Brexit Fund Revisited: Genel Energy

I have written about three UK-listed, largely domestically-oriented stocks in May. The premise was that British stocks are cheap as capital has been leaving the London Stock Exchange in the context of Brexit fears.

Admittedly Brexit-related newsflow has not been particularly favorable since the last write-up with BoJo now in charge and the likelihood of a no-deal Brexit increasing. To make matters worse, we might get an early election and the possibility of a Corbyn-led government running the country makes most capitalists screech. This has been reflected in the price of the pound which is down 7%-8% vs the dollar.

Fund Managers have been underweight the UK for five years (and admittedly, correct)


However, British stocks are cheap and getting cheaper, and should deliver great returns over the medium turn.

Thus far, one of the three stocks has defied gravity: Pets At Home returned 54% over the past three months. The operational performance of the pet retailer has improved markedly. The company reported revenue rising 9.9% year-on-year in Q1 and like-for-like revenues rising 8.0%. So all is not lost in Brexit-land.

Fund Manager Survey confirms an underweight in British stocks
Fund Manager Survey confirms an underweight in British stocks

Admittedly the other two stocks have been weakish, however the investment case hasn’t changed and both remain undervalued and strong cash generators. Card Factory is going to report H1 results next week. The Q1 trading statement reaffirmed guidance as the company is opening up to 50 new stores this year. Greeting cards should not be impacted by the Brexit saga, and neither should be daily essentials sold by McColl’s.

Genel Energy

Genel Energy PLC is an oil producer in the Kurdistan Region of Iraq. It has no exposure the UK domestic economy, and its discount might not be entirely due to Brexit fears. It is rather the company’s history and geographic focus that explain the discount. Genel originally listed under the name Vallares in 2011, as an empty shell and sold shares to investors at £10 a piece. Today the shares trade at £1.80 and the original backers have given up management positions. Exposure to Iraqi Kurdistan might be perceived as somewhat risky by some.

However, there are a number of positives, that make the company a very attractive investment:

– very low cost producer: free cashflow breakeven of ~$40 on Brent

– net cash position of $56m after a few years of deleveraging

– strong cashflow generation (>20% FCF yield currently)

– started paying dividends in 2019 and has been buying back shares

– apart from core production assets (Tawke, Peshkabir and Taq Taq) the company holds working interests in a number of assets in KRI and Africa

– Oil production is growing (37’400 bopd in H1 2019)

– Daesh/ISIS have been defeated and are no longer a threat to Kurdistan and Iraq

– Russia and Rosneft are seriously involved in KRI

– some of the lowest production cost in the world

– exploration potential

An unimpressive chart… thus far!

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