In fiction, a MacGuffin is an element in a story that serves to motivate the characters and drive the plot but has no further purpose. In the news media we call this narrative device a ByteDance.

Chances are you read Niall Ferguson waxing plethoric over the weekend about how “future historians will marvel that we didn’t give our kids crack cocaine, but did give them TikTok.” The ByteDance-owned app is “not just China’s revenge for the century of humiliation between the Opium Wars and Mao’s revolution” apparently, but a “hotline to Xi Jinping’s imperial panopticon”. (Too obvious to explain, it seems, are the mechanics of how teenagers making funny over heavily distorted pop reverses the Treaty of Nanjing. Explanation is also in absence among the 145m other stories spidered by Google News at pixel time that mention Trump and Tiktok.)

Meanwhile, Arm Holdings co-founder Hermann Hauser was on the BBC last week warning of drastic consequences if Nvidia buys the globally system-critical chip designer, which has reportedly also been shopped to companies including TSMC and Foxconn.

Masayoshi Son confirmed this morning that Softbank’s looking to sell all or part of Arm. Please keep thinking about TikTok, though. The plot’s being driven by TikTok. It’s a Chinese WW3.0 digital superweapon, what with its state-compromised T&Cs and inscrutable algorithms for rebroadcasting amateur theatrics that will bring about the downfall of Western capitalist democracy in as-yet unspecified ways.

The growing likelihood of another Beijing-style stimulus package from Washington DC means everything’s rosy in Western capitalist democracy this morning. Heading into mid-session the scoreboards look like this:

Bookmaker GVC’s doing well. seemingly on Monday’s news that Barry Diller’s IAC had bought 12 per cent of its US partner MGM. In a letter to shareholders Mr Diller mentioned MGM’s “highly capable joint venture partner GVC” and said their BetMGM partnership “has only just barely begun to deliver” on online gambling, which is nice.

Why this wasn’t a catalyst for GVC shares on Monday is unclear -- though since the company has had some unknown risk factors following Kenny Alexander’s sudden departure in July, perhaps investors just needed some reassurance that interims due Thursday won’t spring another surprise. That reassurance arrives this morning from Goodbody:

Following the share price recovery in March-July, GVC shares have underperformed given management change and the HRMC investigation on legacy issues in Turkey. On the CEO change, in Shay Segev the group has a strong replacement that has been key to success since the acquisition and ensures continuity. On the issue of the HRMC, it is hard to predict the outcome, but we do not believe it should completely overshadow the strong operational performance. The shares trade on 7.4x FY21 EV/EBITDA and c.10x FY21 PE, both of which are undemanding. In addition, the market is attaching limited value for its US optionality (early signs of share improvements and IAC MGM stake provides 3rd party vindication). A refocusing of attention towards the strong operational performance on Thursday can be a positive catalyst. BUY

And Peel Hunt:

[IAC’s] vote of confidence is likely to encourage more investors to consider the upside opportunity for GVC.

Cloud within cloud, within cloud. The departure of CEO Kenny Alexander; the HMRC investigation; and, the speculation in The Times (since denied) that GVC was linked to Wirecard, have all weighed on valuation. The share price is 25% off its 52-week high, materially lagging peers Gamesys, Flutter and 888. A change in sentiment has the potential rapidly to close that gap.

What to look for. Potentially encouraging interims highlights include: the bounceback in demand for sports betting; the retention of customers acquired during lockdown; and, the development of smaller markets for the group, from Australia to Georgia.

Online sports betting activity levels were back to pre-Covid-19 levels and online gaming was trading strongly by the time of the July trading statement, and all retail premises had reopened. We remain confident in GVC’s ability to take market share and to continue to deliver strong growth, particularly in the US. We reiterate our Buy rating and 1,200p target price.

And Jefferies:

We are bulls of the US online gambling market. We see $19bn net revenue from sports betting in the USA by 2023, equivalent to a $5bn EBITDA opportunity. More US states are legalising sports betting, more quickly than expected, driven by a need for further tax revenues. We anticipate that iGaming is the next logical step in the legislative process, with casino-oriented MGM well placed to benefit. Our £12.10 price target (70% upside) for GVC assumes just a 10% US sports betting market share.

And in a big sector thing from Morgan Stanley:

Gambling remains our preferred sub-sector in Travel & Leisure. We upgrade FY20 forecasts reflecting strong Q2 performances, mainly offset in outer years by normalisation and UK regulation, with slots limits now in our base cases. Stay Overweight Evolution, GVC and William Hill, Underweight Playtech.

The best placed sub-sector in Travel & Leisure... Gambling operators and suppliers performed strongly throughout H1, despite lockdowns and the temporary widespread cancellation of sporting fixtures. Average online revenue growth for operators was 13/18% in Q1/2 and it was 19/8% for suppliers. In particular those companies with strong gaming-led brands, poker verticals or exposure to 'open' markets like Australia have outperformed and we raise FY20 EPS forecasts substantially (20-45%) to reflect a far stronger out-turn than we anticipated in May (see our note here). All of the companies in our coverage are majority online, and Covid looks to be accelerating migration trends, a net positive (though we expect some normalisation in FY21). We have a positive skew to our coverage, with Overweight ratings on Evolution, GVC and William Hill, Equal-weight on Flutter and Underweight on Playtech.

...but short-term regulatory newsflow likely to be negative, partially built into base case. Following recent regulatory developments, we expect the announcement of a UK Gambling Act review by the end of September, with implementation by mid-2021. Our conviction that a £2 limit on slots will be included has increased, so we put this into our base case, a ~£15-45m EBITDA (6-26% EPS) impact across Flutter/GVC/Playtech/William Hill. If this also applies to non-slots, we expect a further 11-59% EPS impact, though this is unlikely to be clear in the next few months and is in our bear case. We also see potential for UK tax rises (2-28% to EPS) given low levels relative to European norms.Evolution: Overweight (SEK680, 7% upside). Evolution has (by far) the strongest revenue growth profile in our coverage (MSe 45% in Q3/4), as well as the highest EBITDA margins (~59%) and strongest cash conversion (>80%). It is the best play on a US iGaming TAM story and has the most achievable bull case across our coverage (FY21-22 growth in-line with FY15-20). We recently increased FY20/21/22 EPS forecasts 7/6/4%, and raised our price target to SEK680 from SEK650

GVC: Overweight (1,030p, 42% upside). Among operators, GVC has the strongest set-up for sustained revenue growth outperformance with strong diversification and exposure to high-growth geographies. Increased US ambitions are a positive with little of the US in the price, we think. HMRC investigation is a risk but reflected in the 16% share price fall since announcement. FY20/21/22 EPS forecasts +45/3/2%.

Prudential continues its slouch towards separation. First-half results come with a big dividend cut and a confirmation that Jackson National Life, its US side, will get a minority IPO within the first half of 2021 (selldowns to follow). Management keeps alive the option of a demerger to shareholders just in case the IPO market tanks. The shares, up 3 per cent, are back to where they were in February then the split plan was first confirmed, though remain down from a month earlier when Third Point first revealed its stake and motivations.

Credit Suisse can summarise:

Recall the equity investment into Jackson during July 2020 valued the business at $4.5bn implying c2.5x two year forward earnings, compared to US peers trading on 3-4x. We think a successful execution on the US exit will create value for shareholders and limit the overhang on the stock, based on the Asian business securing a better valuation and seeing a rotation of growth focused investors.

Upon listing Jackson will be targeting a debt leverage of ~20-25% vs close to zero at the moment, implying c$2bn of debt raise. The RBC ratio is expected to be in the range of 425%-475%; previously we indicated a 450% level would be adequate for a standalone business without support from the wider group. Jackson will not be remitting dividends to Hold Co until the IPO listing, as management retain cash to rebuild the capital. Upon separation the Group will extract capital from Jackson, with the proceeds used to reduce group leverage and/or fund growth across Asia.

And RBC:

We expected this step, given Prudential announced in June that Athene had purchased 11% of JNL, but this is more definitive from management. This will please the many shareholders who want the business to focus purely on the fast-growing Asian franchise and see JNL as a risky business with limited growth. In [recent research] we highlighted that, while the Athene purchase price appeared to undervalue JNL, the Prudential share price valued JNL at close to zero and that an adequately capitalised JNL would attract a higher multiple than an under-capitalised JNL.

Solvency unaffected due to the crisis. As with other life companies, the balance sheet has held up well during this crisis. The group solvency ratio is 334%, unchanged from the end-2019 ratio of 309% when the impact of the Athene transition is excluded. JNL’s solvency ratio is 425% post Athene transaction (end 2019: 366%) - Prudential has said its target is 425-475% at the point of listing. JNL will not remit any dividends to the group prior to the IPO and this will push the ratio up into the middle of this range.

Dividend rebased downwards by 56%. As mentioned, JNL will not remit any dividends to the group prior to the IPO, with only Asia contributing. A new dividend policy has been announced with the interim dividend equating to 44% of the dividend under the previous policy (12.28 cents per share). We calculate the new dividend yield to be 1.0% vs AIA’s 2020E yield of 1.8%. In our view, investors do not own either company for the yield and the dividend reduction is sensible given Prudential will no longer be compared with the high-yielding UK life insurers.

Profit ahead. Prudential reported total IFRS operating profit of $2,541m, 7% ahead of consensus ($2,368m), driven by resilient results in both Asia and the US. Asia operating profit increased by 14% YoY, at the upper end of the 10-15% guided range. US Life operating profit was 7% ahead of consensus, with the adverse impact of DAC acceleration (-$32m) better than expectations. The group has also announced further costs savings, which expect to provide a $70m run-rate benefit from 2023 onwards.

And JP Morgan Cazenove:

Lowering of the dividend by more than 50% to now annual 2020 dividend guidance of 16.10 cents (vs. JPMe 37.85 cents and BBG consensus 39.3 cents) to reflect the separation of US business . . . Overall we believe that the news around separation of US and earnings are positive; however the dividend cut looks to be much more than we would have expected following the US separation. The dividend yield on the current share price is now <1%.

A trading update from housebuider Bellway misses consensus on volumes (completions down 31 per cent year on year or 75 per cent for June and July) with site productivity slightly weaker than the peer group. Newbuild prices are benefitting from the crooked incentive system, as expected, and a higher proportion of private sales help bump up the ASP. Market guidance could’ve been written by an AI bot that’d been fed on all the other housebuilder statements. Here’s Goldman Sachs with the headlines.

Deliveries: 7,522 vs. consensus 8,240 (-8.7%)

ASP: £293k vs. consensus £285k (+2.8%). Sales prices ‘remained firm, with no discernible movement throughout the year’. This commentary is consistent with peers, suggesting that there has been no/very little price weakness in the new build market so far as a consequence of Covid-19.

Revenue: Revenue from housing c.£2,204mn vs. consensus for group revenue of £2,450mn (-9.0%)

Private sales rate: 140 per week in July, vs. 162 per week in July 2019 (-13.6% YoY), suggesting a reasonably strong recovery in demand since lockdown.

Site productivity: Currently ‘approaching 80%’. This is marginally below peers (Persimmon 100%, Barratt and Taylor Wimpey c.80%).

Fire safety: Bellway announced that its investigation into the fire safety of cladding at legacy developments is likely to result in an additional expense in the financial year’.

Dividend: Bellway announced that it does not intend to pay an interim dividend, in line with our expectations.

And JP Morgan:

While the company has not provided a guide for margins, it expects lower gross margins (consistent with TW) due to (i) incremental costs from reduced productivity and (ii) further exceptional expenses which would have been capitalized ordinarily. We note that reduced productivity is likely to have an impact both in FY-2020 and, in subsequent financial years. While the group’s net cash position has improved to £1.0m (£157m net debt in May), we note that the Land creditors position stood at £345m, with the group starting to explore the land market as it acquired 11,921 plots in the full year (vs. 7005 in H1). We note that current trading has been encouraging, with reservations per week increasing to 140 (vs. 71 during Apr-May period) and good increase in order book to 6,588 units at £1.76bn (6,038 units at £1.57bn). However, we note that the group said its productivity is approaching 80% of pre-COVID levels (also consistent with TW).

Rolls-Royce is up slightly after giving a mostly reassuring update on why bits have been falling off its Trent XWB engine, which powers the Airbus A350 XWB. Inspections show signs of wear on Intermediate Pressure Compressor blades in “a minority” of cases. Rolls says it’s looked at the majority of Trent XWB-84 engines that have been flying four to five years and would be nearing their first service, as well as checking newer hardware and finding no unexpected wear. Phew, says Morgan Stanley:

We view this issue as much less material than the more pervasive issues encountered with the Trent 1000, for several reasons: 1) unexpected wear has only been observed as the engine is approaching its scheduled 5-year service interval, 2) customers have not experienced service disruption or abnormal in-flight operation as a result of the issue 3) the issue appears only to affect 1-2 blades in a minority of engines inspected 4) additional work required is limited, and can be contained within the scope of scheduled shop visits. These elements lead us to concur with the company view that the issue should no give rise to significant customer disruption or material annual cost. We recognise the high degree of sensitivity around the XWB, as the engine represents a material component of Rolls-Royce’s installed base and the future value of the company. Recent in-service issues with the Trent 1000 have increased scrutiny on the in-service performance of the Rolls-Royce fleet, and this may have increased further with the forthcoming Airworthiness Directive on the XWB highlighted by Rolls-Royce in the statement. Nonetheless, the disclosure provided leads us to view issues being encountered with the XWB as benign.

Disintegrating engine blades aren’t Rolls’ most pressing problem, however. Rolls’ most pressing problem is David Perry at JP Morgan Cazenove, who continues to portend for a rescue rights issue at best and full nationalisation at worst. This is from his note published on Monday:

We strongly believe a £1.5bn rights issue will not be enough: On July 29th Reuters reported that RR was in talks with three banks about a rights issue to raise c£1.5bn (c30% of the current market cap). We believe RR needs to raise at least c£6bn (through equity raises and disposals) to put itself on a sound footing. . . . at the end of 2020E we expect RR to have SHF of negative c£7bn and JPMe adjusted net debt of c£18.9bn.

RR’s FCF in 2022 – all from working capital? In its July 9th trading update, RR said it expects to generate 2022 FCF of at least £750m. Our own estimate is £624m. More importantly, per Table 1, we believe all of RR’s FCF in 2022 will come from unwinding working capital. Table 1 starts with RR’s u/l EBITA in 2022E and then deducts the utilisation of cash provisions, the excess of investment over D&A, then interest and tax. This shows FCF would then be close to zero, so (yet again) the only way RR can generate FCF is by unlocking working capital.

Elsewhere in sellside, HSBC (both the UK and HK lines) get(s) upgraded to “equal weight” at Morgan Stanley on valuation:

Following 2Q20 results, we lower estimates by 15%, 9% and 10% for 2020-22, respectively. NIM pressures and slowing fees in GBM are the drivers of the downgrades. Despite this, we now believe a lot of the risks are in the price. Upgrade to EW.

2Q results were weak; headwinds drive a lower earnings outlook: NIM pressures have intensified as its key rates have moved closer to zero. In addition, we expect renewed pressure on non-interest income due to both a lower level of economic activity and a strong 1H GB&M income normalises. The offsets to this should be better cost control as some pre-COVID costs are permanently reduced, and as management focuses more on cost management. We have raised credit charges for 2020e following a stronger-than-forecast 1H20 charge, but leave subsequent years unchanged. Our base case is that credit charges normalise by 2022e.

Economic and geopolitical uncertainty will remain as overhangs: In our base case, we assume HSBC sees RoTE fall to 4.0% in 2020e then recover to 6.2% in 2021e and 8.5% in 2022e. However, economic uncertainties mean there are still risks to this forecast. Our bear case assumes a further 25bp fall in NIM, weaker GB&M revenues and more persistent credit problems. In this scenario, we assume 2022e earnings are 25% lower. In addition, we note there is a sentiment overhang for HSBC based on geopolitical concerns; hence, we raise our cost of capital to 12% (previously 11.5%), in line with Standard Chartered. We see these economic and geopolitical uncertainties, the absence of capital returns for the remainder of this year, plus persistently low rates capping upside on the stock for now.

Price target lowered to HK$36, but risks now largely price in; upgrade to EW: Given that RoTE should be below 2022e normalised levels for the next two years, we would expect the market to apply a discount until it is clearer it can be realised. Plus, uncertainties over these normalised returns will likely keep the stock discounted. We therefore expect HSBC stock to continue to trade between our base/bear case values of HK$39/HK$26. Our probability weighted price target suggests HK$36 as a fair value, implying 10% upside, which would be comparable to that for European, HK and SG banks in our coverage with EW ratings.

Morgan Stanley’s also keen on 3i in a sector thing:

3i offers compelling upside, and we upgrade to Overweight. We view recent share price weakness at DWS as an opportunity, given improving fundamentals and underappreciated cost efficiencies, and also see greater security on dividends here versus Amundi.

Ability to access growth themes (ESG, Solutions, private markets, EM/China) while delivering on efficiencies is key to 2Q20 and beyond: 2Q Flow resilience evidences demand for solutions and passive, momentum in ESG and ability to access EM clients as key to growth. Active equities also saw improvement. Yet costs were key to positive profit delta, as revenue margin headwinds remain significant. Our estimate changes range from flattish (Amundi, SLA) to mid-single digit upgrades at DWS, Man and Schroders.

Upgrading 3i to Overweight – compelling upside from key asset Action: We increase our Mar-21 NAV estimates by 5% and see much improved probability of ROE delivery in the mid-teens and portfolio earnings growth at around double digit given the rapid rebound in growth at key asset Action. Our DCF valuation of Action increases, driven by renewed confidence in the growth trajectory (and lower leverage, plus FX). Given this and our previous work on the quality second tier of investments, we see the current 7% premium to June NAV as undemanding. With 15%+ upside, we move to Overweight.

Dividend uncertainty clouds the near term at Amundi, but the valuation is attractive for the patient investor: Amundi's product breadth to access industry growth zones and strong distribution footprint offer longer-term appeal. However, with dividend uncertainty set to continue, and a weaker top-line margin trajectory (which the renegotiated Soc Gen relationship will feed in 2021) leaving estimates broadly unchanged post results, we see less scope for a near-term re-rating than at DWS.

DWS replaces Amundi in our Global Div Fins preferred list: Both Amundi and DWS have underperformed since results. For both stocks, we recognise questions on the quality of the profit beat, given management fees were light. However, cost-driven upgrades combined with superior net new money momentum at DWS lift our earnings forecasts by mid-single digits, while our estimates for Amundi are broadly unchanged. Our confidence on dividends is also stronger for DWS.

Remaining more cautious on Schroders and SLA: Schroder's positioning in solutions, private markets and Asia offers appeal, and the wealth strategy offers scope to further support growth. Our cautious view reflects the premium valuation level, which we think offers limited buffer for continued pressures on core active. Meanwhile SLA continues to face the most challenging headwinds to the top line, combined with a dividend re-base, which we expect late 2020.

And Prosus, the €127bn valued Netherlands headquartered ragbag of internet properties hived off from but still 75 per cent owned by South Africa’s Naspers to act as ballast around its Amsterdam and Johannesburg-tradeable stake in China’s Tencent, gets a “buy” from Deutsche Bank:

Prosus is a consumer internet group operating in three core segments - Classifieds, Food Delivery, Payments & Fintech - and one of the largest technology investors globally. As the Tencent investment has delivered a remarkable return, the rest of the portfolio struggles to get enough credit from investors, in our view. We look at Prosus in the context of our existing online media coverage, and conclude that the holding offers a unique combination of early-stage disruptive online platforms, which investors cannot replicate with a portfolio of separate single stocks. We see Prosus as a way to gain exposure to the structural shift to online channels and the rise of the on-demand economy, trends which have been accelerated by the COVID-19 pandemic. We forecast 20%+ revenue CAGR in FY21-23E and improving economics. Initiate with Buy; TP EUR 105.

3pm BST - Hey, remember over the when Drew Dickson of Albert Bridge Capital, AA’s biggest investor, told the Sunday Telegraph that the shares were being talked down by management and were outrageously undervalued by prospective PE bidders, with no refinancing needs looming? Well, funny thing. Albert Bridge Capital said today it has reduced its total exposure to AA by selling down a CFD position. 🙃

Turning to reader requests, Cyprus/UK/Seychelles regulated CFD punter counterparty Plus500 says it “delivered an outstanding performance during the first half of the year, driven by the strength and differentiation of our proprietary technology, which enabled our business and our customers to benefit from the unprecedented market volatility.” But then, Plus500 says a lot of things. Here’s Canaccord:

Total revenue was $564.2m, as reported in the pre-close update (7 July), +281% y/y. Of this, client losses contributed 1%. EBITDA was $361.8m, +452% y/y, giving an EBITDA margin of 64%. The company has announced an interim dividend of $101m ($0.9531 p/s) and is launching a new $67.3m share buyback today. As previously indicated in the pre-close update, active and new customers reached record levels during the period. The company has also been given “Preferred Technological Enterprise” status by the Israeli Innovation and Tax Authorities, meaning it will benefit from a reduced corporate tax rate of 12% (versus the full rate of 23%) until at least the end of 2021. The outlook statement is confident, indicating that customer income so far in H2’20 is more than double the prior year, although heightened market volatility is expected to normalise. We will review our forecasts post today’s update, but we expect meaningful consensus upgrades are likely on the back of a very strong half. The interim yields 5.8% and the share buyback 3.9%, for a total of 9.7%, which we think is likely to provide support to the shares.

And Liberum (house broker, obv):

The record 1H20 results are due to more than just favourable market conditions. They also reflect the benefits of the group’s best-in-class platform, which continues to deliver despite lower leverage limits. Its scalable technology and agile marketing algorithms has enabled it to win significant market share, drive continued improvement in financial returns, and be one of the first companies in Israel to receive the status of a Preferred Technological Enterprise. This accreditation brings a number of benefits including significant tax credits, which result in us increasing our medium-term EPS forecasts by an average 21%. Despite this positive medium-term outlook the shares trade on just 8.6x our revised CY21 earnings. As a result, we reiterate our BUY rating and increase our TP to 1950p (from 1680p). . . . 

Although the strong top-line performance delivered in 1H20 results in us marginally increasing our revenue forecasts for all years, we leave our EBITDA estimates unchanged to reflect the investments made in the platform during the period, and the potential for further spend in the medium-term. This, combined with a lower than expected net finance charge sees us increase our adjusted PBT forecasts by an average 2% over the FY20-22 period. Assuming that the group is able to sustain the tax incentives created by its accreditation by both the Israeli Innovation Authority and the Israeli Tax Authority beyond FY21, we reduce our underlying tax rate assumption from 23% to 12% for all years. This, and the incorporation of the announced buyback programme, results in us increasing our FY20 EPS estimate by 18%, and FY21 and FY22 by 22% on average.

We note that the reduction in our FY20 DPS reflects the fact that 40% of the interim returns announced will be returned to shareholders via a buyback, and that the earnings associated with the reduced tax rate are being treated as special in their nature. The latter explains why the increase in our FY21 and FY22 DPS is smaller than the upgrade to our EPS forecasts.

Based on our updated forecasts for FY20 the shares trade on a PE of 4.1x and offer a dividend yield of 9.1%. We see the latter as particularly attractive given the upside that could prevail should volatility remain at elevated levels beyond the end of 1H20, and the fact that on more normalised earnings the stock is just trading on just 8.6x CY21 earnings and 4.8x EV/EBITDA. Given the performance of the platform during the first six months of the year, it is clear to us that Plus500 is the leading operator in the retail CFD space As a result, we believe that the current discount at which it trades to its peers will unwind, and set our target price using a 13.0x multiple to reflect this. We apply this to our FY21 earnings and add a small premium to reflect the supernormal returns being generated in FY20, part of which is likely to be returned to shareholders via the dividend. Our revised target price of 1950p (from 1680p) implies upside of 56% from the current share price.

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