John Menzies - please wait at gate

John Menzies: The company is an odd marriage of airport services based around cargo handling and distribution of newspapers and magazines. The strategic justification has always been that the stable cash generation of the latter can help finance the growth of the former. However, there has been a bit of a Left Twix and Right Twix going on at Menzies with each division having its own boss on the group board whilst there has been no overall Chief Executive. However, this is changing with the newly resigned aviation boss working his 12 month notice and the hunt for a Group Chief Executive just beginning. In these interim results for June 2014 the distribution side enjoyed a World Cup kicker from special editions, collectable stickers etc. whilst newspapers and magazines continued their gentle structural decline. After ongoing cost cutting, this left the division’s profits roughly flat. For the aviation division strong sterling was a headwind, whilst new contract wins came with start up costs. In addition the musical chairs at Heathrow, with the new Terminal 2 coming on stream, is leading to some ongoing churn, with some contracts being taken back in house by airlines, notably British Airways. In general Menzies resisted re-bidding on contracts at disadvantageous margins in a competitive environment. Despite this, revenues were up 7% (at constant exchange rates) and profits were held flat. The shares however never seem to get the yield that the mature distribution side justifies or the higher PE that the growthier aviation side merits. So you are left with a moderately rated (c11x) stock on a reasonable yield (4.1% historic), roughly twice covered by earnings. The interim dividend was raised 5.2% to 8.1p per share, with the possible 28.1p full year dividend on course to be twice covered. Cashflow conversion is strong and the balance sheet is stable with net debt at £111m, which is about twice EBIT. It is true that a demerger or break up would allow markets to value each component more clearly, but the market capitalisation is just under £400m. So each component piece could well be too small to attract investor interest. There is no obvious catalyst but there is long term value here, albeit it is a stock that requires patience and is a slow burner. (20^th August 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk