Musings from the trading floor (Regular Service)
In play this week £FSFL, ORSTED.
24th January 2025
Musings from the trading floor (Regular Service)
In play this week £FSFL, ORSTED.
Macro Mania
A broad risk-on week for equities, with UKX -0.03%, SPX +2.76% and EuroStoxx +1.38%. Credit tighter on the week with IG -1.5bps and HY -5bps. 1 year gilt yield down 8bps, whilst 10 year. 3bps lower.
Real Assets
It can be somewhat frustrating when public markets continue to undervalue listed real assets—though interest rates certainly play a role, they are not the only factor. Meanwhile, those same assets in the private market keep increasing in value. This discrepancy often makes one pause and reflect. Take Australian residential property, for example. The cost of new builds (or "replacement" properties) has surged by 29%, reaching A$444,000 in 2023-24, compared to A$345,000 in the pre-COVID era of 2019-20.
When I look closer to home, the UK listed solar assets are a good place to start. Opening the FSFL: LN sept 24 factsheet, and we have a NAV of £639.9m with 969MW of installed operational capacity, equating to around £660k per MW. This headline seems crazy, especially when we consider that capex costs for new builds are in the £500k region. Of course such cigarette packet calculations are ok, for the purpose of making a point, but when we unpack the detail it’s a bit murky (a la BESS asset write-downs, Australia asset/grid issues etc) – so whilst there is clearly a lot of value, especially vs the current share price (70p), I’m sceptical of the 112.6p. But what if we applied a haircut of 20% on the NAV? Well, that’s 28% upside, and a c.10% divi to boot. I might need to bring my suit and business cards out of retirement and become an investment banker again #Buy not build!.
On a Related Note
Expanding on the "Buy, Not Build" concept, it seems European utilities would be better off acquiring operational generating capacity rather than continuing to invest in new construction, especially given the rising costs. A prime example of this is ORSTED: DC, which recently announced three impairments related to its US assets, highlighting the increasing expenses of construction projects (financing and capex). This situation was further exacerbated by the Trump administration's decision to suspend the offshore wind leasing program, pending an environmental and economic review.
Industrials / Energy
This week, I had a discussion with a group of investors about the lack of clear direction in the macroeconomic data. Take German factory orders, for example, which missed expectations by a significant 520 basis points, turning negative with a -5.40% print just two weeks ago. At the same time, Natural Gas prices in Europe have surged by 71% year-over-year, largely due to the cold snap and the rapid depletion of gas reserves (currently at 58% compared to 74% last year). Given these challenges, it seems likely that industrials and cyclical sectors will continue to face margin pressure—whether from rising energy costs, increased social security burdens, or potential US tariffs.
While this argument seems logical, the market appears to be taking a different view, as evidenced by the DAX index, which is up around 7.46% year-to-date.
GCC IPOs
Looking ahead to H1 2025, the GCC’s IPO pipeline is shaping up to be as dynamic as ever, with infrastructure and healthcare taking the lead. Just before the festive break, Saudi’s PIF-backed Saudi Global Ports appointed Goldman Sachs and HSBC to lead its upcoming $1bn offering. Alongside this, several high-profile listings are in the works, including medical procurement giant Nupco, district cooling provider Tabreed, low-cost carrier Flynas, and Tabby, the region’s answer to Klarna. Oman is also preparing to list its state-run electricity transmission business. Meanwhile, the UAE's former SEO monopolies have performed well in the secondary market, making this an exciting sector to keep an eye on in the coming months.
Still consuming “the Coffee”, (a Japanese roastery), downgrading the rating to 6.5/10. This week its more children’s birthday parties. I’ve developed some go to gift habits now (3-5 year birthdays), Hot Wheels “City” sets and anything with unicorns and glitter!
Ps I heard one of the best credit metrics this week: ARR, Annual Recurring Restructurings, with three metrics Predictable Cashflow (to Lawyers), High Retention Rate (to Gibson Dunn), and Sticky Revenue (for PJT)..
Espressos Consumed SB: 1346
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