Weekly Market Commentary | 14/11/2023 | DGE, BEZ, WRKS | Excessive Ebullience

While away on an Australian retreat, Bruce asked ex-fund manager and private investor Jamie Ward to manage his weekly commentary for the upcoming weeks. Jamie takes a look into Diego DGE, Beazley BEZ and The Works WRKS.

Markets had a poor end to an otherwise rather uneventful week. This resulted in equity markets being down slightly at just 0.6% for the UK. It was a different story in the US, with Technology in particular posting a good return. The S&P 500 was up 1.3% on the week, whilst the NASDAQ was up almost 3%. This further boosted Technology’s lead over the year where returns have far exceeded those of the less growth-oriented parts of the market. As with equity markets, bond markets were largely unchanged over the week with the benchmark US ten-year yield increasing 3bps. Last week Bruce mentioned his belief that the AIM market, amongst the very worst performing index year to date, was likely to better into the year end. Thus far, he is being proved largely correct.

The best-performing UK stock in the week was Pensionbee, which is a tech-driven investment platform focused on the defined contribution pension market. I have a natural aversion to companies with excessively ebullient headlines. I prefer headlines like ‘Trading Update’, ‘Interim Results’ and ‘Pre-close Statement’. Pensionbee went with ‘Pivotal Profitability Milestone Achieved’ as the title for its trading update. Nevertheless, it did the trick with the stock modestly arresting an otherwise dismal performance since listing in 2021 and gaining 19% in the process.

This milestone isn’t actually a milestone in the traditional sense (but then neither is the title of the trading update traditional) as it states that the company is expected to be profitable from an Adjusted EBITDA basis from the fourth quarter. It’s not really an achieved milestone when it is in the future. Also, Adjusted EBITDA is just about the lowest profitability hurdle it is possible step over since a. it doesn’t include a load of costs on an ongoing basis and b. is adjusted to remove so-called one-off costs. In the City, there is another phrase sometimes cynically used in place of ‘Adjusted EBITDA’, which is ‘BBS’, meaning ‘before bad stuff’. So, in summary, Pensionbee, for now is unprofitable even before bad stuff but is expected to turn positive as long as you ignore all the areas it is losing money. Not really my sort of thing.

The market it has entered is tough; the big legacy businesses in this sector have a tremendous advantage in that they already have very high assets under administration in a market where customers are disinclined to move their customs elsewhere (it’s not actually that hard but the thought of moving one’s pension does seem rather a lot of faff). The way Pensionbee positions itself is starting with the technology so that it is far easier to use than the older systems that have evolved from the pre-internet days. New entrants also tend to have to aim to be as cheap as possible to compete on cost, albeit Pensionbee doesn’t seem noticeably cheap to me. Despite the statement that there is a c. £1tn addressable market of defined contribution pension schemes, gaining access to some of this money is very hard work. Ultimately, it seems like the best outcome for investors in these sorts of things is if one of the larger businesses with rubbish technology buys them to improve their own offering. Seems a big ask to pay the current market capitalisation for that though.

I’ve just off a two-year working at AJ Bell, and seeing this industry from the inside highlights the uphill struggle the likes of Pensionbee face. Fees can be tricky to calculate but, as far as I can work out, AJ Bell works out cheaper with greater options on offer. And, whilst the technology with AJ Bell is showing signs of its age, the customer service proposition is very good from both a customer-facing technology point of view and a general commitment to customer care.

This week, I looked at Diageo, which issued a profits warning at the end of the week and questioned the ultimate source of consumer weakness. I revisit Beazley, which I wrote about here in February 2022 and which released an update during the last week. Finally, I highlight some more pet peeves through a brief analysis of TheWorks.co.uk in the aftermath of its poorly received trading update.

Diageo, Trading Update

Its rare to see a company like Diageo disappoint, rarer still for that disappointment to yield a double-digit percentage decline in its share price (the shares fell 12% on Friday and accounted for half the FTSE100’s fall that day). The last time we saw share price performance like this was during COVID-19 when selling across equities and asset classes was indiscriminate. The decline seems a bit of an overreaction.


Diageo is one of the world’s largest alcoholic beverage companies in the world with a particular strength in spirits, most notably Scotch whisky. It was created in its current form in 1997 by the merger of Guinness PLC and Grand Union. Both of these have long histories that went through the era of conglomerates. Grand Union in particular operated a very diverse business including hotels such as Intercontinental Hotels, fast food including both Burger King and Wimpy, gambling through the William Hill brand, catering from which the kernel of Compass emerged and food manufacturing through Pilsbury.

Some of these had already been sold prior to the merger but, in the years following the merger, which coincided with the period when many conglomerates were disentangled, the management sold off anything that wasn’t directly related to alcoholic beverages. The final bit of obviously non-core operations, Burger King, was sold to private equity in 2002.

The company has just appointed its third CEO since the turn of the millennium, Paul Walsh ran the firm from 2000 to 2013; Ivan Menzies until this year, when he sadly died from complications during surgery, and most recently Debra Crew, who was CEO of Reynolds had previously been a non-executive director of Diageo.

Trading Update

Geographically, it is split into five reporting regions. The second smallest of which is responsible for the poor reaction. Latin America and the Caribbean account for 11% of sales and is cited as being responsible for the entirety of the slowdown at Diageo. There are two reasons I believe that the shares reacted so poorly to a miss at a relatively small division. Firstly, it represented a bit of an about-turn compared to just six weeks prior.

Diageo last updated the market on September 28th where it stated that:

‘… our expectation for the group was for the first half of fiscal 24 to see a gradual improvement in organic net sales growth from the second half of fiscal 23’

Since then, there has been a material slowdown in the aforementioned Latin America and Caribbean region where the group has reported that sales will probably decline around 20% year-on-year for the first half of fiscal 2024. At a group level, this means that the guidance has moved from ‘a gradual improvement’ to ‘slower growth’. Clearly, something big has happened for such a quick reversal in what is an otherwise rather steady-eddy-type operation.

Secondly, this was an unscheduled, Friday update. There are still plenty who reflexively distrust businesses that release bad news on a Friday and the fact that it wasn’t scheduled speaks to the pace of the downturn in Latin America and the Caribbean. The question is, how much of this is truly a weakness domestically in Latin America and the Caribbean and how much is reduced tourism? Particularly from Americans, who like the rest of us, are grappling with higher cost of living and an economy that is not in the rudest of health.


As a stock, Diageo is a mainstay of many quality-large cap investment funds because of its dependable earnings and conservative management. Fifteen years ago, as a smaller business, it typically guided 7% to 9% per annum growth. Elephants can’t run, so as of today, that growth guidance is lower but is still an admirable 5% to 7% per annum over the medium term.

*Slight aside, I hate the phrase medium term; I wish businesses would just drop this woolly language and just say that the business is capable of growing at 5% to 7% for the foreseeable future and guide it lower if that changes.

That growth rate is for both revenue and profits, which notwithstanding the apparent hiccup this year, and is rather attractive if unspectacular.


On an EV/EBIT basis, the shares have rarely been cheaper with just the depths of the Great Financial Crisis in 2008 and the immediate aftermath of the merger comparable. As mentioned, the sustainable growth rate has come off a little in the decade and a half since the last time it was this cheap. However, perhaps a more important reason for the decline in valuation comes from the higher interest rate environment. This is not because Diageo will face higher interest costs (which it will but it should be able to weather this) but rather because dull but dependable is now available in the form of the bond market for the first time since before 2008. Perhaps this is the true source of the weakness, a combination of a surprise, a disappointment and the fact investors have more options.


Diageo is boring because it is big and dependable. In this regard boring is good. I would feel confident buying Diageo were I told I wasn’t allowed to sell for at least ten years, which is not true of an awful lot of things. I don’t own Diageo as the valuation has never been compelling enough. That might change.

Beazley, Trading Statement

In February 2022, I wrote about Beazley for Sharepad, which talked about its potential as a diversifier in a portfolio.

Last week, the now FTSE 100 stock released a trading update so it seems an opportune time to revisit the business. A full write-up explaining the ins and outs of the business is provided in the earlier piece however a summary is as follows.

Beazley is a specialist non-life insurer with a sizeable niche in cyber and executive insurance. Non-life insurance can be split into two very broad types; that of large, deep, highly-competitive commoditised insurance such as marine and property where the returns are unremarkable but fairly dependable. And, that of specialist niche areas like fine art or Tom Jones’s chest hair (not really but it’s a nice story). Beazley is not unusual (sorry about that but I couldn’t let mention of Sir Tom without a pun) in non-life insurance in that it seeks a balance between commoditised and specialist insurance. I.e., it writes approximately equal amounts of business in low-margin reliable areas and dedicates the remaining capacity to areas it has a competitive advantage.

Trading Update

The trading update from November 7th was well received with the shares rising 7% on the day. An insurance company makes money in two main ways, it writes insurance and it generates investment returns on the float. Both are much improved compared to when we last looked at the business. The combined ratio is now guided to be in the low 80s for the year implying just under 20p of insurance profit for every £1 of insurance written.

As a reminder, the combined ratio has been quite a bit higher than this for a number of years. Even discounting the extraordinary year in 2020 driven by COVID-19 losses, writing insurance has failed to generate very good returns since about 2016. Ultimately, the reason for the improved outlook is the same as why the company recorded an investment loss last year – higher rates.

For years, in the post-Great Financial Crisis world, the cost of capital (interest rates paid on debt) has been very low; that is to say, that for those with access, money has been cheap. When money is cheap it is pushed to seek returns in increasingly esoteric ways. One area that this has affected is insurance where a glut of capital pushed down returns. Following last year’s large increase in interest rates, some of this capital has withdrawn from the sector and consequently pricing of insurance products has become much better for the insurer i.e., it has become a lot more expensive for the customer – I’d hazard a guess that very few people reading this have seen their car insurance go down this year. The flip side was that this shift to higher interest rates was bad for the investment part of the portfolio that is heavily invested in fixed-income securities.


Whilst interest rates remain high and money supply is in decline, insurance companies like Beazley are well-placed to benefit with both an improvement in the combined ratio and improved investment returns. I would imagine the combined ratio might rise a little from here but still leave the sector much more profitable than in recent years. I would be very comfortable were it to hover around the 90% rate. A level at which Beazley grew profitably for many years prior to 2008. Equally, the company will be buying investments with much more attractive rates of return at present than before

Valuation and Opinion

I said 18 months ago, that Beazley was probably a 14% return on equity business and notwithstanding a very good year this year, I stick to that belief. The shares are roughly 1.8x the tangible net asset value, implying a cost of equity of around 7.7%. This is fine, it isn’t obviously cheap nor is it expensive. I didn’t buy the shares last year when we presented the original analysis and I’m disinclined to do so now. It is however a quality outfit and one worth considering on any sizeable share price weakness.

TheWorks.Co.uk, Half-Year Trading Update

It wouldn’t take long to list all the things I like about TheWorks.co.uk as an investment…


That is all.

Last week TheWorks.co.uk released a very badly received update falling around 30% on the day. Companies are exposed to the vicissitudes of the economy or their particular opportunity set, I seek businesses that provide an honest appraisal of such. TheWorks.co.uk is sadly lacking in that regard.


The business goes back to the early 1980s and was founded as a discount bookseller. Its current history really goes back to 2008 however. The old business bought a rival out of administration in 2007 and the subsequent balance sheet leverage proved its undoing a year later during the onset of the Great Financial Crisis. It then bounced around private equity for seven years before a sizeable investment from Card Factory founder Dean Hoyle. It had an initial public offering in 2018 and has been awful ever since.

It currently sits on the FTSE Fledgling market, which despite its name contains few fledgling enterprises and is instead where main market fallen angels reside (angel is a rather too positive a word to describe some of them).

Trading update

Total sales fell 3.4% during half year to the end of October. Unusually, the stores recorded a like-for-like gain during the period and it was the online business, where sales fell >12% that was the source of the pain.

For the period as a whole, management blame the challenging economic conditions; high inflation, low consumer confidence and so forth – all the usual buzzwords. The problem is that these factors affect all UK retailers and in the case of Next and Marks Spencer, things seem to be going rather better. So far it looks like an excuse.

The next bit just seemed bizarre, however, taken verbatim:

‘In the nine weeks since our previous update, consumer demand has softened further and, combined with unseasonable weather conditions, this has caused reduced footfall.’

Those unseasonable weather conditions are called autumn and far from being unseasonable, in the UK, they are all too depressingly seasonable. Notwithstanding a couple of fairly typical autumn storms, nothing seems particularly odd about this autumn from my vantage point in Rugby. The decline in footfall might be true, but knowing the location of the Rugby store, I suspect there are more reasons why footfall is in decline. The Works’ physical stores often seem to be placed in the parts of towns that are in decline.

Interestingly, the ‘unseasonable’ weather has led to a reversal so that it is the stores doing badly and online picking up slightly. It seems poor though when good weather means online does so badly that the group does badly and bad weather means the physical stores do so badly that the group does badly. This begs the question; what is the mythical set of circumstances in which the group actually does well?


The short-term outlook statement was a waste of space in that it says ‘… any forecast prepared at this stage includes a high degree of uncertainty.’ Longer term, management do seem to be engaged in the idea that there is something wrong with the business and it needs improving. The CEO, Gavin Peck, states that they are running a ‘better, not bigger’ strategy. This seems the right thing to do.


I probably sound curmudgeonly on theWorks.co.uk, but the reality is that it could prove a very profitable trade were management able to execute on a ‘better, not bigger’ strategy. I hope they do but I always get burnt when I attempt to profit from so-called special situations. Consequently, this one is only for the brave. I am not.


Jamie Ward

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