SIF Portfolio: Hogg Robinson And Banco Santander Pass My Tests

3rd Jan '18 by Roland Head

8 comments 7563 reads

My first day back at work after Christmas finds me faced with another kind of temptation that could be bad for my (financial) health.

Corporate services group Hogg Robinson is currently the top-ranked eligible stock in my Stock in Focus screen. But after selling this £270m stock from the SIF portfolio last year, I ruled out further investments in companies with giant-sized pension deficits.

My reasoning was that these outsized liabilities seem likely to lead to an unpredictable outcome for shareholders. For example, in Hogg Robinson’s latest interim results, the firm reported a £21.7m reduction in its pension deficit, to £243.5m. This was the result of a 0.1% increase in the discount rate used to calculate future liabilities and “and update of membership data” following the latest triennial valuation.

This valuation is ongoing and will include a discussion of “the appropriateness of the existing recovery plan”. The firm is currently making an extra cash contribution of around £7.5m each year. As Paul Scott pointed out, that’s similar to the amount paid out in dividends. It also represents around 17% of operating profit.

The bullish argument is that interest rates are now likely to rise, erasing the deficit and potentially triggering a re-rating of the stock. On the other hand, the pension trustees could decide that the company must increase its deficit reduction payments. This chart from last year’s results has made me more concerned about this risk:

This shows that the fair value of the plan’s assets rose by 21% to £320m over the five-year period (a strong bull market for almost all asset classes).

However, high bond yields and ultra-low interest rates caused the value of the firm’s obligations to rise by 38% to £585m over the same period. As a result, the deficit increased by 66% to £265.2m.

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*This section updated 8 Jan 2018. I had mistakenly compared asset value data for the group's pension schemes with those of the UK-only scheme.

The situation improved somewhat during H1 of the current year. Group-wide deficits fell by £21.7m to £243.5m. The main factor behind this was an improvement in the condition of the UK scheme, where obligations fell and asset values rose slightly:

This improvement is encouraging. But it still seems…

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KhrisCarter

3rd Jan '18

Of all the banks this one seems best. People have been depositing £20k at 1.5% interest. The bank must be able to do a lot better than that. The rate was previously 3%. Lending rates have not dropped much since. High lending risk seems to pay off. Higher rates seem to outweigh defaults. Banks are pretty opaque though. Some are run pretty badly.

Roland Head

Hi Khris,

I agree that banks' finances can be opaque. That's one reason why I didn't try to delve too deeply into the detail of the Banco Santander SA (LON:BNC) numbers.

But I think it's notable that Santander has largely stayed out of trouble (regulatory and financial) throughout the period since the financial crisis. That's an endorsement of management quality and operational discipline, in my opinion.

Regards,

Roland

Vsihv

My view having worked in banking (not a banker) for most of my working life is that banks are not well managed, especially the investment variety.
To that end, I consider if p/b on or around 1 (pcf might be an exception - still looking at it).
Santander is interesting though.
My view (which I expect is someone smarter's view as well):
Banks are effectively a leveraged bet on the economy and Santander is a leveraged bet on South America.
Personally, I ruled out as I am not comfortable with the risk of South America.
Argentina defaults every 20 years, yet they issued a 100 yr bond @ sub 8%.

That said, if UK investor wants a levered bet on the emeging/emerged economy would do well to hold Standard Chartered (LON:STAN), HSBC Holdings (LON:HSBA) and Banco Santander SA (LON:BNC).
Probably Stan if you want emerging/frontier exposure.

Please note this is not based on detailed analysis but rather anecdotal from conversations with colleagues/friends at various banks

On pensions, I am confused in general about accounting treatment (and I'm an accountant)
Basically pension fund has liabilities with average life of say 40 years (retiree life span), but assets typically only have a life of 30 years (Eg 30yr treasury).
To that end, in simple Math, should the asset cash flow not be 1.25, as you would reinvest maturity proceeds?
I am sure people much smarter than me have looked at this, but would love an actuary to explain how a mismatch between maturity of assets and liabilities is dealt with for the actuarial valuation.

When I say simple Math, I mean my simple brain!

JohnEustace

6th Jan '18

@sharmvr
An average retiree lifespan of 40 years seems high. Obviously I'm hoping to get to 100+, but assuming most people will get there or beyond seems excessive?
Average UK life expectancy is around 80 for males and 83 for females. Assuming retirement at 65 that would give 15 to 18 years of collecting the pension. Some people do retire earlier, but usually the benefits are reduced pro-rata. I might add a few of years of life expectancy to the averages as I have read that having a decent pension helps prolong lifespan.
Perhaps your bank scheme is more generous than most.

dealtn

7th Jan '18

"November’s interims showed a slight fall in the deficit, but also revealed a substantial drop in the fair value of the plan assets". The fair value of the UK scheme assets rose from 278.7mio to 283.2mio as your table immediately below this statement shows. Am I missing something?

8th Jan '18

Hi dealtn,

Thank you for pointing this out. You're not missing anything, it's my error.

I mistakenly compared the value of the global schemes' assets with those of the UK scheme only.

You are correct to say that the UK deficit fell during H1 as a result of an increase in the UK scheme's asset values.

I've amended the article to indicate the error and correct my commentary.

Regards,

Roland

SIF Portfolio: Hogg Robinson and Banco Santander pass my tests

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