Marston's - The ties that bind...or not?

Marston’s: Amid the industry uncertainty post the tied pub Parliamentary vote last week, we have Marston’s 52-week results to 4^th October 2014. The move towards food led destination pubs and new build continues. They opened 27 new build pubs in FY 2014, (to pass the 100 mark), with a similar number (25+) likely in each of FY2015 and FY2016. They are also expanding in lodging with 700 rooms now available. Of the 1689 strong chain now, 75% of profits come from their managed or franchise style pubs. They believe that this franchise model will not be caught up in the ‘market rent only’ net. 

In brewing their leading portfolio of brands (Pedigree, Brakspear, Banks etc….) continues to perform well and they are expanding in the growing craft beer market. Underlying group revenue was up 1%, but pre-tax profits fell 3.6% to £83m due to disposals of older wet led pubs and a shorter trading period (last year being a 53 week year for them). Underlying eps were 11.7p, slightly down on 12.0p last time. The final dividend was up 4.9% making a 1.7x covered 6.7p for the year, an increase of 5.0%. Looking forward their policy is to be progressive, whilst holding medium term cover around 2x. This is supported by a balance sheet where net debt to EBITDA is on a downward trend at 5.4x, with a 5.0x medium term target in sight. They comment that trading in the current financial year has started well.

At 140p, consensus eps of around 13.0p for September 2015 puts Marston’s on 10.8x, with a dividend circling 7p producing a yield of 5.0%. They seem to spend their time in the shadow of Greene King, but are correspondingly lower rated. Growth may not be stellar, but for a high yield play with dividend growth Marston’s holds its own. (Neil Cumming^, 28^th November 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 or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower

Thomas Cook Group - Ms Green, your bags have been packed.

Thomas Cook Group: When Harriet Green arrived at Thomas Cook, it was on its knees. Now, after just over two years, she is on her way, saying that her turnaround task is complete. This all seems at odds with her recent pronouncements that the turnaround was more like a six-year job. Indeed, it seems that all at the company (and its advisers), bar the board, had her booked in to present these results. The consolation is that a well-regarded travel specialist, Peter Frankhauser, landed at Thomas Cook last year with a widely-held  expectation that he would be CEO one day. That day just seems to have arrived very early.

So what of these annual results to end September 2014? There has been major progress, although some self-imposed KPI targets proved elusive. Through the disposal of unwanted business, revenue shrank from £9.3bn to £8.6bn, although there was an underlying LFL change of -£180m due to Ebola, Egypt and sundry geopolitical scares. But more progress on the major cost cutting exercises (amid a sea of exceptionals) led to underlying EBIT moving up from £263m to £323m and underlying eps from 5p to 11.3p. Net debt came down from £421m to £326m. So whilst 2014 showed good progress, the sting in the tail was that 2015 growth will be “more measured” at a “more moderate pace”. Net debt is forecast to come down significantly to “between £100m and £150m”. As well as cost reduction, the migration to the web inches forward with 38% on-line last year up from 36%, but shy of a targeted 40% plus. There is clearly much further to go on this.

Looking at the year to September 2015 let’s work with a modest progression to earnings of 12.5p. There is a wide margin of error around this, but at 120p would be a PE of only 9.6x. There is no dividend, but with debt tumbling and a healthy EBIT line, the balance sheet stress is melting away. So, a dividend in FY2015 is possible and would widen the pool of potential institutional investors. The suspiciously blood like stain on the boardroom carpet aside, this looks like a higher risk nap choice for income investors with patience. (Neil Cumming^, 27^th November 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 or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower

Mitchells & Butler - Minority Report

Mitchells & Butlers: In general, UK pubs have enjoyed decent trading conditions over the last 18 months or so. A company boasting brands including All Bar One, Harvester, Nicholson’s, O’Neill’s and Browns should therefore be in good shape. But Mitchells & Butlers seems sluggish and has baggage. According to the last report and accounts, Joe Lewis, the Bahamas based businessman owns 26.7%, whilst Irish entrepreneurs JP McManus and John Magnier control 22.4%, as well as being linked to Derrick Smith whose Smoothfield Holding owns 3.9%. None of these parties appear willing, or able, to break a stalemate that must be holding back the group’s strategic development. Other investors are in the minority. A new CEO, Alistair Darby, arrived from Marston’s in October 2012, with a good c.v., as part of an operational turn around, but no apparent mandate from the big shareholders to do anything bold.

So far the operational improvement has been patchy. These full year numbers, to 27^th September 2014, show revenues up 4%, but LFL sales growth of only 0.6%. With operating margins down 50bps, operating profit was up just 1.0%. By re-allocating the pension deficit interest charge into underlying profit, pre-tax profits were £172m against an adjusted £171m. Eps of 32.6p were up 1.2% and again there is no dividend. During the period they spent £258m buying 173, mostly freehold, pubs from Orchid Group. Expansion and refurbishment sent capex up to £162m from £128m, leaving net debt up £199m to £1.96bn; being 4.5x EBITDA. The pension scheme triennial valuation as at 31^st March 2013 showed a £572m shortfall, up from £400m three years earlier. The annual contribution has now been set at £45m against £40m previously. The company has agreed that any future dividends will only be paid out of ‘cashflow after bond amortisation’. In this period, net cashflow after bond amortisation was (£257m), but Orchid did cost £258m, so net net was about zero. In the previous year £29m was generated on this measure.

Despite declaring that the current year has started well, we appear to be some way away from the moment when the group can see recurring cash generation large enough to support the resumption of a sustainable dividend. This ‘gold at the end of the rainbow’ syndrome is very disappointing. At 370p, the shares are on a modest 10.0x (weakening) consensus eps of 37p to September 2015, although EV/EBITDA is a far fuller looking valuation of 8.5x (including the pension deficit). There is value locked into this situation, but good investment returns may rest on reading the mood of the big shareholders as much as the analysts’ forecasts. (Neil Cumming^, 26^th November 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 or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower

Babcock International - On Her Majesty's Service

Babcock International: They just seem to be able to keep cranking out good numbers in a way that Serco and G4S can only dream about. In last week’s interims to 30^th September 2014, they reported revenues and operating profit up an underlying 10%, with adjusted eps up 11%. On the back of 115% cash conversion the dividend was raised by 10%, with net debt to EBITDA at a post acquisition mini-peak of 2.3x. The £1.8bn Avincis acquisition seems to be bedding in well and helped add £2bn of the £5n increase in the order book, to £18.5bn. This means that 94% of next year’s targeted revenue is booked and 59% for the year after. Beyond this firm order book is a further £13.5bn in the bid pipeline, in what are described as ‘buoyant’ markets. Of this pipeline 81% is described as ‘new bids’ with only 10% being rebids and extensions.

They have earned the trust of Government and are now deeply embedded in areas of defence and nuclear, from which it would be difficult to dislodge them. At a time when other outsourcers have proved unreliable (albeit in different disciplines), the contrast with Babcock’s delivery record is stark. Avincis has been a decent bite to digest involving debt issuance and a £1.08bn rights issue and the balance sheet is not quite at peak fitness, but it is getting back there. Babcock has been showing the others how to do it for many years now and the rating reflects this. For the year to March 2015 consensus eps are about 67.5p, a PE of 17.6x at 1185p. A nearly three times covered dividend of 22.8p would be a yield of 1.9%. So the stock is not cheap, but holders are happy and those not on board will be waiting for their chance. (Neil Cumming^, 25^th November 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 or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower

BHP Billiton & Friends Life - separation & marriage

Monday Morsels: BHP Billiton have released a demerger update, along with some management re-shuffling as the deckchairs are re-arranged and occupied. This statement confirms that the demerger is on track for completion in the first half of 2015. They have also started to flesh out a new dividend policy. They are saying that BHP Billiton will not re-base its dividend post demerger “implying a higher payout ratio”. Following demerger they remain “committed to steadily increasing or at least maintaining its dividend per share in US dollar terms”. Further reference is also made to “cash generating capacity” being key to the future dividend policy. Now, BHP Billiton today yields 4.5% at 1640p (pretty much a five year low). When Newco is spun out, the dividend yield on BHP will go up (it’s the maths….). You will then also hold a piece of paper in Newco, for which I have not seen a dividend policy yet, but it seems reasonable to expect something. So total dividend streams could get a leg up. This relative confidence from BHP comes at a time of weakness in many commodity prices and seems to be a significant sign that future cash allocation will favour returns to shareholders. All this I see as encouraging for those brave enough to buy a bit of a ‘knife catch’.

Aviva have been flushed out and announced terms to acquire Friends Life (a.k.a Resolution) in an all paper deal. As Aviva re-structures it will re-build its slashed dividend, but at the moment it is a somewhat meagre 3%. Friends Life has been paying out a full dividend, being a 5.75% yield. The main rationale for Aviva seems to be accessing FL’s cashflow, so I would presume that Aviva’s lower yield will prevail and FL holders will see an income drop. Aviva’s prospects still look a bit cloudy in a challenging market, so FL holders facing that uncertainty and a lower income stream may decide that cashing out after a smart share price rise is attractive. (Neil Cumming^, 24^th November 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 or e-mail at info@dividendpower.co.uk  

Centrica - weather or not....

Centrica: Another stock that seems to be trapped in the high yield but uncertain growth category. The company is weather sensitive and cite mild UK conditions and the North American Polar vortex as having being problems, as well as reduced margins at British Gas Residential. In addition two nuclear power station outages have hit profits and now oil and gas prices are falling. As a consequence, in this IMS, they have reduced 2014 guidance from eps of 21p–22p to a range of 19-20p, whilst pointing out that they still expect to see eps growth in 2015. This prediction though, is then caveated by almost everything except Nigel Farage foreswearing public houses. On the balance sheet, Group net debt is a manageable £5.2bn, whilst the £420m share buyback has been completed. They re-iterate that they see real dividend growth this year.  

So with the shares at 294p, the mid-point eps guidance of 19.5p gives a not really bargain basement PE for 2014 of 15.1x. The dividend last year was 17p, so an RPI plus-ish 3% rise to 17.5p results in a chunky yield of almost 6%. With the balance sheet debt looking OK, such a low dividend cover for a utility can be OK. It certainly doesn’t raise as many niggly doubts in my mind as SSE did recently. So, for the yield hungry, the stock looks interesting, but it just all feels rather laboured and sluggish. With so much outside management’s control (mainly weather), visibility isn’t great. It just doesn’t look like it is going to top your dividend growth or total return charts unless the Met Office is wrong and it’s a freezing winter. Actually, on second thoughts...... (Neil Cumming^, 20th November 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 or e-mail at info@dividendpower.co.uk  

Royal Mail - paddling up the Amazon

Royal Mail: This big beast is there for all to compete against and everyone knows it. These half year results to 28^th September 2014 have plenty of ‘adjusted’ metrics, but showed revenue up 2%, with underlying pre-tax profits down 6.4% at £218m. Underlying eps were down slightly at 16.3p against 16.8p and a 6.7p dividend was declared. They calculated this by taking one third of the 20p dividend paid in FY2014. Addressed letter volumes decreased by 3%, against expectations of 4-6% declines, whilst a bit of cream on the overall letter division was added by election mailings in May (and of course next year is a General Election year). The bad news was that parcel revenue was down 1% as Amazon built up its own delivery network. This will curb Royal Mail’s progress “for approximately two years”, reducing long term growth expectations of 4% p.a. volume growth by 1%-2%. Overall costs have been kept tightly under control, with an increased £70m being targeted by FY2016. Their guidance is that they are in line with their own expectations, depending on a good Christmas period.

Royal Mail faces a tough world in which it has to deal with its own legacy issues of under-investment and poor work force relations. At the same time it has to provide the Universal Service, whilst new entrants nibble away at low hanging fruit in cities and big business contracts. The main advantage held by Royal Mail is a VAT exemption for providing the Universal Service, but that has already been (and will be again) challenged by those new entrants. Such tussles are part and parcel of life for Royal Mail.

Following guidance and assuming that consensus forecasts hold, then FY2015 eps of 32p gives a PE of 13.4x at 430p, with a 4.8% yield on a progressive 20.5p dividend. For a previously under-managed beast with scope for self-improvement, these seem reasonable, despite all the political and competitive pressures. However, there are factors at work outside their control, centred on the Universal Service, whilst Amazon have become a new threat in the parcels business. So I fear that forecasts may be flaky for this 500 year old business, but with a very short stock market record. The likes of BT found the ultimately successful transition from monopolistic regulated business to modern company to be lengthy and at times troubled. I suspect the same will be true of Royal Mail. (Neil Cumming^, 19^th November 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 or e-mail at info@dividendpower.co.uk  

Intermediate Capital - intermediate performance

Intermediate Capital: In the run up to the 2008 banking crisis, funding for venture capital and private equity was plentiful and Intermediate Capital found their territory of mezzanine finance being encroached by both banks and hedge funds. The subsequent travails of banks, in particular, offered the company a less competitive operating environment, although customer risk appetite also took a hit. Yet, the shares have never quite kicked on, with new competition appearing, such as in the form of shadow banking.

In these interims to 30^th September 2014 AUM was up 6% to Euro13.7bn, but this was more than accounted for by new monies of Euro 1.7bn. It is a shame that existing assets have gone backwards, but nice to see new funding being landed. Pre-tax profits were £85m, down from £155m, mainly due to sharply lower realisations. The company has tried to grow its third party funds but has struggled, somewhat, to look sexy enough to attract eye-catching flows. However their fund management operation has seen profits rise from £17m a year ago to £27m, helped by performance fees.

The balance sheet remains strong with cash available and a £100m share buyback programme underway. In fact, it is too strong to generate attractive returns on equity and so the company has an aim to re-gear the balance sheet from 0.4x to 0.8x-1.2x by 2016. This, they hope, will move the return on equity from the 9.8% in these numbers, to 13%.

Given the lumpy nature of some of the profit line the PE may not be the best metric. This year looks like a down year, but even a dip below 30p only sends the PE to 14.3x at 430p. At this share price there is also some underpinning from a NAV of 385p. Cash will out and so the dividend may be the right metric here. For March 2015 the recent 1p p.a. dividend progressions suggest a 22.0p dividend, covered about 1.5x. This is a 5.1% yield, with some growth. It feels like the company is in interesting markets and management are trying to step up returns. With a high and growing yield this is a stock with attractions, albeit the recent record suggests that one step back and two steps forward could be the pattern. (Neil Cumming^, 18^th November 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 or e-mail at info@dividendpower.co.uk  

Electrocomponents/Premier Farnell - soggy chips

Electrocomponents/Premier Farnell: There are differences between these two component distributors, but the market views them generally as non-identical twins. Frustrating ones at that. They long ago both grasped that paper catalogues were in decline and have switched to the internet, as well as becoming more international. Yet, despite the all-pervasive growth of electronic gadgetry these two stocks have become stock market plodders. Partly this is due to poor economic conditions since 2008, but there is still something missing. Electrocomponents interims to 30^th September show sales up 2.8%, with the UK down 2% and international up 5%. However, pre-tax profits were down 16.1% on a margin squeeze, caused by price discounting and mix effects. At the earnings line eps took a similar hit being down 15.3% at 6.1p. Free cash flow also took a thump being down 31.7% to £24.6m, although the balance sheet remained strong with net debt to EBITDA at 1.2x. The dividend was maintained at 5p, but thinly covered at 1.2x. Longer term the dividend policy is to be progressive, whilst growing cover towards 2x. So any earnings growth will not be fully reflected in the dividend for quite some time to come.

They flag that the second half has got off to a slow start. The CEO Ian Mason has announced that he is leaving after a long stint. Whilst being well regarded, his tenure has never quite delivered on the initial optimism. I would like to be enthusiastic about the shares but I can’t, with the shares stretching to reach 14p of eps for a PE to March 2015 of 14.4x at a soggy 201p although a maintained11.75p total dividend is a 5.8% yield.

In Premier Farnell’s IMS, a similar tale was told. Quarterly sales were up 2.7%, with the gross margin down 0.5 percentage points. Their guidance reflects tougher conditions and is now that “full year operating margin [will be] slightly below prior year levels”. Premier Farnell has a January year end and maybe 14.0p of eps for FY 2015 is a PE of 11.6x at 162p, with a yield, assuming a maintained dividend of 10.4p, of 6.4%. So Premier looks cheaper than Electros, but neither seem to be in their stride and dividend growth is elusive. They are ones to watch for macro-economic or self-help improvement, but with little rush to invest just now. (Neil Cumming^, 17^th November 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 or e-mail at info@dividendpower.co.uk