Spin-off #2 - Citizens Financial Group

Another spin-off I have written about is Citizens Financial.  Back in July I noted that it was time for me to sell:

'I concluded a couple of months ago that the hope of achieving a 10% ROTCE opened up the potential for a US$27-30 share price.  With this being pushed back the share at c. US$27 feels there or there abouts.

Citizens Financial has been a great spin-off since the IPO but it feels time to tactically say goodbye to the share.  Somewhere at/around that US$24 share price I might feel differently'

I duly sold the share...and it did subsequently fall back...

...and actually after falling below that US$24 level has recovered a bit. The latter occurrence is interesting as late last week - as I noted here - there was some newsflow from the original parent of Citizens Financial, RBS:

$RBS achieve that 5% leverage ratio & post Citizens disposal above this

Yes, Citizens is to be liberated from any ownership overhang from RBS.  Of course this is good news for both.  

I still note however that will the company trading at around book value and the current return on tangible equity improving but still stuck below 7% you need to be a believer.  A liberated management can work wonders...

 ...but I note it is not quite all green traffic lights.

My view: I am not getting the impression that I need to rush back into Citizens Financial.  Good news re the overhang but given the range of interesting banking stocks (HSBC, Barclays...and possibly RBS) I don't feel the need to rush back into Citizens.  I note the technical support building in the US$23s however.  This is one level for believers at prevailing. 

Spin-offs #1: NN Group and Voya

Regular readers will know I am a fan of spin-offs.  Two related postings on this theme inspired by results over the last few days.

Today Benelux financials behemoth ING Groep reported their third quarter results which also means that two recent spin-offs from the company NN Group and Voya also have reported.  My most recent report on these two names from a quarter ago can be found here.  Turning first to NN Group I concluded back then that:

'have made very solid progression since the spin-off and are trading at/around all time highs.  And they are still cheap trading on about x0.8 book for a H1 RoE of 11.8%.  Even giving a 20% discount for the overhang still suggests a theoretical fair value of around Euro33.  With a good dividend yield suggested for the full year NN Group also remains a keeper'

Since that early August write-up the shares have actually fallen back from the US$29s before rallying in recent weeks back to this level.  Of course this represents a continued outperformance against the broader European indices.

So what was said today?  Well basically further progress.  Return on equity edged up further to now a 12% level for the first nine months as cost cutting continued...

...meaning with ING having shed more of their stake, Euro1bn of free cash having been generated in the first 9 months of the year (an annualised 13% free cash flow yield!) and getting on for a 4% dividend yield paid in the last year (plus a slightly larger buyback!) investors are being given income whilst waiting for the overhang to be reduced...down to just over 25% now. 

My Euro33 target noted above actually now appears a little ungenerous given the reduction in the overhang.  At prevailing - at worst - a solid HOLD. 

Voya is a little different however.  Back in August I noted:

'...with the shares trading in the US$45s today...I still see value into the early US$50s at least.  Still a buy even if ING will one day soon exit its remaining c. 20% stake (which actually will be taken once placed positively)' 

And how are the shares today?  Just below US$40...that's a pretty big fall since August.  

Well with a book value in the US$56s - and even applying an overhang discount - still gives a target price in the mid US$50s.  

So what could have gone wrong?  Try outflows for a start in the retirement and...

...investment management areas.  

Of course these outflows are only a modicum of the overall assets under management (e.g. for the retirement assets it is less than 2% of the total) but it does deserve watching.  Even with another 10% discount the stock still has 20% theoretical upside. 

Net net that sounds like a buying opportunity to me. 

Postscript - another reason for a technical miss by Voya in the Q3 financials was mortality as noted here.  Again this feels transitory and should be no impediment to buying the stock. 

Though Retirement and Investment Solutions accounted for 78% of Voya Financial's (VOYA -3.8%) Q3 pretax operating income, it was a 2nd consecutive month of elevated mortality in the Individual Life unit which caused the sizable earnings miss, writes BTIG's Mark Palmer.

The mortality ratio was more than two standard deviations above the expected level - the first time such an unfavorable variance has occurred since 2007, says management. The unit paid 35 claims of more than $1M during the quarter, totaling $65M. One year ago it paid 25 claims of more than $1M totaling $34M.

Spin-off reprise: Voya Financial and NN Group

As I noted here earlier in the year:

'One of my more successful holdings over the last year has been Voya Financial another spin-off from ING (my success here encouraged me to buy NN Group, another spin-off from ING but only floated last summer in Europe...(which) I wrote up here'

All three companies in a wonderful display of insurance/asset management sector historical union reported today.  So how do I feel about Voya, still worth - as I noted in the link above - over US$50 a share?

'With the overhang abating then the required discount should also decline.  Book value is over US$53/share.  With a clearer path laid out to low teens RoE there really is no reason why the stock should not trade on x1 book...with a c. US$43 share price this still implies undervaluation.  

Of course a low interest rate and generally competitive world overhangs too but I am feeling no need to sell my Voya shares today.  In fact I have upgraded my valuation hopes to over US$50 a share'

Well the good news is that book value continues to move up and now stands at over US$56/share...

...and given this occurred with hopes of a clear move deeper into double digit RoEs...

...and positive flows across their key retirement markets then an above book value still seems reasonable to me.  

In other words with the shares trading in the US$45s today (with expectations maybe getting slightly ahead of reality as according to Seeking Alpha 'Voya Financial (NYSE:VOYA): Q2 EPS of $0.78 misses by $0.05.Revenue of $312M (-12.4% Y/Y) misses by $24.03M') I still see value into the early US$50s at least.  Still a buy even if ING will one day soon exit its remaining c. 20% stake (which actually will be taken once placed positively).    

The overhang for the Dutch listed NN Group is larger at 68%...but many of the underlying themes are similar. With very strong return on equity progression and - slipped into the last bullet point - an indication that the inaugural full year dividend is likely to be well over Euro1 in size i.e. getting on for a 4% yield which is not too shabby. 

Equally as impressive was the very successful expense reduction which has almost hit the 2016 targets already - no wonder the above dividend progression was so good.

 But that is not to say that everything is great.  The value of new business progression was modest identifying again that NN Group is probably more a cost cutting / dividend story than a high growth story.  Still at least it is positive...

As for the shares, they have made very solid progression since the spin-off and are trading at/around all time highs.  And they are still cheap trading on about x0.8 book for a H1 RoE of 11.8%.  Even giving a 20% discount for the overhang still suggests a theoretical fair value of around Euro33.  With a good dividend yield suggested for the full year NN Group also remains a keeper.   

Two spin-outs, still two strong holds/buys.

Time for me to sell a spin-off: Citizens Financial

I like spin-offs and generally the progressive sales/placings of stock by the exiting parent company should be viewed as an opportunity and not a threat. Certainly that was my view of Citizens Financial as I talked about here a couple of months ago when RBS did a large placing of stock.

At the time the Citizens' stock was a little under US$25.  Today it trades for just over US$27.  So a 'result'?  Well...it depends on how you review today's 3%+ fall...

So why the fall?  Ultimately it comes down to one key chart from the presentation deck and the observation of 'broadly reaffirm overall FY 2015...(but the) achievement of 10% ROTCE run-rate target by end 2016 is likely pushed out...will provide 2016 guidance in January 2016':

Oh dear.  I had noted already the poor trends of net interest margin...

 ...that certain growth initiatives were coloured 'amber' and hence a bit behind the curve...

 ...and that despite a static loan-to-deposit ratio, the company was no longer accumulating capital (although in absolute terms its capital ratios remain absolutely fine).

So what to think?  Well as I concluded a couple of months ago that the hope of achieving a 10% ROTCE opened up the potential for a US$27-30 share price.  With this being pushed back the share at c. US$27 feels there or there abouts.

Citizens Financial has been a great spin-off since the IPO but it feels time to tactically say goodbye to the share.  Somewhere at/around that US$24 share price I might feel differently.

Emerson Electric's interesting proposed spin-off

Regular readers will know I am a great fan of spin-offs, recently commenting on Symantec's upcoming one (here), the Citizen's Bank spin-out from RBS (here), Voya (here) and NN Group (here) out of ING Groep and Indivior (here) via Reckitts.  So when I read earlier that Emerson Electric were joining the spin-out party...it piqued my interest.

So what is going on?  Well Emerson are spinning-off their Network Power business as well as considering 'strategic alternatives' for other businesses.

The former is obviously more tangible.  So what price the Network Power business?  Well it is an international profitable business generating over US$0.55bn in ebit.  By the sound of the company's conference call they will carry some debt but given a reasonable geographic spread and sensible divisional focus suggests to me a c. US$6bn potential spin-out valuation.  

Now given this is all happening in the future, what about the rest of the business?  Usefully Emerson provided some further insights on this and not the proliferation of #1 industry positions.  

Additionally the focusing of the business on these core areas will heighten margins and efficiency.  Using the numbers below 'core' Emerson generated US$3.2bn of ebit.  Prospectively I could see this being a US$40bn worth business.  Now add on the above noted Network Power profit and the other businesses to be spun-out/evolved/applied with 'strategic alternatives' generated only around US$0.3bn in ebit.  US$3bn worth of value?

So add up all three areas and my rough sum-of-the-parts (SOTP) is around US$50bn.  And the prevailing EV of Emerson Electric at the moment?  US$41bn.  Hmm.  Even if my numbers are a bit prospective centric / you worry about the global economy and energy sector demand / US$ translation etc. and you take a 10% haircut I could see the shares to the early US$60s at worst (let alone my rough SOTP value nearer the 52 week high in the mid US$60s.  

Another potentially interesting spin-out?  Yes, I think so. 

"Symantec: cyber theme, upcoming spin-off: what more do you need?"

My latest post as a Yahoo Finance Contributor titled "Symantec: cyber theme, upcoming spin-off: what more do you need?" can be found here.

Citizens Financial Group - look for the opportunity not the threat in a big placing

It was six months ago that I last wrote exclusively about Citizens Financial Group the US$13bn+ market cap regional bank that used to be a fully-owned part of the RBS financial empire.  I say 'used to be a fully-owned part...' as the inspiration for a posting last September was the event of their separate listing on the US stock market as a minority free float spin-off.  Since then the shares have pushed up solidly - good news given that I bought the stock early in its stock market life and included the name in my preferred stock list for 2015 (link here).

As I have chronicled via a number of updates on Voya (the ex ING US business) it is inevitable that these businesses do trade at a discount to some semblance of full/fair value due to the existence of a share overhang which periodically gets placed.  No surprises then to read today that RBS have decided to place some stock (I have highlighted certain aspects of their statement of particular interest): 

'The Royal Bank of Scotland Group plc ("RBSG") today announces it intends to sell part of its shareholding in its subsidiary Citizens Financial Group Inc. ("CFG" or "Citizens") in an underwritten public follow-on offering ("the Offering").

The Offering is expected to comprise 115 million shares of Citizens' common stock, equivalent to 21% of CFG's common stock excluding an over-allotment option. A further 17.25 million shares will be made available by RBSG under a 30 day over-allotment option.

If all the CFG shares made available in the Offering are sold, assuming no exercise of the over-allotment option, RBSG's remaining stake would comprise 269.7 million shares, equivalent to 49.3% of CFG's issued common stock. If the over-allotment option is exercised in full, RBSG's remaining stake would be 252.5 million shares or 46.1% of CFG's common stock'

So should Citizens Financial investors panic?

Of course not...as noted above the likelihood of this was of an almost certain probability.  

Looking at January's Q4/FY results the company is sensibly financed and positioned...

...with sensible / achievable growth targets for FY15e supplemented by ongoing cost cuts.  As always with a spin-off the scope for the newly liberated incumbent management team to deliver stronger performance versus the prior 'empire' owner.

If you put all of that together then I am not surprised that rolling the RoTE number forward a year or two sees a sharp (anticipated) improvement.  

And the implication for a 'fair' target share price?  Certainly something in the US$26/27s, possibly even closer to US$30.  Of course some element of a discount has to be applied to this given today's placing and the high likelihood that RBS totally exits (to support their own capital position improvement hopes) but my observation would be any share price shift notably below Friday's closing level in the mid US$24s is more of an opportunity than a threat. 

Spin-off #3: Voya Financial

One of my more successful holdings over the last year has been Voya Financial another spin-off from ING (my success here encouraged me to buy NN Group, another spin-off from ING but only floated last summer in Europe whose latest numbers I wrote up here).  The share has simply been phenomenal since listing - especially given that ING have been selling down their stake consistently through this period (and are now down to under 20% i.e. a much reduced overhang).

The shares are up today because they have beaten another target - their 2016 return on equity one:

This is clearly very pleasing to read...and the new 2018 target is another solid progression.  It is also worth noting above the anticipation of 'next generation customer experiences and solutions' (new business flows essentially) and a useful new US$750m share repurchase authority.  To put the latter into context, the size of ING's residual holding is approximately equivalent to US$2bn.  I would anticipate the former again being used to offset the latter.  

Picking up the flows point again it has been noteworthy in both the Retirement Net Flows...

...and Annuities divisions that the company has focused on higher margin businesses and is happy to run off less margin accretive areas.  This is good news.

So what about absolute valuation?  With the overhang abating then the required discount should also decline.  Book value is over US$53/share.  With a clearer path laid out to low teens RoE there really is no reason why the stock should not trade on x1 book...with a c. US$43 share price this still implies undervaluation.  

Of course a low interest rate and generally competitive world overhangs too but I am feeling no need to sell my Voya shares today.  In fact I have upgraded my valuation hopes to over US$50 a share.  

Spin-off #2: Indivior

Just before Christmas I wrote up the spin-off of Indivior from its parent company, musing whether it was potentially good value or not (I did subsequently initiate a position albeit a relatively small one as my investigations continued).  Even though the share has has been volatile today (day's range of 133-167p!) from the mid 140p level I initially purchased the shares at before Christmas it has been a winner.

The inaugural listed results are always an important point of any new company to the market and it is noteworthy how the company described itself:

Typically when you see 'enormous future potential' this is short-hand for shabby near-term results and on that front this guide was absolutely correct.  I discussed at the above link before Christmas some of the challenges the group was facing and they nicely summarised some of these in an early slide from their presentation pack: 

Share losses, 'forced switching' and price reductions is rarely a good miss but not totally surprising given the profile of company established at the time of its spin-off.  Competition has kicked in and, as noted below, 'will intensify'...

...and hence the key product market share of Suboxone (the background to which is discussed at more length at the link above) is seeing fading market share but it is broadly fair to describe it as 'resilient':

Pull all of this together and revenues are anticipated to fall over 20%...and unsurprisingly net income in a geared fashion much more than this.  

So is the share cheap?  Well with an EV of around £1.4bn the implied EV/ebit (generated using the 29% tax rate guided to by the company for 2015) is just over x10 for FY15.  The free cash flow yield (historically 80%+ of operating profit) is a reasonably healthy c. 8% which no doubt contributes to management's second assertion below that: 

Back in December in my initial piece I noted that the company's pipeline products are focused on later in the decade albeit that the first product (Nasal Naloxone) is twelve months away.  If you are looking for the source of upside it is undoubtedly here.  There may also be some dividend benefit in 2015 as the company looks to assuage concerns used to the Reckitts dividend flow.  

What I also liked about the inaugural results presentation document was that the Indivior management are clearly trying to help educate (potential) investors with two presentation slides full of helpful academic and related information to assist in monitoring the company plus a further two slides encompassing the forward calendar of meetings, presentations and corporate results.  It is a shame other companies do not make such efforts.  

Pulling it all together, Indivior remains speculative but interesting.  The shareholder base is clearly calming down and the apparent support for the share in the 130s/140s is worthy of note.  Clearly there are uncertainties but to have no position feels wrong.  This is a company in transition and it is not well-known (or covered).  

With more information now it is clear that the extent of the undervaluation is not as material as I thought in December but risk-reward still feels sufficient to at least maintain my position in this (unfortunately addiction centred) fascinating theme stock 

Spin-off #1: NN Group

The next three postings are all going to be about spin-offs in one form or another - a part of the market I have long found value in due to the likelihood of mis-pricing and changeable shareholder ownership lists.

The Benelux financial behemoth ING separately listed NN Group on the Dutch market in the middle of last year.  As I discussed last year I bought the stock and so far that has proved up well.

So what about today's numbers?  Well I liked the combination of lower administrative expenses, higher earnings and better RoE.  

The free cash flow generation also appeared impressive for a company with a sub Euro9bn market cap at close to a 5% free cash flow yield.  The company also paid an inaugural yield just for the second half of the year equivalent to a little over 2% with indications that this sort of run rate (50% pay out ratio) should be annualised up going forward...

Of course there was some variability at the divisional level with Dutch non-life, the Japanese book of business and investment management leading the way whilst the Dutch life and other European business lagged.  Unsurprisingly the latter areas were hindered by fading returns.  

Reading through the presentation document and associated documentation I was impressed by how little had changed from my original thesis.  The share looks undervalued on its valuation basis of around x0.7 book / c. 9% RoE even with the remaining ING overhang (which they will continue to sell down).

Theoretical fair value is in the early Euro30s (x0.9 book to equate with a 9% RoE).  Discount to reflect the likelihood of further ING sales (15% discount for this) and I get a target of around Euro27.  This - and the good dividend stream - are more than enough reasons to hold on.  

Pre Christmas spin-off time: Indivior

So the last full day of trading on the London stock market...and hence a perfect day for Reckitts to spin out their pharmaceutical business Indivior!  Well maybe not...but spin-offs are always interesting and one which occurs at a strange time of year doubly so.  

So who are Indivior?  From today's RNS document...

'Indivior will trade under the ticker "INDV". Indivior is a global specialty pharmaceutical company committed to expanding treatment access and pioneering innovative therapies for the chronic diseases of addiction and related mental health disorders'

Using last month's Indivior investor day presentation here are some key slides on the newly listed company: 

A clear US focus (not unusual for a pharmaceutical company): 

 Main issue been competition rising on main Suboxone (global opioid dependence) product

Other issues/opportunities in the US business.  Note pipeline is more a >2016 factor...

Opportunities in untapped US market as the company sees them...

…but as noted above new products from 2016-2020 only

Hope for non-US interests but market developed not so advanced: 

So outlook not going to be easy.  In my opinion the company is going to do well to keep profitability at these levels without the new products kicking in. This is undoubtedly why Reckitts spun them out...

Quite cash flow generative with high cash conversion.  Even adjusting for business pressures should still be able to generate $500m+

So a profile of $600m+ operating profit, $500m+ FCF (and confirmation of $500m net debt to be given to the company on spin-off which equates to < x1 ebitda so not excessive).  Limited short-term growth but some longer-term potential (pipeline, RoW).  Given there will be some overhang too (RB shareholders not holding onto their shares) I would value at x8 EV/ebit = $4.8bn market cap = c. £3bn market cap. 

And the spin-off market cap today?  718.78m shares at 146p = £1.05bn.  

Either my pre Christmas maths are sunk or this is quite an interesting spin-off.  Small trading position established whilst further investigations continue.