Temple Bar Investment Trust PLC (TMPL) Earnings Call Transcript & Summary

Welcome, everybody. September, as you say, my goodness, how does that happen? So as Neil said, and as you will be aware, obviously, market -- equity markets generally have been reasonably strong so far this year, and that is obviously despite some well-known, some pretty obvious headwinds. Obviously, the events in the Middle East. Obviously, we've now got temporarily at least $100 oil and bond yields, I was looking this morning in the chart, the 10 -- if you look at U.K. gilts, the 10-year gilt was yielding 4.5% on the 1st of January this year, and today, it's yielding at 5.3%. So long-term interest rates have been going up. So probably begs the obvious question perhaps as to why stock markets have been so resilient. Always difficult to know, of course. Probably, I would say we will put it down to the fact that corporate profits continue to be strong. And that's pretty much everywhere. I mean, certainly in the U.K., there obviously -- there are obviously exceptions. There are always companies that are struggling. But generally, corporate profits growth has been strong. And I'm sure you'll be familiar with some of the core profit growth that we're seeing in the U.S. at the moment. S&P profit growth has been exceptional so far this year. So, so far, the markets have managed to shrug off the negatives of higher oil and rising interest rates. But I think most of us have been around long enough to know that stock markets have an incredible ability to change their mind. And obviously, what we're seeing today doesn't -- won't necessarily be the same as what we're seeing in 3 or 4 months' time. The trust itself has continued -- it had a good year so far, marginally outpacing year-to-date, a reasonably strong market. There's always positives and negatives, obviously. The positives so far this year for the trust have basically been the -- unsurprisingly, the energy companies obviously been driven higher by rising energy prices. The financials, the banks have continued to do pretty well. Banks generally continue to enjoy a very benign backdrop, put it that way. Obviously, as interest rates continue to rise, so net interest margins continue to roll up over time at a time when costs remain very much under control and the level of loan losses continues to be very low. And a number of actually the consumer companies have also done relatively well. And so I'll talk a bit more about it in a minute, but companies like Diageo, which we recently bought into. And then in the U.S., companies like Kraft Heinz and J.M. Smucker, two U.S. consumer names. There are always negatives, as I say, so far this year, the standout negative has been Stellantis, the auto manufacturer. Auto -- the auto industry is in a very, very difficult place at the moment because as we all know, the level of Chinese competition has increased very markedly. It's satisfying, of course, that the reasonably strong performance year-to-date builds on strong performance from prior years to give so far at least a very satisfactory outcome. The dividend is obviously very important to shareholders, and that has continued to rise year-to-date in 2026. The forecast for the year is -- just over 15.5p. That would represent around a 4% increase on last year. Dividend, the ability of the trust to drive dividend growth, of course, is dictated by ultimately corporate profits, how well the underlying companies are doing in profit terms. And again, it has been a relatively benign backdrop. So most companies are obviously generating some earnings growth, and that is feeding through into higher dividends. So obviously, a long way that continue. Just remind yourselves that as of last year, 2025, the fund started to distribute an element of capital. And the -- around -- very roughly around 1% of the portfolio. So in that 15p from 2025 is 3p of capital return. So the underlying revenue-driven dividend, if you want to think about it like that, was around 12p. Around the beginning of this year, the trust moved to a small premium, again, which is satisfying. And that has enabled the trust to start issuing shares for the first time in a long time. And so far this year, the trust has issued around 7% of its starting shares in issue as new shares into the market. So transactions for the last 12 months. And I certainly -- obviously, I'm not going to go through all of these in the interest of time. Obviously, I'm very happy to take any questions at the end on any particularly any one of the names that's listed here. I suppose the ones I would highlight would be in the U.K. would be Diageo, Land Securities and Bellway. I'll talk a bit more about Land Securities in a minute. Diageo, obviously, it's -- I think we all know Diageo, the company, like so many others in its sector, it's been through a relatively difficult period actually of muted consumer demand, in some cases, falling volumes, a consumer that's been unprepared to take price increases in the way that they have been prepared to do, let's say, 10 years ago at a time when actually for these companies, input cost inflation has been rising quite significantly. So that's created a squeeze on margins. In many of these companies, Diageo certainly, profits had actually fallen. In the case of Diageo, they've fallen from about 25% from their peak, and the shares as a group have significantly derated on the back of that. So, why do we think that they are worth buying now? Well, we think because essentially, you've had a management change, you're probably familiar with that [indiscernible] -- Dave Lewis has taken over of ex-Tesco Fame. He did a great job in turning around Tesco, and he set about doing the sensible thing. So investing more for growth to try and drive volume-led sales growth again. Ultimately, that's really important for the health of the business and to take out cost, simplify the business and to sell off non-core brands. And as a result of that, we think that the company should be able to generate, let's say, between 5% to 10% per annum earnings growth over time on a rating today, which is around 12x earnings in the stock market and you compare that rating today to where it was 3 or 4 years ago -- 3 or 4 years ago, the rating was around 25 -- 25x. So it's significantly de-rated at a time when we have a new CEO who's getting the house in order, investing for the future and returning the company, hopefully, to steady, if unspectacular growth. The other 2 companies really from the U.K. to Bellway, the housebuilder, some similarities bizzardi, some similarities from the housebuilders to the consumer, the big consumer companies. The housebuilders again, have gone from having it all their own way between 2010 and 2020 when house prices were rising at a time when input costs were very -- input cost inflation was very muted. And of course, we've now got the exact opposite problem. So we've got house prices, which are going nowhere temporarily at best and input cost inflation that continues to rise. And of course, that's resulted in a nasty squeeze on margins. These are operationally geared businesses at the end of the day, and that's resulted in some very poor share price performance from the housebuilders generally. Many of them have declined very significantly. We haven't owned a housebuilder for a while actually, but in any of our portfolios. But today, a number of them are now priced at a significant discount to tangible net asset value. In the case of Bellway, they're priced at around 60% to 70% of tangible asset value. And while we don't expect the backdrop to get any better soon, ultimately, the high-cost land that they are building out today will work its way through their P&L account, and it should allow for a normalization in margins over time, and that should lead to some profit growth, again, at a time when the market, of course, has become very despondent about the prospects for these companies. Landsec, as I say, I'll cover a bit more in a minute. On when think about the overseas portion of the portfolio, I've mentioned a couple of the consumer names already, but we've added, let's say, Kraft Heinz, J.M. Smucker. Again, the narrative is very similar to the one I've just described on Diageo. Companies that have had a difficult time, lost their way, hadn't been investing enough for growth, often where you've got a new management team who's setting about putting that right. And again, obviously, at a time when valuations have fallen very, very significantly. Another area which -- where we've been interested has been what we would call perceived AI losers. So companies that the market believes are going to be aggressively disrupted by developments in the AI sphere. So the 2 we have here are IT services companies, Accenture and Capgemini, both which have fallen very dramatically in share price terms. So I mean, I think Accenture has lost more than 2/3 of its value over the last 2 or 3 years. And both companies available for single-digit PEs. At the moment, the companies continue to be confident that they can deliver mid-single-digit earnings growth, and that will feed through into mid- to single digit, high-single-digit earnings growth at a time, as I say, when these companies -- the market is very, very skeptical and they're trading on high-single-digit or even low-double-digit price earnings multiples. So these new positions, if you like, have been funded from -- you can see the sales on the right. It's essentially been -- largely, it's been taking some money out of financials, which, of course, have done extremely well, where valuations are not as attractive as they were and also the -- some of the mining stocks, which have done a phenomenally well on the back of rising commodity prices. So Anglo American pretty much doubled in the last 12 months. And we think the share price today reflects -- doesn't provide the margin of safety that it used to. Ultimately, none of us know how commodity prices are going to pan out. And so what you need is a margin of safety. You want a share price, which is assuming that commodity prices stay low. That was the case when Anglo American was trading below GBP 20, which it was about a year ago. At GBP 40, which is where it is today, that is no longer the case. So we think it's right to be taking money off the table there. As I said, a bit more on Land Securities, and I think you'll be relieved to know I'm not going to go through enormous detail on this slide. But I think the reason -- and again, like the housebuilders, we haven't invested in a property company for a long time. So why do we think that it's right now? Well, we think that actually post a very difficult few years. And Land Securities is effectively pretty much entirely invested in what you would call high-end retail and office properties. And then obviously, in both of those sectors, both in office and in retail, there have been some very challenging adverse secular changes going on. In office, obviously, working patterns have been disrupted by COVID and have likely changed permanently as a result of that. And in retail, obviously, the shift to -- from physical retail, bricks-and-mortar retail to online, obviously, that has been a major headwind for retail landlords over time. But we think in both cases, that those changes have effectively worked their way through the system. And that now we have a new base -- we rebased to a level of which we think rents can grow reasonably nicely. And we actually value -- we don't value property companies on an NAV. We value them on an earnings basis. We think about them just like we think about other companies. And Land Securities it trades today at around GBP 6.20. It's generating earnings of around between 50p and 55p, -- it's trading on a price-to-earnings ratio of around 12x. That's an earnings yield of just over 8% and paying a very generous dividend, about 6% dividend yield. And due to rental growth, that dividend should be able to grow at, let's say, 4% per annum that sort of number. So we think the combination of an attractive dividend yield and a relatively stable and should be predictable dividend growth over time, we think that is an attractive combination. So we have to say we recently bought that one. And then again, actually moving back overseas in the U.S., we bought Comcast Corporation, which is a telecom stroke media company, which has delivered some very attractive -- some steady, if you like, growth over time. It's distributed back to shareholders over 100% of its market capitalization in the last 10 years or so. It's turned revenue growth of 5% per annum over that decade into earnings per share growth of just under 12% per annum because it has been incredibly disciplined when it comes to capital allocation. It's used the cash flows it generates to retire cheap equity. We think the earnings power of the business is around $4 a share at a time when the share price is around $25. So you can do the math, free cash flow yield of, we think, over 15%. Moving more to the trust more widely. We think the trust continues to be invested in areas that offer attractive valuations. I suppose the areas we would continue to highlight will be financials. We've had to -- we've actually taken a decent amount of money out of the financials. I know it doesn't necessarily look like it from -- when we're looking at that pie. But yes, we've taken significant amounts of capital out of the banks principally because the share prices have performed well. I was looking at some numbers the other day that the number of shares that the trust owns in Barclays today is around 2/3 lower than it was 3 years ago. Just to give you an idea of the amount of capital that we'd be taking out of that area. A question we often get is the share price of these companies have done extremely well. Do we think they still offer value? I mean we would say they're clearly not as attractively priced as they were 2, 3 years ago. You simply cannot make that argument. But we continue to think that they are reasonably priced and offer the ability to drive decent market-beating levels of total return from today's level. Other areas we'd highlight would be consumer staples. That includes the supermarkets and also some of those consumer goods companies I've been talking about energy, which obviously, the energy stocks are very difficult to value aren't they? -- because obviously, it depends on what oil price assumption you use. And of course, none of us know where oil prices are going to go in the coming months. So we value them all on $70 oil. And because actually that's the price that the companies themselves use when they're evaluating new projects. And if we can make the numbers add up at $70 oil, which we can, and they're trading as a group roughly at about 10x earnings at $70 oil, then effectively, you have a free option on the fact that oil prices stay higher for longer. And obviously, today, they're sitting just above $100 Communication services, consumer discretionary, also other attractive areas. There's the top 10 of the portfolio. Again, I'm certainly not going to go through them all or any of them indeed. And again, happy to take questions. I would just note a couple of things. Despite the fact that some of the share price has done extremely well, can't do the math, 5 of the 10 there still trading on single-digit P/Es. So I mean that's interesting to note. And as a group, they offer some pretty attractive dividend yields. This chart hasn't come out as we would have hoped. But anyway, so the color scheme has got a bit wonky, but if we're trying to show the value of value, if that makes sense, the second derivative. So how has the value of value changed over time? And we've shown -- when we've shown this slide previously, we've shown that basically value -- the value of value has been good, i.e., value stocks have been trading at a greater discount to where they have normally traded in the past. That has shown signs of changing in the U.K. And perhaps that shouldn't surprise us. If you look in the U.S. and also in global markets, then that discount seems to be as wide as ever. Here are some valuation ratios on the portfolio. You can see the dividend yield is sitting just below 4%. Again, it's a reasonably significant premium to the All-Share index. Price to earnings ratio on the strategy is between 10x and 11x. Again, we would say that it's quite a decent result given how well the portfolio overall has performed over time. And of course, that 10 to 11x continues to be a reasonably significant discount to the U.K. index of between 12 and 13. And of course, as you know very well, the U.K. index trading at quite a significant discount to the global index. You remember from the previous slide, about a 40% discount, obviously putting the global index on around 20x earnings. So you're still investing today in a strategy, which is trading on roughly half the valuation of the global index. This is -- okay, we've shown this chart before, obviously, just making the point that we think that following a period of enormous success that's come from investing in U.S. equities, the U.S. market overall has delivered some phenomenal returns in recent years. And of course, as it does that and as profits don't manage to keep up with the rise in prices, so the valuation increases. And it's just worth noting out that noting that valuations today in the U.S. are pretty much as high as they ever have been. Now that is absolutely not a prediction about the direction of the U.S. market. History has shown a starting valuation is a very poor predictor of market moves over the short term. But it is, however, a good predictor of long-run expected returns. And of course, the relationship is an inverse one. If you buy when valuation and starting valuations are very high, you should expect lower or muted long-term returns. If you buy when starting valuations are low, you should expect much more attractive returns. And so the point we're trying to get across here. So we think in a world where the U.S. index is highly valued compared to history, accounts for 70% of the global index. It's important that you remain diversified. And you have a decent chunk of money, we would say, outside the U.S. away from growth probably into value and probably further down the market cap spectrum as well out of the mega-caps and into the mid and small-caps where the valuation discount is greatest. This is U.K. versus the world, again, still hovering around 40%, as I said earlier. And of course, it's that, that has driven probably a continued high pace of acquisitions of U.K.-listed companies by -- often by private equity or by overseas corporates. And of course, this is a double-edged sword, isn't it? Because there are 2 positives that come out of this. One, of course, is that the -- it is a testament, if you like, to the undervaluation perhaps that exists within the U.K. market. Also, the takeovers themselves can be additive to value. If you hold obviously the stock that's been taken over in the portfolio, that obviously is good for returns. The negative side of the coin is, of course, is that as these companies get taken over and delisted, the opportunity set in the U.K. does reduce over time. And of course, that is a challenge that we have to manage. I'm going to leave it there. And then -- but obviously, I'm very happy to try and answer any questions that you have. Neil?

With apologies. I was just making a couple of separate notes on -- to make sure I have a good summary at the end, Nick. So thank you very much for that. Ladies and gentlemen, we've got a Q&A button at the bottom of your screen, and we have had some questions that have come in. I'm going to start with a couple of stock-specific ones, if I may.

And having seen the recent price rise in WPP, Nick, do you believe a corner has been turned by the company? Is the leadership change having an effect?

Sorry, second question first, we think absolutely the new leadership is absolutely is having an effect. And in a way, it was long overdue. And again, it's a pretty tried and tested playbook and one we often repeat actually, which is just WPP worth thinking about the history here, WPP was essentially built by acquisition over time. It became -- is so often the case, it became enormously complicated, a sort of a series of sort of individual fee. I think at one point, it has sort of close to 1,000 subsidiaries because the acquisitions weren't properly integrated. And eventually, of course, it takes some time, but the wheels do eventually come off because basically there's a loss of control at the center. And of course, in the case of WPP, this is all coincided with a very difficult backdrop. There's no doubt about it. The advertising market generally has been relatively poor. And of course, there is secular change going on within the background. And so it's been a very, very difficult period. Share price performance obviously massively reflected that. We absolutely needed a new management team to come in, simplify the business, merge the different entities to create some more streamlined reporting, more joined up thinking -- improve the balance sheet, take out cost, yes, and start to -- and reset margins, of course, which they have from a base from which they can start to grow. So Cindy Rose is the new CEO. She came from Microsoft. She's actually got the right background. She came in, in November last year. We've -- sorry, in the autumn of last year, we met her twice in the 12 months that she's been at the company, and we've been very impressed with what she's doing. So absolutely, we think she's doing the right thing. Has it turned a corner? Well, that's a difficult one. I mean, that would be nice, wouldn't it? But I think we're hopeful that profits have been reset down to a level from which they can grow. I mean 2 years ago, WPP generated -- the share price today is about GBP 3.60. 2 years ago, it generated earnings -- 2024 generated earnings of 80p. Last year -- this year's forecast report earnings about 50p. So we're hoping that this year is the bottom. Obviously, you can do the math. You can see that the share is trading around 7x what hopefully should be relatively depressed earnings. So that if things do start to move in the right direction, that share price, there could be plenty more to go from that share price.

Perfect. And a question now, I think, on AI and sort of thoughts on terminal value. But specifically, how do you discern a margin of safety in stocks like Accenture, where there is a clear debate about terminal value? And are you taking a view on the probability of AI disruption? And if so, what is your edge in analyzing what is inherently fast-moving and technical subject matter?

That's really -- I think those are all good and difficult questions. And of course, there is no -- I mean, let me start out by saying what we always think. There's no magic formula. There's no magic formula. No one knows the extent to which AI, if you think about where you're an advertising agency or an IT services company, where the extent to which AI is going to act as a headwind to your profitability or even perhaps a tailwind. We shouldn't assume WPP will tell you they are absolutely convinced that it's a tailwind. Now -- but I can have to guarantee, ultimately, they don't know. None of us know. And so you -- what you -- as I say, there's no secret sauce. What you're trying to -- you're trying to frame everything from a sort of probabilistic perspective. And what you do know is that as the valuation of the company goes down, it is the market taking an increasingly pessimistic view over time and pricing the bar of expectation at a lower and lower level. And there comes a point where our judgment would say that -- and obviously, we are talking to the companies. We're reading around the subject. We're trying to understand as best we can, knowing, accepting in advance that we're never going to get the perfect answer. But there comes a point when Capgemini is trading on a 6 to 7x earnings now. They had -- so just flip that on its head as an earnings yield of, I don't know, 12%, 14%, let's call it. And who -- who's best placed to see it? Probably the people running the businesses themselves. If anyone is going to have the best guess as to how things might pan out in this sphere, it's probably the people running the businesses themselves. So Capgemini had a Capital Markets Day in May, so 3, 4 months ago. And they said -- and they can see everything that we can see and they can see more probably a little bit more. And they say that they are targeting revenue growth of -- I think it's 5% to 7% per annum and an improvement in margins over time. They are targeting today, the company is capitalized at around EUR 17 billion to EUR 18 billion, they're targeting EUR 2 billion of free cash flow every year. So EUR 6 billion of free cash flow over 3 years. And I think for a company that has grown steadily over time, for a company that continues to predict growth, a P/E of 6 or 7x, we would say, okay, we think there's a margin of safety in there. But that is -- that is a judgment call at the end of the day.

A question, I guess, on bond yields actually and obviously, a lot in the papers about bond markets at the moment. And I guess the question is how concerned are you about rising bond yields and in terms of the knock-on effect potentially for equity markets? And how do you think bond yields influence the levels of return you're searching for in your underlying holdings?

I think, obviously, I mean, it's basic arithmetic as bond yields go up, in theory, the discount rate goes up, in which case all other things being equal, equity valuation should fall. I think, again, we can't -- of course, we're all concerned about it. There's not really very much we can say because I mean the sentiment -- as I started out, as I said at the very beginning, sentiment in the market is a fickle creature, and it can just change its mind. I was just looking this morning, it's interesting that if you remember, so October '22, I think it was, was the Liz Truss mini-budget, wasn't it? And the market was an absolute panic at that stage and obviously falling very sharply. 10-year bond yield in October '22 peaked at 4.3%. And here we are today, we're 5.3%. And yet the markets have been going -- and this is why it's so hard because at the end of the day, you're trying to price sentiment, you're trying to price how is the next person going to be feeling about -- so it's something -- and then that doesn't mean for one second, we're dismissive of it. It's something that I think is worrying. And -- but we haven't really got a way of pricing it. And I think we -- the portfolio is on a P/E of 10 to 11. They're pretty robust businesses as a group. I mean if there was some sort of fiscal event, would the market go down? Absolutely, probably. Would corporate profits in some areas get hurt? Yes, probably. Would share prices in those areas go down? Would the banks sell off? I have no doubt that they would. But that's -- you got to -- but that doesn't mean the asset would be impaired. And so it's thinking about -- it's trying to think about or differentiate between short-term market action, changes in sentiment and the long-run value of the asset that you hold, which we provided the earnings power of the business is not fundamentally damaged, then over time, you should expect to recoup any losses that you see in the short term.

Yes. It's a big question, but thank you for your answering, that was great. Consumer spending has been resilient, but the outlook currently remains difficult. So do the consumer discretionary investments remain something you feel will suffer? Or do you feel the muted current valuations keep the investment case strong?