Saga - still plenty to go for

Saga (SAGA.L): After a rocky start, Saga seems to be settling into stock market life. Today’s interims, to 31^st July, show EBITDA up 0.8% at £130.6m, with Financial Services and Travel contributing £136.5m (+5.2%). Reflecting life in the public arena, media and central costs jumped from £1.2m to £6.5m, after which they should level off. Further down the P&L the comparatives get a bit distorted by the flotation process last year, hence pre-tax profit up 140% at £101.3m and eps up 121% at 7.3p. Cash generation is good with ‘available operating cash flow’ of £139.1m (+0.9%), whilst net debt to EBITDA has come down to 2.35x from 2.56x. A maiden dividend payout of 2.2p has been declared, with the group re-iterating its policy to pay out 40%-60% of earnings, on a one third/two thirds split. The Financial services division continues to be helped by a very low Combined Operating Ratio of 68.0%, which looks unsustainable to me (or is it just that the over 50’s really drive that well?). The new motor panel is in place to further grow the business and the Bennetts motorbike insurer is now on board. In the travel division, a new cruise ship has been ordered, with an option on a second. They have 11m (July 2014: 10.6m) names on their database, of which 2.6m (July 2014: 2.7m) are active, holding 2.6 (July 2014: 2.7) products each. Clearly these numbers are drifting backwards and whilst being a weakness, also offer an opportunity. There are around 22m people over 50 in the UK (c35% of the population) and that number is growing, so the target market is huge. In the outlook the Board confirm that they are on track to meet expectations for the year.

Consensus eps for the year to 31^st January 2016 are 13.1p, giving a PE of 15.7x at 206p. If 2.2p is a third of the final, which points to a 6.6p total, being a yield of 3.2%. That would be a payout ratio of a smidge over 50%, at the mid-point of their stated range. Strong cash generation should enable net debt to come down further, meaning that the board could then start to edge up towards the 60% payout level in future years. Given the growth opportunity, long term high single digit eps growth and dividend growth potential, I think that this is still a stock to tuck away, even after the move up from the 163p level, when I first wrote favourably on the stock in January. (Neil Cumming^, 30^th September 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

Mitchells & Butlers - plus ca change

Mitchells & Butlers (MAB.L): Well, all my optimism that M&B was on a path back to institutional status has evaporated. Alongside a dreary trading update, the CEO, Alistair Darby, has pulled his last pint. He is being replaced by Phil Urban, who joined as COO in January and has worked previously with the Chairman. It seems that Darby was not dynamic enough for the group’s major shareholders, with significant sales growth proving elusive. I thought he was actually making a decent fist of a sprawling business hampered by a large pension deficit and a very lumpy shareholder register.

In this pre-close update (for the 50 weeks to 12^th September) LFL sales were up 1.0%, with food up 2.1% and drink down 0.3%, with a sharp deceleration (probably worse than the industry average) having been seen in the last seven (damp and cool) weeks. Their bottom line is that “results for the year to 26^th September [will] show growth [but will] be at the bottom end..…of current market expectations”. Current FY2015 consensus is for eps of 34.8p, so perhaps we should shoot low for 33p, just above last year’s 32.4p. At the depressed share price of 317p, that is a PE of just 9.7x. However, hopes of an imminent return to the dividend list have probably been dashed. I had been looking to a nominal interim for FY2016, but that too looks less likely. The mood in the M&B boardroom won’t have been lightened by the hot breath of Greene King who are poised to overtake them in terms of size post the Spirit deal. Reading the runes at this company is made more difficult by the near 27% held by a Joe Lewis vehicle whilst the Magnier/MacManus vehicle Elpida has just gone up through the 23% barrier.

So I am retreating to saying that the stock is not at present worth the agro for income hunters. However, we all know the risk is that the major shareholders somehow brew up a value creating deal, but that has been the case for many years. Being the outsider at someone else’s corporate party is never easy. (Neil Cumming^, 29^th September 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

AA - changing the engine oil

AA (AA..L): As a mature, well known brand it should be expected that the AA pays a dividend. In these interims, to 31^st July 2015, it has done just that, but this hasn’t pleased everyone. The nub of the debate is whether, in a period of corporate re-generation, cashflow should be used to pay down debt further, before paying shareholders. The AA came to market in 2014 with a full load of debt but in July of this year they completed a re-financing of debt. This saved £45m p.a. of interest but only cut net debt (including a chunky pension deficit) to trading EBITDA from 6.9x to a still chunky 6.7x. At the time the company said that they would now be able to pay dividends totaling £50m in FY2016, so a tad more than the interest savings. They have now tweaked this up to £55m, or 9p per share, of which 3.5p has been declared as an interim. This optimism is backed by 111.8% cash conversion in the period, as working capital was squeezed hard.

However, a quick look under the bonnet has some worried that the AA spark plugs might be a bit damp. Interim revenue fell 1.4% and trading EBITDA fell 5.9% to £199.2m, with adjusted eps down 29.3% at 8.2p. In a post private equity ownership catch-up, the IT systems (with SIX customer databases) are being over-hauled and money is being spent on halting the decline in individual members, whilst the insurance and financial services offerings are being re-booted. The benefits of all this “will not begin [to be seen] until the latter half of the 2017 financial year”. They do then lob in the caveat that investors need to consider the hits from the 58% Insurance Premium Tax hike this November and EU regulation on holiday pay.

The shares have been stuck in the slow lane of late, having fallen back by almost a third in six months, to 287p. On consensus eps of 21.3p for FY2016, the PE is 13.5x and the yield is 3.1%, with accelerating growth expected in FY2017. If the management deliver on their business plans then the current valuation is a good entry point, but the worry is that if they hit any speed bumps then the debt pile and the dividend expectations will stall the engine. There is just something about all this that is making me wary. (Neil Cumming^, 28^th September  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

Morrison Wm. Supermarkets - better a shopper than a shareholder be

Morrison Wm. Supermarkets (MRW.L): Time to see how life is after the fruit’n’veg de-misters, with these interim results, to 2^nd August. As a preface, yesterday saw confirmation that 140 M local convenience stores are being sold for £25m, triggering a loss on disposal of £30m and a contingent lease obligation of £20m. It was announced today that a further 11 supermarkets are to be closed, on top of the 23 announced in March. In the interims, LFL sales (ex-fuel and VAT) were down 2.7%, but on an uptick as the Q2 figure was -2.4%. Turnover was down 5.1%, with pre-tax profits before all the bad bits down 34.7% at £141m. After re-structuring charges the pre-tax profit was down 35.4% at £117m, (of which £96m was property profits offset by £87m of exceptionals), with eps down 35.0% at 3.73p. As previously flagged the full year dividend should be not less than 5p (down 63.4%), with the interim set at 1.5p. A focus on squeezing working capital and selling property helped net debt to come down from £2.34bn to £2.086bn over the six months. The drive to woo back customers continues, but that means that large chunks of cost savings have to be re-cycled into price cuts, not profits, (as seen in operating profit margin falling from 2.67% to 2.0% year-on-year). There is also the concern as to when capex cuts start to result in a backlog of required work to build up. Capex falling from £257m last year to just £139m looks pretty fierce to me. Apart from wooing back customers the broad ambition is confirmed as “to generate £1bn of cost savings and £2bn of free cashflow in the three years to 2016/17”. After this year’s 5p dividend, they are non-committal saying that they will tell us “as appropriate”.

Aldi and Lidl continue to grow, whilst the other majors are not taking all the blows lying down and it is too early for Morrison’s to feel remotely comfortable. There is still much to do before they can declare ‘business as usual’. They have done plenty to help secure the balance sheet and boost cashflow, but the P&L is another matter. They reckon that the second half will be more profitable than the first, but consensus eps for FY2016 of 10.15p look a bit toppy to me. If the analysts are right, then at 170p the shares are on 16.2x, with a 2.9% yield. Back in March, I felt that there was little rush with the stock at 203p, so a share price 16% lower is worth a quick look. Right, done that. If previous margins could be regained then the multiple might look like a recovery rating. However, lower profitability is the new ‘norm’ and so the shares still do not look compelling at these valuations. The lack of medium term clarity on a dividend policy only adds more doubt for income lovers. I still see little reason to get involved just yet. (Neil Cumming^, 10^th September 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

Barratt Developments - Lawrie would be proud

Barratt Developments (BDEV.L): More evidence, this time from Barratts, about how great it is to be a house builder right now. In these finals, to 30^th June 2015, revenue was up 19%, driven by a 10.8% rise in completions to 16,447. Operating margins expanded by 230bps to 15.3%, helping pre-tax profits to rise 44.8% to £565.5m with eps up 45.8% at 45.5p. The return on capital employed rose 440bps to 23.9%, with good cash generation helping net cash rise to £186.5m from £73.1m a year ago. This is after committing £957m for 16,956 plots to be added to their land bank. The ordinary dividend is 15.1p, up 46.6%, but the cash bonanza means that there is also a (pre-announced) 10p special, making a total of 25.1p. They comment that the current year has started strongly, with reservations up 14.7% and forward sales up 32.2%.

It might just be worth noting that the group is sporting a new Chairman and CFO, with the new CEO being the old CFO. That is quite a lot of boardroom shuffling in short order and investors will hope that nothing is dropped in the handover. The group’s aim is to hit a 20% gross margin and a 25% ROCE by FY2017 and they appear well on course to do this. They have a detailed cash return plan in place, running for another two years, to FY 2017. In FY 2016 they plan a return of 30.2p, split 17.6p ordinary and 12.6p capital return. Then, in FY2017, they plan 36.9p, being 19.3p ordinary and 17.6p capital return. They state that the ordinary dividend calculations are driven off Reuters consensus eps of 52.7p for FY2016 and 57.9p for FY2017, with a three times dividend cover applied.

The risks are shared by most house builders, especially interest rate rises and inflation (land, materials and labour). However the pent up demand for new houses means that these risks are not immediate threats. Even if UK interest rates rose, it would only be modestly and would be very slow. The main cloud is just that the shares have roughly doubled in price in two years. Yet, at 641p, on the consensus numbers the PE is still only 12.2x dropping to 11.1x, The all-in yield is 4.7% in FY2016 and 5.8% in FY2017, although the ordinary yield is a more mundane (but well covered at three times) 2.7% rising to 3.0%. This all looks pretty good value, although there may be better value to be had in other more niche house builders (such as Berkeley Group). (Neil Cumming^, 9^th September 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