Dividend Power

Wednesday, 10 December 2014

Carillion - trying to forget Balfour Beatty

Carillion: This support services stock is not everyone’s cup of tea, due in large part to the contracting element of the business and the distorting effect that can have on cash conversion. The seemingly mis-guided acquisition of energy efficiency firm EAGA in 2011 lost them a few fans too. The rash tilt at Balfour Beatty this year was one that shareholders must be glad failed, but again called into question management’s judgement. Of its sort though, Carillion is one of the best and by luck or judgement has so far stepped around the banana skins better than many. In the pre-close statement, for the year to 31^st December 2014, they confirm that earnings are in line with expectations and that the “medium-term outlook remains positive”. Looking ahead, the order book, having been £18bn at the last year end, is expected to be a healthy £18.5bn plus at year end, with a high 85% of expected revenue already booked for 2015. The pipeline of opportunities has expanded from £37.5bn to “over £39bn”. Underlying net debt is trending down, although this is being affected at the headline level by acquisition costs. Average net debt for 2014 is expected to be around £460m, down £30m on last year. In this statement they go to some effort to reassure that they are being picky and choosy about work, with an expectation that, despite various pressures, they can maintain operating margins around last year’s levels.

Last year eps were 34.7p and if they can repeat that then at 340p the shares are on 9.8x. Eps are in a valley, having been over 40p in 2011 and 2012, but despite dividend cover dipping below 2x, the interim was raised by 1.8%. This implies a full year total of 17.8p for a yield of 5.2%. These valuations seem fair enough for a group with their mix of businesses, but post the Balfour Beatty escapade and with the shares towards the top end of their trading range, there is no rush to buy. (Neil Cumming^,10^th December 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

Tuesday, 9 December 2014

Tesco - spilt milk in aisle 17

Tesco: So Tesco’s have dropped another pallet of baked beans, to a resounding crashing noise. The statement is full of fine words and intentions but the bottom line is a stark warning that group trading profit for FY 2015 will not now exceed £1.4bn. This is against £3.3bn last year (FY 2014) and already sharply reduced latest expectations of £1.8bn to £2.2bn. When they refer to new policies and procedures for their commercial income activities, I would assume that the P&L is now being made more transparent, but that means the entire toolbox (both good and bad) of profit smoothing has been junked. The recent hooha at Premier Foods over their recent over-bearing supplier contracts only adds to the momentum towards greater contract clarity and fairness throughout the supply chain. Reference is also made by Tesco “to invest in and improve our customer offer”, which must imply more price cuts and a further margin squeeze. But investors are not yet able to look to brighter days ahead. On 8^th January, Tesco will provide more details about improving the “competitiveness of the UK customer offer and to strengthen the balance sheet”. The former probably means yet more margin pressure and the latter a mix of cost cutting, capex constraints, further dividend pressure and maybe even fresh equity.

All this woe means that forecasts are more uncertain than ever. For what it is worth, if the operating profit reaches £1.4bn (but that is tops), it would be down 57%. If eps followed the same path they would be 13.5p-ish. At 170p that is a PE of 12.6x, with a very cloudy dividend outlook. If these were trough earnings then you could look to the stock as a recovery play. Sadly though, the 13.5p still feels flaky and the best course of action could well be to wait for the 8^th January. Remember also that, with Tesco’s sharpening the price offer, the likes of Sainsbury’s, Asda and Morrison’s profit line should be feeling the pain as well. Meantime, the special offers in various supermarkets over the next 15 days could be the real excitement (Neil Cumming^,9^th December 2014)

Monday, 8 December 2014

Sage Group - The forecast is for increasing Cloud cover

Sage Group: The ubiquitous accounting software house has released results for the year to 30^th September 2014. That aside the world is changing fast around them as the old model of selling ‘physical’ software is replaced by cloud-based subscription services. In these numbers organic revenue was up 4.9%, but within that recurring revenue was up 7% and software (and related) services were down 0.5%. This reflects the structural shift described above. On the back of margins moving up 40bps to 27.5%, eps came out 8.2% ahead at 22.69p. The nearly twice-covered dividend of 12.12p was up 7.1%. Cash conversion remained good at 107%, albeit a tickle down on last time’s 112%. Their guidance is that they are on course to deliver 6% organic revenue growth in 2015 and a 28% operating profit margin. The visibility on this is helped by the fact that 73% of group revenue is recurring, up from 71% last year.

The shift to subscription revenues supports the view that Sage’s earnings now have more visibility and are therefore worth a higher valuation. International expansion continues to offer the opportunity of further long term growth. It is worth noting that the group has changed CEO (Stephen Kelly; ex-Micro Focus and HMG), FD (Steve Hare; ex-Apax, Invensys and Spectris) and two non-execs, all in the last 12 months. This scale of change must add one notch to any investment risk assessment, despite the good pedigree of the new recruits. The shares have spiked 10% on these numbers and at 445p, FY2015 eps of, say, 25p, is a full-ish looking 17.8x, for around 10% p.a. growth. A near twice covered dividend of 13p would be a yield of 2.9%. These are not cheap metrics, but the improving quality of the earnings provides some justification. Maybe not one for today, but Sage is well worth keeping an eye on. (Neil Cumming^,8thDecember 2014)

Friday, 5 December 2014

Greene King - That's the Spirit

Greene King: These interims are for the 24 weeks to 19^th October 2014. Since then the company has launched its recommended bid for Spirit Pub Group, which is still on course for completion early next year. In these numbers, revenue is up 3.3%, although retail LFLs were only up 0.8%. PTP were down 3.5% to £82.6m and eps down 1.6% at 29.9p, due mainly to the dilutive effect of the £75.6m disposal of 275 unwanted pubs in the period. The group states that, adjusting for the disposal, eps would have been up 5.3%. This is all part of the drive to reduce the tenanted and leased estate further, from the current 864 to around 750 pubs. The strategic shift is to managed pubs leading on food. In the face of the proposed changes to the law on the beer tie, this is sensible. Much has already been achieved with, at the moment, 76% of group revenue from retail, of which 43% is food. Reflecting the underlying eps growth, the well-covered interim dividend was put up 4.6% to 7.95p. The group adds that after 30 weeks, retail sales were up 0.8%, but the 12 week number was +1.5% and Christmas bookings were up 7.2%, with the South trading better than the North.

Analyst forecasts at present are ex-Spirit and so of reduced use, but at 755p, 63p of FY 2015 eps would mean that the shares are on a PE of about 12x with a yield, on say a 29.5p dividend, of 3.9%. If the Spirit deal goes through, Greene King expects to achieve at least £30m of cost savings and efficiencies (for scale: last year profits were £102.3m). As Spirit is a mainly paper deal there could be a technical overhang post completion, but the soggy Greene King share price is already anticipating some of that selling. Chief Executive Rooney Anand has a good track record, so all the signs are that Spirit should be a good deal and Greene King shares look interesting at these levels. (Neil Cumming^,5^th December 2014)

Thursday, 4 December 2014

SSP Group - from baguettes to caviar

SSP Group: Talk about a name that gives you no clue what they do! Well, they provide food and drink here and abroad (operating in 29 countries) at travel hubs such as airports, motorway service areas and railway stations, under around 300 names (often franchised in or out) including Millie’s Cookies, Burger King, M&S Simply Food and Upper Crust. The extra interest is that Kate Swann left her very successful tenure at WH Smith’s in order to take SSP on, so she must see repeat potential in it. The group is not a pure newbie and can trace its roots back over 60 years through ownership by Compass Group, through to its origins within the Scandinavian airline business SAS. SSP floated earlier this year and are one of the rarities that have seen a rising share price amid the glut of over hyped issues. These results are for the year to 30^th September 2014, showing flat revenues due to sterling strength (but +4.0% on constant currencies), with operating profits up 12.3% to £88.5m (but +20.8% on constant currencies). The operating margin improved 50bps to 4.8%, “reflect[ing] good early progress” in running the business and implies that there is more to come. Post the float net debt of £371.1m is a manageable 2.3x EBITDA, with good cash generation of £51.5m helping too. Having only floated in July there is no dividend, but FY2015 will be a full year’s worth.

Given the exposure to currency risk, the economic sensitivity of travel and the ever-present threat of security and/or health risks for travellers, short term forecasting must be prone to volatility. However, leisure and business travel looks set to grow steadily (mid single digits p.a.?), even in a world concerned about carbon footprints. Passengers are spending longer at airports (as security needs stretch out check-in procedures) and service areas/railway stations are making more effort to capture discretionary spend. In a highly fragmented market, there is plenty of scope for growth, with many travel outlets offering very indifferent value for money to travellers.

Having floated at 210p, the shares are now at 280p. Consensus forecasts for FY2015 are for 12.8p of eps, but that seems to cover a wide spectrum as analysts tweak their models. At this level the PE is 21.9x, whilst a two times dividend cover would generate 6.4p for a yield of 2.3%. These are not cheap metrics, but I feel that they are probably over-cautious or just plain mean. SSP is a stock to put on the radar screen for now, whilst waiting for upgrades and/or any price weakness. (Neil Cumming^,4^th December 2014)

Wednesday, 3 December 2014

McColl's Retail Group - more "Fairytale of Brentwood" than New York

McColl’s Retail Group: I wrote favourably on this stock in August with the shares at 200p. Since then, they haven’t done anything wrong, but remain one of the forgotten class of 2014 flotations. The shares have been weak and have struggled to form a base between 175p and 180p. They have released a trading update for the year to 30^th November 2014, which also includes a 14 week update. They are saying that annual sales are up 4.2% with the fourth quarter growth is faster at +5%, whilst the equivalent annual LFL number is -1.0%, with a fourth quarter LFL of +0.7%. The standard phrase used is that “we expect the 2014 results to be broadly in line with expectations”. Although that wording always leaves the feeling that it has been a struggle to get there, it is good to know that 2014 is pretty much in the bag.

The sales growth reflects new store openings and acquisitions, with plenty more work to be done on product range, services (including Post Office counters) and portfolio tweaking. The overall thrust is to increase the proportion of more profitable convenience stores. Of the overall store portfolio of 1,315 outlets, 799 are now convenience stores. The stated aim is to reach 1000 by the end of 2016.

The stock has, at a market capitalisation of £185m, limited broker coverage and is all too easy to ignore. But it is worth at least a look. Following this statement, consensus remains at about 17p of eps for September 2014, which is, at 175p, a PE of just 10.3x. Pencilling in 18p (not even a 6% growth rate) for the current year to September 2015 is a PE of 9.7x. With a strong balance sheet (net debt to EBITDA <1x) and good cash generation, the expectation is for a dividend that year of just under 11p, for a yield of 6.2%. McColl’s is unlikely to revolutionise retailing (buying milk in my local store confirms this) but on these valuations it looks overly unloved. (Neil Cumming^,3^rd December 2014)

Tuesday, 2 December 2014

Aberdeen Asset Management - cashed up and married to a Widow

Aberdeen Asset Management: Aberdeen continues to advance, with the latest step being this year’s debt and equity funded £606.6m acquisition of the SWIP investment arm. This move resulted in AUM jumping 62% to £324.4bn, although this masks underlying significant redemptions from ‘Old Aberdeen’ and ongoing client defections at SWIP. In these results to 30^th September 2014, net revenue was up 4% at £1.12bn, with underlying PBT up 2% at £490.3m. Underlying eps were a slight beat, but were down 4% to 31.1p, whilst the total dividend has been increased by 12.5% to 18p. So, this dividend is almost twice covered (1.7x) by earnings and backed by a cash pile (including c£400m regulatory capital) that grew from £426.6m to £653.9m. Sentiment on emerging markets has worsened as QE tapering in the US developed. For Aberdeen their Asian bias has been a hindrance. SWIP will help even out this imbalance, but will fuzz Aberdeen’s specialist image. This is reflected in the average management fee falling to 41.8 bps, with the second half (so with SWIP fully included) showing a rate of 36.9bps. The outlook is one of those that can be characterises as cautiously optimistic.

It looks like FY2015 forecasts are settling at 35p and a bit, being growth of 12.5% and putting the shares on 13.2x at 460p. If cover is held at 1.7x, this gives a dividend of 20.6p for a yield of 4.5%. It is not unreasonable to look at similar growth in FY2016 and FY2017 as underlying growth is blended with efficiencies and cost savings at SWIP. Before the SWIP deal the company’s management had been guiding that acquisition led growth was over and that organic progress was favoured. The temptation provided by the SWIP opportunity was too great, but shareholders must be hoping that the dust will now be allowed to settle for at least the 18 months suggested by management. So, whilst capital returns were not mentioned in this release, the assumption must still be that shareholders can expect more cash returns given the strong balance sheet and cash generation. The multiples are no longer compelling but equally are not stretched. Unless you have the glums about equities and emerging markets, then for dividend growth investors, Aberdeen Asst Management still looks like it meets the requirements. (Neil Cumming^,2^nd December 2014)