You would think that being an investment trust would be enough in its own right. Law Debenture complicates life — or, for enthusiasts, adds to the investment case — by also operating a professional services business.
Both have been busy over the past year, but for different reasons. The investment trust is aimed at investors seeking income, ostensibly through dividends, which has been a tricky proposition during the pandemic when so many companies have axed or suspended their payouts. The professional services unit, on the other hand, has been in acquisitive mode and spent £20 million on a company secretarial business from a division of Eversheds Sutherland, the law firm.
The group’s shares, meanwhile, having been hit hard during the early months of coronavirus, have more than recovered their poise and have been trading at record highs.
Law Debenture was set up in 1889 to facilitate the issue of company debentures. These typically are interest-bearing, transferable loans used to secure seats at venues such as Wimbledon. Over time, it began to provide legal and financial services to companies and governments and subsequently brought in a third party to manage its collection of interests. The investment trust is managed today by Janus Henderson and the professional services business serves Britain, Ireland, the Channel Islands, the United States and Hong Kong.
It is tempting to want to look at the two businesses as distinct entities, but from an investment point of view they are inextricably linked. That professional services side generates between 35 per cent and 40 per cent of the group’s cashflows and helps to support the dividend payment; that, in turn, means that the investment trust has a freer rein when it comes to putting together its portfolio of stocks.
Fans of the company also claim that the contribution from professional services is not properly reflected in the group’s market worth as it accounts for only 17 per cent to 18 per cent of the net value of assets but clearly contributes more.
The investment trust’s portfolio looks solid enough, counting traditionally reliable dividend-payers such as HSBC, BP and Royal Dutch Shell among its biggest holdings. There are some more adventurous positions, including Ceres Power, the fuel-cell technology and engineering business, and Herald Investment Trust, which invests in smaller listed technology and media companies.
The investment trust needed a bit of support last year: Shell, BP and HSBC cut their dividends and their share prices suffered. However, Law Debenture managed to increase its full-year dividend by 5.8 per cent to 27½p at its annual results last month and to outperform its benchmark FTSE Actuaries All-Share Index in annual returns. It undershot its benchmark in January, but over one, three, five and ten years it has comfortably beaten the reference index.
Growth last year of 8.5 per cent in professional services revenues far outpaced the portfolio’s 3.6 per cent improvement over the year, but the trust had its successes, including benefiting from share price improvements at Royal Mail, Rio Tinto and ITM Power, the hydrogen energy storage company.
There is much to commend Law Debenture and its structure, not least that it has held or improved the dividend each year for more than four decades. The shares, up 15p, or 2.1 per cent, at 715p, trade at a premium of a little more than 10 per cent, a gap that it tends to manage by issuing fresh shares to bring down the price. With a dividend yield of nearly 4 per cent, the shares look worth owning for the longer term.
ADVICE Hold
WHY Reliable performer with an interesting company structure that should benefit from an economic recovery
Aggreko
It looks like a bull market bid. The £2.3 billion being offered for Aggreko by two private equity firms weighs in at a hefty 39 per cent premium to the temporary power provider’s undisturbed share price. At that kind of level and with profits under pressure, it is of little surprise that management is recommending that Aggreko’s shareholders accept the offer from TDR Capital, the British buyout group, and I Squared Capital, of the United States.
The backdrop is less straightforward, though. Aggreko’s share price has been a serial underperformer in recent years. The price came close to reaching £23.75 in September 2012, but has been moving lower since, losing just over 26 per cent last year alone.
While it seems unlikely to analysts that a rival bidder will emerge and some, including at Panmure Gordon, argue that the price on the table is generous, others are not so sure. Quest, a division of Canaccord Genuity, believes that even a slight improvement in margins and growth could make Aggreko considerably more valuable than the offer implies.
Aggreko is best known for its rental solutions division, which rents power generators and heating and cooling systems to festivals, including Glastonbury, and sporting events, such as the Ryder Cup. It also has a power solutions unit, providing equipment to industrial customers and utilities.
Last year was exceptional as the global pandemic forced the cancellation of the big events that Aggreko supplies. Nevertheless, analysts were impressed with annual results this month that showed a resilient 15 per cent drop in revenue to £1.4 billion and a 49 per cent fall in pre-tax profit to £102 million. The bid looks generous at 22.8 times last year’s profit, but less so at 11.7 times the £199 million for the previous year. Yet, tellingly, even if Quest is right, Aggreko appears to have a problem generating growth and revenues are not expected to return to pre-pandemic levels before the end of 2023.
Aggreko’s shares were off 6p, or 0.7 per cent, at 889p yesterday, suggesting that the market is not betting on a rival bid. Shareholders clearly should await developments, but maybe a firm price is irresistible.
ADVICE Hold
WHY There is still time for a rival offer to come
