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Woodford buys ITV on 'compelling' valuation opportunity

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Woodford buys ITV on 'compelling' valuation opportunity

Neil Woodford has bought ITV and participated in the IPO of a real estate investment trust (Reit) focused on warehouses.  

Both purchases, made last month, were new positions in his Income Focus fund. 

'ITV is a highly-cash generative business with a good track record of returning excess cash to shareholders through special dividends. Its valuation has started to look increasingly attractive recently, however, as the market has focused on the perceived structural threat posed to the business by digital media,' Woodford's head of investment communications Mitchell Fraser-Jones wrote in an update to investors.

Shares in ITV closed at 176.7p last night, well below their 12-month high of 221.76p. 

Earlier this week HSBC upgraded the stock from hold to buy on the view the worst could be over for the firm. 'We believe that a lot of the potential negatives are discounted, expectations have bottomed and the market has formed a view that "everything" is bad,' the investment bank said in its research note. 

Woodford admitted ITV may not be out of the woods, but like HSBC he believes its share price reflects the risks. 

'We are not complacent about the way that global advertising trends are evolving but, in our view, the risks are now more than adequately reflected in the share price,' Woodford said.

'These worries, coupled with the company’s UK focus, have therefore created an attractive entry point.'

Woodford also sees attractive income potential in Warehouse Reit. 'This is an investment trust which has raised capital to invest in a diversified portfolio of UK warehouses in urban areas. It aims to deliver a quarterly income stream of 5.5p per share in its first full year (31 March 2019 year-end), which equates a yield of 5.5% based on the 100p per share IPO price.' 

To fund these buys Woodford sold down positions in pharma firms AbbVie and Gilead. 'Although we remain attracted to these businesses, their shares have performed very well recently, so we decided to redeploy the capital in opportunities with even more compelling valuations'.

Under appreciated Card Factory

Meanwhile for his flagship Income fund Woodford took advantage of a near 11% slide in the share price of former small cap darling Card Factory to up his stake in the business.

The purchase, following a series of high profiles slip-ups in some of his most closely held stocks, suggests the manager has not become leery of mining what he believes is under appreciated value.

The house upped its stake in Card Factory from below a disclosable position to just above 5% of shares or 17.1 million worth £53 million at a share price of 313p.

Investors had earlier sold the stock as low as 278p, almost 20% lower overnight following a poorly received update warning that cost pressures had knocked profits harder than previously forecast.

Despite like-for-like sales rising 3.1% in the first half of the year and revenue 6.1% higher at £179 million, pre-tax profits for the period were 14.1% lower at £23.3 million.  

Woodford believes the short term pain was being traded off against longer term gains.

‘The company’s decision to not pass on currency and living wage-related input price increases to its customers has negatively impacted its financial results in the near-term but it makes absolute sense from a long-term strategic perspective,’ Woodford noted.

‘Consequently, we were keen to take advantage of the share price decline to add to our position in this well-managed, highly-competitive and cash generative retailer.’

Shares in Card Factory remain 71% higher from where they entered trading in 2014 but in the last two years have rarely threatened a 2015 high of 367p.

Analyst forecasts for the group have cooled sharply over the last six months with three of the analysts tracked by Reuters rating it a hold versus two on a buy and a median target price of 329p.

Looking ahead the group said it was optimistic that some of the shorter term headwinds to recent performance were fading. ‘This is an encouraging development, and although there are sound reasons to believe this could become more established in the months ahead, it is too early to conclude that a more meaningful reassessment of the fundamental outlook for markets is now underway,’ it said.

‘From a long-term perspective, however, we are convinced that the portfolio is positioned appropriately for the macroeconomic and market environment we see unfolding in the period ahead.’

Struggling outsourcing firm Capita, which recently appointed a new chief executive, continued to be one of the weak spots in the portfolio in September. Shares in the firm took another hit on the back of weak half-year results, but Woodford is optimistic over Capita's future prospects.

'The business is still on the path towards rehabilitation and the shares have recovered somewhat from the declines that greeted its operational difficulties in 2016.

'Following a recent meeting with the company and the subsequent announcement of its new CEO, we are more encouraged about the outlook for Capita. Much work has been done in recent months to improve the business and its transparency to investors and, as a consequence, we have become more confident in its prospects.'

AstraZeneca proved to be the best contributor to performance in September as it recovered ground from its sharp sell off in July after disappointing interim data from the phase III Mystic trial.

'As we said at the time, we have always believed that the investment case for AstraZeneca is about much more than Mystic – further evidence of this was provided at the European Society for Medical Oncology’s (ESMO) annual conference,' Woodford said. 

'Impressive data releases from 2 trials (the Phase III Flaura trial in Tagrisso and the Phase III Pacific trial in Imfinzi) appears to have shifted the market’s attention away from Mystic and back towards AstraZeneca’s much broader drug development pipeline potential.' 

The stock problems over the last year or so have tarnished Woodford's long term record and prompted him to apologise to investors for the poor performance.

Over the last three years he has returned 20.8% versus a UK Equity Income peer average return of 28.1%.

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Neil Woodford
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90/90 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: -3.51%
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