it was at the end of 2019, consistent with that productivity slowdown. And there’s no reason to suppose the pandemic will eventually raise productivity. Quite the opposite. In cutting business investment and depriving people of experience, it might cut it.
Urging wage restraint thus distracts us from the fundamental problem — that productivity growth is so sluggish.
Chris Dillow is an economics commentator for Investors’ Chronicle