You can give as many reasons as you like why it was an awful first quarter for Aberdeen Asset Management, but the fact is that it was an awful first quarter, the 15th in a row of falling assets under management. It will not get any better, because Aberdeen is signalling a further £3.4 billion reduction baked into the second three months.
The business lost is mainly low margin and includes the loss of two big mandates. The company also decided to withdraw from part of the US fixed-income business to focus on areas that showed greater potential for growth, which meant the loss of another £2.2 billion of assets.
None of this is too damaging in itself. Aberdeen had been doing quite well for much of last year and that first quarter saw some recovery in the emerging markets where it is concentrated. Then along came the US election and investors panicked.
There are few obvious reasons why that fall should be reversed to put this quarter into a positive out-turn. As one analyst puts it, there are only three obvious levers for an improvement in the share price which, off another 8½p to 249¾p, has now lost £1 since October. One, the company could do a deal, perhaps in the US along the lines of Henderson’s purchase of Janus Capital in the autumn, so offering immediate synergies and buying its management a bit more time.
Two, it could be bought itself. This appears implausible, despite earlier rumours, unless investors are prepared to cash out at the nadir of the company’s fortunes. Three, emerging markets could stage an immediate upswing, perhaps under the influence of a US economic boost, an event entirely outside Aberdeen’s control.
For investors, the key question is the dividend for this year and the 7.8 per cent the shares are yielding. On paper, this is just about covered by earnings but there is so little visibility of forward conditions in such a business that anything could happen. The halfway dividend looks safe enough, but a further deterioration would definitely mean a cut in the final payment come November, putting the skids under the shares again.
That yield may look tempting but this is one falling knife best avoided.
My advice Avoid
Why There is no guarantee that the bad news will not continue. About the only thing holding the shares up is the yield, and this is not assured
Cranswick
In theory a rise in the price of pork ought to be bad news for Cranswick, increasing the price of the main raw material in its sausages and other food products and making them less competitive as a source of protein. The price is above 150p a kilo, up from about 115p last spring, and supply is tight, though the market is not yet at the 170p a kilo level seen at the end of 2013.
In practice there is plenty the company can do to mitigate this. About half its contracts with the big retailers allow price rises to be passed through, and the rest can be the subject of sensible negotiations. Cranswick has its own herds that used to fulfil approaching a fifth of its needs, though the recent purchase of a processing business in Northern Ireland has reduced this. New business gains allow its facilities to operate more efficiently.
This explains why the share price has remained relatively impervious to pricing concerns. The third-quarter trading update showed revenues accelerating away and that further investment is going in. The shares, off 3p at £23, sell on a relatively expensive 19 times earnings but remain a good long-term growth stock.
My advice Buy
Why The long-term growth story remains intact
Astrazeneca
The forthcoming trials for treatments for lung cancer, named Mystic, using one drug and a combination of two are not quite make or break for Astrazeneca but they are pretty close. The company has a dozen products in a late phase of development and these are key to lifting it out of the trough year that 2017 will be. A contribution from the subjects of the Mystic trial is one of the elements that will achieve this.
The full-year figures, in this context, begin to look like an irrelevance. Revenues will fall in broad terms by about $1 billion from the $23 billion recorded for 2016 as sales of established drugs such as Crestor dip further. Sales of the anti-cholesterol treatment were off by 53 per cent at constant exchange rates in the fourth quarter as competition from generics kicked in.
The market expects revenues for 2018 to grow to perhaps $25 billion, part of a promise made at the time of the 2014 Pfizer bid to get these to $45 billion by 2023. Though there are plenty of other avenues to develop, such as the angina drug Brilinta and further applications for Tagrisso, for lung cancer, and Lynparza, for breast and ovarian cancer, a failure of that Mystic trial would seem to make that target unattainable.
Astrazeneca shares, off 25½p at £42.72½, are mainly attractive for the 5.2 per cent dividend yield. The company will miss its target of 1.5 times’ earnings cover this year but the payment will be maintained. For that yield at least, the shares warrant a hold.
My advice Hold
Why The dividend yield looks safe enough for now
And finally . . .
RM2 International is not one of AIM’s most conspicuous successes. It came to the market in 2014 promising to shake up the market in pallets used to deliver goods to supermarkets. The float price was 88p; there turned out to be huge production problems that had to be put right. RM2 announced yesterday it had won a contract to supply a big US retailer, thought to be Walmart, which should open the doors to further contracts there. The shares gained 2p to 30p, which could be the start of an eventual recovery.
