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The Answer, My Friend, Wasn’t Blowing In The Wind

20 September 2021

Every day that passes further illustrates that the UK’s energy strategy, if indeed we have one, is a shambles. The increasing reliance on renewables came back to bite us recently as insufficient wind speeds meant the turbines that are supposed to provide 20% of our energy needs actually produced less than 2% at one point and only 3% over the entire week. Ireland has blocked interconnector exports to us for the second time in a week to preserve its own supplies. Imports via the French interconnectors have been running well under capacity although at one point recently one had to be halted completely due to a power surge and, in the last few days, another has been knocked out by a fire. Post AUKUS, who knows how tetchy Macron could be? We have a portfolio of mothballed gas and coal-fired power stations that are perfectly serviceable but sit idle as we take an environmental stance to which most other nations pay lip service and ignore.

The gas price is a multiple of over four times its price a year ago and the electricity day-ahead price is so volatile you would think the world is running out of the stuff. We are beholden to imported energy, much of which is itself unstable for both practical and political reasons. Industry has been warned that heavy users may need to switch to diesel generators this winter so any environmental benefits gained would quickly be lost. You may well ask what is the point of holding ourselves to ransom in this way? We haven’t even reached winter yet, when domestic energy needs will be far greater.

Supply problems also abound in areas outside of our energy needs. Some of it is exacerbated by Brexit but, in truth, the whole world is suffering. The rapid recovery from Covid coupled with reductions in the workforce in many industries in many countries has led to production shortages in some areas and transportation problems almost everywhere. Whoever heard of bin-lorry drivers being poached? (I am not talking about the summer cab temperature). When was the last time a haulage company gave its drivers a 30% pay rise just to earn their loyalty whilst others have offered substantial signing on bonuses to tempt them away. Such things are happening!

A shortage of energy means higher energy costs. A shortage of drivers means higher transportation costs. A shortage of port workers (particularly in China) means higher transportation costs. I could go on. Many of you probably think I do already. All of this is, of course, inflationary. It is happening in varying degrees in many countries and it is impeding the recovery from the Covid slump. The silver lining is that a slowdown in the rate of recovery will allow time for some of these imbalances to work themselves through and, with luck, perhaps most of them. Western central banks said the inflation rise would be transitory. They were looking so wrong but it now seems they could just be right, after all, by default.

Market Outlook

On the assumption the slowing recovery leads to the central banks’ favoured outcome, as above, we should see the recent clamour for “higher interest rates sooner” gradually dissipate and, with that, confidence can be expected to return to equity markets. September has, in recent years, tended to be a fairly miserable month for the markets and this year is no exception. The main equity markets have been range-bound to the point of tedium and this is likely to remain the case for a bit longer yet.

However, if the time for higher interest rates is pushed out again then the favoured position of equities as the only real providers of income in a low interest rate environment should return. For that reason we remain comfortable with the medium-term outlook for most major equity markets, with the exception of China and Hong Kong, reasons for which were outlined in last month’s article.

Wickes Group – Update

Mentioned at 260p on 25th May following their hive-off from Travis Perkins, Wickes has spent almost its entire listed existence thus far in the 240’s. However, interim figures reported last week were extremely good. Revenue was 33% up on last year and, although margins were very slightly lower, mainly due to higher material costs, pre-tax profit of £46.5m comfortably surpassed guidance of £45m. An interim dividend of 2.1p was announced.

As with many DIY outlets, Wickes has encountered shortages in a number of products and materials but numerous recent visits suggest to me this problem is gradually resolving itself. A number of analysts have been raising their thoughts re this year and next and earnings of around 23p – 24p are expected this year and perhaps 10% more for 2022. The dividend yield looks like 3% plus and the balance sheet is strong with around £200m of cash. The share price is 250p as I write – a prospective multiple of under 10 times 2022 earnings. The market value of only £655m leaves them in the “high risk” category so they are not suitable for less risky portfolios but for those not averse to such risk, Wickes look very good value. I would not be surprised to see a significant re-rating over the next year or so.

Brickability – Update (Neil Morss)

My high-risk January 2020 tip for the year at 72p struggled over that period as did many in the sector. However, 2021 has been a different story and, following a 26% decline last year to 53p, the shares have rallied strongly, more than doubling from the low point to 110p, where they sit 52% higher than the recommendation price.

I met the management last month and it is apparent the company is taking full advantage of the industry’s growing requirement for building materials, a trend that seems likely to continue for quite some time as a result of the nation’s drastic shortage of housing stock and the plans for upgrading existing and developing new infrastructure. The management left me confident the shares have some way to go yet.

Diversified Energy Company (Neil Morss)

We have recently begun to take an interest in this independent energy company which operates entirely in the USA, primarily owning on-shore natural gas producing assets. DEC acquires existing producers rather than spend money searching for new fields. Recent acquisitions look to have been very well timed ahead of the massive increase in the prices of gas and LNG, and their concentration around Louisiana and Texas will allow them to pursue operational and administrative synergies as they have done with an earlier cluster of acquisitions in the Appalachian Basin. Basically, DEC is a consolidator of producing assets and, by rapidly acquiring assets in a given area, they have been able to achieve economies of scale and operating efficiencies quickly.

The company is capitalised at just under £1bn so falls into the medium/high risk range. However, their asset portfolio is actually quite low risk as no funds are wasted on new exploration ventures and production costs are relatively low. The income yield at the current 116p is an attractive 8% although we have seen some research suggesting the new acquisitions could see this rise to 10% plus. It is hard to imagine the shares remaining at these levels if that turns out to be the case, making them attractive on both an income and growth basis.


Russell Dobbs FCSI

Chartered Wealth Manager