Kingfisher - Demain, Le Martin-Pecheur?

Kingfisher: When a new CEO talks about ‘sharp’ decisions, then you know the axe is out. Out goes Kevin O’Byrne, who didn’t quite get the top job, with another internal candidate, Veronique Laury, having got the nod last year. The main thrust of the new strategy is that national fiefdoms and format silos are out. In comes the concept of ONE Kingfisher, with the top team organised along functional lines (Finance, Supply, IT and HR). The Mr Bricolage deal having floundered, it is a case of press on with other plans. ONE encompasses a rationalised group product offering, fewer formats and a permanent low cost offer. They proffer the morsel that of a boggling 393,000 group products only 7,000 are sold in more than one group retail format. In the UK, 15% of B&Q’s space is going with some 60 stores closing and six being shrunk, with an associated £350m exceptional charge. The future focus of expansion will be the fragmented European DIY space. SAP is being trialled across the Ireland operation, with a view to a group roll out. This could be worth watching as many companies seem to struggle with SAP in its early phases. All this is being attempted at a time when the stop-start UK DIY market seems to have lost its mojo over recent years and France is in an economic porridge. So the scale of the task is not to be under-estimated.

The big picture stuff rather overshadows these well-guided results for the year to 31st January 2015, showing sales down 1.4% (which would have been +2.9% constant currency) and adjusted pre-tax profits down 7.5% at £675m, but again currency affected by a similar factor. Eps down 8.3% at 20.9p, are supporting a just twice-covered dividend of 10p, up 1% on last year. The net cash pile has grown to £329m from £238m. So, there is a firm platform from which to launch this programme of re-invigoration, but you need to break some eggs to make an omelette and this is a big omelette in the making. Allowing for a modest rise in eps to 22p for the year to 31^st January 2016, which is subject to currency swings, we have a PE of 17.4x at today’s perky 382p. A 10.5p dividend would be a yield of 2.7%. The new CEO is mapping out an aggressive programme of change, which if it delivers improved growth and profitability will make these valuations look a good entry point. The challenge is whether change is delivered successfully. After today’s 5% odd price rise, I would wait for some of the dust and wood chippings to be cleared away before getting too excited. (Neil Cumming^, 30^th March 2015)

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

Compass Group - Are there lumps floating in the custard?

Compass Group: Compass seems to sum up the investment conundrum of how high a rating to apply to a share that cranks out reliable growth pretty much year after year. The global trend towards out-sourcing is well established and set to continue. Compass has exploited this superbly, predominantly through food and catering but now also other support service activities. This pre-close statement is fairly brief, but sounds fairly upbeat at group level. A “strong first half” has seen good contract wins and retentions, organic revenue growth of “towards 5.5%” (so maybe a tad lower than that and implying a slight 2Q on 1Q slowdown?) and operating profit margin edging up 10bps. In the geographic breakdown, the largest division, North America has traded well, although a comment that retentions “remained unusually high” must indicate that this is a purple patch of indeterminate length. The next biggest division is the unlikely geographic bed-mates of Europe and Japan. In this division, growth has resumed, with a 10bps margin improvement squeezed out through cost cutting and an efficiency drive. The third leg is Faster Growing and Emerging, where mid-teens organic revenue growth is diluted to 8% by the resource related Australian turndown. In such a multi-national business currency translation swings are part of life, but at the moment are a help to the possible tune of £31m at the bottom line this year. So all this sounds encouraging enough to me, but the outlook for the second half of FY 2014/15 is more cautious citing the resource sector slowdown and a tougher backdrop in emerging market economies. The longer-term prospects are still in place, but it sounds like we are being warned off getting carried away with the second half.

For the year to 30^th September 2015, eps consensus is about 55p for a full-ish looking PE of 21.4x at 1177p. A dividend cover just shy of 2x, suggests a 29.9p dividend for an unremarkable yield of 2.5%. For long run future growth of high single digits these valuations look full, unless you believe that the visibility and reliability of growth justifies paying a premium. Given the more cautious noises from management today, I don’t think that there is any rush to pay up. Compass feels like a stock to put on the list for a market set-back…..if ever we get one. (Neil Cumming^, 30^th March 2015)

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

Polypipe - Pretty Polly

Polypipe: The name says it all; plastic pipes for all is the core product area. For those with a long memory, the company was a well-regarded share when it was bought by IMI in 1999. Now it is back, after a period in private equity/venture capital hands. These results are for the year to 31^st December 2014, the first part of which was before April’s IPO. Revenue was up 9%, underlying pre-tax profits up 53% at £37.6m, with adjusted eps of 16.11p and a total dividend of 4.5p. Against operating profits of £46.3m, net debt was down 9% at a supportable £76.9m and there is no defined benefit pension scheme to worry about. Cash flow conversion was strong at 103.7%. Being predominantly a UK business, the good state of the UK house building industry is helpful, with Polypipe commenting that the market upswing is spreading outside just the major south-east based groups. The immediate expansion drive is to increase exports into the Middle East, which they say is going well and to improve results in France, where economic stagnation is a hindrance. At home, the General Election in May is a potential stumbling block this year, but the group point out that all the major parties have favourable policies in their markets, so at worse any hiatus should be short-lived. Whoever wins, interest rates are set to remain low (or even go lower?) so the macro-economic backdrop is benign, although their biggest worry would be a significant turn upwards in raw material prices.

The group comments that, with a strong balance sheet and good liquidity there is “significant headroom to increase payback capital”, which is encouraging for income investors. The standard dividend policy is to pay out at least 40% of net earnings, split one-third/two-thirds between interim and final. So with a fair wind 19p of eps for this year looks very attainable, which at 264p is a PE of 13.9x. A 40% payout would be a basic dividend of 7.6p, for a yield of 2.9%. These do not look wildly cheap valuations, but this could be a slow-burner that over time delivers good total returns for the patient investor. Just for now though, it is worth remembering that management share lock ups have expired so they may well be sellers. (Neil Cumming^, 27^th March 2015)

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

Balfour Beatty - "Dr. Quinn, Medicine Man"

Balfour Beatty: Leo Quinn arrived back at Balfour Beatty in January, having left as a sprog, so these annual results to 31^st December 2014 are only the very early stages of the corporate recovery. Quinn did a very good job of sorting out QinetiQ, but seemed to run out of steam once the ‘corporate doctor’ phase was over. The recent dull performance of QinetiQ suggests that he left a group with little forward momentum, although many would point out that the tough defence-spending environment was an unavoidable external factor. Anyway, now he is wielding a set of scalpels at Balfour Beatty. In 2014 revenues only slipped 2% at constant exchange rates, to £8.44bn, but the underlying operational loss was £58m, against a profit of £131m in 2013. However, a sea of red ink one-offs lead to a pre-tax loss of £304m on continuing operations against a £49m loss last time. A further £118m provision against UK construction losses has been taken, on top of a previous £70m. Quinn’s inheritance is a book of business taken on with poor risk assessment and too skinny margins. Working through this will take at least another couple of years and that faint rattling noise could well be more skeletons trying to fall out of the cupboards. The rest of the group is a mixed bag, but it is the UK that dominates. Whilst Hong Kong revenues grew at a clip, there was £15m of losses from the Middle East. The investments division profits increased from £102m to £127m, with the portfolio value reaching £1.3bn against £766m last time. In part this is due to an increased directors’ valuation sparked by John Laing’s cheeky bid approach last year. Post the disposal of Parsons, the balance sheet has cash of £219m, with the pension fund deficit down £306m to £128m, helped by a good asset performance (and the Trustees have allowed a less onerous catch up payment schedule). The final dividend has been passed with a stated intention to declare a final this time next year on the back of a two year plan to improve ‘cash in’ by £200m and ‘cost out’ by £100m.

So all this is right up Quinn’s street and what happens beyond is of no immediate concern. Surgery first, physiotherapy second is a good game plan. The market cap of £1.65bn is not much more than the £219m cash and £1.3bn investment portfolio. So the UK construction side is pretty much in for free (which may still be optimistic?). Forecasts for this year are a bit disparate, but 8p-10p should cover it. The share price reacted well to Quinn’s plan, moving up to 238p, but at the 9p mid point for eps that is a PE of 26.5x, with flimsy dividend support. A PE of 15x would demand eps of almost 16p, which seems unlikely before FY2017. So I can’t see much P&L driven upside from here and little interest for dividend fans, but it still looks like there is a break up story and that is where the value release could lie. (Neil Cumming^, 26^th March 2015)

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

Anglo Pacific - a seductive 8% yielder

Anglo Pacific: After the recent equity raise, we now have the annual results to 31^st December 2014. This is a case of looking back on a horrible time, but looking forward to more optimistic times. Apart from low commodity prices in 2014, Anglo Pacific was hit by low royalties from Kestrel (coking coal), where Rio Tinto, as operator, was mining mainly outside Anglo’s land.  This year (and beyond) Rio are moving back onto Anglo’s land and have agreed to give Anglo more forecast information on future mining plans. Anglo has also managed to diversify its portfolio, increasing it to six producing royalties, as against three a year ago. This total includes the new long-life Narrabri (thermal coal) royalty, recently bought for $65m. None of this hides the fact that life has been grim. The loss for the year was £47.6m, slightly worse than the £42.5m last time, but these were after hefty impairment charges of £31.5m and £34.6m respectively. The cash balance at year-end was down to £8.8m from £15.7m. A final dividend of 4p, makes a total of 8.45p, still substantial, but down on last year’s 10.2p.

Moving forward the dividend policy is set out to be progressive, based on 65% of adjusted earnings, with a medium term annual minimum of 8p. Whilst the words ‘medium term’ raises a slight worry about this year, I may be just worrying too much. However, on current forecasts an 8p dividend in 2015 would be uncovered again. Looking out to 2016, a possible 11.5p of eps would almost cover the 8p at a 65% payout. All this is very subject to commodity prices, but a recent recovery in coal settlement prices offers hope. Eighteen months into the job Julian Treger has wrought some significant changes for the better. It is flagged that they would like to acquire an interest in the copper market. He has rather nailed his colours to the mast over that yield, which, at the possible nadir of the commodity markets, is a very seductive income stream. (Neil Cumming^, 25^th March 2015)

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