Dividend Power: June 2015

Tuesday, 30 June 2015

Carpetright - shedding the past rapidly

Carpetright (CPR.L): Hat's off to Wilf Walsh after a successful first set of annual results in the Carpetright hot seat. Back in December I noted that he was making good progress and that the stock merited some renewed attention. However, with the share price having moved from 350p then to 620p now, clearly I was way too cautious. In these results to 2^nd May revenue was up 3.3%, with underlying pre-tax profits jumping from £4.6m to £13.0m. A similar jump was seen in eps to 13.7p (against December’s expectation of 12.5p) from 4.7p. There is no return to the dividend list yet, which may just disappoint any super-bulls of the stock. On the back of UK LFL sales up 7.3%, UK operating profit jumped from £10.7m to £14.3m, with the Rest of Europe moving into a profit of £0.3m, against a loss last year of £3.8m. Cash generation resulted in a move from net debt of £11.1m to cash of £0.5m. There was an £7.6m exceptional charge largely relating to the re-profiling of the store estate, with 15 new stores opening and 32 stores closing. Trading do far this year has continued in the same positive vein with UK LFL sales ahead 4.9%, whilst Europe has accelerated from last year’s +0.3% to +7.4%.

Carpetright had become a byword for cheap and cheerful, but there is clearly progress towards broadening its appeal through moving service and quality up the agenda. In the next five years 27% of the UK estate has a lease renewal, offering further major opportunities to re-shape the store portfolio and look to reduce rent costs. A similar exercise is underway with the Rest of Europe stores, where the average lease length is a lot shorter than the UK’s 7.1 years. Further encouragement comes from the positive outlook for the UK consumer and an improvement in consumer confidence in Belgium and the Netherlands. Upgrades should come through after these results and being bull-ish for FY2016, eps of 22p might be possible. Yet at 620p that is a PE of 28x, with no specific timetable for a dividend return. It will be no surprise that I am not prepared to pay up for the stock, but for recovery style investors the direction of travel is most encouraging. (Neil Cumming^,30^th June 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

Monday, 29 June 2015

Tesco - off the ropes but still bloodied

Tesco (TSCO.L): Last Friday’s trading statement for the first quarter to 30^th May 2015 confirmed that trading is showing signs of bottoming out, albeit there isn’t a lot to cheer about yet. Group LFL sales were down 1.3%, but this was the third quarter of improvement (having troughed at -4.9% in 2Q FY2015). Both the UK and International divisions are showing a similar pattern, although Ireland continues to flounder. The UK’s improvement was despite coming up against comparatives based off a major coupon led promotion this time last year. Total sales growth also declined (by 1.0% at constant currency), partly reflecting the marked slowdown in new store openings. It is still the case though that margins are being squeezed, as prices are cut to win back customers’ business. Food price deflation is still helping to make this a torrid time for the sector. The various players are still looking for ways to land new blows. For example, Waitrose have just launched a novel loyalty offer, which is essentially a tailor made price promotion on a range of your choice for each card carrying customer. The underlying problem remains that Asda, Morrison, Sainsbury’s and Tesco have mis-shaped store portfolios, weighted too much towards large sites. In this respect Tesco is the worst off, with its generation of hypermarkets sites resembling a herd of white elephants. The rise and threat of on-line shopping (along with click and collect) is ongoing as customers tweak their shopping habits. And yet, the chatter seems to be swinging around to the range limitations at Aldi and Lidl’s. The newer, more affluent, customers have always chosen to add the discounters to their trip, rather than replace their habitual store. However, as the Big Four sharpen their act up the incentive to visit a discounter on an extra stop or trip is decreasing. So, I will be brave and wonder whether we may be somewhere near the bottom for the established players.

This might not help much with investment though as profit recovery may be slow-paced. Looking at Tesco, the share price has settled around the 220p level, where on consensus eps forecasts of 9p for FY2016, the PE is 24.4x, with no yield support. In FY2017, consensus eps of 11.7p drops the PE to 18.8x. Much of the bitter medicine has been taken and customers seem to recognise the fact that Tesco is shedding some of its arrogance. But with dividends a long way down the board agenda still, this may all be too much like pie in the warming cabinet for income investors, with plenty of reason to play the waiting game. It does seem to me though that the sector looks less toxic than it did a few months ago. (Neil Cumming^,29^th June 2015)

Thursday, 25 June 2015

Shawbrook & Aldermore - both are challenger banks worth a look

Shawbrook (SHAW.L)/Aldermore (ALD.L): Running an established High Street retail bank must be a nightmare at the moment. You are lumbered with an estate of properties that are often over-spaced. They are too grand, but of an age that requires plenty of maintenance expenditure. Your customers increasingly don’t want to drop in and say “Hello” – especially the younger customers would much rather be using a computer or mobile device for their banking. They of course are the future wealth holders that the bank wants to keep in their sights, whilst for now selling them secured and unsecured credit products. Yet, if you shut a branch you are pilloried by one and all. Your computer systems quite possibly resemble an inventive child’s Lego model. Rumours abound of mainframe’s still running pre-decimal code and shielding long lost corporate identities. The recent IT meltdown at RBS (the second belter in recent years) could have had many causes, but you have to wonder if in some bland datacentre there are still racks labelled National Provincial Bank and Westminster Bank. As if all this wasn’t enough, the Government and regulators have been on your parent company’s case ever since the banking crisis flared up.

So it does feel as if this is a great time to be a new challenger bank, unencumbered by an unwieldy branch network, powered by spanking new computer systems and with the prize of a low cost income ratio. I do not include in this converted Building Societies (e.g. Virgin Money) or re-discovered brands such as Williams & Glynn’s (whose divorce from RBS is underway) or TSB (soon to lose its independence again), who will have some of the issues described above. Likewise OneSavings Bank has at its heart the legacy of the Kent Reliance Building Society. Metro Bank is a real ‘newbie’, but is not yet quoted. That leaves us Shawbrook (to all intents and purposes new) and Aldermore, which both successfully floated this year. Shawbrook, trading at 375p is on 10.9x CY2016 consensus eps forecasts of 34.5p, with a maiden forecast dividend of 4.1p for a yield of 1.1%. Clearly this cover is very high and all being well there is scope for much more income in future years. At Aldermore the PE is 11.1x for CY2016, with the share price at 299p and consensus earnings at 26.9p and no dividend until, probably, CY2017. Clearly these are very early days and dividend hunters may want to wait, but these both look to be stocks worth keeping an eye on. As ever, keep mind out for the over-hang from ‘locked up’ holders, AnaCap at Aldermore and the Special Opportunities Fund at Shawbrook. Somehow lock ups just don’t seem to be what they used to be. (Neil Cumming^,25^th June 2015)

Wednesday, 24 June 2015

UTV - Crying into their Guinness

UTV Media (UTV.L): The group has, today, issued a profit warning relating to its new-ish start up TV channel, UTV Ireland. Progress so far has been slower than expected, but a first quarter pick up in audience growth seems to have petered out. Weekday evening viewing figures have been OK, but they say that they have performed badly in daytime and weekend viewing. They are now assuming that, despite initiating an action plan, audience figures will not pick up in the second half. Therefore they expect UTV Ireland to lose £11.5m in 2015, a jump from the previous £8.5m guidance in May and the £6m loss expected at the time of the Finals in March. As a consequence they have agreed with their banks to a twelve-month relaxation in the net debt to EBITDA covenant from 3.5x to 4.5x. The RNS does not state what costs or conditions this entails.

Whilst this is clearly bad news, the recent sale of Juice FM for a better than envisaged £10m showed that there might be useful value in their remaining twelve (lesser) UK independent local radio stations. The strategic review of the remainder of these UK local radio stations continues, so further disposals are quite possible. Post that Juice FM disposal, net debt was heading for around £40m, with historic EBITDA just under £20m, leaving them comfortably inside the then covenant. However crumbling EBITDA has now led to the covenant re-negotiation. The situation could be rescued by further disposals cutting the pile of debt, although this would be set against any loss of EBITDA. Anyway, consensus for CY2015 was for £11.6m of pre-tax profits. Simply knocking off £3m for UTV Ireland, gets to £8.6m, with eps of around 7.2p, although this assumes that trading doesn’t get any worse and might be optimistic. Still, at today’s beaten up 145p, that would be a PE of 20.1x and last year’s dividend of 7.5p is an historic yield of 5.2%. However, unless asset sales reduce debt significantly and UTV Ireland stabilizes, I cannot see the lenders letting UTV maintain that barely covered payout. The dividend looks at risk to me and income investors should walk on by. That said, it seems that almost anything is being bid for at the moment and this would be a great time for someone to test the board’s resolve…. (Neil Cumming^,24^th June 2015)

Tuesday, 23 June 2015

Telecom Plus - powering after the big 6

Telecom Plus: This is the company behind Utility Warehouse, offering a one-stop shop for consumers to buy telephony and energy utilities. It uses a multi-level distributor system to drive new customer growth, which can a tricky model to grow in the longer run. The shares are down some 40% over the last year, having seen growth disrupted by new, unhedged, energy suppliers taking advantage of tumbling spot prices. Telecom Plus see this as a temporary timing difference. They have also had to write off almost £11m as a non-cash item, due to ‘gas leakage’, which originates in poor industry reconciliation of accounts as customers move property. In these annual results to 31^st March 2015, revenue was up 105% to £729.2m, with over 2m services supplied to over 580,000 customers through almost 50,000 agents. The longer-term aim is to reach 1m customers. Cross selling continues to improve with almost 60,000 customers now taking all five services (phone-line, broadband, mobile, electricity and gas) against just over 40,000 a year ago. Adjusted pre-tax profits of £52.2m were in line with the guidance given with April’s warning and still 22.5% up on the previous year. Eps were up 9.4% to 53.0p and the dividend, as guided, was hiked 14.3% to 40p. Further earnings growth is forecast for FY2016, although they complain that the Big 6 utilities are not passing on lower spot prices to their wholesale customers. Likewise, new retail competitors are still exploiting low spot prices to undercut those, like Telecom Plus, who operate hedging programmes.

Looking forward the group is hoping that the CMA will duff up the Big 6, to the advantage of smaller rivals. They also want to see a halt called to the prevalence of exploiting legacy books of customers to fund low introductory offers, a practice that Telecom Plus now eschews (albeit at a cost to current customer growth). They also point out that the passage of time should start to erode the new entrants cost advantage as spot prices recover, whilst Telecom Plus’s old hedging contracts start to unwind and roll forward. In the meantime though, customer growth remains below target.

For the current year to 31^st March 2016, the group guidance is for adjusted pre-tax profits to be between £54m and £58m, representing growth of 3.5%-11.1%. On the back of ongoing strong cash generation, the group has forecast a 15% dividend rise in FY2016, taking the payout to 46p. Further earnings increases over the coming years will also be reflected in further dividend growth. Consensus eps for FY2016 are centred on 57p, a PE of 15x at today’s 852p, with the 46p prospective dividend being a yield of 5.4%. I feel that I should be excited about these metrics, as growth is being achieved despite various headwinds. However, the Big 6 in Energy will never be easy competitors and the telephony space is seeing mergers and acquisitions potentially produce new larger beasts. Allied to my general mis-givings about the whole agent/distributor model, I see enough reasons not to invest for now. (Neil Cumming^,23^rd June 2015)