Pershing Square
When Bill Ackman decided to list Pershing Square in London in March 2017, the investment vehicle was already quoted in Amsterdam and the billionaire hedge fund investor wanted to improve the trading liquidity of its shares and to narrow the discount at which it was trading relative to the net value of its assets.
Investors clamoured for the shares at the time, largely because of Mr Ackman’s reputation for successfully kicking up the dust at underperforming companies, but the fund’s track record initially was distinctly patchy. After a poor 2017, Mr Ackman oversaw a back-to-basics campaign last year that now could be paying off.
Pershing Square is an open-ended investment vehicle set up in 2012 by Pershing Square Capital Management, the Delaware-incorporated hedge fund manager created by Mr Ackman in 2003. It specialises in long-term positions in North American companies and generally has weighted its holdings towards restaurant businesses, the business services sector and consumer goods groups.
After underperforming the S&P 500, its benchmark, for three years on the trot, Pershing Square had a rethink last year in an effort to improve returns. Among several changes, it decided to prioritise squeezing additional returns from its existing portfolio over adding to its investments.
Those companies that it does buy into, which last year included Hilton Worldwide, the hotel chain, and Starbucks, the coffee operator, must be simple, predictable, cash-generative businesses with hard-to-assail positions in their chosen markets. As well as streamlining its investment team, still overseen by Mr Ackman, Pershing Square beefed up its board, moved to a quarterly dividend and spent hundreds of millions buying back its shares to help to improve the value.
The rewards seem to have come thick and fast. The fund beat the S&P 500 last year, albeit still delivering negative returns, and has come screaming out of the blocks this year, up 24.7 per cent in the weeks to mid-February, well ahead of the 9.7 per cent gain by its benchmark. Mind you, its shares have gone with it. They were off 8p, or 0.6 per cent, at £12.74 yesterday,, but are 23.7 per cent higher since the beginning of 2019. They still trade at a yawning discount of a little more than 25 per cent to the £17.12 a share net value of its assets at February 19.
Mr Ackman, who has delegated day-to-day operational duties and managing investor relations to concentrate on improving returns, also seems to have reacquainted himself with his activist roots. He and his team actively engaged last year with ADP, the human resources software group, the Chipotle Mexican grill chain, Lowe’s, a DIY retailer, and United Technologies, the conglomerate.
Mr Ackman’s investment strategy seems sensible and his fondness for US companies gives shareholders exposure to the strong dollar and a growing economy.
In some ways, Pershing Square has yet to achieve its aims at the listing. The share buybacks will have done nothing to improve trading liquidity and the free float and the discount to NAV persists. Yet it is refreshing to see a fund that has rediscovered its mojo. The shares trade for a little more than 11.5 times forecast earnings, hardly demanding, and offer a yield of about 2.4 per cent, respectable for a vehicle that is prioritising investment returns and capital growth.
While there is always a risk that underperformance will creep in again, the shares remain cheap and look a good longer-term bet.
Advice Buy
Why A quality listed hedge fund that has rediscovered its investment roots and begun to outperform
Drax
Tick, tick. The clock now reads only seven years to run before the subsidies that have kept Drax alive come to an end; and while the power station is pulling out the stops to wean itself off its reliance on the support, it is running out of time.
During the 12 months just gone, Drax received £789 million of subsidies as a condition of converting its six boilers from polluting coal burners to gas-fired users of sustainable biomass fuels. Without the payments, up from £729 million for the previous year, the pre-tax profits of just under £14 million for last year that it reported yesterday would disappear in a puff of smoke.
Drax consists of the eponymous power station near Selby in North Yorkshire that was first opened in 1973 and several factories in the United States that make the compressed wooden pellets used in its four converted boilers. Listed in 2005, the group also owns two companies that supply electricity and gas to businesses.
As of December, it is also the owner of Scottish Power’s gas and hydroelectric power plants, after an acquisition for up to £702 million that should diversify its capabilities. The deal was too late for any numbers to be included in its results yesterday, but there were positives: higher revenues, a return to pre-tax profit thanks to currency hedging and a 15 per cent rise in the dividend. US pellet production surged 64 per cent to 1.35 million tonnes and at a cost of 10 per cent less per tonne.
Adjusted earnings from power generation fell from £238 million to £232 million on lower margins from the costly coal it still burns at its two other boilers, which will continue until the fuel is phased out in 2025.
Drax also missed out on £7 million of revenues as a result of the forced suspension of the government’s capacity market auction scheme, under which generators are paid to be on standby to provide back-up power in winter. If a European court annuls the scheme, it would mean an end to Drax’s plan to install a giant battery at the power station that would also help it to diversify.
The shares, down 3½p, or 0.96 per cent, at 370p yesterday, cost 35.6 times last year’s earnings for a yield of 3.8 per cent. There is still no compelling reason to own them.
ADVICE Avoid
WHY There’s a limited amount of its fate it can control
