Investors’ Chronicle: GSK, NWF, ITM Power

BUY: GSK (GSK)

After years as a sector laggard, the company has decided to make a name for itself in immunisations, writes Jennifer Johnson.

Investors can sometimes be a fickle bunch — a company might put out a perfectly healthy set of results only to see its shares lurch instantly downward.

This was the case when GSK released its 2023 figures: consensus-beating revenue growth of 5 per cent (at constant currency) was met by a share price drop of more than 1 per cent in early trading, although by midday they’d recovered and were up 3 per cent.

For several years, investors have been concerned about the relative weakness of the group’s drug development pipeline compared with its peers in big pharma. But these worries should be receding, especially given the performance of GSK’s new RSV vaccine, Arexvy. Although it only launched in the second half of last year, it has already logged more than £1bn in sales — and a significant untapped market opportunity remains.

According to the company, some 6mn US adults have been vaccinated to date — of an estimated population of 83mn at risk of developing complications from RSV infection. The jab is awaiting approval in other jurisdictions. Turnover in GSK’s vaccines division was up 24 per cent across 2023 — helped by the 17 per cent growth in sales of the Shingrix shingles jab. The fourth quarter of last year was its best in sales terms, with growth driven by both an expansion of public funding and strong private uptake.

At the close of 2023, GSK had 71 vaccines and speciality medicines in clinical development, including 18 in the third and final trial stage. This fact alone should go some way towards assuaging pipeline worries. The group now anticipates 2024 revenue growth of 5-7 per cent and adjusted operating profit growth of 7-10 per cent. In the longer term, it will have to contend with the loss of patent exclusivity on dolutegravir, one of the key treatments in its HIV franchise. 

The majority of this impact will be seen in 2029 and 2030 — though management has stated that it expects operating margins to remain “broadly stable through this period”. While it’s clear that this so-called “patent cliff” will remain tricky, it’s not going to negate the very real progress GSK has made elsewhere in its portfolio.

In terms of downside risk, there is the matter of the ongoing US litigation around heartburn drug Zantac, and although the company has settled many of the cases, there is another hearing scheduled imminently. At this point, there’s no way to estimate the cost of resolving the saga, but with shares trading on just 10 times forward earnings for 2024, we’d argue GSK looks cheap for a company on the up.

HOLD: NWF (NWF)

The company is allocating £8.5mn in cash to fit out a large new food warehouse, writes Michael Fahy.

This year was always going to be something of a comedown for NWF, the fuel, food and animal feed distributor.

The company still generates around three-quarters of its revenue through fuel sales and a normalisation of prices in the period translated into a 74 per cent decline in operating margin for this division, down to just £700,000. A warmer period of weather also hit demand for heating oil. The animal feeds business also suffered as milk prices slumped and the milder weather meant better grazing conditions, which limited demand.

The food business flourished, though. Operating profit grew by 38 per cent to £2.9mn, or 73 per cent of the group’s total. Chief executive-designate Chris Belsham argued that NWF operates in a useful niche, consolidating products from smaller suppliers that are then fed into retailers’ networks. This is a service that smaller competitors can’t match for scale, and one in which larger distributors “are not specialists”.

NWF recently signed a 15-year lease for a 332,000 sq ft warehouse, which will grow the division’s capacity by 39 per cent. This is a big investment. The company had £13.3mn of cash (excluding leases) at the end of November, and it is spending £8.5mn on the warehouse’s fit-out. Once complete, it is expected to generate an extra £2.8mn of annual operating profit, but this won’t be until 2026, and this year it will drag down headline pre-tax profit by £1.7mn.

Although guidance was maintained, NWF’s shares slid by 8 per cent and trade at 11 times broker Shore Capital’s forecast earnings, just below their five-year average. Given the additional execution risk, we don’t see a pressing case to invest.

HOLD: ITM Power (ITM)

The turnaround plan at the hydrogen company is showing hopeful signs, writes Mark Robinson.

ITM Power has revealed half-year figures that suggest its turnaround plan is having the desired effect. Given the bump in revenue and the narrowing loss profile, it would be churlish to suggest otherwise. Yet the company’s shares have almost halved over the past 12 months, and it would be fair to say that providers of alternative energy sources are under more scrutiny than during the pandemic, when shares in the hydrogen electrolyser manufacturer went into orbit.

Investors, however, will note a more disciplined approach to capital management, evidenced by the reduction in product development costs, in favour of spending aimed at upgrading existing factories and machines. Significantly less cash was sucked into investing activities, and the outflow in cash/equivalents was reduced by 40 per cent to £28.8mn. Gross losses fell appreciably, coming in at £8.15mn against £45.6mn in the comparative half-year, partly driven by the closure of legacy projects. Management noted that manufacturing and testing have gradually been “debottlenecked”, while increased automation and standardisation show that volume manufacturing is to become the preferred source of revenue.

ITM’s chief executive, Dennis Schulz, said that the self-help measures “successfully addressed the most pressing issues to right the ship” but recognised that “the electrolyser market is still immature”. This point may well have been lost on an overly excitable market during the dark days of the pandemic.

In keeping with the clean energy zeitgeist, the Yorkshire-based firm is looking across the Atlantic for opportunities in the wake of Joe Biden’s Inflation Reduction Act. However, the role hydrogen-based fuels will play in any future energy mix is still far from certain.

The market reacted positively to the interim figures, but it’s still very much a work in progress as the steep reduction in the premium to net assets demonstrates.