Zalaris — Continuing contract momentum in FY24

Zalaris (OSE: ZAL)

Last close As at 12/06/2024

NOK76.20

−1.00 (−1.30%)

Market capitalisation

NOK1,687m

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Research: TMT

Zalaris — Continuing contract momentum in FY24

Zalaris reported its ninth consecutive quarter of year-on-year revenue growth in Q124, up to a record NOK318m. New contract momentum has continued, while the net retention rate of existing clients within Managed Services was 109%, driven by an increase in upselling of additional services. Profitability is improving as the benefits from its EBIT improvement programme are bearing fruit alongside operational leverage. Zalaris’s strong contract momentum has led us to upgrade our revenue estimates by 1.9% to NOK1,275m for the year at an improved adjusted EBIT margin of 10.9%, more closely reflecting the Q124 exit-margin. These results underpin management’s confidence in achieving its FY26 revenue target of NOK1.5bn at an adjusted EBIT margin of 12–15%. The company continues to undertake the strategic review that was announced in early-April, with management expecting to announce a conclusion in Q224.

Written by

Milo Bussell

Analyst, Consumer and TMT

TMT

Zalaris

Continuing contract momentum in FY24

Q124 results

Software and comp services

9 May 2024

Price

NOK72.6

Market cap

NOK1,608m

Net debt (NOKm) (including lease liabilities and from continuing operations) at 31 March 2024

361.3

Shares in issue

22.1m

Free float

65.7%

Code

ZAL

Primary exchange

Oslo Børs

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.6

48.2

93.6

Rel (local)

2.7

31.5

74.0

52-week high/low

NOK73.4

NOK37

Business description

Zalaris is a leading provider of comprehensive human capital management and payroll solutions. The company works with organisations globally to deliver solutions covering over 150 countries and the payroll and HR needs of over 1.5 million employees.

Next events

H124 results

22 August 2024

Q324 results

24 October 2024

Analysts

Milo Bussell

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Zalaris is a research client of Edison Investment Research Limited

Zalaris reported its ninth consecutive quarter of year-on-year revenue growth in Q124, up to a record NOK318m. New contract momentum has continued, while the net retention rate of existing clients within Managed Services was 109%, driven by an increase in upselling of additional services. Profitability is improving as the benefits from its EBIT improvement programme are bearing fruit alongside operational leverage. Zalaris’s strong contract momentum has led us to upgrade our revenue estimates by 1.9% to NOK1,275m for the year at an improved adjusted EBIT margin of 10.9%, more closely reflecting the Q124 exit-margin. These results underpin management’s confidence in achieving its FY26 revenue target of NOK1.5bn at an adjusted EBIT margin of 12–15%. The company continues to undertake the strategic review that was announced in early-April, with management expecting to announce a conclusion in Q224.

Year end

Revenue (NOKm)

PBT*
(NOKm)

EPS*
(NOK)

DPS
(NOK)

P/E
(x)

Yield
(%)

12/22

892.7

6.1

0.07

0.50

1,085.0

0.7

12/23

1,131.2

21.5

1.49

0.00

48.7

N/A

12/24e

1,275.4

104.3

3.86

0.95

18.8

1.3

12/25e

1,410.1

131.7

4.98

1.10

14.6

1.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Positive Q124 results

Zalaris delivered another quarter of record revenue in Q124, up 22% y-o-y to NOK318.3m (Q123: NOK260.8m). The company continues to win new business and has a high net retention rate within Managed Services of 109%. EBIT improvement initiatives, mainly a greater use of nearshore and offshore locations, resulted in an 88% increase in adjusted EBIT to NOK34.8m (Q123: NOK18.5m), at an improved margin of 10.9% (Q123: 7.1%). Strong free cash flow benefited from the NOK42m sale of its Leipzig office, which helped to lower the net debt position (excluding leases) to NOK297.9m, with leverage reducing to 1.7x (FY23: 2.1x).

Contract pipeline remains buoyant

Zalaris won several significant new contracts in the quarter, including a four-year project implementing SAP HCM for the City of Berlin and a four-year application maintenance agreement with the state of North Rhine-Westphalia, which together have a total contract value of c NOK290m. Management noted that the pipeline for potential new contracts remains strong and that Zalaris is receiving more inbound interest from companies seeking to digitise their human capital management (HCM) systems.

Valuation: Substantial upside potential

Zalaris’ share price has risen substantially since the strategic review announcement on 2 April. Driven by our estimate changes, our DCF-based valuation has nudged up to NOK88.8 per share, from NOK87.1 in our initiation, 22% above the current share price. We believe this is relatively conservative given Zalaris’s strong contract momentum and margin improvements.

Q124 shows robust progress

Zalaris saw continued strong momentum in Q124, delivering its ninth consecutive quarter of revenue growth. Revenue came in at a record NOK318.3m (Q123: NOK260.8m), driven by strong growth in both of Zalaris’s business segments, Managed Services (+25%) and Professional Services (+15%). Notable contract wins in the quarter include those with the City of Berlin, the state of North Rhine-Westphalia and Vår Energi, a Norwegian energy company. These new wins, two of which are within Professional Services, showcase Zalaris’s position as a regional leader in human capital management solutions and services. Additionally, it continued its strong growth in Asia-Pacific, with 25 contracts signed in Q124. Management noted that the pipeline for potential new contracts remains strong and that Zalaris is receiving more inbound interest from companies seeking to digitise their HCM systems.

Profitability continued to progress due to the benefits realised through the EBIT improvement programme. The use of nearshore and offshore locations within the headcount mix improved in Q124, accounting for 41.6% of the headcount, up from 38.3% in Q123 and 40.4% in Q423. Alongside other operational efficiencies and leverage, Zalaris delivered a year-on-year 3.8pp expansion in the adjusted EBIT margin to 10.9% (Q123: 7.1%).

The company completed the sale of its Leipzig office for NOK42m, receiving net proceeds of NOK31m following the repayment of debt. With the improvement in profitability, partially offset by an increase in working capital due to the timing of public Easter holidays, free cash flow (including the proceeds from the sale of the Leipzig office for NOK41.9m) was much improved at NOK52.3m (Q123: outflow of NOK2.5m). Consequently, the net debt position (excluding leases) reduced to NOK297.9m (FY23: NOK314.8m), reflecting 1.7x adjusted EBITDA.

Exhibit 1: Q124 results summary

NOKm

Q123

Q124

Revenue

260.8

318.3

Y-o-y growth (%)

22%

Adjusted EBITDA

29.6

50.9

Y-o-y growth (%)

72%

Adjusted EBIT

18.5

34.8

Y-o-y growth (%)

88%

Operating cash flow

(4.1)

7.2

Investing cash flow

(4.8)

35.4

Financing cash flow

36.1

(16.9)

Net change in cash

27.1

25.7

Net debt

332.9

297.9

Y-o-y growth (%)

-10%

Net debt/adjusted EBITDA (LTM)

3.32

1.73

Source: Zalaris

Updated forecasts

We have updated our revenue forecasts to reflect the good momentum shown in Zalaris’s contract wins as well as the commentary around the robust levels of demand within its pipeline. We now anticipate revenue growth in FY24 of 12.7% to NOK1,275.4m (previously NOK1,252.1m), driven by good progress made in Managed Services, robustness within Professional Services and the continued rapid growth of APAC. We anticipate a slightly improvement in the adjusted EBIT margin to 10.9% (previously 10.7%) to reflect the Q124 exit margin as Zalaris realises the benefits to its EBIT improvement programme. Our updated forecasts also include the confirmed numbers for the sale of the group’s Leipzig office that completed in the quarter.

We have maintained our FY25 revenue growth rate expectations, leading to an increase in our forecasts in line with FY24e of 1.9% to NOK1,410.1m (previously NOK1,384.3m). The expected adjusted EBIT margin has improved by 0.1pp given Zalaris’s operational leverage to 11.3% (previously 11.2%).

The changes to our estimates improve the expected net debt position in both years, resulting in an improved net debt (excluding leases) to adjusted EBITDA leverage ratio of 1.11x in FY24e and 0.80x in FY25e.

Exhibit 2: Summary forecast changes

NOKm

FY24e

FY24e

FY25e

FY25e

Old

New

Change

Old

New

Change

Revenues

1,252.1

1,275.4

1.9%

1,384.3

1,410.1

1.9%

Adjusted EBIT

134.5

138.6

3.0%

155.4

159.7

2.8%

Adjusted EBIT margin

10.7%

10.9%

0.1ppt

11.2%

11.3%

0.1ppt

Reported operating profit

122.5

137.1

11.9%

143.4

147.7

3.0%

Reported operating margin

9.8%

10.7%

1.0ppt

10.4%

10.5%

0.1ppt

Normalised PBT

103.2

104.3

1.1%

130.3

131.7

1.1%

Normalised basic EPS (NOK)

3.81

3.86

1.2%

4.93

4.98

1.1%

Normalised diluted EPS (NOK)

3.81

3.86

1.2%

4.93

4.98

1.1%

Net debt (ex leases)

239.6

234.2

-2.3%

194.3

191.4

-1.5%

Net debt/adjusted EBITDA

1.23

1.11

0.87

0.80

Source: Edison Investment Research

Exhibit 3: Financial summary

NOK'm

2021

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

775.3

892.7

1,131.2

1,275.4

1,410.1

Costs

(673.3)

(786.6)

(968.6)

(1,052.2)

(1,156.2)

EBITDA

 

101.9

106.2

162.6

223.2

253.8

Normalised operating profit

 

39.8

46.2

95.8

138.6

159.7

Amortisation of acquired intangibles

11.5

11.9

13.7

0.0

0.0

Exceptionals

0.0

1.9

0.0

0.0

0.0

Share-based payments

5.7

8.7

11.6

12.0

12.0

Reported operating profit

22.6

23.7

70.5

126.6

147.7

Net Interest

(7.6)

(40.1)

(74.2)

(34.3)

(28.0)

JVS and associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

32.2

6.1

21.5

104.3

131.7

Profit Before Tax (reported)

 

15.0

(16.4)

(3.7)

102.8

119.7

Reported tax

(2.2)

(6.3)

9.2

(22.6)

(26.3)

Profit After Tax (norm)

30.0

(0.2)

30.7

81.7

105.4

Profit After Tax (reported)

12.8

(22.7)

5.5

80.2

93.4

Minority interests

0.0

1.6

0.8

0.0

0.0

Discontinued operations

0.0

(16.0)

(8.4)

0.0

0.0

Net income (normalised)

30.0

1.4

31.6

81.7

105.4

Net income (reported)

12.8

(37.1)

(2.1)

80.2

93.4

Basic average number of shares outstanding (m)

21

22

21

21

21

EPS - normalised (NOK)

 

1.41

0.07

1.49

3.86

4.98

EPS - normalised fully diluted (NOK)

 

1.32

0.07

1.29

3.86

4.98

EPS - basic reported (NOK)

 

0.60

(1.72)

(0.10)

3.79

4.41

Dividend (NOK)

0.35

0.50

0.00

0.95

1.10

Revenue growth (%)

(-2.2)

15.2

26.7

12.7

10.6

EBITDA Margin (%)

13.2

11.9

14.4

17.5

18.0

Normalised Operating Margin (%)

5.1

5.2

8.5

10.9

11.3

BALANCE SHEET

Fixed Assets

 

394.6

438.6

469.9

427.3

422.5

Intangible Assets

308.0

315.0

327.6

294.7

291.0

Tangible Assets

59.6

81.5

80.0

70.2

69.1

Investments & other

27.0

42.2

62.3

62.3

62.3

Current Assets

 

432.0

467.1

641.6

793.9

910.3

Stocks

94.8

135.4

197.1

234.2

272.0

Debtors

141.4

191.7

262.7

293.3

324.3

Cash & cash equivalents

176.2

91.8

135.7

216.3

259.0

Other

19.6

48.2

46.1

50.1

55.0

Current Liabilities

 

(213.3)

(669.6)

(407.9)

(437.4)

(455.6)

Creditors

(84.7)

(149.2)

(220.7)

(250.2)

(268.4)

Tax and social security

(38.7)

(41.0)

(49.2)

(49.2)

(49.2)

Short term borrowings

(1.4)

(369.7)

(10.8)

(10.8)

(10.8)

Other

(88.6)

(109.8)

(127.3)

(127.3)

(127.3)

Long Term Liabilities

 

(404.3)

(72.6)

(500.6)

(500.6)

(500.6)

Long term borrowings

(374.3)

(43.2)

(468.5)

(468.6)

(468.6)

Other long term liabilities

(30.0)

(29.3)

(32.1)

(32.1)

(32.1)

Net Assets

 

209.0

163.6

203.0

283.1

376.5

Minority interests

0.0

(1.6)

(2.4)

(2.4)

(2.4)

Shareholders' equity

 

209.0

162.0

200.5

280.7

374.1

CASH FLOW

Op Cash Flow before WC and tax

43.0

(22.2)

(11.7)

123.4

131.9

Working capital

(18.6)

(33.2)

(43.1)

(30.7)

(31.8)

Exceptional & other

(6.2)

28.9

50.1

(7.9)

2.6

Net revenue deferred/(recognised)

19.7

41.3

74.7

25.5

14.1

Tax

(4.8)

(14.4)

(11.5)

(22.6)

(26.3)

Net operating cash flow

 

33.0

0.4

58.6

87.7

90.5

Capex

(20.6)

(27.8)

(33.9)

(22.0)

(20.0)

Acquisitions/disposals

(43.3)

(11.3)

0.0

0.0

0.0

Net interest

(11.9)

20.2

38.5

2.6

2.6

Equity financing

6.3

(17.8)

0.9

0.0

0.0

Dividends

(19.6)

(7.6)

0.0

0.0

0.0

Other

109.7

(38.7)

(20.7)

12.3

(30.4)

Net Cash Flow

53.5

(82.6)

43.3

80.6

42.7

Opening net debt/(cash) including leases

 

275.1

213.9

338.9

362.1

281.5

FX

(2.2)

(0.1)

(0.8)

0.0

0.0

Other non-cash movements

(112.6)

207.8

(19.4)

(161.2)

(85.5)

Closing net debt/(cash) including leases

 

213.9

338.9

362.1

281.5

238.7

Source: Zalaris accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Zalaris and prepared and issued by Edison, in consideration of a fee payable by Zalaris. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Zalaris and prepared and issued by Edison, in consideration of a fee payable by Zalaris. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Investment Companies

BlackRock Sustainable American Income Trust — Unique value/ESG fund at an attractive valuation

BlackRock Sustainable American Income Trust (BRSA) offers a unique opportunity to invest in a fund that focuses on both value and sustainability. The trust’s three managers, Tony DeSpirito, David Zhao and Lisa Yang, aim to deliver an attractive level of income and long-term capital growth from a portfolio of attractively valued, high-quality, dividend-paying companies, which have favourable ESG credentials either as leaders, improvers or ‘sustainability enablers’. BRSA’s managers are finding attractive opportunities due to the historically wide valuation gap between value stocks and the broad US market. Data from BlackRock show that since 1978, following a peak in the interest rate cycle, which is the consensus outcome given moderating US inflation, quality stocks outperformed over the subsequent one, two and three years; this should also bode well for the trust’s relative performance.

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